When Adventurous Journeys Capital Partners notified the tenants of the President Hotel Apartments in downtown Palo Alto in June that they would be evicted in November so that the iconic 1929 building could once again serve as a hotel, the pushback from Palo Alto residents and city leaders was strong and swift.
Tenants and housing advocates turned up at City Hall en masse to urge the City Council to stop the conversion and prevent evictions from the 75 apartments. City planners told AJ Capital in July that the proposed hotel project would violate a city law that requires a "grandfathered" building undergoing renovation to retain its current use — in this case, housing.
Many critics argued that AJ Capital's plan would destroy a diverse community that has flourished for decades at the historic Birge Clark-designed building. John Vermes was one of dozens who pleaded with the council in July to do what it could to prevent the community from becoming a "footnote to history."
Others pointed out the paradox of eliminating 75 apartments amid a shortage of housing that prompted Palo Alto to set a goal of adding 300 housing units per year — a target that the city's nowhere close to meeting.
Katya Priess, a President Hotel resident, argued at the council's July 30 meeting that, in an area with exorbitant housing costs, "each substantial loss of housing becomes a moral issue."
Most members of the council appeared to share these sentiments, having discussed for the better part of a year the need to protect tenants facing the loss of housing. In August the council approved an urgency ordinance increasing relocation assistance for displaced tenants and directed its Policy and Services Committee to discuss other policies that could help renters.
But despite the public outcry and the council's desires to see more housing built and to prevent tenants from being evicted, the hotel conversion proposal has somehow picked up momentum since the summer.
Dozens of units are now vacant; the tenants are no longer speaking out; and the city is preparing to consider in the coming weeks two zoning changes that would pave the way for the hotel. One is the removal of 350,000-square-foot limit on non-residential development downtown, a threshold that the city is on the cusp of reaching and that the President Hotel conversion would exceed.
Another is the removal of the "grandfathered facilities" provision that specifies that old buildings that are out of compliance with zoning can only be renovated if they maintain the same use.
Although interim Planning Director Jonathan Lait sent AJ Capital the July letter stating that the conversion would run afoul of the "grandfathered facilities" provision — and despite the council having had no intervening discussions on the matter — city planners are now suddenly recommending that the clause be removed from the city's zoning code.
As a result, a project that only months ago was broadly unpopular, legally dubious and contrary to the council's officially adopted goal of creating more housing now appears to be on the fast track toward approval. In a city where even mundane developments take years to germinate, the turnaround has been nothing short of remarkable.
How did this happen? Documents obtained by the Weekly in response to a Public Records Act request shed light on what has been going on behind the scenes: The correspondence makes clear that since July, AJ Capital has been both actively lobbying and privately negotiating with tenants, top City Hall staff and at least one member of the council, with the goal of getting a green light for its project by the end of this year. The company's representatives and consultants have sparred with the city over entitlements while AJ Capital's attorney both threatened the city with litigation and negotiated with tenants with the goal of silencing their opposition.
AJ Capital's multi-pronged strategy has already borne some fruit. Most of the tenants in late October signed an agreement in which they consented not to oppose the hotel project in exchange for money and a few more months at the President. Council members have been mum on the project, fearful of saying anything that could hinder the city in a potential lawsuit. And city staff is now preparing to change the zoning code, prompting questions and concerns from Palo Alto's land-use and good-government observers.
Winter Dellenbach, who led the effort from 2012 to 2017 to prevent the closure of Buena Vista Mobile Home Park and who has been talking with President Hotel tenants, is one of several residents who find the city's upcoming discussion of the two zone changes suspicious.
"The overriding question for us is: Why is the city even contemplating doing this? Why is the city contemplating even entertaining these items, given that the proposed changes would convey such massive new entitlements and financial benefits to AJ Capital and only short-term limited relief to remaining hotel residents?" Dellenbach wrote to the Weekly.
The grandfather clause
AJ Capital has been gunning for the zoning changes ever since they were identified during the summer, much to the developer's surprise, documents show. Before that — in a June 7 meeting of AJ Capital's application team, Lait and City Manager Jim Keene — a company consultant had indicated that AJ Capital would "only need to address parking and obtain design review approval" for the conversion to go ahead, according to Lait.
Keene himself told the council in June that hotel uses are permitted downtown "by right."
The following week, however, Keene said staff was still exploring the pertinent zoning laws to determine whether the project could legally proceed.
The bad news for AJ Capital came in the July 17 letter from Lait.
"The city has conducted a review of the property and determined that the establishment of a hotel at this location, as described, is impermissible based on existing regulations and site characteristics," Lait wrote. "Specifically, the (code provision) precludes the remodeling, improving or replacement of site improvements together with the conversion of an existing non-complying facility in the subject property's Downtown Commercial CD-C district to a different land use."
While AJ Capital immediately contested the city's finding, an attorney hired by the tenants supported the city's determination. Heather Minner, an attorney with the firm Shute, Mihaly & Weinberger, LLP, noted in a July 27 letter to the city that based on the plain language of the grandfather provision, "remodeling non-complying facilities is permitted only for 'continual use' of the 'same use' that currently exists."
"If AJ Capital wishes to develop a luxury hotel in Palo alto, it must do so in a manner that complies with the city's zoning-code regulations," Minner wrote. "The city's determination that the code prohibits converting residential apartments in an oversized building into a new hotel use is well supported by the plain language of the code and by legal precedent. Any other determination would contravene the Comprehensive Plan's housing policies, deepen the city's housing crisis, and frustrate efforts to improve traffic congestion for all residents."
AJ Capital, meanwhile, was preparing its legal response, a 15-page letter from David Lanferman of the Palo Alto law firm Rutan & Tucker, sent to Lait on Aug. 20, that asserted numerous reasons why it believed the "grandfathered facilities" provision stood in conflict with other city regulations and should be done away with.
Specifically, Lanferman argued that the city's interpretation of the code is "fatally inconsistent" with the Comprehensive Plan provisions that allow hotels in commercial districts; that encourage preservation and restoration of historic structures; and that urge seismic safety improvements.
The city's findings on the "grandfathered facilities" clause, he wrote, clashes with a different section of the zoning code, which explicitly permits renovations to non-conforming buildings, provided these alterations accommodate a conforming use — namely, in this case, a hotel.
"This project easily meets that provision, by restoring the President Hotel to a conforming use and not increasing the existing degree of nonconformity," Lanferman wrote.
Even as AJ Capital was meeting with city staff, it was also having side conversations with at least one council member — and trying to hurry up the process.
According to email correspondence obtained by the Weekly, Tim Franzen, president of Graduate Hotels (a division of AJ Capital), reached out to Councilman Greg Scharff on Sept. 13 to update him about AJ Capital's effort to reach an agreement with President Hotel tenants — a deal that would require the tenants to stop opposing the hotel conversion in exchange for money and an extension of their stay at the building until June 16, 2019. (Read more in "The deal and the deadlines.")
The correspondence makes clear that Scharff and Franzen held several discussions about the topic in September and that, at least in one case, Franzen was seeking advice from Scharff on how to proceed. The emails indicate that the two talked about the potential agreement on Sept. 23. The following day, Franzen emailed Scharff a document that he said "outlines what I walked you through yesterday in terms of both additional time and financial assistance to the residents, along with what we'll need from the city in terms of project approvals."
Franzen told Scharff that he had asked the company's attorney to call the tenants' attorney to walk him through AJ Capital's proposal to tenants, which he said appears to be "very much in line with what they asked for at the end of last week."
"We would also like to schedule a call with (City Attorney) Molly Stump, but we'll await your OK before doing so," Franzen wrote.
The Sept. 24 document, which the Weekly has obtained, makes clear what AJ Capital expected from the city, as well as the link between the city's actions and the tenants' potential benefits. Under its terms, residents would be allowed to stay in their apartments until June 16, 2019, and receive additional relocation payments if the city effectively stands down and gives AJ Capital what it wants in a timely manner.
