Palo Alto officials rarely turn down grant funding but they made an exception on Monday night when they agreed not to launch a long-discussed master plan for the area around Fry's Electronics.

Instead, the City Council unanimously voted to defer the plan for the 15-acre site until after it adopts a broader vision for the various neighborhoods around California Avenue. The decision not to move ahead with the plan was reached despite recognition that this could effectively nullify a $256,000 grant that the city had received from the Metropolitan Transportation Commission for this purpose.

The area, commonly referred to as the Fry's site because of its flagship tenant, is seen by the council and planning officials as one of the city's most promising areas for developing new housing. A report from city planners calls it one of the city's "largest underdeveloped sites" and says it provides "a unique opportunity to plan for a variety of uses," with housing topping the list.

The city's Housing Element lists the site as capable of accommodating a "realistic capacity" of 221 new housing units. The site's location near the California Avenue Caltrain station also makes it ripe for transportation improvements, which the master plan would also consider.

"The coordinated area plan would identify land use and transportation opportunities, include a site plan with a mix of uses, and seek to enhance the site's transit oriented character by improving vehicular, pedestrian and transit opportunities," the report from the Department of Planning and Community Environment reads.

Earlier this year, council members were anxious to launch the planning process out of fear that Fry's would leave and that the site would be redeveloped without adequate guidance from the city and the community. Since then, however, Fry's has extended its lease and is now set to remain at its current location, at 340 Portage Ave., until at least early 2020, said Tim Steele, senior vice president for the Sobrato Organization, which owns the site.

With the sense of urgency gone, the council decided not to pursue the grant and the master plan at this time. The decision was reached after Steele committed up to $300,000 of Sobrato's money to help pay for a master plan for the Fry's site in the future, provided the city does not pursue the state funds now. The pledge was made in response to Councilman Marc Berman's question about whether Sobrato would be willing to "backfill" the grant funds once the city is ready to move ahead with the planning process.

Steele said Sobrato had approached the city before Fry's exercised its option to extend the lease to express its interest in participating in the master plan and possibly help pay for it.

"We talked to staff about the appropriate vehicle to fund it," Steele said.

The council was all too happy to take Steele up on his offer, which Councilwoman Liz Kniss characterized as a "gentleman's agreement."

Councilman Eric Filseth made the motion not to proceed with the master plan at this time and his colleagues quickly agreed. Instead, the council will now focus on adopting the broader plan for the 115-acre around California Avenue before zooming in on the Fry's site.

Going forward with the Fry's plan before the larger vision document is adopted, Filseth said. would be "putting the cart before a horse."

"I don't think it should be driven by a short-term grant," Filseth said.

In possibly losing the grant funding (which would have to be spent by 2018), the council completely agreed with Herb Borock, a land-use watchdog who wrote a letter criticizing the proposed sequence of the planning efforts.

"It is bad planning to develop a site-specific master plan for the Fry's Site prior to the time the Council adopts a Comprehensive Plan that includes an internally consistent set of policies and programs for the city's planning area as a whole, and for the California Avenue area that includes the Fry's site," Borock wrote.

Berman and Kniss both said they agree with Borock.

"We've added a lot to our plate this year, and to the staff plate," Berman said, referring to the wide array of planning processes and transportation programs the city is now pursuing. "It's an opportunity to not only remove something from staff's plate but remove something that logically belongs later in the timeline."