After nearly four years of negotiations with the United States Postal Service, Palo Alto is abandoning its plan to purchase the historic downtown post office.

City officials have been considering buying the Birge Clark-designed building at 380 Hamilton Ave. since late 2011, when the USPS first announced its plan to sell the building as part of a nationwide cost-cutting campaign. In May 2013, the council voted 7-0 to make a bid for the 1932 building. At the time, council members and city staff touted the building's historic significance and argued that buying it would make financial sense.

One idea that was on the table was using the building to house the city's Development Services Center -- which currently operates out of leased space across the street from City Hall.

While the city and USPS were making steady progress in negotiations over the past five years, the council agreed last month that the cost of buying and retrofitting the building is too high. On April 11, the council discussed the potential sale in a closed session. This week, City Manager James Keene sent a letter to the broker representing USPS notifying him that the city is withdrawing the February 2016 offer.

"As the renovation and leaseback plans evolved it became apparent to the City that the cost of renovating the entire building, including extensive seismic stabilization and other requirements to meet the needs of USPS, were dramatically higher than previously estimated in 2012 and updated in 2015," Keene wrote to Joe Kelly of CBRE Brokerage Services. "As you may be aware, while the cost of construction across the country has increased since 2012, the construction costs in the Bay Area have increased at an even greater rate."

In addition, Keene wrote, the cost of bond financing has also gone up over the past five years. That, compounded with the rising cost for other infrastructure items, strained available funding for the project, he said.

The decision to abandon the post office purchase comes at a time when the city is moving ahead with an aggressive infrastructure plan that includes a new police headquarters, two new garages, two rebuilt fire stations, new bike boulevards and a bike bridge over U.S. Highway 101. The cost of these projects is now estimated at about $196 million, up from the initial estimate of about $170 million.

To get the needed funding, the city raised its hotel-tax rate in 2014, with the new proceeds earmarked toward infrastructure. The council has also been spending more on capital improvements. Keene's proposed budget for Fiscal Year 2018 includes an increase of $6 million over the current year for infrastructure.

But even with the costs going up, the city was still optimistic earlier this year that the sale could take place. In February, the city's Real Property Manager Hamid Ghaemmaghami notified Kelly that the city had finalized its estimates for total cost of purchase and renovation of the building. Staff was also arranging a tour of the building for the newly elected council members.

The following week, the city received an email from Brent Davidson, transaction manager at CBRE, asking Ghaemmaghami to clarify that "the City is ready to move forward with the purchase at the agreed-upon terms."

"As you noted, USPS has the leases and sale contract drafts," Davidson wrote. "They are prepared to transmit the final drafts next week if needed."

While the purchase price for the building was reportedly about $16 million, city officials had determined this year that the cost of renovating the building and making it seismically sound was roughly as steep. Keene told the Weekly that after doing further diligence on the building this year, staff had determined that the rehabilitation costs would be far higher than they had previously considered.

"We really got some revised estimates and perspectives that pretty much doubled what our costs for improvements would be," Keene said. "And the expectation would be very high on us to make sure we really did this right."

The rising costs, the city's existing infrastructure commitments and the long review process used by the USPS amounted to what Keene called "a perfect storm" of factors that made the city reconsider its direction on the historic building.

The negotiations were further complicated last year when USPS notified the city that the buyer of the building would be required to retain a retail postal outlet on the site. According to Keene's letter, after the City submitted its February 2016 offer, officials began working with the federal agency to define its criteria for rental space on the lower level of the three-story building.

Keene told the Weekly that housing the postal outlet complicated the city's ability to design the building in a "cost-efficient manner."

Mayor Greg Scharff shared Keene's assessment. While the outcome is somewhat disappointing, spending more than $30 million on buying and rehabilitating the building just didn't make financial sense, he said.

He also noted that historical restoration always carries a big risks of costs rising further.

"As you do a historic building and you open up the walls and all that stuff, it's usually worse than you think," Scharff said.

In his letter to Kelly, Keene wrote that the city had "worked diligently with your team in the drafting of not only a mutually agreeable purchase and sale agreement, but also various interim, short-term and long term leaseback agreements."

Despite the good progress, Keene wrote, "Certain essential deal points remained unresolved."

But even with the post office now off the table, Keene told the Weekly the city is still considering relocating the Development Services Center. Once the city constructs its new public-safety building on Sherman Avenue in the California Avenue Business District, the space at City Hall that is currently occupied by the Police Department can potentially become the new home of Development Services, Keene said.

Scharff said moving Development Services into the current police wing "makes more sense" than buying the post office, particularly given the high cost of renovation.

Keene wrote to Kelly that the city "regrets that we cannot go forward with this purchase."

"We do appreciate the work you have done to create an effective deed covenant to protect this historic structure, and we will strive to ensure that the covenants are met by whoever purchases this wonderful property in the future," Keene said.

Even if the city isn't buying the building, it has plenty of leverage when it comes to the next occupant. The site is zoned as "public facility" and any private development would require a zone change by the City Council.

"In my view, hopefully the post office stays there, but if it doesn't, I think the building would have to be retail and the public would have to have access," Scharff said.