A plan to replace four homes on a busy stretch of Page Mill Road with a three-story building featuring apartments, office space and retail ran into a wall of skepticism Monday night when Palo Alto officials declined to grant the developer the requested zoning exceptions and demanded a fresh financial analysis of the project.

The development at 441 Page Mill Road is one of several mixed-use projects that have recently been approved in the busy and often congested area around Page Mill Road and El Camino Real.

Unlike the other projects — a crop that includes mixed-use projects at 3159 El Camino Real, 2180 El Camino Real, 2500 El Camino Real and 195 Page Mill Road — this one relied heavily on a state law that automatically grants developers zoning concessions if they provide affordable-housing units. As such, it was a test case for the Palo Alto council, which last year adopted a local version of the density-bonus ordinance.

Designed by Stoecker and Northway Architects, the development at 441 Page Mill Road would include 10 apartments, three of which would be sold below market rate. In exchange for providing these three units, property owner Norm Schwab is requesting more density. He is seeking to build 21,540 square feet of office space at the site, double of what would normally be allowed under the zoning code.

He is also seeking a lot coverage of 18,520 square feet, more than 5,000 square beyond what would normally be allowed, and an increase in the project's overall density. While the site's zoning would accommodate a development 26,926 square feet, Schwab's proposal comes in at 35,521 square feet. It would replace four existing homes on a largely commercial block that includes Kelly-Moore Paints, the AT&T retail store and an animal hospital.

The project has already undergone numerous reviews and had recently secured the approvals of the Planning and Transportation Commission and the Architectural Review Board.

The reception from the public has been mixed, with many praising the building's design and calling it exactly the type of mixed-use development that the city should encourage at the transit-rich corridor. Others argued that the project would further exacerbate the traffic congestion in the rapidly changing area near the California Avenue Business District.

The council was likewise ambivalent. Though members generally liked the project's design, they had a problem with its size and density.

After a discussion that lasted more than four hours, the council unanimously agreed to commission another analysis before approving what they characterized as a precedent-setting development.

The main questions revolved around the value of the zoning concessions. In seeking the concessions under the state's density-bonus law, the applicant was required to demonstrate that the extra density is needed to support the creation of affordable housing.

The city's economic consultants, Keyser Marston Associates, confirmed that this is indeed the case. The cost of constructing the new units in the firm's estimation was greater than the benefit that the developer would get from the increased density.

The firm estimated that the net cost of the additional housing units would be about $1.85 million. The net value increment from the concessions was projected to be $1.28 million. This led Keyser Marston to conclude that "all three of the requested concessions are needed to address the BMR (below-market-rate) housing costs in the proposed project."

But with commercial real estate market booming in Palo Alto, the council wasn't sold on this analysis. Councilman Eric Filseth led the charge and asserted that the figures in the Keyser Marston report don't account for the type of double-digit growth Palo Alto has been experiencing in the past decade.

He noted that real estate rent in downtown Palo Alto has been going up by 11 percent annually over the past decade and plugged in his own numbers, which suggested that the project would generate far more revenue than the consultant had indicated.

Filseth said the Keyser Marson's approach uses "simplified models" and "shortcuts for a really discounted cash-flow analysis." The simplified model, he said, doesn't work in the high-growth climate of Palo Alto, he argued.

"I think we used a model that's not quite appropriate for the exact circumstances in Palo Alto," Filseth said. "These numbers are the basis for deciding whether the city is legally entitled to grant concessions. The current model gives the wrong answer and we can't use it to make that judgment."

Councilman Tom DuBois, who like Filseth is affiliated with the slow-growth group Palo Altans for Sensible Zoning, levied his own criticisms at the consultant's methodology and said it "doesn't pass the sniff test."

While Filseth focused on the revenue projections, DuBois zoomed in on construction costs and argued that the report placed too much burden on the affordable-housing units in justifying the project's overall costs. The methodology, he said, could prompt a developer to inflate his construction costs by installing amenities such as marble entryways and golden urinals — all for the sole purpose of justifying the density concessions he is seeking.

"I'd like this to find a method that shields the city from individual construction costs and the potential of loading expensive things to the building and spreading that over the BMRs (below-market-rate units)," DuBois said. "Because at that point you will be able to justify whatever density you want."

After Filseth proposed commissioning a fresh analysis that considers local growth trends, DuBois and other council members began tacking on their own conditions to the motion. The long discussion ultimately netted a laundry list of conditions, including a direction to staff to conduct additional traffic analysis and a requirement that the building's occupants use its garage. The council voted unanimously not to approve the project Monday night but to defer its decision until the new studies are concluded.

The council's caution was fueled by the fact that this was the city's first test of the density-bonus ordinance and council members stressed the need to "get it right."

Councilman Marc Berman was one of several council members to make that point, even as he then criticized the state law that makes the density bonuses almost automatic.

"We all agree that affordable housing is a good thing and is desperately needed in Palo Alto, but when setting precedent we need to be diligent to make sure we're making an appropriate analysis for our community," Berman said.

Berman lauded the "quality of the project" but called the building too big. He criticized the state law for its unintended consequences and said he was "uncomfortable with the fact that we lost all local control based on a state density-bonus law."

The proposal was further complicated by the applicant's decision not to rely on the local density-bonus ordinance that the city passed last year. Intended as as companion piece to the state law, the Palo Alto ordinance created a menu of concessions that a developer can automatically receive for providing affordable housing (these include things such as extra height and parking exemptions).

The project at 441 Page Mill Road was designed before the local ordinance was approved and it relies on concessions that are not on the city's menu. Because the developer went "off menu" in requesting concessions, he was required by the local ordinance to submit an economic analysis justifying its requests.

The fact that the concessions involved a significant increase in density further complicated the decision by making the project a tough sell for council members who had promised during last year's election to protect the community against unfettered commercial growth and to oppose the types of parking and zoning exemptions that have been common in recent proposals. The Page Mill project is also seeking parking exemptions that would allow it to provide 91 parking spaces — 19 fewer that the city's code would otherwise require. This, however, wasn't as big of a stumbling block as the sheer size of the proposed building.

"I'm probably more open to being persuaded that the parking could be adequately addressed on the site if it weren't for such a huge office bonus that's going on here," Councilman Patrick Burt said.