Palo Alto is preparing to sharply ramp up fines against the owner of College Terrace Centre, the blocklong development on El Camino Real that has been facing neighborhood scorn for its failure to maintain an operating grocery store, as required by the city's zoning code.

The City Council agreed on Monday to revise its administrative penalty schedule to add a $2,000 fine for every day that the market is without a grocer. The action will allow the city to enforce the ongoing zoning violation by the development's owner, Jason Oberman and his company, AGB-PACT Owner LP.

The council's move to add the penalty to its schedule comes about a month after the development's latest grocer, Khoury's Market, ceased its operations.

For residents of College Terrace, the market's closure carried a sense of disappointment that has become all too familiar. It's the second grocer to close shop since the contentious mixed-use development at 2100 El Camino Real went up. The first grocer, College Terrace Market, closed in January 2018 after just six months in operation.

When the council approved the 57,000-square-foot development in 2010, a grocer was deemed as the primary "public benefit" of the zone-busting project, which went up on the former site of beloved grocery store JJ&F. The development relied on a "planned community" process, which allows developers to extract zoning exemptions with the city in exchange for negotiated public benefits.

But even though the "planned community" ordinance requires a grocery store to be "in continuous operation" at College Terrace Centre, the city has had only limited success in enforcing the zoning violations that resulted from prolonged vacancies at the supermarket site. In 2015, the city and the former property owner Brian Spiers entered into a restrictive covenant that provided for a $2,000 penalty for each day that the 8,000-square-foot grocery space is vacant.

Despite that agreement, the plaza's new owner, Jason Oberman, has challenged the city's ability to collect the fines. Oberman, who bought the property in June 2018, scored a partial victory last March, when an administrative judge ruled that the city cannot collect the full amount of about $345,000 that it was planning to charge Oberman. That's because the $2,000-per-day fine is not included in the city's penalty schedule.

"While that penalty provision might be relevant in a civil action for breach of conditions of the Covenant, it is not an available remedy in these code enforcement proceedings which the City has chosen to bring pursuant to PAMC Chapter 1.12," Administrative Judge Alan Seltzer wrote, referring to the restrictive covenant.

Seltzer also rejected Oberman's assertion that the fines are completely void. Oberman's attorneys claimed that the city did not provide timely notice on the administrative hearings pertaining to the appeals of the citations.

The city's zoning code states that a hearing officer may impose administrative penalties "in an amount not to exceed the maximum provided in the schedule of administrative penalties adopted by council resolution in effect on the date when the violation occurred."

The city's zoning code sets the penalty for "planned community" violations at $500 for the first day, $750 for the second and $1,000 for each subsequent day.

Given this limitation, Seltzer wrote, the city can charge the developer $164,250 for the 165 days in 2018 that the supermarket space was vacant.

Seltzer gave some credit to Oberman for making a "good faith effort" in finding a replacement tenant once he bought the property. Thus, he reduced the maximum amount of the penalty that can be imposed by $25,000 from $164,250 to $139,250, for the period of vacancy between July and December 2018.

AGB-PACT has also asked the Santa Clara County Superior Court last July for an injunction that would throw out all of the penalties that the city is planning to charge for the zoning violation.

Oberman, who attended the Monday meeting, told the council that his group is "saddened" about the market's closure and assured council members and residents that his company has already engaged with a leasing team to help find a replacement that could succeed.

"We're focused on trying to bring a new tenant there," Oberman said. "We're eager to do it, to come up with (a) solution that (gets us) the best tenant, that can succeed and fulfill what we think the project needs and what the community really wants."

Oberman also submitted a letter in which he alleged that the market had failed to pay rent during its 14 months of operation, with the exception of the first month.

"The outstanding obligations were and remain substantial," Oberman wrote.

"The owners went beyond our legal obligations under the lease to support Khoury's Market and waited over one-year to pursue legal recourse for the outstanding rent payments after all other efforts to find a fair compromise proved unsuccessful," Oberman wrote. "To date no outstanding rent or other payment obligations have been paid. Despite this, the Owners remain focused on completion of the improvements (to the building) and future occupancy of the space with a community serving retail tenant or tenants as soon as possible."

Until that happens, the city is planning to charge Oberman's group the full $2,000-per-day amount, as agreed upon in the restrictive covenant. City Manager Ed Shikada told the council last week that the city will update its code "to allow for the full implementation of remedies previously agreed to with the College Terrace Centre owner and to make sure the code enforcement staff have the tools they need for enforcement."

Because the penalty is subject to an adjustment based on the Consumer Price Index, the actual penalty amount will now be $2,157 per day, according to the new ordinance. A report from the office of City Attorney Molly Stump states that the change in the penalty schedule "confirms and implements the City Council's prior direction and agreement with the then-owner of the subject property and ensures the City's code enforcement officers have the tools they need to enforce the subject PC ordinance."

Even though the council had initially created a grace period of six months for every five-year period that the grocery store is not in operation, the revised penalty schedule notes that because this period was previously applied to violations in the first half of 2018, there is no entitlement to any further grace period until Jan. 10, 2023.

The council's revision to its penalty schedule drew praise from Palo Alto Neighborhoods, an umbrella group consisting of members from various neighborhoods. Becky Sanders and Sheri Furman, co-chairs of Palo Alto Neighborhoods, submitted a letter notifying the council that the organization's members voted to support the correction to the penalty schedule.

"Correcting and collecting fees when developers renege is the City's best way to make sure that developers provide the public benefits promised to the community in exchange for relaxing the building standards under PC zoning," Sanders and Furman wrote.

Annette Ross, a College Terrace resident, agreed and cited the seven-month period during which the building with the grocery store was covered with scaffolding and a black sheath. The netting was there as part of a project to repaint the building, which is also occupied by First Republic Bank. It stayed on for more than six months and the Khoury family blamed it for costing them business and precipitating the store's closure.

Wrapping the building for that long, Ross wrote, "is an egregious attempt to drive out an unwanted tenant."

"This is about much more than a grocery," Ross wrote. "I doubt this owner's actions would have been tolerated had this been done to First Republic Bank or a downtown business such as, say Palantir. If the City finds a way to agree with this owner the City will essentially be rubber stamping bad faith and rewarding breach of contract."

Several College Terrace residents also spoke out before the council's closed session on Monday. Michael Frank, who lives in the neighborhood, said not having a market deprives the area of a valued amenity.

"I can't judge the facts of this case but I know the owners of Khoury's Market and (the) operators believe this was a malicious action to drive them out of business," Frank said. "The result is a major loss for the community and our neighborhood."

AGB-PACT has also asked the county Superior Court last July for an injunction that would throw out all of the penalties that the city is planning to charge it for the zoning violation. The council discussed the developer's legal action in a closed session on Monday night but did not take any reportable action.