Stuck in a housing drought, Palo Alto leaders are preparing to consider more drastic actions to encourage residential construction, including reviving the contentious "planning community" zone, which allows developers to negotiate for exemptions to regulations on height, density and parking in exchange for providing "public benefits."

The City Council suspended its use of the zoning tool in 2013, after voters overturned in a referendum the city's last "planned community" (PC) project, which included 60 apartments for low-income seniors and 12 single-family homes on Maybell Avenue.

The tool has also been used by developers to win approvals for large commercial projects, including the redevelopment of Edgewood Plaza, the four-story office building at 101 Lytton Ave., and the College Terrace Centre on El Camino Real and College Avenue. In nearly every case, the approval process was followed by uproar from residents when the promised public benefits were either insufficient or missing altogether.

But while the PC zone became politically toxic, city leaders also see it as one of the few mechanisms that they can use to meet their goal of producing more than 300 housing units per year. As such, it is one of the proposals that Planning Director Jonathan Lait plans to present to the council as part of his department's housing work plan for 2020.

A new report from the Department of Planning and Development Services acknowledges that "planned community zoning has received significant criticism for a variety of reasons." At the same time, the zoning process has been used over the past 20 years in the construction of about 1,300 of the new 3,300 housing units (or 39%), the document states. Another tool, the development agreement, which similarly allows the city and the developer to negotiate on a project that exceeds zoning laws, accounted for 25% of the entitled projects. These two tools were used to produce 2,120 housing units over the two-decade period.

As proposed by the planning staff, the PC zone could be brought back in a modified form -- "one that eliminates the need for a negotiated public benefit."

The push for housing is expected to dominate the City Council's agenda this year, thanks to both internal and external pressures. Newly elected Mayor Adrian Fine has consistently called for the city to ramp up its housing production by relaxing zoning standards and allowing more taller and denser buildings, particularly near transit. On Jan. 6, just after he was elected mayor, Fine indicated that housing will be one of his priorities this year, along with transportation and economic vitality.

Fine argued that the city's annual production of housing – between 50 and 60 units – is not good enough. The numbers, however, don't illustrate what the housing problem is really about -- people.

"It's not housing units and development. It's new neighbors and new homes. … Whether it's seniors who need a supportive community, Stanford students who want to put down roots here, young families who want to send kids to our great schools — we need to figure out what Palo Alto looks like in five, 10, 15, 20, 50 years. And I think that's a challenge for all of us," Fine said.

Senate Bill 50, which Fine supports, may be the state stick that prods local action. Under recent amendments to the bill, cities will have two years to design zoning policies that would facilitate the type of housing production envisioned by SB 50. If they fail to do so, they would be forced to comply with SB 50's provisions, which relax height, density and parking restrictions near busy transit corridors and hubs and in jobs-rich areas.

In areas near transit, housing developments would be granted height limits of 45 feet, or about four stories, including in single-family neighborhoods. In areas deemed "jobs-rich," projects would have no density limits and parking standards would not exceed 0.5 spaces per unit.

To advance, the bill must win approval from the state Senate by the end of January.

The bill could have significant ramifications for communities like Palo Alto, which has a jobs-housing imbalance of 3-to-1 and where housing production has slowed to a trickle in recent years. The city's Comprehensive Plan, which the council approved in 2017, calls for producing between 3,545 and 4,420 new housing units between 2015 and 2030, an average of about 343 units per year for the next decade. This is more than twice as many units as the city has issued permits for in 2018 and 2019 combined.

Affordable housing has been a particularly rare commodity in Palo Alto. In 2015, the city approved plans for 43 housing units for residents at "very low income" levels, about 6% of its regional allocation of 648 units. Since then, the tally has been zero.

The council's 2018 vote to make housing a priority did little to change that trend. In 2018 and 2019 combined, the council has produced zero housing units in the "very low" and "moderate" categories and two units in the "low" category. At the same time, the city permitted 54 units in the "above moderate" category in 2018 and 105 units in 2019.

The city's recent zone changes haven't helped. Since 2018, the council has approved fixes including a "Housing Incentive Program" that allows builders to claim density bonuses for building residential projects in the downtown area, around California Avenue and along El Camino Real. After receiving no takers, the council voted last September to extend the program to San Antonio Road.

The city did receive a proposal for 100 housing units on San Antonio, which the council will be reviewing in the coming months.

The city's efforts to bring more housing to the city's commercial areas also have not netted results: The few projects that have received approval are now stuck in planning limbo.

The Sobrato Organization, which received the green light in October 2017 for a 50-apartment project at the former site of Mike's Bikes on El Camino Real, has since informed the city that is not moving ahead with development, saying the project no longer pencils out financially. Tim Steele, senior vice president for real estate development at Sobrato, informed city planners in a July 2019 letter that "construction pricing is difficult at this time."

Sobrato has also indicated that it is not interested in building housing at 340 Portage Ave., a longtime location of Fry's Electronics, which closed up shop last month after three decades of operation. The decision dealt a serious blow for the city's plans for the site, which is now at the center of a planning effort known as the "North Ventura Concept Area Plan." The city's Housing Element, which lays out Palo Alto's plans to meet regional housing allocation, calls for 221 housing units at the Fry's site.

With Sobrato reluctant to convert the site to residential use and area residents generally opposed to adding hundreds of units to the site, the property is unlikely to yield much housing, if any, in the foreseeable future.

Given the limitation, Lait proposed in the new report an amortization study of 340 Portage Ave., potentially paving the way for the site's ultimate conversion from commercial to residential use. In 1995, the council gave Fry's Electronics a 20-year extension for its commercial use, after which time the site would revert to residential. But in 2006, the council voted to scrap the 20-year amortization date, effectively allowing commercial uses to remain indefinitely.

The study would consider how long the city should wait before making the zoning change to allow the property owner to recoup its investment in the property. Such a study, Lait added, would require additional analysis in coordination with the City Attorney's Office.

The proposals reflect a harsh reality that Palo Alto and surrounding cities are dealing with: a construction market in which building housing is extremely expensive and a real estate market that continues to favor commercial development over residential. Even as the council members continue to talk about the need for more housing, particularly for low-income residents, the new work plan suggests that the council's target may be out of reach, barring drastic and potentially unpopular actions.

The city's existing efforts on housing "address the need to protect, preserve and produce housing in Palo Alto, which are the cornerstones to a comprehensive housing strategy," the report states.

"However, the projects listed above, while meaningful and important, are not likely to advance the city toward its aspirational goal of 300 or more new housing units a year," it adds.

One proposal that Lait included in the report is the creation of a new "housing overlay" district that would only be available to housing and mixed-use projects and that would allow developers to deviate from development standards such as parking, density and height.

Unlike the planned community process, which involved extensive negotiations over "public benefits," the overlay district would explicitly acknowledge that housing – and particularly affordable housing – is in of itself a public benefit that could justify zoning exemptions.

The new planning report argues that "there needs to be sufficient profit incentive for a property owner to build housing that overcomes revenues that can be generated by existing or proposed non-residential uses on property – and sufficient return to attract investors.

"City regulatory processes, fees, inclusionary requirements and zoning regulations play a key role in what it costs to build in Palo Alto," the report states. "Combined with other factors, projects in Palo Alto tend to result in a lower return on investment, which discourages lenders or results in an insufficient profit to offset the risk of development."