HomeMy WebLinkAbout2016-02-16 Finance Committee Agenda Packet Finance Committee
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Tuesday, February 16, 2016
Regular Meeting
Community Meeting Room
7:00 PM
Agenda posted according to PAMC Section 2.04.070. Supporting materials are available in
the Council Chambers on the Thursday 10 days preceding the meeting.
PUBLIC COMMENT
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Call to Order
Oral Communications
Members of the public may speak to any item NOT on the agenda.
Action Items
1.Utilities Advisory Commission Recommendation That the City Council
Adopt a Resolution to Approve a Power Purchase Agreement With
Hecate Energy Palo Alto LLC for up to 75,000 Megawatt-hours per Year
of Energy Over a Maximum of 40 Years for a Total not to Exceed
Amount of $101 Million
2.Utilities Advisory Commission Recommendation that the City Council
Adopt a Resolution to Continue the Palo Alto Clean Local Energy
Accessible Now (CLEAN) Program at the Current Contract Price of
$0.165 per kilowatt-hour for Local Solar Resources and at the Avoided
Cost Level ($0.081 to $0.082 per kilowatt-hour) for Local Non-solar
Eligible Renewable Resources
3.Commercial and Residential Impact Fee Nexus Studies and
Recommend Affordable Housing Impact Fees
Future Meetings and Agendas
Adjournment
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Corrected Pages
10 and 11
4.Approval of Amendment to Table of Organization by Adding 1.0 FTE Management Analyst in the Development Services Department
REVISED
2 February 16, 2016
MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA
PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE.
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Finance Committee Items Tentatively Scheduled
Meeting
Date
Line
No. Item Title Referral
Date
3/1/16
1 Review of the draft Comprehensive Plan Update Fiscal
Impact Analysis (PLN)
2 Fiscal Year 2016 Midyear Budget Review (ASD)
3/15/16 3 Discussion of Usage and Replacement of Pool Vehicles
(Public Works)
4/5/16 4
Recommendations on Proposed Fiscal Year 2017
Community Development Block Grant Funding
Allocations (CDBG) and the Draft Fiscal Year 2017 Annual
Action Plan (PLN)
Finance Committee Items to be Scheduled
Referral
Date
Line
No. Item Title Status
2013 5 Police Services Utilization and Resources Study (Police)
To be
scheduled
in 2016
6 Consideration of stronger encroachment fees for
construction that impact portions or all of a city street or
sidewalk (Public Works)
7 Discussion of changes to the Public Art Ordinance to
simplify the calculation of the Public Art Fee (Community
Services)
8
Cubberley Center Master Plan: additional information and
a timeline for the site (requested by the FC) (City
Manager)
City of Palo Alto (ID # 6517)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 2/16/2016
City of Palo Alto Page 1
Council Priority: Environmental Sustainability
Summary Title: Wilsona Solar Renewable Power Purchase Agreement
Title: Utilities Advisory Commission Recommendation That the City Council
Adopt a Resolution to Approve a Power Purchase Agreement With Hecate
Energy Palo Alto LLC for up to 75,000 Megawatt-hours per Year of Energy
Over a Maximum of 40 Years for a Total not to Exceed Amount of $101
Million
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) recommend that the Finance Committee
recommend that the City Council adopt a Resolution (Attachment A) to:
1. Approve a Power Purchase Agreement (PPA) with Hecate Energy Palo Alto LLC (HEPA), a
Delaware limited liability company, for the acquisition of up to 75,000 Megawatt-hours
(MWh) per year of energy from the Wilsona solar project (Wilsona) over a maximum of
forty years at a total cost not to exceed $101 million;
2. Delegate to the City Manager or his designee, the authority to execute on behalf of the
City the PPA with HEPA, the three contract term extension options available to the City
under the PPA, and any documents necessary to administer the agreements that are
consistent with the Palo Alto Municipal Code and City Council approved policies;
3. Waive the application of the investment-grade credit rating requirement of Section
2.30.340(d) of the Palo Alto Municipal Code, which applies to energy companies that do
business with the City, as HEPA will provide a $5.2 million letter of credit as a
development assurance deposit, and a subsequent $2.6 million letter of credit as a
performance assurance deposit; and
4. Waive the application of the anti-speculation requirement of Section D.1 of the City’s
Energy Risk Management Policy as it may apply to surplus electricity purchases resulting
from the City’s participation in the Wilsona PPA, due to the variability of the City’s
hydroelectric resources.
