Watch Weekly journalists discuss this issue on an episode of "Behind the Headlines."

Faced with public outcry about insufficient transparency and misplaced priorities, Palo Alto officials backed away Monday from passing a zone change that would have helped the new owner of President Hotel convert the 75-apartment building at 488 University Ave. into a boutique hotel.

Instead, the City Council decided to leave in place -- at least for the moment -- a law that planning staff believes was added to the Municipal Code by mistake in January 2016 as part of a broader cleanup of the zoning code. The law requires that "grandfathered" buildings (those not complying with current zoning rules) undergoing remodeling retain their existing use. As such, it presents an obstacle to the planned conversion of the President Hotel in downtown Palo Alto.

The council agreed that the mistake should be corrected and directed its Planning and Transportation Commission to evaluate an ordinance that would eliminate the "same use" clause in the "grandfathered facilities" section of city code. Council members also signaled that they would favor an ordinance that explicitly prohibits the conversion of buildings from residential to commercial use -- a decision that may block the hotel's conversion but that will almost certainly invite a legal challenge from the developer, Adventurous Journeys Capital Ventures.

For council members, the Monday hearing presented a highly unusual dilemma: They were asked to fix an error that, despite its dubious origin, is standing in the way of an unpopular project. Planning staff made the case for deleting the provision, which City Manager James Keene compared to a surgeon leaving a sponge inside a patient.

"We're going back to take it out," Keene said.

Staff noted that the provision affects numerous downtown properties, including some that want to shift from one allowed commercial use to another but can't because of this new clause. Interim Planning Director Jonathan Lait cited as one example The Cheesecake Factory building on University Avenue, which has been vacant since the restaurant's May departure. The building owner, Roxy Rapp, wants to convert it to retail but can't because of the "same use" clause in the "grandfathered facilities" section of city code.

But the council's response, in the words of Councilman Cory Wolbach, amounted to this: Maybe half of the sponge should stay there.

The council voted 6-2, with Councilmen Greg Tanaka and Adrian Fine dissenting and Councilman Greg Scharff recused, to make the zoning change but to do so through its normal process, which would entail a review by the Planning and Transportation Commission and is expected to take at least four months to complete.

The council reached its decision after hearing from about two dozen residents, all of whom urged the council to reject the staff proposal to restore the zoning provision to its pre-2016 state. Staff had also proposed the council expedite the adoption of the ordinance by doing so on a temporary basis -- an unusual process that would skip the review by the Planning and Transportation Commission. This method is intended for policies that preserve the "public health, safety and welfare."

Many in the public and some on the council rejected the notion that the zone change meets these criteria. They also criticized city officials for their opaque negotiations with AJ Capital, which in October issued the city a "term sheet" that called for the city to grant it several zone changes by Dec. 18 in exchange for giving the evicted President tenants an extra six months in their apartments.

Though the city didn't agree to the term sheet, it did initially schedule the two zone revisions that AJ Capital had requested -- the removal of the "same use" clause and the abolition of the downtown cap on non-residential development -- on its Dec. 3 agenda (both items were ultimately continued to later dates).

Beth Rosenthal, one of about two dozen residents who addressed the council on the issue, chided city leaders for "working behind the scenes to accommodate AJ Capital Ventures" while ostensibly advocating for transparency.

"How can this council profess their profound sympathy for the soon-to-be-evicted residents of President Hotel while all the while negotiating with the evicters who are facilitating the process?" Rosenthal asked.

Becky Sanders, the moderator of the Ventura Neighborhood Association, said her neighbors are livid about the council accommodating a developer and moving so fast on a policy to aid the conversion of President Hotel. She said many residents resent the city's "double standard" in play when it comes to the city's work with AJ Capital.

"You're bending over backwards to change laws in order to enrich a single property owner and lose forever 75 units," Sanders said. "I've got to call you out on this. ... If you really believe in supporting housing in Palo Alto please do not let AJ Capital and their friends bully you into changing a law to benefit their vested interests."