"The spirit of this agreement is that, in exchange for additional time and financial assistance granted to the residents of the President Hotel Apartments by AJ Capital, the city will take the following actions and will generally work in good faith with AJ Capital to remove all impediments, and to not cause any unusual or unreasonable delays or impose any unusual or unreasonable conditions, to AJ Capital's receipt of any and all permits or approvals necessary for AJ Capital's planned conversion of the Hotel President back to its original use as a hotel," the document states.
Specifically, the city would have to "accept and approve" AJ Capital's interpretation of city's provision on grandfathered facilities (as articulated by Lanferman in the Aug. 20 letter); exempt Hotel President from parking requirements (Read more in "Developer seeks parking exemptions"); expedite the approval of a conditional use permit for alcohol sales at the hotel; and approve access to the "entire usable area of rooftop" for use by Hotel President.
The proposed agreement also notes that the city would have to pass the changes by Oct. 8. If not, the document states, "AJ Capital will keep its non-renewal date of Nov. 12, 2018, and reserves its rights to challenge the applicability and legality of the (relocation-assistance) emergency ordinance to it." (The council had passed an ordinance in August stating the conditions under which property owners have to provide evicted tenants with relocation payments.)
When asked about his exchanges with Franzen, Scharff said he approached the developer in early September at the behest of President Hotel tenants. One tenant, Michelle Kraus, invited Scharff to meet with a group tenants, who asked him if there was anything the city could do to extend their stay.
"It became clear that the tenants really wanted to stay past November and this was a huge hardship for them," Scharff told the Weekly. "I said I'd reach out to Tim Franzen and see what we can do to get them to be able stay at least through January."
After having conversations with Franzen, he received from AJ Capital the list of actions that the city would need to take in exchange for deferring the evictions. Scharff said he immediately rejected these terms.
"I told him that the city doesn't make deals and that it's an open process," Scharff said.
After making the introductions, Scharff said he stepped back from the negotiations process and did not have any further discussions with AJ Capital.
Franzen said his company does not wish to comment at this time. Steve Emslie, a consultant with Lighthouse Public Affairs who helped facilitate meetings between AJ Capital and City Hall, also said the company does not wish to comment.
A shifting stance
The documents released to the Weekly provide a papertrail of AJ Capital's active negotiations with both the city and with tenants — and its use of former City Hall insiders to try to gain access.
On Oct. 3, on behalf of AJ Capital, Richard Hackmann, who used to work under Keene in the city manager's office, reached out to Assistant City Manager Ed Shikada and City Attorney Molly Stump, trying to arrange meetings with AJ Capital officials. On the same day, Emslie, Palo Alto's former planning director and deputy city manager, reached out to Lait to try to schedule an Oct. 10 meeting with the AJ Capital team, which was coming to town.
"Do you think it would be a good idea to schedule a face-to-face meeting sometime Wednesday in an attempt to make significant progress or even to wrap up issues?" Emslie wrote to Lait.
The meeting between AJ Capital Partners and city staff occurred on Oct. 22, Stump told the Weekly. At that meeting, AJ Capital gave the city a one-page summary of an agreement they told the city they had reached with the President Hotel tenants and updated staff on their project.
"There was a general discussion of city processes and requirements," Stump wrote.
By the end of the month, city officials began to signal that they were willing to reconsider the grandfather clause that stood in the way of AJ Capital's plans, issuing a "tentative agenda" indicating that the council would discuss the provision at its Dec. 3 meeting.
In addition, at least some council members were privately updated on the negotiations between the tenants and the developer, which culminated in an Oct. 26 developer-tenant agreement that barred tenants from voicing any opposition to the conversion plan and identified Dec. 17 as a deadline set by AJ Capital for gaining certain city approvals. After hearing about the agreement, Councilwoman Lydia Kou told the Weekly on Nov. 2 that she was "furious" about it, though she declined to discuss the terms.
