A development the size of Palo Alto Square built behind the large AOL building at Park Boulevard and Page Mill Road?
Hard as it may be to picture, that is what developer Jay Paul is proposing in what would likely be the largest commercial office development ever built in Palo Alto outside the Stanford Research Park since Palo Alto Square was developed more than 40 years ago.
The proposal, for two four-story office buildings totaling 311,000 square feet, would be about 50 percent larger than the current AOL building, which would remain. By comparison, the Palo Alto Square complex, with two 10-story and three smaller buildings, totals about 320,000 square feet and is estimated to be occupied by about 1,300 employees, according to city staff.
Another way of gauging the size of this proposal is to realize that this single project would exceed the roughly 250,000 square feet of new commercial development that has been built in all of downtown Palo Alto over the last 27 years.
And if the mere size of this project and the potential traffic impacts aren't enough, consider the fact that under the current zoning, no additional development on that parcel is allowed. None. It was maxed-out when the current AOL building (previously occupied by Agilent) was developed.
If the zoning doesn't allow it, how is this proposal even under consideration?
As with virtually all new commercial development these days in Palo Alto, the Jay Paul Company is hoping to win approval of a special "planned community" (PC) zone, a method by which developers bargain with the city over what "public benefits" they provide in exchange for City Council making an exception to the zoning restrictions. With this development, as proposed, resulting in more than twice the allowable square footage on the parcel than permitted by the zoning, it would (by far) be the largest and most valuable zoning exception ever granted by the city.
So what does Jay Paul propose to provide in the way of a public benefit in exchange for receiving these extraordinary development rights?
The company is offering to build the city a new 44,000 square-foot public-safety building on a parcel it owns across Park Boulevard from the proposed office development (and right next door to another yet-to-be built but already approved office building.)
City Manager Jim Keene pledged last year during the ill-fated consideration of John Arrillaga's audacious proposal for 27 University Ave. to begin commissioning independent economic analyses for all future "planned community" proposals, and on Monday night the City Council will review and discuss the first such effort a six-page report from Applied Development Economics of Walnut Creek. As stated in the accompanying staff memo, "The purpose of this review is to quantify the private gain/increased value associated with the land use changes requested under the PC zone ..."
We hope this analysis is neither the final report nor the model for doing these studies in the future.
Instead of estimating the value to the developer of the proposed zoning exception, it attempts to construct a financial projection showing the developer's return on investment on the entire project, including the construction costs of the proposed public benefit (the public-safety building) to determine if the return is adequate and comparable to what developers generally seek in a development project. This approach has it backwards and skips the step of quantifying the direct financial benefits of the zoning exception. It muddles the analysis by incorporating the costs of the proposed public benefit rather than simply comparing the value to the developer of getting no zoning exception to the value with the zoning exception.
More importantly, the analysis fails entirely to address the fact that the developer can currently build nothing on the site under the zoning, and the fact that the land costs are already paid and accounted for through the initial development of the existing building. The analysis allocates more than $33 million in land costs to the new development when in fact there is no land cost associated with the proposed development at all. The land is effectively free, and the owner should not be able to double-dip and receive a return again on its investment in the land.
Finally, the economic analysis uses a number of questionable assumptions based on what seems like a lack of familiarity with the Palo Alto commercial real-estate market. It assumes an office lease rate of $5.40 per square foot by relying on very general market reviews by others rather than citing actual rents being paid for first-class office space in the immediate area, and it simply takes regional averages in estimating the value of the project once completed. That's not good enough.
Monday's Council discussion is billed as a "check-in" point for the Jay Paul proposal and was to have included a traffic study that has now been put off until early next year due to being deemed inadequate by staff. We suspect that the traffic analysis will all but kill this proposal anyway.
But it is crucial that the city get the economic analysis right, since it will become the model for how future development proposals are handled. With trust in the staff and council's ability to critically evaluate new development proposals running low in the community right now, we urge the Council to insist on a better and more comprehensive economic analysis of this, and future, projects.