Midtown resident Greer Stone called the proposed conversion of President Hotel "antithetical to the honorable goal that this city and the council have to create more housing."

"Anything that removes housing and replaces it with labor-intense businesses like a hotel is preposterous," Stone said.

The council agreed that scrapping the grandfathered-facility wording would lead to an outcome that directly conflicts its goal of promoting housing. Councilman Adrian Fine observed that President Hotel, a prominent Spanish Colonial building built in 1929 that initially operated as a hotel before being converted into apartments in the 1950s, is precisely the kind of project that many in the community would oppose if it were proposed as a new development. It is far taller and denser than today's zoning code allows and it only contains 10 parking spots for its 75 small units.

Wolbach, who is concluding his council term this month, also lauded the existing President Hotel and lamented its potential conversion.

"I think it would be a bad idea for us to lose over 70 units of reasonably priced housing. ... We need more President Hotels as apartment buildings, not fewer," Wolbach said.

Fine proposed adopting an ordinance that would remove the grandfather clause on a temporary basis but that would also prohibit conversions from residential to commercial. Most of his colleagues preferred not to adopt anything outright, thus giving planning commissioners a chance to do their own review. They ultimately backed Councilwoman Karen Holman's motion to support an option banning residential-to-commercial conversions downtown and to give the planning commission a chance to vet it before the council adopts it.

Holman said delaying the adoption is a matter of "due diligence" and noted that the option banning residential conversions hadn't been presented to the council by city staff prior to Monday's meeting. It's difficult, she said, to properly evaluate the proposal in real time.

"I want to feel 100 percent confident that there are no negative consequences to this action," Holman said.

Councilman Tom DuBois agreed, rejecting staff's argument for the expedited process, and said following the normal sequence for reviewing ordinances is the "more transparent process."

"I really think the appearance of rushing here is not helpful," DuBois said.

Council members also defended staff from public accusations of shady dealmaking with AJ Capital. Vice Mayor Eric FIlseth, who supported sending the issue to the planning commission, said he has seen no evidence of a "deep state conspiracy."

"Everyone is trying to do the right thing," Filseth said.

Keene also rejected the notion that staff had any improper negotiations with the developer.

"If there is some conspiracy at staff level, it is such deep state territory that I knew nothing about it," Keene said.

At the same time, staff acknowledged that it has made a significant -- if inadvertent -- error in approving the "same use" phrase in the "grandfather facility" section in the first place. The nine words in questions -- "for continual use and occupancy, by the same use" -- also appears in a different section of the zoning code. Lait surmised that they may have been accidentally copied from one section to another.

While Councilwoman Lydia Kou and Holman both questioned whether the clause addition was truly a mistake, Lait noted that the zone change had not been highlighted in staff reports or mentioned in presentations.

"If it were intentional, we would've written about it. We would've talked about it in staff reports. We would've had discussion with the planning commission and council about the change we're making," Lait said. "There's no evidence in the public record that this dialogue ever took place."

City Attorney Molly Stump called the error "very unusual."

"In my time of working with cities, I haven't seen a staff error like this," Stump said.

That said, Stump said it's important to acknowledge that human errors do occur and that, in this case, staff had acknowledged it and recommended a method to fix it.

While council members said they would prefer an ordinance that prohibits the conversion of residential to commercial use, Stump also proposed on Monday that the revised zoning provision also include a clause that allows applicants to request a "waiver" from this restriction on conversions if they can show that it would violate state or federal law.

Stump called this addition "good housekeeping" that could insulate the city from legal challenges. But Jeff Levinsky, the resident who first alerted planning staff to the "grandfathered facility" clause and its implications for the President Hotel project, criticized Stump's proposed policy, which he suggested would facilitate more backroom dealing.

"If our city attorney believes there is some problem or that this law would violate state or federal law, you should know about that before you approve the law," Levinsky told the council.