A controversial proposal to convert the iconic President Hotel from an apartment building into a hotel hit a snag this week, when Palo Alto officials determined that the change would violate the local zoning code.

Palo Alto's acting Planning Director Jonathan Lait informed the hotel's new owner, Adventurous Journeys Capital Partners (AJ Capital), in a letter dated Tuesday that the city has conducted a review of the property and "determined that the establishment of a hotel at this location, as described, is impermissible based on existing zoning regulations and site characteristics."

The determination comes less than a month after City Manager James Keene suggested at a City Council meeting that the new property owner can move ahead "by right" with the conversion, which would force the displacement of residents who occupy the building's 75 units. Keene walked back his comments on June 25 and said staff is still reviewing the zoning code to see whether the conversion can legally proceed.

The city's determination this week that it cannot is based on a code provision that pertains to "grandfathered" buildings -- those that do not comply with the zoning code but that are allowed to retain their uses because they were established before the code was developed. Designed by Birge Clark, the President Hotel building was constructed in 1929 and initially functioned as a hotel, but was converted to an apartment building about 50 years ago.

The zoning code allows grandfathered facilities to be remodeled or improved but specifies that these facilities should retain "the same use" as part of the renovation. That provision would be violated if the building at 488 University Ave. reverted to a hotel, according to the city.

In his letter to Timothy Franzen, president of AJ Capital, Lait noted that when he and Keene met with Franzen and the company's representative, Richard Hackmann, on June 7 -- five days before AJ Capital closed escrow on the building -- to discuss code compliance, Hackmann indicated "only a need to address parking and obtain design review approval."

"Since that meeting, the City has conducted a review of the property and determined that the establishment of a hotel at this location, as described is impermissible based on existing regulations and site characteristics," Lait wrote.

He noted that President Hotel, with its ground-floor retail and above-grade apartments "is non-complying with respect to maximum building height and floor area requirements of the Municipal Code and perhaps other provisions as well."

AJ Capital President Tim Franzen said in a statement Friday that the company "respectfully disagree(s) with the letter’s preliminary analysis of the zoning question."

"A hotel use at this location is supported by the zoning," Franzen said. "We intend to discuss this matter further with the City."

While it remains to be seen what impact the determination will have on the evictions, it offers a bit of hope to residents, many of whom asked the council on June 18 to slow down the process and to take a closer look at whether the conversion is legal. Many noted at the meeting that President Hotel, with its small units, offers a commodity that has become exceedingly rare in Palo Alto: affordable housing.

"The result of this eviction is that, in all likelihood, that the residents of this building will leave Palo Alto," resident Tucker Berckmann said at the meeting. "I don't think this is what everyone wants."

Mayor Liz Kniss responded at the time that while council members are sympathetic to the residents, they don't have enough information to determine what can be done to help them.

But for land-use watchdog Jeff Levinsky, the city's determination isn't surprising. On June 9, Levinsky circulated a letter flagging possible legal issues with the conversion, including the provision on "grandfathered" buildings. Levinsky, who co-chairs the Development, Zoning and Code Enforcement Committee for the umbrella group Palo Alto Neighborhoods, noted in the letter that the residences were in existence in 1986, when the zoning code was adopted, and as such can remain and be occupied.

Current zoning laws, he noted, would only allow two hotel floors at the downtown site if it weren't for the "grandfathered" provision.

"In the case of the President Hotel, one of those floors would have to be the ground floor," Levinsky wrote. "The remaining floors of the building cannot be used as part of the hotel and must either stay in use as residences or not be used at all.

"No sensible building owners would want to abandon the residential use of those floors, as they'd then earn no income from the majority of the building."

For the residents, the city's concurrence that the conversion cannot proceed is a glint of good news, even if it offers no real assurance that they will be able to keep their homes, resident Pemo Theodore told the Weekly. Theodore said that some residents have already "cut their losses and left." It is very sad, she said, to go to the mailroom and see their names removed.

"It has been a huge cost to all of us and we still do not know what the future holds for The President Hotel and our apartments," Theodore told the Weekly. "We are grateful for all the support from the Palo Alto community. The building has a heart and the heart is the residents -- the community."

The hotel's conversion would have also dealt a blow to Palo Alto's officially adopted goal of producing 300 units of new housing annually. To date, the council had only approved one housing project totaling 57 units. The loss of 75 units would have more than offset that project.

Councilman Cory Wolbach, one of the city's staunchest advocates for more housing, called the city's determination that the building cannot be converted to a hotel "a matter of due diligence, of understanding what the zoning code says, understanding what the new owner is proposing and understanding what our proper role is as a jurisdiction where this is proposed."

He noted that the item may end up as a quasi-judicial matter (in which the council is effectively acting as a judge) and said it's important that council members "be careful not to reach full conclusions or prejudice ourselves."

"But of course, it's important that we continue to expand, rather than constrict, our overall housing supply in Palo Alto," Wolbach said. "I think most people in Palo Alto, the council included, are always concerned when members of the community face displacement."