City of Palo Alto Page 2
Executive Summary
As part of ongoing efforts to meet the City’s Carbon Neutral Plan requirements, as well as to
comply with the recently adopted state Renewable Portfolio Standard (RPS) mandate of
providing at least 50% of sales from qualifying renewable resources by 2030, staff issued a
request for proposals (RFP) for renewable resources in the spring of 2015 and evaluated the
proposals based on price, value, viability and compatibility with the City’s needs. Under this
RFP, staff sought projects that would begin delivering energy to Palo Alto in 2021, which is
when one of the City’s older wind energy contracts will expire. After thorough review, staff
concluded that the Wilsona solar photovoltaic (PV) project proposal had the best total score.
When it begins operating in mid-2021, the 26-megawatt (MW) project1 will provide about 7.5
percent of the City’s annual electricity needs, and will be sited on low productivity, previously
disturbed agricultural land in Los Angeles County. The project was proposed by Hecate Energy
LLC (Hecate), a privately-held developer, owner, and operator of solar, wind, energy storage,
and natural gas projects. Headquartered in Nashville, Hecate was founded in 2012 by the
executive team that built (and subsequently sold) the company OCI Solar Power. Hecate
currently has over 2,400 MW of projects under development.
The Wilsona PPA (Attachment B) is structured as a 25-year initial term, followed by three
separate five-year extension term options that can be exercised at the City’s sole discretion.
The project’s contract price of 3.676 cents per kWh is substantially lower than the prices of any
of the City’s previously executed renewable energy contracts. But as with all of those prior
contracts, Palo Alto will make no upfront payments under the Wilsona PPA; energy will be paid
for only after it is delivered.
Further mitigating the risks posed by this contract, HEPA will be required to post a $5.2 million
development assurance deposit, which the City will be able to keep in the event that the
project is not completed in a timely manner. This deposit amount is almost three times greater
than the amount provided under any of the City’s prior renewable energy contracts. In
addition, the Wilsona project will be a “fully deliverable” project, meaning that it will provide
Resource Adequacy (RA) value to the City, in addition to the value of its renewable energy.
On January 13, 2016, the UAC reviewed the proposed PPA and unanimously recommended that
Council approve staff’s recommendation.
Background
Per the Council-approved Long-term Electric Acquisition Plan (LEAP) Objectives and Strategies,
updated in April 2012 (Staff Report 2710), the City’s RPS target is to procure at least 33% of its
retail sales volume from qualifying renewable resources by 2015, and to continue procuring
1 Under the terms of the PPA, the Wilsona project will be sized between 25 and 27 MW, with an expected size of
26 MW. All references to the Wilsona project’s 26 MW size in this report should be understood to capture that
range.
City of Palo Alto Page 3
renewable resources as long as the cumulative rate impact of all of the City’s renewable
resources is not more than 0.5 cents per kilowatt-hour (¢/kWh).
In addition, California’s Senate Bill (SB) 350, signed into law in October 2015, requires all
electric utilities in the state, including Palo Alto’s municipal utility, to procure increasing
amounts of renewable resources in order to serve their retail customers. Utilities must procure
at least 40% of their retail sales volume from renewable resources by December 31, 2024, at
least 45% by December 31, 2027, and at least 50% by December 31, 2030 (and each year
thereafter).
Finally, in March 2013, Council approved the City’s Carbon Neutral Plan for the electric supply
portfolio, to be achieved starting in 2013 (Staff Report 3550). Since 2013 and over the next year
of implementing the Carbon Neutral Plan, the City expects to achieve carbon neutrality with its
renewable energy portfolio, its carbon-free hydroelectric resources and by purchasing
renewable energy certificates (RECs) to offset the emissions associated with its wholesale
market power purchases. Starting in 2017, the City plans to achieve carbon neutrality entirely
through the acquisition of additional “hard resources” that supply the City with both energy
and environmental attributes so that REC purchases can be minimized—and the Wilsona PPA is
a part of that long-term effort.
Current Status of Renewable Resources in Palo Alto’s Electric Portfolio
The City has executed nine PPAs for new renewable resources that are currently delivering
energy to Palo Alto. The currently operating resources include two wind projects, five landfill-
gas-to-energy (LFGTE) projects, and two large-scale solar PV projects. In addition, three more
PPAs have been executed for solar projects that are still under development and expected to
begin operating by the end of 2016. The City has also executed PPAs for three other resources
but subsequently terminated those agreements after the suppliers ran into problems
developing the projects and requested unacceptable contractual concessions. Summary
information for all 12 currently contracted RPS resources is provided in Table 1.
City of Palo Alto Page 4
Table 1 – Palo Alto’s Existing Renewable Energy Contracts
Project Supplier Technology Date Contract
Executed
Actual or
Estimated
Online Date
Annual
Energy
(GWh)
High Winds Iberdrola Wind Nov. 2004 Dec. 2004 48.2
Shiloh Iberdrola Wind Oct. 2005 Jun. 2006 64.5
Santa Cruz Ameresco Landfill Gas Nov. 2004 Feb. 2006 9.9
Half Moon Bay Ameresco Landfill Gas Jan. 2005 Apr. 2009 43.9
Keller Canyon Ameresco Landfill Gas Aug. 2005 Aug. 2009 14.9
Johnson Canyon Ameresco Landfill Gas Aug. 2009 May 2013 10.4
San Joaquin Ameresco Landfill Gas May 2010 Apr. 2014 30.3
EE Kettleman Land Clēnera Solar PV Nov. 2012 Aug. 2015 53.5
Hayworth Solar sPower Solar PV Jun. 2014 Dec. 2015 63.7
Subtotal – Operating 339.2
Frontier Solar Clēnera Solar PV Jul. 2013 May 2016 52.5
Elevation Solar C sPower Solar PV Jul. 2013 Oct. 2016 100.8
Western Antelope
Blue Sky Ranch B sPower Solar PV Jul. 2013 Oct. 2016 50.4
Subtotal – Under Development 203.7
Total – All Executed Contracts 542.9
In addition, through its contract with the Western Area Power Administration and through its
ownership share of the Calaveras Hydroelectric Project, the City receives a small amount of
energy from “small” hydroelectric projects that qualify under the state’s RPS standard. These
resources that can be counted towards the City’s RPS requirements together account for about
1% of the City’s sales in normal water years.
Lastly, Palo Alto CLEAN, a local solar PV feed-in tariff program, was launched in March 2012
(Staff Report 2548, Resolution 9235). Under the current program design approved in May 2015
(Staff Report 5849), the Palo Alto CLEAN program may provide up to 0.5% of Palo Alto’s electric
energy needs.
Together, when all of the renewable facilities under contract enter commercial operation, and
assuming Palo Alto CLEAN provides 0.5% of the City’s total energy supply, the City’s RPS is
expected to be about 42.9% of total energy supply needs in 2016, and 57.5% in 2017, as shown
in Figure 1 below. However, one of the City’s earliest PPAs, for the Shiloh I wind project, is set
to expire in May 2021. Once it does, the City’s RPS will fall to about 50% (in 2022). Figure 1
shows actual energy deliveries through 2014 and estimated deliveries after that date.
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Figure 1 – Palo Alto’s Committed Renewable Resources
Green Premium Calculation
To conform to the City’s RPS policy rate impact limitation of 0.5¢/kWh on average, staff
compares the total cost of each renewable resource to the wholesale market price of non-
renewable energy at the time that the contract for the resource is executed. The green
premium represents the additional cost paid for renewable energy compared to non-renewable
energy from the market. For each resource the levelized2 cost impact ($/year) is calculated as
follows:
Green Premium = (PPA cost + transmission charges – capacity value) – brown power cost,
where “PPA cost” is the renewable energy cost adjusted for its time-of-delivery3; “transmission
charges” are any costs Palo Alto would incur to get the energy delivered to CAISO territory;
“capacity value” is any system or local capacity value provided by the resource; and “brown
2 Levelizing is a process of taking nominal cash flows, discounting them to present value, summing the present
values, and amortizing the present value into uniform annual payments like a mortgage. The discounting and the
amortizing are both performed with the user’s discount rate or time-value of money.
3 In general, solar PV projects deliver energy during the on-peak hours when energy deliveries are more valuable;
thus solar PV project prices are discounted slightly in the green premium calculation. The opposite adjustment is
usually true of wind projects.
City of Palo Alto Page 6
power cost” is the wholesale market price quote for non-renewable energy delivered to
northern California for an equivalent term.