Last week, planning staff released a report making a case, for the first time, for abolishing the grandfather clause, a strong indication that AJ Capital's lobbying and threats of litigation may be paying off for the company. The staff report stated that the grandfather clause "for continual use and occupancy, by the same use" was mistakenly added in January 2016 as part of a broader ordinance revising the zoning code.
Lait told the Weekly that city planners appeared to have made the change by inadvertently copying-and-pasting text from a different code provision that relates to grandfathered uses.
"Clearly, the President Hotel conversation surrounding AJ Capital has caused us to be aware of this code provision and now that we're aware of it, we're seeking to address it," he told the Weekly.
When the council approved the zoning ordinance in January 2016 that included this provision, the change was not highlighted in the ordinance and the accompanying staff reports "included no reference or policy analysis related to the change," the planning report states.
The report also argues that President Hotel isn't the only building that is impacted by the "same use" provision and cited a few others, including the Cheesecake Factory building on University Avenue and the former North Face building on Alma, both of which had trouble getting a new tenant.
The report claims that the clause has had various "negative impacts," including frustrated property owners.
"If the council decides not to amend the code, the city can expect additional downtown property owners objecting to the standard and frustrated by an inability to remodel to fill tenant spaces based on market demand and subject to the city's other regulatory requirements."
The report also states that without changing the law, other downtown properties that don't comply with the city's height and density regulations would be "prevented from remodeling, improving or replacing their facilities to change from existing land uses to other permitted or conditionally permitted land uses, including a change from non-retail to retail, which other city policies support."
The report also mentions that AJ Capital "has asserted that application of the current code would run afoul of the Ellis Act, among other state laws." (The Ellis Act ensures that property owners are able to close a rental property and evict all tenants without a local municipality preventing it.)
The staff recommendation is remarkable for several reasons. The council has never publicly discussed the removal of the grandfather clause, and planning staff is generally loathe to take on new projects without council direction. (It's far more common for Keene and other top executives to cite their daunting workload as a reason for why they cannot pursue new initiatives.)
Also, zone changes are typically vetted by the Planning and Transportation Commission before going to the council. In this case, staff deemed the removal of the "grandfather facility" provision critical for preserving "public health, safety and welfare." As such, it is going straight to council for approval on a temporary basis (the planning commission would later consider a permanent change).
Housing advocates had also pointed out that the conversion clearly runs counter to the city's housing priorities, noting that 75 apartments would be eliminated. While not technically low-income housing, rents at the President ranged from $1,200 to $2,400 a month, according to signage at the building.
Jeff Levinsky, who in June alerted city officials and residents about the proposed hotel's inconsistency with the "grandfathered facilities" clause, told the Weekly that he found it striking that the city is now considering abolishing the phrase, which could enable the loss of more housing.
If the city were to remove the restriction, other historic properties in the downtown area — including the 85-unit Stalling Court (formerly Laning Chateau), a 1929 multi-family complex at Gilman Street and Forest Avenue — would also be eligible to switch from residential to commercial use, he said.
"Our grandfathering laws downtown are pretty strict," Levinsky said. "The idea is that you have these giant buildings that in no way would have been allowed to get built today. So if you have them, you have limited rights with what you can do with them."
Despite Levinksy's and Dellenbach's suspicions that the staff recommendation to change the code now is tied to the President Hotel project and December deadlines set by AJ Capital, Lait denied the connection.
"This isn't about the President Hotel," Lait said. "This is about an inadvertent code change that we need to fix."
A controversial cap
Though the council agenda item to scrap the grandfathered-facilities provision seemed to emerge out of the blue, the recommendation to remove the downtown cap on non-residential development from the city's municipal code has been nearly two years in the making.
The idea to eliminate the cap, which has been in place since 1998, first emerged on Jan. 30, 2017, during a contentious and controversial council meeting over the pending update of the Comprehensive Plan. By a 5-4 vote, the downtown cap, which limits non-residential development built in the downtown area since 1998 to 350,000 square feet, was eliminated from the plan.
