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To promote housing, Palo Alto hikes up development fees

Controversial change gives city some of the highest affordable-housing impact fees in the region

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.


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27 people like this
Posted by commonsense
a resident of Barron Park
on Dec 13, 2016 at 10:19 am

This will ultimately reduce office development by an immeasurable amount and will not make a dent in the housing crisis the entire region is in and will continue to be in unless drastic measures to boost housing are taken. This is a political win and a waste of time and resources for the citizens. The council should spend all the time they waste on this issue to solve the budget deficit. More money than ever is coming in but some how they are short $6mm...and growing. I hope the new council will tackle the problems facing PA with real, risky and long term solutions.

28 people like this
Posted by Barrier to Housing
a resident of Fairmeadow
on Dec 13, 2016 at 10:40 am

The idea that Council members say they want to help create housing and then proceed to ignore the housing professionals and vote to create more barriers, is only political posturing to a minority of residents who aren't actually interested in creating housing at all and are instead irrationally obsessed with office. A statement for in support of housing? What a joke.

Like this comment
Posted by John
a resident of Southgate
on Dec 13, 2016 at 11:00 am

Will these fees apply to granny units?

10 people like this
Posted by I wonder
a resident of Downtown North
on Dec 13, 2016 at 12:02 pm

I wonder if the new Council will reconsider this when they start up next year. Just outrageous, with all of the housing advocates telling them they shouldn't do it, they go ahead anyway.

Bye, bye Burt.

2 people like this
Posted by Gale Johnson
a resident of Adobe-Meadow
on Dec 13, 2016 at 12:27 pm

Gale Johnson is a registered user.

I watched the discussion on Mid-Peninsula's Webcast...very good, lively, and informative discussion with CC members and public speakers offering their viewpoints. It sounds like there is uncertainty whether the new fees will help or hinder developments of any kind, and that the increases might have a negative effect by discouraging developers from proposing building projects of any kind in PA. That would mean less money for affordable housing. Time will tell. I liked what Liz Kniss said, however,...whatever we decide, let's give it a year, as a trial period, and then evaluate what the effects of the new fees have been at the end of that period. My thought exactly. A lot of things CC approves turn out to be grand experiments and data should be taken and written down in lab notebooks and then analyzed later to see what really happened.

"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".

I agree with that rationale. That would be a trivial cost to developers and they could easily meld it into their proposals and just pass it on to the tenants, either office or housing unit renters. So by that argument the new much higher fees shouldn't be an impediment to development. Let's just stay tuned in and watch and wait.

14 people like this
Posted by confused
a resident of College Terrace
on Dec 13, 2016 at 12:33 pm

Why did the most pro-growth CC members (Kniss and Wolbach) vote AGAINST a measure that would increase funding for affordable housing?? Fortunately, it seemed to pass nonetheless.

6 people like this
Posted by Gale Johnson
a resident of Adobe-Meadow
on Dec 13, 2016 at 1:33 pm

Gale Johnson is a registered user.


Just my thoughts: I admit, I am confused also, and our CC members and PA citizens might also be confused. No shame in that because it is simply a very confusing issue and nobody has the perfect solution or can predict how the new fees will turn out. The three 'nay' voters are for more affordable housing, but not at the expense of alienating their developer friends who want to build only the most profitable projects, office and research park projects where the big profits exist. I got that. Like I said before...we just have to wait and see.

Be patient.

2 people like this
Posted by george drysdale
a resident of Professorville
on Dec 14, 2016 at 10:12 am

The Palo Alto city council insists on flunking out of Economics 101. The Buena Vista is a complete disaster. You want to always increase the supply of housing. Remember: There no such thing is as "affordable housing" only subsidized housing,which only the lucky few get. "Affordable housing" in Palo Alto is like giving those few housing in Manhattan or the biggest joke Malibu. On the internet: The end of rent control . . . Malibu the crash . . . George Drysdale a social studies teacher

11 people like this
Posted by Tom DuBois
a resident of Midtown
on Dec 14, 2016 at 2:19 pm

Tom DuBois is a registered user.

To clarify what we did at the Council meeting Monday night - we adopted the recommendations of Staff, the Finance Commitment and a some changes suggested by the PTC to increase impact fees on market rate development. We took the advice of the PTC and lowered the impact fees on Market Rate rental housing. All of these development fees are used to raise money to build affordable housing.

