Palo Alto's elected leaders all agree that the city desperately needs more "affordable housing," though there is little consensus on what exactly that means and on whether that should be the city's sole objective.

For the City Council's more pro-growth members, including Mayor Adrian Fine and council members Liz Kniss and Greg Tanaka, the city's goal should be to encourage everything from subsidized housing to small market-rate units such as the workforce-centered apartments that the city approved for the corner of El Camino Real and Page Mill Road. While the developer is required to designate six of its 57 units for "affordable housing," these units would target individuals who make 120% of area median income, or about $118,950 for a one-person household.

Those on the more slow-growth side, including Vice Mayor Tom DuBois and Councilwoman Lydia Kou, take a more restrictive view and believe the city should primarily focus on apartments designated for tenants at lower-income tiers, much like those in the Wilton Court development that is slated to go up at El Camino and Wilton Avenue. All 59 units are designated for residents that make between 30% and 60% of area median income, with those on the highest end making less than $60,000.

The debate about what constitutes "true" affordable housing will take on increased urgency on Monday, when the council considers the rules governing the city's new "planned home" zone, which will allow developers to exceed zoning rules on aspects such as height, density and parking in exchange for housing. The council voted in February to introduce the zoning designation as a way to encourage more housing, though it left the details hazy.

The new zone is a descendant of the city's "planned community" zone, which was used in the past for both affordable housing projects and for mixed-use developments such as Edgewood Plaza, Alma Village and the College Terrace Centre. Unlike the "planned community" zone, which involves negotiations between the city and the developer over "public benefits" that the latter has to provide, the "planned home" zone would specify that the chief public benefit is housing.

The idea, Fine said during the February discussion, is to let staff go work with homebuilders to figure out what they need, whether it's reduced parking, more height or reduced setbacks.

"I want to be clear, we're not negotiating things like grocery stores, or park benches or rooftop gardens," Fine said. "Housing is actually the benefit there."

Developments under the planned home zone will be allowed to have a commercial component, though the council specified in February that the housing would need to be adequate to offset the demand for residential units from the project's employees and lower Palo Alto's jobs-housing imbalance.

The council agreed that 20% of the units in the proposed developments would need to be "affordable housing," which is higher than the city's normal 15% requirement for new residential developments. The council left unanswered, however, the question of affordability when it comes to the new housing units. Some on the council, including Kou, argued that setting the limit at the high end of area median income will not produce the type of housing that the city really wants. She proposed in February that these projects be required to provide housing at 50% of the area median income level.

Others, including Tanaka, raised concerns that imposing stringent affordability requirements would discourage applicants from coming forward. He also argued that raising the percentage of income-restricted units would discourage developers from submitting proposals.

"If we want to make housing, it has to be economically viable," Tanaka said. "We can't expect people to lose money on this."

While Tanaka wondered in February whether the city's proposed rules for the "planned home" zone will actually produce results, Palo Alto has seen some positive signs since then. In June, the council considered a proposal from Sand Hill Property Company for a mixed-use development with 187 rental units and a two-story office building at 3300 El Camino Real, on the edge of Stanford Research Park.

The city also received an application for a potential "planned home" project from the Menlo Park-based developer Acclaimed Companies that includes 119 units, as well as 1,000 square feet of retail and 5,000 square feet of office space, at 2951 El Camino Real, in the Ventura neighborhood.

A new report from the Department of Planning and Development Services states that despite the pandemic, staff "continues to be approached by developers interested in pursuing housing developments." For the council, which has consistently failed to meet its annual goal of 300 new housing units per year, this is a welcoming trend. The staff report notes that the city is not on target to meet its Comprehensive Goal of producing between 3,545 and 4,420 new housing units by 2030.

"The lack of housing affordable at all income levels contributes to other impacts experienced in Palo Alto," the report states. "These impacts relate to traffic congestion, higher vehicle miles traveled, greater greenhouse gas emissions, and diminished housing opportunities, among other quality of life issues."

To gain some clarity on the issue of affordability, staff is proposing numerous options for the council's consideration. Under one proposed option, the 20% requirement would be split among various affordability levels, with the developer being required to provide 5% for each income strata.

Under another option, the city would weigh units based on their affordability level and adjust the number of required units accordingly. Thus, a developer who wants to satisfy the 20% requirement by building housing for the "moderate" income level would need to produce more such units than a developer who is building units in the "low-income" tier. The approach, according to staff, recognizes that units in the "low," "very low" and "extremely low" categories entail more subsidy and a lower return of investment.

"Requiring more units to be deed restricted at the lower income level means greater concessions from the zoning code to home builders will be required."

The option, according to staff, provides "maximum flexibility to determine how to comply with the inclusionary requirement and, if elected, would tend to generate more low and very-low income units than would otherwise be produced — or a greater number of income restricted units if a developer chooses units in the moderate or workforce housing range."

For rental properties, staff is proposing a different approach: requiring them to provide 10% of their units for "very low income" housing (50% of area median income) and paying housing impact fees equivalent to 20% of the city's requirement. This, according to staff, is equivalent to a 25% inclusionary requirement. The city would then be able to use the funds to support affordable-housing developments similar to Wilton Court, which received about $10 million in city funding.

"Payment of the housing impact fee will help restore the City's housing funds, which are typically used by non-profit, low-income housing projects," the report states. "Non-profit housing typically also provides supportive programs that low-income households can use to find jobs, help with school work, connect with social services and other programs; these services are not generally provided in market rate housing projects.

According to staff, a hypothetical 100,000-square-foot rental project with 100 units would be required to provide 10 "very low income" units and pay about $2 million in fees.

Even with the new zone designation, developers would need to go through the city's typically lengthy review process to win approval. This includes a "pre-screening" session with the council, reviews from the Planning and Transportation Commission and the Architectural Review Board and final approval from the council.