Discussion
This section of the report will cover the following topics:
A. The Market for Renewable Resources in California
B. Results of Palo Alto’s Renewable Resource Request for Proposals (Spring 2015 RFP)
C. Wilsona Solar Project Summary
D. Contract Mechanisms for Mitigating Project Risks
E. Energy Risk Manager’s Assessment
F. Palo Alto’s Renewable Resource Portfolio with Wilsona
G. Alternative to Approving the Wilsona PPA
A. The Market for Renewable Resources in California
California’s aggressive RPS mandates for electric utilities resulted in a supply-demand
imbalance in the renewables market that drove prices up, particularly between 2007 and 2011.
However, in the past several years renewable energy prices have plummeted—largely due to an
influx of low-cost solar panels into the market. Prior to 2011, solar was generally the most
expensive type of renewable energy technology; now it is easily the least expensive.
Furthermore, in the past few years, supply and demand factors have shifted decidedly in favor
of buyers like Palo Alto. A large number of renewable energy developers have entered the
market in recent years—reacting to the then-high renewable energy contract prices and the
large appetites of the state’s large investor-owned utilities (IOUs) seeking to meet their RPS
procurement requirements. But, as of now, the IOUs have contracted for enough renewable
energy to meet their mid-term needs and have dramatically slowed their procurement efforts.
This has left a large pool of project developers competing with each other to win contracts with
a relatively small pool of buyers. As a result, renewables prices—particularly for solar—have
been driven down to the point that they are now roughly at parity with long-term brown
market prices.
However, there are a number of factors that have the potential to push renewable energy
prices back up in the mid- to long-term. Among them are:
a) The scheduled expiration of federal tax incentives for renewable energy projects—
including the reduction from 30% to 10% of the Investment Tax Credit (ITC)4 and
accelerated depreciation rules;
b) The recent passage of SB 350, the new 50% by 2030 RPS mandate, which will likely spur
all of the state’s electric utilities to begin actively procuring renewable energy for the
2020 to 2030 time period; and
4 At the time the City issued this RFP, and through the majority of the negotiations process with Hecate, the ITC
was slated to drop from 30% to 10% at the end of 2016. However, in mid-December 2015 Congress extended the
ITC at the 30% level for an additional three years. It is now scheduled to reduce to 26% for projects beginning
construction in 2020, and to 22% for projects beginning construction in 2021, before falling to the 10% level again.
City of Palo Alto Page 7
c) The enactment of the U.S. Environmental Protection Agency’s (EPA’s) Clean Power Plan,
which is likely to lead other Western states to more actively pursue renewable
resources in order to reduce the carbon emissions associated with their electricity.
All of the above factors suggest that now is a good time to lock in long-term commitments at
historically low prices in order to help the City meet its carbon neutrality goals and its post-
2020 RPS requirements.
B. Results of Palo Alto’s Renewable Resource Request for Proposals (Spring 2015 RFP)
The City typically contracts for renewable power by independently issuing RFPs, the most
recent of which was released in April 2015 in pursuit of projects that would deliver renewable
energy starting in 2021 to replace the Shiloh I wind PPA when it expires in 2021. Staff expected
to receive proposals from projects that would be constructed before the end of 2016 (in order
to take advantage of the 30% federal ITC—which, at the time the RFP was issued, was
scheduled to be reduced to 10% at the end of 2016; however, in December Congress extended
it at the 30% level until the end of 2019) or from projects that would not be completed until
2021. In response to this RFP, the City received 41 project proposals, which is about half as
many as were received in response to the City’s prior RFP in fall 2013. This drop-off in proposals
received is likely due to the fact that the City was requesting a rather late contract start date of
2021. The 41 proposals represented a total capacity of 900 MW and 2,600 gigawatt-hours per
year (GWh/year) of energy from a variety of different generating technologies. The proposed
projects included 32 solar PV projects, five wind projects, two biomass projects, one
geothermal project, and one ocean wave project.
The proposals were evaluated based on price and value, project/contract viability, and
compatibility with Palo Alto’s electric portfolio. The City received many attractive proposals—
including several that were priced lower than any of Palo Alto’s previously executed PPAs—but
ultimately the Wilsona proposal received the highest overall score.
In evaluating the price and value of different offers staff takes into account:
The daily and seasonal shape of the energy output;
The location of the resource;
The structure of the output in terms of meeting legislated criteria (i.e., satisfying
limitations on the use of the three categories of renewable resources defined by the
state’s RPS law);
The estimated capacity value of the output;
The estimated interconnection cost to get the output onto the grid; and
The green premium, which is calculated for each proposal as the proposal cost minus
the cost of buying the equivalent amount of non-renewable resource output.
