Palo Alto will have to refund more than $900,000 to a downtown developer after a state appeals court ruled Monday that the city had illegally imposed parking fees on his project without having a real plan to spend this money on parking.
With its March 20 ruling, the 6th District Court of Appeal overturned a decision by a trial court in favor of the city and handed a victory to Charles "Chop" Keenan, a developer whose commercial properties in downtown Palo Alto include the Aquarius Theatre, the HanaHaus building that once housed Varsity Theatre and the mixed-use building at 135 Hamilton Ave. that went up on the corner of Hamilton and High Street. As part of the city's 2013 approval of the Hamilton Avenue project, Keenan's company paid $1.56 million in fees, which included a $972,000 "in-lieu parking fee."
At the time, the city had plans to use these fees to expand parking supply in the downtown area by building a garage. Council members had flirted with the idea of adding a public structure on an existing lot on Waverley Street and Hamilton Avenue and voted more than a decade ago to place the project on its official list of infrastructure priorities. But the council made an about-face in February 2019 and opted not to move ahead with the garage at 375 Hamilton Ave., choosing instead to pursue a comprehensive strategy for parking.
Since then, plans for the garage have remained in the city's infrastructure purgatory, with the council neither pursuing nor formally abandoning the project. In 2020, the council approved a resolution stating its intention to use the parking fees "for the purpose of constructing public parking spaces within the University Avenue parking assessment district to serve the parking needs of the district created by the developments that paid the fees." More recently, it amended its plans to explore the construction of housing and parking on city-owned lots, a strategy that the council included in its new Housing Element.
While Keenan's company, Hamilton and High LLC, has demanded its money back, a Santa Clara County Superior Court judge ruled in 2021 that the city's actions were legal. Judge Cynthia Lie warned in the ruling, however, that "there may come a time when the duration of the City's inaction on the parking garage — short of express abandonment — would warrant restitution on in-lieu parking fees."
That time arrived Monday, when a panel of three judges concluded that the city ran afoul of state law by failing to make findings every five years to account for the money in the fund, consistent with the Mitigation Fee Act. The city had argued that it didn't have to make these findings because the in-lieu parking fees — which developers pay to avoid providing actual on-site parking — are not governed by the Mitigation Fee Act.
The appeals court concluded Monday that they are. Writing for the majority, Justice Allison Marston Danner noted that the city had issued five-year reports for the parking fund in January 2009 and January 2014 and argued that the language of the law required the city to continue to do so, even for funds that were contributed years ago and were never spent.
"Five-year findings must report all unexpended fees in the account or fund, irrespective of the date at which the fees were deposited, as long as the account or fund during the five-year period contained a positive balance of unexpended fees," Danner wrote. "We therefore reject the City's contention that it was not required to make five-year findings on the unexpended portion of the parking fund for the fiscal year that ended on June 30, 2018."
While the ruling pertains only to the fees that Hamilton and High LLC contributed to the city, it also places in legal jeopardy other in-lieu payments that developers had made to the city. Between 2012 and 2015, Palo Alto collected $4.5 million from five different development projects, including 135 High St., according to the court opinion.
Danner recognized in her opinion that the court's prescribed remedy for an agency that fails to make the five-year findings "may be viewed as severe where the error or omission in making the required findings could be perceived as slight or emendable."
"However, such speculation about the preferred policy outcomes or possible mitigators goes beyond our role in interpreting the statutes," she wrote.
Read the court's full ruling: