Developers looking to build offices, research facilities and hotels in Palo Alto will have to significantly up their contribution toward solving the city's affordable-housing crisis under a new law that the City Council passed Monday night.
By a 5-3 vote, with Vice Mayor Greg Scharff, Councilmember Liz Kniss and Councilman Cory Wolbach dissenting, the council voted to sharply raise the city's "housing impact" fees, making them among the highest in the region. With the new fees, developers looking to construct office and research-and-development projects will now have to pay $60 per square foot of new development – nearly triple the current level of $20.37 per square foot and far more than other cities in the region (Cupertino and Redwood City, for instance, each charge a fee of $20 per square foot of office developments; Mountain View charges $25, with a 50 percent discount for new floor area under 25,000 square feet).
In advocating for the new fees, Councilman Tom DuBois called them "an opportunity to make a statement" about the council's desire to see more housing.
"We live in an expensive area and the impact fees have not kept up," said DuBois, who recommended adopting the Finance Committee's proposal. "The pace of government is slow."
Not everyone was convinced. Some argued that charging fees that are too high would deter development and deplete – rather than enhance – the affordable-housing fund that the city uses for below-market-rate projects. Candace Gonzalez, CEO of Palo Alto Housing, urged the council to keep the fees aligned with neighboring jurisdictions.
"We're concerned that if they are significantly more than neighboring cities, combined with more restrictive land use and zoning regulations, it will discourage developments altogether," said Gonzalez, whose nonprofit administers the city's below-market-rate program.
Pat Sausedo, executive director of NAIOP Silicon Valley, an industry group for commercial developers, focused on the commercial side and argued that the $60 per square foot fee for office developments is excessive.
"With all due respect, to adopt a $60 fee in this point in time really does send to many in the business community an anti-business message," Sausedo said. "We really hope you think about this long and hard and not exceed the highest linkage fee in the Silicon Valley region."
The council did think long and hard but it ultimately reached the opposite conclusion. Councilwoman Karen Holman, a member of the Finance Committee, took issue with Sausedo's argument.
"I'd argue that this isn't an anti-business message that we're sending," Holman said. "It's a message we're sending that we're serious about creating housing."
The new housing fees are based on a recently completed "nexus study," which analyzed the connection between fees and project impacts and which determined the maximum amount that the city can justifiably charge. During its hearings earlier this year, the Finance Committee decided that given the city's urgent need for affordable housing, the fees should be set relatively high. The Planning and Transportation Commission was more skeptical as it reviewed the proposed changes. Though the commission ultimately went along with the Finance Committee's recommendation to significantly hike up the fees for most types of commercial development (retail is an exception; its fee will remain at the current level of $20.37 per square foot), it concluded that the fee for market-rate rental housing should be around $10 to $20 per square foot, well below the $50 recommended by the Finance Committee.
While the council accepted most of the Finance Committee's recommendations on housing-impact fees, Councilman Greg Schmid led the charge in convincing his colleagues to go with the lower rate for market-rate rental housing. Schmid, participating in his final meeting after nine years on the council, made a case that the city's existing zoning and market forces encourage developers to pursue office projects in the city's most vibrant areas. By making this fee significantly lower for residential developments, the city can send a signal that it wants to encourage housing in walkable, mixed-use areas. Like DuBois and Holman, he talked about the “message”
"You want to create an incentive where a developer comes in and says, 'Geez, the city is interested in getting housing in mixed-use areas," Schmid said. "They are sending a signal that this is a process that would help our community."
Schmid's amendment to go with the lower fees for rental housing (they were set at $20 per square foot) ultimately passed by a 6-2 vote. Scharff, who joined Schmid in backing lower fees for rental housing, said he was more interested in adding housing than in making a statement.
"I'm not really interested in saying, 'We have the highest fees and we have the most money,'" Scharff said. "I'm interested in producing housing. I'm interested in producing affordable housing and in producing market-rate housing."
Holman and Eric Filseth both dissented and argued that the housing fees make up a very small percentage of what housing sells for in Palo Alto.
"Market rate housing is so high in Palo Alto," said Filseth, who chairs the Finance Committee. "A one-bedroom condo sells for $1 million. A difference of $10,000 or $20,000 on the fees we didn't think would make a huge impact."
While the council majority agreed to lower the fees for rental housing, it held firm on the other Finance Committee recommendations. Wolbach's motion to lower the fees for office projects from $60 to $40 faltered by a 3-5 vote (only Scharff and Liz Kniss joined him). Mayor Pat Burt, also appearing in his final meeting as a council member, noted that the city's office rents are more than twice as high as in San Jose and Santa Clara.
"When you look at it that way, the correlation between their fees and ours don't look so out of kilter," Burt said. "A number of locales are doing what we're doing and we're liable to see some increases in the region in the coming year or so."
Wolbach's other proposed amendment, to lower the fee for single-family attached homes from $50 to $35 similarly faltered, with only Liz Kniss joining him.
Ultimately, Wolbach, Kniss and Scharff all voted against the main motion, which passed despite their opposition. In addition to increasing various categories of fees, the new ordinance also changes how the city calculates the fees for market-rate condos and single-family homes. The new law scraps the current practice of basing the fee on 7.5 to 10 percent of the sales price and instead sets a fee of $50 per square foot of new development.