Figure 2 depicts the range of green premiums for the proposals received in the spring 2015 RFP,
sorted by type of generation technology. Overall, the green premiums of these projects were
City of Palo Alto Page 8
somewhat lower than those of the project proposals received through the fall 2013 RFP, and
those of the top few proposals were substantially lower.
Further, the viability of each proposed project/contract was evaluated in terms of accomplished
and remaining project development steps, along with the financial standing and development
experience of the project developer.
Figure 2 – Green Premiums and Project Start Dates of RFP Proposals
C. Wilsona Solar Project Summary
The Wilsona PPA proposal was submitted by Hecate Energy, a privately-held Nashville-based
firm that develops solar PV, wind, energy storage, and natural gas projects in the U.S. as well as
abroad. Hecate currently has over 2,400 MW of projects under development. In June 2014, the
Los Angeles Department of Water and Power board unanimously approved the award of 190
MW of solar PV PPAs to Hecate—an award that comprises two 56 MW projects, a 50 MW
project, and 28 MW of in-city distributed generation solar PV projects. Additionally, Hecate’s
management team led the partnership for a 400 MW solar PPA with CPS Energy of San Antonio,
Texas—the largest municipal solar development in the U.S.
Wilsona Solar is a 26 MW project, with expected annual energy deliveries of 75,000 MWh
(approximately 7.5% of the City’s energy needs) in the first year of the contract term. As with
City of Palo Alto Page 9
any solar PV plant, the annual output is expected to decline at a rate of about 0.5% per year
due to solar panel degradation effects. The project is expected to begin commercial operations
in the first half of 2021, and will interconnect to the California Independent System Operator
(CAISO) grid as a Full Capacity Deliverability Status (FCDS) resource, which means that the City
will be able to claim capacity value from the project. The project is expected to be sited on
disturbed agricultural land about 20 miles east of the City of Palmdale in Los Angeles County,
and interconnect at the Wilsona Substation.
The Wilsona PPA is structured as a 25-year base contract term, followed by three separate five-
year extension term options that can be exercised by Palo Alto in its sole discretion. The
negotiated price for the PPA is $36.76 per MWh (3.676/kWh) for the entire term of the
contract, which is about 47% lower than the price of the lowest cost solar PPA that was
approved by the Council5.
As of today, the green premium for a 40-year contract term is significantly lower than that of a
25-, 30-, or 35-year term. For this reason, and assuming the development of the project
proceeds according to plan, it appears likely that the City will want to exercise all three contract
term extension options. Staff therefore seeks Council authorization to exercise all three
options, which would extend the 25-year base contract to a full 40-year contract term for the
City. Staff also requests that Council delegate authority to the City Manager to exercise the
extension term options, so that the City may act expeditiously if staff determines that it is in the
City’s best interest to exercise each option near the end of the then-current contract term.
Delegation of such authority to the City Manager is permissible under section 2.30.290 of the
Palo Alto Municipal Code.
D. Contract Mechanisms for Mitigating Project Risks
With any new, or “greenfield,” electric generation resource there is a risk that the project will
not be built, will come online later than scheduled, or will stop performing at some point after
it comes online. The Wilsona project, in particular, due to its planned 2021 start date, is at a
relatively early stage of development and therefore can be considered at greater risk than
other, more advanced projects. To mitigate these risks, the City has negotiated the inclusion of
very sizable development and performance assurance deposits in this PPA. Also, as with all
PPAs, this agreement is structured so that the City pays only for metered output from the
project after it has been delivered each month. This structure minimizes the City’s exposure to
operational, maintenance, and counterparty default risks in the contract.
For this project, HEPA will provide a development assurance deposit of $5.2 million (in the form
of a letter of credit), or $200/kW of installed capacity, which will be available to the City as
liquidated damages payable by the developer if the project misses the commercial operation
milestone deadline. The development deposit provides an incentive to the developer to
complete the project on time. It also provides compensation to the City should the project
5 The levelized price for the Hayworth Solar PPA approved in June 2015 is $68.72 per MWh for the 34-year term
(assuming both extension term options are exercised). (See Staff Report 4791, Resolution 9416.)
City of Palo Alto Page 10
suffer unexcused delays or fail to materialize. Due to the extended length of time before the
Wilsona project begins operating, staff negotiated a significantly greater development
assurance amount under this PPA compared to prior ones the City has executed6 in order to
offset the increased development risk.
