Fueled by federal funds, Palo Alto is preparing to undertake a three-year planning process aimed at answering a critical question: What would it take to build more housing in the downtown area?

The city has received a grant of $800,000 from the Metropolitan Transportation Commission (MTC) for the planning process, which is expected to take about three years and culminate in a new Downtown Housing Plan. The City Council will consider accepting the grant on Monday night as well as discuss committing additional city funds for the planning effort.

If adopted, the downtown plan would play a central role in the council's efforts to increase housing in the city's most transit-served area. It may also help the city plan for transportation improvements, including a reconfiguration of the city's northernmost rail crossing at Palo Alto Avenue so that the road and the tracks no longer intersect.

That said, the boundaries of the proposed planning area stop just short of the downtown Transit Center, which includes a Caltrain station and various bus stations. The plan would cover the area just east of the tracks, between Alma and Cowper streets and bounded by Lytton Avenue in the north and Hamilton Avenue in the south.

While transportation improvements would be considered as part of the planning, the main focus of the effort would be housing. The money that the MTC is distributing comes from the Federal Highway Administration and is dedicated to planning in "priority development areas" — areas that cities designate as ripe for growth and change and that are typically located next to transit hubs. The council designated a 206-acre portion of downtown as a priority development area in January 2020, making it eligible for planning grants. The 76-acre area that staff has proposed for the Downtown Housing Plan is included in the priority development area.

Planning Director Jonathan Lait said that city staff had initially considered a broader downtown planning effort, one that considered the transit center and improving connections between downtown, Stanford University and Stanford Shopping Center. The decision to focus on the section just east of the transit hub was based on the staff's estimate of what can actually be accomplished with the grant dollars.

Lait noted, however, that staff has been in discussions with Stanford University about possibly expanding the area to include the transit area if the council opts to do so.

The city's Comprehensive Plan, which is generally seen as its land use bible, includes a policy that encourages an area plan for downtown. A broad analysis, however, would require more than double the grant money that the city has received from the MTC, Lait said.

"We're really talking about a more extensive planning effort," Lait said, referring to the Comprehensive Plan policy. "The idea here is to capitalize on the opportunity that we have now."

If the council approves the MTC grant, the housing plan would be one of several concurring efforts to create a new vision for downtown. The council has already directed staff to evaluate streetscape improvements along University Avenue to make it more compatible with the parklets that popped up along the thoroughfare during the pandemic and that are now set to become permanent fixtures.

Then there's grade separation, the city's large-scale effort to redesign all of its grade crossings so that streets no longer intersect with rail tracks. The redesign effort initially included the city's northernmost rail crossing at Palo Alto Avenue, though the council ultimately voted to defer its design work on this crossing until it forms a broader plan for the downtown area.

Given its limited scope, the MTC grant is unlikely to further the discussion of the Palo Alto Avenue crossing. But Mayor Pat Burt noted that other funding sources may become available for grade separations in the downtown area. One potential source is the Santa Clara Valley Transportation Authority, which included $700 million for grade separation as part of its Measure B, the 2016 sales-tax measure. The money is earmarked for Palo Alto, Mountain View and Sunnyvale.

Burt said in an interview that one important factor that the council will consider in its discussion of the MTC grant is the degree to which the city should be hanging its planning efforts on the regional agency's stipulations. He also said it's important for the housing plan to be consistent with the city's vision for transportation improvements.

"I'd want to see a plan that would increase housing in our downtown area significantly over time and do so in a way that is integrated in not only more transit use but necessary changes that fit grade separations and infrastructure that is approaching 100 years old in the multimodal center," Burt said.

The MTC grant requires the city to complete its planning effort within three years, by April 30, 2025. The funding agreement for the grant requires Palo Alto to complete a series of reports as part of the planning process, including an evaluation of the relationships between jobs and housing affordability, an analysis of existing inequities between people of different racial or ethnic backgrounds, and consideration of changes to development standards that would make housing construction more feasible.

The plan's goal to increase residential construction in downtown Palo Alto has taken on a greater sense of urgency over the past year as the city is moving toward adopting a new housing element, a document that identifies housing sites and strategies that will allow it to meet its regional mandate of adding 6,086 new dwellings by 2031. The area immediately around the downtown Caltrain station could play a pivotal role. Stanford University, which owns the land, had proposed a concept for accommodating up to 530 apartments near the transit station. That, however, would entail a 137-foot-tall building.

In March, the council backed a more modest alternative when it voted to include 270 apartments at the center site in the next housing element.

Even with a limited scope that excludes the transit center, the MTC grant is unlikely to be enough to complete the plan for the 76 acres. City staff believe that it would take at least an additional $150,000 annually to hire consultants who would support the project, according to the report from the planning department. A key decision that the council will have to make on April 18 is whether to commit these funds.

The report also notes that downtown faces numerous challenges that limit housing production. These include high land costs, the tendency of office development to be far more lucrative for developers than residential buildings, and the fact that public parking takes up a significant amount of land in the area.

"Through a focused and thoughtful housing plan, the city can identify ways to help overcome these challenges and find opportunities to promote greater housing production," the report states.