Palo Alto officials on Monday unleashed a new tool for appraising the most ambitious development in the city's pipeline -- a proposal by Jay Paul Company to build two four-story office buildings next to the AOL headquarters at 395 Page Mill.
It didn't take long for them to realize that this tool -- an independent economic analysis -- is both imperfect and insufficient for making a decision on the massive development. Most council members agreed the deciding factor will not be economics but something much closer to the hearts of most Palo Altans -- traffic problems.
At 311,000 square feet, the Jay Paul development is the largest in the recent wave of "planned community" proposals, which offer "public benefits" in exchange for permission to exceed zoning limitations. In this case, the exemption would be adding the office complex to a site that is already built out. The benefit would be a new police station, located across the street from the office development, at 3045 Park Blvd.
At Monday's wide-ranging discussion, several members lauded the "first of its kind" report as a welcome addition to the council's decision-making tool kit, even as they acknowledged its limited usefulness. The report from the firm Applied Development Economics estimates that Jay Paul would get a 17 percent profit from the development over a 30-year period, though this projection is based on a number of assumptions that are far from certain, including a low interest rate and a hot real estate market.
Despite the new tool, the council came no closer Monday on reaching a decision on the project. Several council members found flaws in the appraisal, most notably in its decision to include land cost in its equation despite the fact that the company already owns the site and didn't have to purchase any new land for the proposed development.
Others questioned the report's assumption that trimming the size of the office development would force Jay Paul to significantly reduce its benefit in order to still realize a reasonable return on investment.
Everyone agreed that the real conversation will begin only after the traffic-impact analysis for the development is released early next year.
Councilman Pat Burt was the lead skeptic Monday, taking aim at both the economic report and the city's process for reviewing the Jay Paul proposal. The former planning commissioner said he was "baffled" by the consultant's decision to include the $33 million cost of land in the analysis. The land, he noted, has already been purchased, and there is no incremental cost of land for the new development (several of his colleagues, including Marc Berman and Karen Holman made similar points).
Burt also rejected the report's finding that cutting the new development's size by half would make it financially impossible for the developer to offer the police building. He challenged the idea that a developer who constructs 150,000 square feet of prime office space in Palo Alto would not be able to afford public benefits.
"We've done this for years for developers of all kinds of projects for Palo Alto," Burt said. "We know there's big dollars left over for public benefits for projects well smaller than this."
Burt also voiced broader concerns about the city's process for reaching a decision on the Jay Paul project. Getting a new police building, Burt said, remains "an extremely high priority for the city," but the city's process for reaching this priority is backwards. He argued that the "planned community" process was traditionally used to enable projects that have "intrinsic" benefits but that cannot be accommodated under existing zoning. The "public benefits" are things that go beyond these intrinsic benefits.
The zone change, he said, should not be a basis to "throw out zoning entirely" and allow something that's twice the size of what's allowed. The Jay Paul proposal, he said, "is not even in the ballpark for what the PCs have been about in our community, at least for the past 40 years."
He lobbied for the council to revisit this project after the economic analysis is updated, the traffic study is complete, the council gets a draft of the California Avenue concept plan (a vision document that the city has been working on for four years) and staff holds outreach meetings with the community. The primary question should be: What development is appropriate for the site?
"We need a time-out on this process so that we're making decisions on what we think is the right design for this area," Burt said.
Right now, he said, the city isn't having that kind of a discussion.
"We're reacting to a developer who comes forward and offers us a huge gift horse, and everything else is a reaction to the gift horse," Burt said. "That's not what the community wants."
Holman, also a former planning commissioner, agreed that the progress is "backwards" and argued that by approving projects like Jay Paul's on a "piecemeal" basis, the council is effectively precluding development of the community's soon-to-be-adopted vision.
"We're eliminating what that vision might be or might become because we're doing this project by project," Holman said,
Even so, most council members found some value in the debate over Jay Paul's economics.
Councilwoman Gail Price called the creation of an economic analysis a useful and important exercise for the city as it tries to find the right balance between development bonuses and community benefits. Vice Mayor Nancy Shepherd agreed, calling the report "exactly what we should be doing so that we don't have to justify something that is very quantifiable and qualifiable."
In this case, the stakes are particularly high. The proposed buildings would have more square feet of office space between them than the entire downtown has seen in the past three decades, and they would stand a short stroll from the city's most congested intersection, at El Camino Real and Page Mill Road. It doesn't help that the city is now weighing another PC-zone proposal that would enable a four-story office building at the intersection.
The proposed benefit is also unprecedented. The police building, valued at close to $50 million, is the council's top infrastructure priority, one that the city has grasping for but failing to reach for more than a decade. For this reason, Shepherd argued Monday, the Jay Paul project should be taken very seriously, despite the glaring unknowns revolving traffic.
Shepherd said she is concerned that in her four years on the council, the city hasn't made any progress on the new police building. A bond that would fund the police building would require support from two-thirds of the voters, a high threshold that Shepherd said would be difficult to reach. Recent surveys commissioned by the city showed about 60 percent of the voters expressing support for a new police headquarters.
"That is driving me to take this project very seriously, until public opinions can change," Shepherd said. "Based on the information we have from polling, we're not sure (they) changed enough. We know we have a 50 percent majority to go forward. We need a supermajority."
Berman, who had served on the specially appointed Infrastructure Blue Ribbon Commission before joining the council, agreed that the police building is a top priority, though he was a bit more hesitant to look to Jay Paul for answers. The council's Infrastructure Committee, which includes Berman, Shepherd, Mayor Greg Scharff and Councilman Larry Klein, is now considering a variety of possible measures, including raising the hotel-tax rate, to fund the new police headquarters.
"A new public-safety building is vital to the future of our city," Berman said. "It's one of if not my highest priority in my time on the council. I'm also 100 percent confident that we can build a new public-safety building without this project."
For Klein, much like for most of the council and for the handful of residents who addressed the council Monday night, traffic was the paramount concern. Staff was scheduled to present on Monday a preliminary look at the project's traffic impacts, but that presentation was deferred until early 2014 because of staff's concern with the assumptions on which the traffic report was to be based. Klein said he was concerned that evaluating the project's economics before getting a look at traffic is out of order.
"To me, the traffic study is a determining factor," Klein said. "We don't even get to a discussion of public benefits in my view until we decide that the traffic is something we can handle."