In their latest attempt to address the city's worsening housing crisis, Palo Alto officials are preparing to sharply raise -- and in some cases, triple -- the fees that developers are required to contribute to the city's affordable-housing program.
Furthermore, the city would for the first time require developers of market-rate rental housing to also pay into a fund for affordable housing, according to a proposal that the City Council is set to consider in late August, when it returns from its annual recess.
In a dramatic revision of its "impact fee" program, the city would roughly triple the fee for developers of office and research-and-development projects, raising it from the current level of $20.37 per net new square foot of development to $60. The move would push the city well beyond other area jurisdictions, which typically charge around $20 per new square foot (as in Cupertino and Redwood City) or $25 per new square foot, as in Mountain View (though projects of less than 25,000 square feet of office space pay only half of this fee), according to a recent report from the Department of Planning and Community Environment.
The $60 fee came out of a recent study that the city's consulting firm, Strategic Economics, performed last year to gauge the linkage between commercial developments and their effects on city services and housing availability, known as a "nexus" study. While the study recommended the city raise its fees for commercial developments to $30 per square foot for office development (the city's planning staff later recommended $35 per square foot), the council's Finance Committee last month decided to go further and set the fee at $60, the level that the study found to be the maximum amount that would be "financially feasible" for developers.
In issuing their recommendations, both the consultants and city staff were wary of setting fees that are so much higher than in neighboring municipalities. The four members of the Finance Committee had no such qualms when they voted 3-1 on June 21 to adopt the new fee schedule. Councilman Greg Schmid voted against it, but his objections had less to do with the office fees than with the fact that the new ordinance would also charge housing developers more.
Councilman Cory Wolbach cited a "pretty broad consensus on the council" that housing should be prioritized over office developments as reason for feeling comfortable with charging an impact fee "at full feasible range."
"Frankly, I am fine with milking developers, but I don't want to kill the cow," Wolbach said. "It is reasonable to demand all that we can of developments to compensate the community for the impacts of the development, particularly when it comes to the need for affordable housing. And setting these fees at the maximum feasible (level) for commercial development is prudent and reflects a growing sense of the community that we have a preference for housing, in particular affordable housing, over rampant commercial development."
If the full council approves the change, the city would effectively revamp how it collects funds from developers of market-rate housing. Currently, developers are required to devote 15 percent of their projects (or 20 percent for properties greater than 5 acres) to below-market-rate housing or pay "in lieu" fees (as impact fees for market-rate for-sale units are called) totaling 7.5 percent of the sales price. Under the present system, the city doesn't know exactly how much it will collect and when the funds would come in.
The new system would require all market-rate developers that don't provide any affordable housing to pay $50 per square foot before they get their building permits. This means that someone looking to build a new 3,000-square-foot detached single-family home would have to pay $150,000. Under today's system, such a development would require a fee of about $40,000. (If a 2,500-square-foot home were demolished and replaced by a 3,000-square-foot house, only the new 500 square feet would be subject to the affordable-housing fee.)
Palo Alto isn't the only city that is looking at new commercial projects for possible solutions to the housing crunch. In San Francisco, a proposal from Supervisor Eric Mar would impose a 1.5 percent payroll tax on tech companies, with the proceeds going toward affordable housing and programs that support programs for the homeless.
But even in San Francisco, which remains an epicenter of both the tech boom and the homelessness crisis, the impact fees are less than half of what Palo Alto plans to charge. Office developers in San Francisco are charged an impact fee of $24 per square foot, while research-and-development projects require a fee of $16 per square foot.
In Palo Alto, while impact fees for office and research-and-development projects would go up to $60 per square foot, hotels would experience a more modest increase, with fees going up from $20.37 to $30. For retail establishments and restaurants, the fee would remain at the existing level of $20.37.
In advocating a higher impact fee for housing projects, council members and planning staff said one of the goals is to see developers actually provide the below-market-rate housing (which would exempt them from the impact fee) rather than paying a fee to avoid this requirement. The issue was central to the council's discussion last week of a proposed housing development at 567 Maybell Ave. In that case, the council allowed the developer, Golden Gate Homes, to forego the city's requirement that it dedicate 15 percent of its 16-unit project to affordable housing. Instead, the developer was allowed to pay an in-lieu fee.
"One of the ideas of setting a fee that is not inconsequential is we'd like to incentivize actually getting the units -- either on- or off site -- rather than just collecting the money," Planning Director Hillary Gitelman said at the June 21 committee meeting.
For rental housing, Palo Alto currently has no requirement that developers provide below-market-rate units. Such a requirement would conflict with the Costa Hawkins Act, which allows owners of new rental housing to set initial rental rates and empowers owners of existing units to set rates after a unit is vacated. By adopting the impact fees based on the nexus study, the city would for the first time require market-rate rental projects to contribute to the city's affordable-housing program, at $50 per net new square foot.
Schmid took issue with the idea of raising fees for housing projects and proposed a different schedule, one in which commercial fees would be twice as high as housing fees.
"Why are we creating disincentives for housing when we live in the community that has the most unbalanced ratio of jobs to employed residents?" Schmid asked.
His colleagues disagreed. Wolbach noted that the increase would only impact those projects that do not provide any affordable housing. And Councilwoman Karen Holman argued that even with the higher fees, the incentive to build in Palo Alto's hot real estate market will remain high.
"With what housing goes for in Palo Alto, I don't think we're close to disincentivizing housing," Holman said. "We're raising what it costs to build housing here, but I don't think it's close to a disincentive."