Palo Alto Weekly

Spectrum - March 28, 2014

Editorial: Caution and skepticism needed on transit-center lease

City staff hasn't made the case yet for giving up long-term ground lease and allowing Stanford to regain control over site

It is ironic that at the very time the city is promoting a community discussion about the future of the area surrounding the University Avenue train station it would even consider giving up a lease that gives it substantial influence and control over the site.

But that is what the Palo Alto city staff is recommending to the City Council and that will be reviewed by the Council's policy committee next week.

A complicated agreement with Stanford dating back to 1981 gives Palo Alto control over almost 3 acres that includes the train station and the bus transit center and parking areas around it. The lease runs another 19 years, until 2033. The train station itself was built and had been owned by Southern Pacific until 1981, when it gave it to Stanford, which then turned around and leased it to the city.

Since then, the city has been subleasing the building and land to the Santa Clara Valley Transportation Authority (VTA), which uses the property as its northernmost bus transportation hub and, in turn, subleases the train depot to a coffee house and a bike shop.

The city has been breaking even on the arrangement, simply passing on the rent and tax obligations under its sublease to VTA. But that sublease expired last July and now continues on a month-to-month basis. Both VTA and Stanford want Palo Alto out as the master lease-holder.

Until 1999, Palo Alto also held the ground lease for the area occupied by the Sheraton Hotel, MacArthur Park restaurant and the Red Cross building, but released it as part of a deal to reduce its lease fees to Stanford for the use of El Camino Park, which is also on Stanford property.

It was Stanford's regaining control over those lands that made John Arrillaga's 27 University Ave. proposal possible. Stanford has not renewed its lease with the Red Cross, and that building will soon be vacant.

The city staff argues that this whole arrangement is needlessly complicated and that the city would be better off relinquishing the 19 years remaining on the lease of the transit facilities and let Stanford and VTA work out their own lease arrangements directly.

To bolster its argument, the staff points to a provision in the lease that permits Stanford to raise the lease rate substantially, from about $160,000 a year to over $400,000, on July 1, which the city would pass along to VTA.

For reasons that aren't clear, Stanford is so motivated to get back control over the ground lease that it is willing to let VTA use the building and land at no cost going forward if Palo Alto would terminate its lease with the university. And Stanford has pledged to take an active role in the maintenance of the area, including having its police force patrol it. (Or, as an alternative, Stanford has offered to hold the rent at current levels for two more years to give VTA and the city a chance to sort out options for the area.)

The city staff offers no explanation for why VTA should receive substantial financial benefits if the city agrees to cancel the remaining 19 years on the lease it has with Stanford, while the city gets none. It does suggest that a memorandum of understanding be made with Stanford and VTA to spell out the city's role and input in future plans for the area.

We sympathize with the city staff's desire to rid itself of the complications and obligations of its current lease and the need to negotiate and manage a sublease of the property with VTA.

But long-term leases of valuable real estate are normally worth a substantial amount, and since the city holds zoning powers over the site this is especially the case. We find it hard to believe that the value of the remaining 19 years on the lease is not a substantial asset for the city, and wonder why we would want to relinquish that asset with no consideration.

It is appropriate to question Stanford about its motivations and plans. Why is it that the university would forego substantial rental income in order to get Palo Alto to terminate its lease?

With so much about the future of this critical area of the city up in the air and the subject of upcoming community debate, it seems like an unwise time to relinquish our leverage. The right move for Palo Alto is to maintain this lease, complete a comprehensive plan for the entire area, and then negotiate with Stanford the termination of the lease so that the plan's vision can be implemented.

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