Concerned about Palo Alto's plans to phase out some of the commercial uses at the former site of Fry's Electronics, the owner of the Portage Avenue property is now threatening to sue the city unless it reconsiders its interpretation of the zoning code.

The City Council was scheduled to consider on Monday night a question that is at the heart of the debate: What types of uses should be allowed at the prominent Ventura campus at 3200 Park Blvd. and 340 Portage Ave? While the site has been zoned for multifamily housing, the council voted in 2006 to allow Fry's to remain at the site indefinitely as a nonconforming use. With Fry's shuttering in December 2019 and its space still unoccupied, city planners and council members are now in the process of determining what types of uses should be allowed in its former building, as well as other spaces at the Ventura campus.

City planners had determined that because Fry's had left more than a year ago, the site can no longer be designated as a "non-conforming" use, a designation that disappears after a year of disuse. The Sobrato Organization pushed back against this determination, noting that it has been aggressively trying to attract other retailers, including Target, to the property. Through its attorney, the company is also resisting the city's suggestion that the existing uses at the campus need to be "rebalanced" so that the composition of uses is similar to what it was in 2006, as specified by the zoning provision that the council approved at that time. In its last discussion of the topic on June 14, council members leaned toward accepting the staff interpretation and suggested that the city undertake an amortization study that would lay the groundwork for phasing out some of the uses at the site.

On Monday, Sept. 14, the council deferred taking any formal action on the zoning question after it received a letter from Sobrato's attorney suggesting that following the course laid out by planning staff would expose the city to litigation. Tamsen Plume, an attorney representing Sobrato, characterized the city's proposal to "rebalance" the uses at the site as an unconstitutional property taking. If the council approves the recommended interpretation, Plume wrote, Sobrato "will exercise its rights under the Takings Clause of the Fifth Amendment," as it applies to states under the 14th Amendment.

In making the case for Sobrato, Plume noted that the company bought the property in 2011 and has substantially improved it through acquisition, such that it now has a value in excess of $200 million. If planning staff's interpretation holds and Sobrato will be required to "rebalance" the tenants, the property value "simply cannot be reasonably protected or recouped," Plume wrote.

Pluma also contended that none of the nonconforming use provisions in any other jurisdiction within Santa Clara or San Mateo counties has anything close to a "rebalancing" requirement proposed by Palo Alto planning staff.

"It should not be simply assumed that the internal space of any building, particularly the Cannery building, can be easily or economically changed to another use — that is just not the case," Plume wrote.

Plume also raised procedural questions, arguing that planning staff has not made any formal determination before issuing its zoning code interpretation. The process did not give Sobrato an avenue to appeal the determination, though the company had submitted numerous letters that argued against the idea that the retail use as the Fry's building has been discontinued since the store's departure.

"This process is unsupported and legally inadequate, given the potential impact on the owner's Property value — particularly in the context of the interpretation of the existing legal non-conforming use provision presented in the Staff Report," Plume wrote. "At minimum, the City must first provide a reasoned, supported final determination and must provide Sobrato an opportunity to respond and appeal."

Plume's letter prompted the city to continue the hearing to a later date. City Manager Ed Shikada and Planning Director Jonathan Lait issued a memo on Monday requesting more time to consider the arguments from Sobrato. They plan to issue an updated memo to the council in the next several weeks, when the discussion resumes.

To date, the city had argued that because Sobrato has failed to find a replacement for Fry's within a year, the property should revert to RM-30 zoning, which allows up to 30 dwelling units per acre. Palo Alto has long considered the site as suitable for housing, with the city's Housing Element identifying it as having a realistic capacity of 221 residences.

"The municipal code defines a nonconforming use as being discontinued or abandoned if not re-established within one year," a recent report from planning staff states. "Since no retail use reoccupied the former Fry's tenant space, that portion of the building can now only be occupied by a conforming RM-30 land use."