The policy, however, has not yet been implemented because the actual ordinance is still on the books.
For AJ Capital, whose President Hotel conversion would not be allowed with the development cap still in place, time is of the essence. (Only about 19,000 square feet of commercial development can be built under the cap, according to staff. The hotel renovation would encompass more than 50,000 square feet.)
The five council members who want to eliminate the downtown cap — Cory Wolbach, Greg Tanaka, Scharff, Liz Kniss and Adrian Fine — likewise are facing a ticking clock. Wolbach and Scharff will both be off the council next year, and the newly elected member, Alison Cormack, has been less keen than the current pro-growth majority to eliminate the cap. Cormack has not expressed any strong views about the city's commercial restrictions, but when asked by the Weekly about the downtown cap shortly before the election, she said she saw no reason to do away with it.
The fact that the other three council members who will continue on the council, Vice Mayor Eric Filseth, Tom DuBois and Lydia Kou, have all vociferously opposed removing the downtown cap suggests that the new seven-member council of 2019 is much less likely to repeal it than the nine-member council of 2018.
In addition to the political opportunity to get the downtown cap formally removed, AJ Capital faces other opposition on this zoning change: The city's Planning and Transportation Commission considered the repeal of the downtown cap on July 25, and, in a rare move, voted to keep it in place and to punt the issue back to the council.
Commissioners noted that much had changed since January 2017, when elimination of the cap made more sense to some: Housing became a more pressing priority; a ballot measure was proceeding this summer to slash in half the non-residential development allowed by in the Comprehensive Plan (the council ultimately adopted the citizen initiative, obviating the need for a vote on it in November); and the President Hotel tenants were on the verge of eviction.
Chair Ed Lauing said that increasing housing should "take the highest priority."
"That's what we need to work on for the rest of the year and that needs to be done before we look at this thing in front of us tonight in a vacuum," Lauing said. "Because we don't know what the impacts are."
Commissioner Asher Waldfogel questioned the timing of the policy change, which he argued contradicts the council's goals of encouraging housing and protecting neighborhoods from commercial intrusion. Allowing more office space, he noted, is not a stated priority.
"So, we're solving a non-problem today, and it's something that's just wildly contradicted in the Comprehensive Plan," Waldfogel said.
Opposition is also almost certain to come from residents concerned about commercial growth in the city. Several addressed the planning commission in July and cited the plight of the President Hotel tenants. Joe Hirsch, co-founder of the grassroots group Palo Altans for Sensible Zoning, told the commission that by removing the cap, the commission will become a "part of a process that will, in essence, evict the tenants."
Margaret Heath, a College Terrace resident, called President Hotel "a perfect example of the kind of housing that we need downtown.
"Indeed, there may be other housing units downtown that would also be eliminated," Heath said.
Though the downtown cap is scheduled for council discussion in December, Lait disputed the notion that the city's timing has anything to do with AJ Capital's proposed timelines. City staff has a goal of implementing the Comprehensive Plan directions within a year, Lait said. The plan update, he noted, was adopted in November 2017, and it has taken some time for staff to find a slot on the council agenda to take up the change, he said.
"AJ Capital has its own interests, and they want to see progress be made," Lait said. "That's independent of what we're able to do and willing to do."
Up until this week, council members had not publicly acknowledged the existence of AJ Capital's offer to the city or its negotiations. Scharff said Tuesday that he rejected AJ Capital's terms immediately after Franzen sent them. Scharff provided as evidence a Sept. 24 email that he had sent to the tenants' attorney, Scott Emblidge. Referring to AJ Capital, Scharff wrote that he has to "set them straight on the city process."
"They clearly don't understand," Scharff said.
On Monday, Kou alluded to the agreement when she fervently objected to taking up any proposed zone changes, including the grandfathered-facilities clause and the downtown cap, until next year. Considering these changes now, she said, "is going to further mistrust from the general public." She referred obliquely to the deadlines of a downtown property owner, a veiled reference to AJ Capital.
