With housing production falling well short of their goals, members of the Palo Alto City Council clashed and compromised Monday over the best way to support residents whose incomes make it all but impossible to live in town.
The discussion was prompted by a new memo by Councilwoman Lydia Kou and Councilman Tom DuBois, who argued Monday that the city's housing efforts are inadequate to help those in the lower income categories. The memo suggested that the city focuses on those housing programs that target low- and moderate-income residents.
The council ultimately voted to move ahead with several key proposals in the memo, including ones that staff had already been working on. These include implementing the "Palmer fix," a policy that would require developers of rental properties to designate a percentage of their units for below-market-rate housing. The city's existing inclusionary zoning policy only applies to ownership units.
The council also agreed to explore protections for low-density buildings, including duplexes and cluster housing.
And in a turnaround, the council agreed to explore roughly doubling the housing-impact fees that the city charges commercial developers. With its unanimous vote, it directed staff to update a nexus study that the city had performed in 2016, when it last considered the fee change.
At that time, the council voted to raise the housing-impact fee from $20.37 per square foot to $60 per square foot for commercial projects. But after the November election changed the council's makeup, members voted to bring the rate down to $35 per square foot before the new ordinance could take effect.
These moves come at a time when the city's housing production continues to lag well behind the council's ambitions and expectations. Despite setting a goal of producing 300 housing units annually, adopting new laws to encourage accessory-dwelling units and creating a Housing Incentive Program with density bonuses, the city hasn't seen any new development proposals since January, when it approved Wilton Court, a 59-unit below-market-rate housing development on El Camino Real.
Meanwhile, the few developments that have won approval remain mired in uncertainty. Councilwoman Liz Kniss cited the project that the city approved in October 2017 — a four-story building with 50 apartments at 3001 El Camino Real, near Equinox Gym. The builder, Sobrato Organization, informed the city that it won't be building the project because "it doesn't pencil out to build in Palo Alto at this point."
"That puts us really in a tough spot," Kniss said.
She also alluded to the 57-unit development that the council approved in June 2018 for the prominent corner of Page Mill Road and El Camino Real, on a former VTA parking lot. Construction, Kniss said, has been held up by a neighboring property.
Statistics from recent years also paint a picture of failure. In 2015, the city had permitted 43 units in the very-low-income category and 58 units in the low-income category. In 2016, 2017 and 2018, the city hadn't permitted a single unit in either of these categories. This year, it has permitted two low-income income and zero very low units.
In the moderate-income category, the city had approved 11 units in 2015, three in 2016, 28 in 2017 and zero since.
The only area where the city has seen some production is in the above moderate category, with 174 permits in 2015; 15 in 2016; 61 in 2017; 54 in 2018; and 66 in 2019.
While the council supported the bulk of the proposals in the Kou-DuBois memo, members also acknowledged that much of the work proposed is already occurring. The council adopted in early 2018 a Housing Work Plan with a long list of new housing programs, including zone changes that loosen density rules and that enable mixed-use projects consisting of retail and housing. The plan was spurred by an October 2017 memo penned by Vice Mayor Adrian Fine and co-signed by Kniss and former Councilman Cory Wolbach.
Then, as now, the main difference between Fine's camp and Kou's was over whether the city should encourage housing for all income levels or focus its energies on affordable housing.
Kou argued Monday that producing market-rate housing does little for those who are not at the highest income levels. She showed her colleagues slides of several apartment listings, including ones in recently built apartment buildings in Mountain View, with rents for one-bedroom apartments hovering well above $4,000.
"The trickle-down economics don't work," Kou said.
The city's programs should focus on addressing the city's "affordability issue" — particularly, housing for those making 80% of the area median income or below, according to Kou.
Kniss said she found Kou's memo "troubling" and suggested that some of its proposals would actually make it harder for developers to build housing. The memo proposes, for example, exploring a requirement that up to 25% of the rental units in new developments be set aside for below-market-rate housing. She called such a rate "a really high bar for a developer to take on" and suggested that the council consider far more drastic law changes if it really wants to create housing.
"I think we can decry that there's no affordable housing," Kniss said. "But if we are not willing to go up, as Mountain View did, to go up higher, to go up in density, to increase the FAR (floor-area-ratio), I don't think we will increase (housing) at the low-income end. ..."
Fine also said that the best way Palo Alto and other communities can support the production of affordable housing is through "large projects that are mostly market rate, and some portion of them can be subsidized." While he joined his colleagues in supporting the "Palmer fix" (named after the 2009 ruling in the case of Palmer v. Los Angeles that made it illegal for cities to adopt inclusionary-zoning laws to rental properties — until a 2017 state law restored the cities' powers to do so), he argued that the rate should remain at 15%, similar as for ownership units.
Mitch Mankin, a policy and advocacy associate at SV@Home, a group that advocates for affordable housing, also urged the council to tread cautiously on raising the percentage in the inclusionary zoning requirement. The area has seen economically feasible projects with 15% of their units designated for residents at or below 80% of area median income, but there is no evidence that the market would support going to a rate higher than 15%.
"We know that 25% of zero units is still zero units," Mankin said.
Fine also went along with his colleagues in directing staff to explore raising the housing-impact fees. In doing so, he warned against adopting policies that are too punitive to developers.
"I do not understand why we punish developers," said Fine, who in 2017 helped overturn the council's prior decision to raise the impact fees. "When you have a shortage of bread, you don't punish the bakers. Developers are the only people around here building homes."
Others were more enthusiastic about raising the fees. Councilman Tom DuBois and Mayor Eric Filseth had both advocated for raising rates during their re-election campaigns in fall 2018 and each reaffirmed his support for the change on Monday night. The change, they noted, would be consistent with Santa Clara County's recent decision to raise its development-impact fees for Stanford University to $68.50 per square foot.
The city will need to perform a nexus study to justify the rate increase, though council members don't expect the study's conclusions to be much different than they were in 2015. Filseth said it's "inconceivable" that the study will show that impacts of development today are lower than they were a few years ago.
The city uses the development fees to support affordable housing projects. Most recently, the council contributed $10 million from its affordable fund to support Wilton Court, the 59-unit development for low-income residents and adults with disabilities. The contribution allowed the nonprofit developer Palo Alto Housing to move ahead with the project, but it but depleted the housing fund.
"I don't want to wait another decade for a Wilton Court project," Filseth said. "There numbers are a few millions here and there, but the Housing Corporation (as Palo Alto Housing was previously known) takes that money and leverages it for state and federal funds, so there's a multiplier effect there."