What a mess. A carefully negotiated deal, made in 2012, offered a developer the right to build 10 homes at Edgewood Plaza on the condition that it maintain an operating grocery store in perpetuity as the anchor tenant on the remaining commercial portion of the site.
It was the type of deal that had been encouraged by Palo Alto's zoning code through what is called a planned community (PC) zone. In exchange for negotiated "community benefits," the City Council could grant a property owner more development rights than would otherwise be permitted under the normal zoning, and, in theory at least, residents of the city would benefit enough to warrant the special exception and additional impacts.
Over the years, this PC zoning process has been repeatedly abused by developers who have managed to find a way to either negate or minimize the so-called public benefit, leaving them with a substantially more profitable development and the public shortchanged. Until the council finally decided in 2015 to stop, at least temporarily, doing PC agreements, they were the preferred approach by most developers and infuriated residents, who saw them as harmful, lopsided deals.
There were never any independent economic analyses to quantify the financial benefits to the developer of these arrangements and ensure they were appropriately shared with the city, nor was there any policy about what the public benefits should be to warrant these zoning exceptions. Each case was negotiated between the developer and city staff, as happened with the Sand Hill Property Company for the property at Edgewood Plaza, located on Embarcadero Road just west of the freeway.
The city thought it had secured a sure-fire and popular community benefit: the return of a neighborhood grocery store. Sand Hill guaranteed it would maintain a grocery store as a condition for being granted the additional development rights, or so it was thought.
Sand Hill landed The Fresh Market as a tenant and all seemed copacetic — until the grocery chain suddenly decided to pull out of Palo Alto in March 2015, less than two years after opening, leaving the 21,000-square-foot empty again. The Fresh Market apparently continued paying rent to Sand Hill, as obligated under its lease.
Sand Hill has been so opaque about its dealings and agreement with The Fresh Market that it is unknown if it sought to buy out the lease, was holding The Fresh Market to the terms of the lease to put the burden on it to find a new grocery tenant, or if the lease agreement contained provisions covering the closure of the market.
But as the space stood empty and neighborhood resentment mounted, in October 2015 the city began imposing $500 a day fines on Sand Hill for violating the development agreement, later increasing them to $5,000 a day. Sand Hill eventually stopped paying and challenged the city's right to levy the fines. An administrative law judge ruled in favor of the city in April, but Sand Hill then filed suit in Superior Court, and on Dec. 15, just as a new grocery operator was opening "The Market at Edgewood," Judge Peter Kirwan ruled the city improperly imposed the fines because the wording in the development agreement with Sand Hill wasn't clear enough that it required the developer to ensure the continued operation of a grocery store rather than simply that the use be restricted to a grocery store.
On Monday, in closed session, the City Council voted 7-2, with Mayor Kniss and Councilman Greg Tanaka dissenting, to appeal the ruling to the state Court of Appeals. It also rejected a settlement offer by Sand Hill that would have reduced the fines to a fraction of what the city has levied. The total amount at stake is more than $1 million.
Whether the city is likely to prevail on appeal is impossible to know, but one can assume that the council was advised in closed session by its attorneys it had a strong case and that filing an appeal would put pressure on Sand Hill to settle.
While we have strongly opposed the use of planned community zoning because of how it distorts the zoning and lacks transparency, we support the council's appeal of Kirwan's decision. We have no sympathy for Sand Hill Properties, which made a calculated business decision to risk having to pay fines if it could not maintain a grocery tenant. It freely concluded that obtaining permission to build the houses on the site was so valuable that it was worth possible problems of sustaining a grocer in the space. If it didn't negotiate protective language in its lease with The Fresh Market, that's not the city's problem.
Sand Hill is an active developer in the region and will undoubtedly be seeking approvals of future projects in Palo Alto. It would be smart for the company to settle this dispute at a price that provides substantial compensation to the city for Sand Hill's failure to meet its commitment under the development agreement, and at a price that makes it easy for the city to drop its appeal.