"I find it highly unethical to be doing this, especially with the dates of Dec. 10 and Dec. 17 over our heads in making decisions," Kou said.
Since its Sept. 24 proposal to the city, AJ Capital has scaled back its demands, eliminating references to the rooftop deck and the conditional-use permit to serve alcohol, according to an updated term sheet that was obtained by the Weekly. It still calls for the city to eliminate the downtown cap and the grandfathered facilities clause and to waive in-lieu fees for parking, with a deadline of Dec. 17, the council's last meeting before the council's winter break. If that deadline is met, the term sheet states, tenants will be allowed to live in the building until June 16, 2019. If the deadline is not met, tenants will face a Jan. 31, 2019, eviction.
Lait was cautious when asked whether the confluence of the council's consideration of the two zoning items and the deadlines in the AJ Capital term sheet is a "coincidence," only reasserting that the city would have pursued these changes regardless of the President Hotel project.
"Scheduling this hearing before the date on AJ Capital's term sheet gives the council an opportunity to correct an error and, if approved, extend the time that residents living at the President Hotel can stay in their apartments," Lait wrote in an email, adding that other downtown property owners are "impacted by this inadvertent change."
The publicly noticed hearing, he wrote, will give the council a chance to decide to retain the language, modify it or restore it to the pre-2016 standard.
"In any event, such action would be intentional and transparently discussed in an open public meeting, which to this point has not occurred," Lait wrote.
Keene also rejected the notion that AJ Capital's plans had anything to do with setting the council's agenda. The main consideration when scheduling the grandfathered-facilities issue, he said, is to find a date when the council's busy agenda can accommodate an important item like that.
Keene said he has not seen the AJ Capital's deal with its tenants and was not influenced by it in any way.
"Bringing these items forward before the council goes on a break at the end of the year ... is more about the fact that we have a lot of work we need to do with the council and when we have the opportunities to get stuff on the agenda," Keene told the Weekly.
In fact, by Wednesday, it became increasingly likely that the two zoning items that were scheduled for Dec. 3 would be postponed. The council's discussion on Monday of a different zoning issue was continued to Dec. 3, pushing the "grandfathered facilities" item forward to Dec. 10. And as for the downtown-cap ordinance, it's unlikely the council will be able to consider it before the end of the year, given the council's upcoming agendas, he said.
Scharff, for his part, said that even if staff had decided to put the zoning issues on the agenda to accommodate AJ Capital's deal with tenants, there is nothing improper about that.
He also noted that the council had not discussed the proposed AJ Capital's terms in any closed sessions (though it had talked about AJ Capital's threatened legal challenge).
"I would not say it's inappropriate for the council, in an open process, to make the choice about whether or not to do that now, which would help the tenants, or whether to deal with it after this time frame," Scharff said. "If I had a choice on that, I'd say bring it forward early because I think the council should make those choices."
Dellenbach sees it differently.
"As someone said, 'coincidence' is the word we use when we can't see the levers and pulleys," Dellenbach told the Weekly.
While the council has not entertained AJ Capital's offer, those tenants that remain in the building appear to be honoring their Oct. 26 agreement with the building's new property owner. The Nov. 12 deadline has come and gone and those who remain in the building have been watching their words carefully of late. In June and July, dozens talked about the devastation that the President Hotel's conversion would wreak on their lives. During a June 18 council meeting, tenant Alex Smaliy, who works in tech, said it would be "very difficult to imagine that any one of these residents will find housing in this area."
Another resident, Mary Riordan, told the council that there is nothing in the area anywhere near price range of the President Hotel rents.
"I would have to leave Palo Alto," Riordan said.
But on Oct. 23, just as AJ Capital was finalizing its deal with the residents, Riordan reached out to council members with a different message. In an email, Riordan thanked them for their recent efforts on behalf of renters and made an unusual request.
"Moving forward, I hope that you will assess any proposal with regard to the property at 488 University Ave. solely on its merits," Riordan said.
• Watch Weekly journalists discuss this issue on an episode of "Behind the Headlines."