The Palo Alto City Council will try to strike a delicate balance later this month, when it considers how much the city charges commercial developers in "impact fees" to support affordable housing.
The council majority believes that the current fees are far too low and that raising them would allow the city to build more developments like the recent Wilton Court project on El Camino Real and the proposed Mitchell Park project, both of which require public subsidies. Raising them too much, however, could deter new development and leave the city's affordable housing fund dry.
On Oct. 18, the council is set to continue a debate that has been polarizing the council for years. In December 2016, council members voted to significantly raise impact fees for affordable housing only to see the action overturned and the increases dramatically reduced by newly elected council members in March 2017 on what is typically a routine "second reading" vote. Instead of raising the fees from $20.37 per square foot to $60 per square foot for new office developments and from $20.37 to $30 per square foot for hotels, as initially approved, the council voted 5-4 to adopt far more modest increases, bringing the office fees to $35 per square foot and leaving the hotel rate as is. Since then, the rate has gone up to the current level of $39.70.
Mayor Tom DuBois and council members Eric Filseth and Lydia Kou — who supported the steeper increase in 2016 — have publicly maintained since then that the rate remains far too low and have called for revisiting the issue and reaffirming the council's initial direction. And unlike in 2017, the majority of the council now appears to share that view. Vice Mayor Pat Burt and council member Greer Stone both suggested in recent public hearings that the fees should be raised.
The impetus for the renewed effort was a memo that Filseth and Kou drafted in June, arguing for the fees to be increased. The memo noted that the city is facing a state mandate to produce more than 3,000 units of affordable housing and that it does not currently have the means to do so. Since 2015, the memo states, the city had dedicated millions of dollars in affordable housing funds to help Santa Clara County purchase and preserve the Buena Vista Mobile Home Park and to support the Wilton Court project, which provides 58 apartments for low-income residents, and the teacher housing project that the county is preparing to develop on Grant Avenue, near the Palo Alto Courthouse.
The fund, the memo notes, "is now nearly depleted and needs replenishing."
"Since demand for housing, including housing affordable to low- and moderate-income residents, is driven primarily by job growth, it makes sense to fund Affordable Housing subsidies from that job growth, through commercial development impact fees which reflect that impact," the memo states.
During the council's June 21 discussion of the memo, Filseth cited "nexus studies" in other jurisdictions indicating that new commercial development demand for affordable housing was somewhere in the range of $100 to $200 per square foot of office space. That, he said, is far more than the city is able to reinvest in such housing.
"If we're serious about affordable housing as a permanent structural part of our society, then we're going to need policies that rework that," Filseth said.
Stone similarly argued that the city will not be able to achieve its Regional Housing Needs Allocation (RHNA) targets unless it is able to increase its affordable housing fund.
"We are not going to get anywhere close to our RHNA targets or the kind of increases in affordable housing that all of us want in this city based on inclusionary zoning alone or relying on other sources," Stone said. "This still isn't going to get us there but it's another tool that we have to add to our tool chest."
In raising the fees, the council will be able to rely on a new study from its economic consultant, Strategic Economics, which surveyed the cost of land and construction in Palo Alto and which established the maximum fees that the city can legally charge. That study was completed and released last week, paving the way for the council to adopt the new fees at its Oct. 18 meeting.
The study concluded that for office and research-and development projects, the maximum fee can be set as high at $264 per square foot; for hotels, the maximum nexus fee is $177 per square foot.
At the same time, the study found that setting a fee that high would make many types of commercial development — particularly, low-density office projects, research-and-development facilities and hotels — infeasible.
A professional office project with floor area ratio of 1.0 could support a fee of about $50 per square foot, the study concluded. At higher levels, the development project becomes less likely to get built because the costs become too high. Meanwhile, denser — and, hence, more profitable — office projects with a floor area ratio of 2.0 could support a linkage fee of between $70 and $150 per square foot still remain profitable, the study found.
The council will consider the study's findings and set the new impact fees for commercial development on Oct. 18, as part of a broader discussion of municipal fees. In a report accompanying the Strategic Economics studies, staff from the Department Planning and Development Services warn that setting the fees at the highest level — while legally justifiable — can adversely affect the city's bottom line.
"A fee that makes development less likely to be built is permissible, but it may negatively impact the amount of fees collected not only for the affordable housing fund but other City services supported by commercial development," the report from the Department of Planning and Development Services states. "This may include both direct impact fees and economic benefits such as visitors or business generating revenues such as sales taxes or hotel."