Edgewood Plaza Shopping Center owner Sand Hill Property Company must pay $248,250 in back penalties for leaving the the shopping center without a functioning grocery store, Administrative Judge Lance Bayer ruled on April 2.
The ruling comes after two days of testimony and arguments, which took place Feb. 13 and March 6, after Edgewood developer John Tze sought relief from fines of up to $5,000 per day for allegedly violating the city's Planned Community (PC) ordinance governing the property. Under the ordinance, Sand Hill is required to provide a grocery store on the property for the life of the project as a public benefit. Sand Hill has already paid the city $630,500 in penalties.
Sand Hill's attorney David Lanferman had argued the PC ordinance does not spell out a guarantee for an operating grocery store and that trying to enforce a guarantee is "an illusory condition." But in a 12-page decision, Bayer found "without merit" Sand Hill's arguments that it is responsible only for providing the building for a grocery store.
City of Palo Alto's lead attorney Terence Howzell had argued that the ordinance, which was revised in November 2013 after Sand Hill erroneously demolished one of the historic Joseph Eichler buildings, requires "the commercial property owner shall ensure the continued use of the 20,600-square-foot building as a grocery store for the life of the project." Bayer agreed that two Palo Alto municipal codes (18.01.080 and 18.38.020) and two city ordinances (5150 and 5224) "unambiguously" require the developer to provide and use the building as a grocery store, meaning to have an operational grocery store.
In exchange for a grocery store as one of the public benefits, Sand Hill built 10 homes on the property. Tze testified on Feb. 13 that the company grossed about $30 million from the homes, which sold for about $3 million each.
The company was not able to build and sell the homes until a grocer was signed to lease the property and the store was operational. Sand Hill initially signed grocer The Fresh Market, which opened in June 2013, but the East Coast-based chain pulled out of California, including at Edgewood, one year and nine months later. The 20,600-square-foot building at 2170 West Bayshore Road has remained vacant since March 13, 2015, according to signage posted on the building at the time.
Tze claimed Fresh Market's 10-year lease agreement allows for the market to "go dark" and remain as a tenant in good standing. There was no provision for Sand Hill to take over nor provide or use the premises as a grocery store if The Fresh Market pulled out, he said. Sand Hill continues to receive $33,000 per month rent. The Fresh Market controls the terms of any sublease, he said. Tze and commercial Realtor Cushman & Wakefield reached out to between 65 and 70 prospective grocers without success, he added.
Bayer noted during the March 6 hearing that neither the city nor the developer had provided him with a copy of the lease agreement. Sand Hill's own actions in negotiating the lease terms made it significantly more difficult to replace the grocery store, he wrote in his decision. The city also provided "substantial evidence" that it had given Sand Hill a reasonable opportunity to provide a replacement store -- more than one year and eight months -- before issuing its first citation, Bayer concluded.
That date is for the first citation subject to the hearing. The city began citing Sand Hill months prior to that date, but Sand Hill failed to appeal those earlier citations.
The city began fining Sand Hill $500 a day, then raised the penalties over time. The Palo Alto City Council fined the developer $1,000 per day from Oct. 17, 2016, through Nov. 27, 2016, then set the fine to $2,500 on Nov. 28, 2016. The fine automatically went up 50 percent to $3,750 on Nov. 29, 2016, and the fine doubled to $5,000 daily starting Nov. 30, 2016, through Jan. 8, 2017. The council stayed additional fines until the matter could be heard by the administrative judge, but their accrual is ongoing.
Bayer said that based on the totality of the circumstances and in accordance with the municipal code the penalties are justified and there will be no reduction. The decision may be appealed in Santa Clara County Superior Court within 20 days.
"We are pleased to see the City's position upheld and sustained and would hope the property owner could turn all his attention to getting a grocery store in at Edgewood Plaza and upholding the commitment to the community," City Manager James Keene said in a statement to the Weekly.
Matt Larson, director of public affairs at Sand Hill Property Company, asserted his firm is doing just that.
"We are focused on finding a grocery tenant and we should have something to announce on that front soon," Larson said.
Neighborhood leaders applauded the ruling.
"Our neighborhood is encouraged that the city won its case against Sand Hill. We hope Sand Hill will now offer excellent incentives to a new grocer so we can all shop again at Edgewood Plaza and put this behind us," Carla Carvalho, Lenore Cymes and Jeff Levinsky said in a statement.