We should maximize the number of Below Market Rate (BMR) housing units as opposed to the percentage of BMR units in new projects. This requires having the funds for construction - our current housing impact/linkage fees are too low to enable us to actually build affordable housing. These new fees were studied for over a year and are far below the economic impact of the development in our city. As Mayor Burt pointed out office rents in PA are more than 2X higher than other bay area cities. Our impact fees should be higher as well.

Palo Alto used to lead on affordable housing impacts caused by development. We have fallen behind and this fee update is an important step. It’s a piece of the puzzle, not a solution on its own.

Some of the comments suggest that housing advocates were all against raising impact fees on office development. This is not true. I had several affordable housing advocates tell me they supported the nexus study and the suggested increases to rates. If other cities on the peninsula follow us, we should see more affordable housing throughout the area.

It is true that people that wanted more office development were against raising the office impact fee. It’s time for us citizens to start to distinguish between those people that want to promote ALL forms of development whether good for the community or not versus those that truly want to build affordable housing.

3 people like this
Posted by Resident11
a resident of Fairmeadow
on Dec 15, 2016 at 10:45 am

Resident11 is a registered user.

Thank you Tom. I am strongly supportive of this rate hike. We need affordable housing for city employees and seniors. We do not need commercial development. We do not need high-priced housing. We have enough of both! This is exactly the kind of incentive/disincentive that we need to change the balance. I really hope the new City Council understands this.

Like this comment
Posted by Gale Johnson
a resident of Adobe-Meadow
on Dec 15, 2016 at 2:59 pm

Gale Johnson is a registered user.

Back at it again...someone posts and I feel a need to I post back. Isn't this fun?

@John...I'm sure it will, at least I hope so.

@Tom Dubois..."Some of the comments suggest that housing advocates were all against raising impact fees on office development. This is not true. I had several affordable housing advocates tell me they supported the nexus study and the suggested increases to rates. If other cities on the peninsula follow us, we should see more affordable housing throughout the area". Yes, and the final vote on the main motion indicated that, I think.

@Eric Filseth...I agree that the impact of the fee increases should not be a deterrent or a deciding factor in developers' minds of wanting to propose or proceed with a project. They are smart people and can bury that cost in many different ways.

Now, I have a question that I know there's enough data available to answer, and city staff should have it.

Go back to the last 3 years of development of all kinds in PA. Quantify and compare the revenues from fees from those projects with current rates, to what they would have been with the new rates. Then, assuming the same level of development going forward, with the new rates, how much money would we see coming into our city's coffers in a 3 year period? How much affordable housing would that buy?

You must know be by now. I ask some tough questions.

2 people like this
Posted by Roger Overnaut
a resident of Evergreen Park
on Dec 16, 2016 at 12:26 pm

"Why did the most pro-growth CC members (Kniss and Wolbach) vote AGAINST a measure that would increase funding for affordable housing??"

It hits their friends the office developers.

Like this comment
Posted by John
a resident of Southgate
on Dec 16, 2016 at 12:57 pm

@Gale...if granny units are charged a fee to be used to build affordable housing, then granny units may not be built in the first place. This is a self defeating mission. I am toying with the idea of putting a granny unit on my lot, but I won't do it if I am charged the development fee for affordable housing.

Like this comment
Posted by Frank Duquesne
a resident of Embarcadero Oaks/Leland
on Feb 8, 2017 at 4:22 pm

@ Dan Gold Palo Alto

We are well aware of your contributions to Palo Alto but explain to me this. How can Council members use support for housing as a front when by their actions it seems that they are more interested in protecting the real estate interests and property value of a small elite few?

Whats more important in the end. The rise of property value? Or allowing more people to live here who contribute to the towns economy.

Like this comment
Posted by AB
a resident of Midtown
on Feb 8, 2017 at 9:55 pm

I had missed this thread earlier. Reading Tom DuBois's comment now makes me realize that I do not agree with him at all. I had been on his side when he posted the editorial about the council hijacking the Jan 30 meeting. Now seeing his comments about building new affordable housing and maximizing the number of BMRs makes me realize that he is no different than the other members of the council. Even he is looking to increase traffic and congestion. Sheesh. Recalling the others and keeping Tom or his ilk won't really improve matters.

Sorry, but further commenting on this topic has been closed.

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