Commercial builders in Palo Alto will have to pay significantly more to support the city's affordable housing projects after the City Council voted on Monday night to hike up the city's "impact fees."
In a vote that harkens back to one of the council's deepest political divisions of the past decade, the council voted 5-2 to raise the city's impact fees for commercial and research-and-development projects from the current level of $39.50 per square foot to $68.50 per square foot.
Supporters of the change argued that the change is necessary to address the impacts of commercial growth on the region's housing stock, particularly when it comes affordable housing. Council member Eric Filseth, who led the charge on raising the fees, suggested that Silicon Valley has profited fabulously from the technology boom while failing to make the types of investments in housing and transportation that are necessary to ensure long-term prosperity. Requiring tech firms to contribute more for affordable housing is a way to address that, he maintained.
"If we're going to do this sustainably in the long run … then we and all the peer cities need to get out of kick-it-down-the-road mode and get into a mode where if we build something, we're upfront about true impacts and we've got a regular process in place for funding those," Filseth said.
The debate is far from new. In 2016, the City Council voted to significantly raise impact fees for affordable housing only to see its decision overturned in 2017 by a narrow majority of the newly elected council. Instead of raising the fees from $20.37 to $60 per square foot, as was originally proposed, the council voted 5-4 to set the fee at $35 per square foot (it had since gone up to $39.50).
Filseth, Mayor Tom DuBois and council member Lydia Kou were all in the minority during the 2017 vote and all had supported going back to the larger amount. They pointed to Santa Clara County, which had adopted a fee of $68.50 for affordable housing when the Board of Supervisors reviewed Stanford University's plans to expand academic space and argued that it's time to revisit the issue.
In June, Filseth and Kou submitted a colleagues memo that made the case for raising the fee and cited the various projects that had benefitted from the city's affordable housing fund, including the preservation of Buena Vista Mobile Home Park and Wilton Court, a 58-apartment complex for low-income families and individuals with development disabilities that is currently being constructed.
"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.
Not everyone is convinced that the new fees are a good thing. Charlie Weidanz, CEO of the Palo Alto Chamber of Commerce, suggested that the fee proposal, coupled with the city's existing caps on commercial development and its exploration of a new business tax, would hinder the city's business community.
"And if companies do leave or downsize their operations due to these taxing measures, the city will not only lose tax revenue but also restaurants and hotels that rely on revenues generated by employees and business travelers will be significantly impacted," Weidanz said.
Stanford University has also expressed concerns about the higher rate. Jean McCown, associate vice president for government affairs, noted in a letter that most neighboring cities have much lower affordable housing impact fees, generally between $15 and $30 per square foot. Redwood City has a fee of $20, while Menlo Park has a fee of $18.
"A significantly higher fee is likely to discourage types of businesses that could be desirable to have in Palo Alto — such as capital-intensive businesses in a variety of research and development fields that contribute to a stable economic ecosystem," McCown wrote. "We are concerned that increased fees might result in less investment and partnership in Palo Alto."
Council member Greg Tanaka, who was part of the 2017 majority that reversed the council's 2016 action, shared her concerns. He pointed to Tesla's recent decision to move its headquarters to Austin and suggested that the city's startup culture is suffering.
"I think it's a real wake-up call that innovation is leaving our city and it's not something to be taken for granted," Tanaka said. "By making it harder and harder to do business in our city, we're going to lose this innovation.
"Some might think that Palo Alto is always going to be the most desirable place to be and that's simply not true."
While council member Alison Cormack joined him in dissent, the rest of the council supported the higher fee, which is based on a nexus study that the city had recently commissioned from its consultant, Strategic Economics. Vice Mayor Pat Burt recalled the council's debate over fees in 2016 and 2017 and argued that by nullifying the higher fee increase, the council majority had hindered the city's ability to support affordable housing.
"Millions of dollars for affordable housing was lost because of the reversal of what was then described as a 'pro-development' council majority that came into office in 2017 and cost our community huge amounts in ability to fund affordable housing," Burt said. "I'm glad this council … is going to be committed to help fund this affordable housing like it needs to be done."