After the start of commercial operations, HEPA will provide a $2.6 million performance
assurance deposit (also in the form of a letter of credit), or $100/kW of installed capacity, which
will be available to the City as liquidated damages payable by HEPA if certain performance
benchmarks are not met. The performance deposit provides an added incentive for the
operator to maintain the project output and provides compensation to the City should
performance be less than expected, which would require the City to procure replacement
renewable energy.
In addition to risks related to project development, operations, and counterparty default, it
should also be noted that there is a risk that in the future the CAISO could impose additional
fees on the owners or off-takers of resources with highly intermittent output such as the
Wilsona project. As more solar and wind resources are added to the state’s generation mix in
the coming years to meet the new 50% RPS mandate, the cost of managing the intermittency of
these resources and ensuring the stability of the electric grid will likely increase, and it is
possible that this additional cost will be passed on to the owners of the resources that are
driving the cost increases. On the other hand, it is also possible that these cost increases would
be spread evenly across all CAISO load-serving entities, regardless of the level of intermittency
of their generation portfolios. While it is important to acknowledge the potential for future cost
increases as a result of executing this agreement, it should also be noted that it is highly
unlikely that these cost increases would be great enough to make the Wilsona project less
attractive to the City than a non-intermittent alternative (i.e., a geothermal or biomass project)
based on the response to the City’s recent renewable energy RFP.
E. Energy Risk Manager’s Assessment
The Energy Risk Manager (ERM) was involved in the final stages of the RFP evaluation process
when two final candidates were being considered. The ERM analyzed the creditworthiness of
each counterparty and provided the results to the RFP selection team. Credit assessments were
performed on the companies providing financing for the projects. HEPA’s financial backer is
Hecate Energy.
The ERM assessed the expected default frequency (EDF) of Hecate using Moody’s credit
measure tool, which extracts credit signals by combining information from the equity markets
with the company’s debt structure as reported on its financial statements. This analysis yielded
an EDF of 1.02 percent (meaning that there is an estimated one in 98 chance of default by the
company within the next year).
6 Under the City’s other five solar PPAs, the development assurance amounts range from $20/kW to $75/kW of
installed generating capacity.
City of Palo Alto Page 11
The risks to the City of entering into the proposed PPA are that the supplier defaults or is
unable to perform according to the terms of the contract. If this occurs, the City might need to
buy renewable energy from another supplier in order to meet its RPS obligations under state
law or to meet the City’s RPS and Carbon Neutral goals. These risks are minimized by the
following terms of the proposed PPA:
The City is not at risk for paying for output that is not delivered. The City will make no
payments under the PPA unless and until energy from the project is delivered to the
City.
The supplier’s development assurance deposit funds provide some degree of comfort
that the project will be completed. If it is not, then the City would be able to access the
development deposit funds of up to $5.2 million to help offset the cost of procuring
replacement renewable energy.
Once the project becomes operational, the unclaimed development deposit funds will
be returned to HEPA. At the same time, HEPA will post a new performance assurance
deposit that the City can use to cover operational and performance risk. Staff believes
this amount ($2.6 million) is sufficient to cover these risks given that the operating costs
for solar plants are much lower than their operating revenues; thus project owners tend
to keep their projects operating.
In general, businesses in the renewable industry lack extensive financial and operational track
records, and because of the capital-intensive nature of these projects, they tend to be highly
leveraged as well. Hecate Energy is no exception; thus, it is not investment-grade and has a
higher projected default rate than the City’s other (non-renewable) electric and gas suppliers.
However, under the terms of the Wilsona PPA, if the project does not come to fruition
according to the construction start and commercial operation date milestones set forth in the
PPA, or if the supplier defaults at any time during the term of the agreement, the City can
access the then-current development assurance funds provided by the letter of credit. For
these reasons, staff recommends that the Council waive the investment-grade credit
requirement for public agency contracts required under Section 2.20.340(d) of the Palo Alto
Municipal Code. This conforms to Council action on prior renewable resource contracts with
similar characteristics (CMR:461:04, CMR:100:05, CMR:350:05, CMR:343:09, CMR:226:10, Staff
Report 3223, Staff Report 3845, and Staff Report 4791).
F. Palo Alto’s Renewable Resource Portfolio with Wilsona
The City has made commitments to renewable resources projected to provide 57.7% of its
energy from qualified renewable resources by 2017. However, in May 2021 the City’s PPA for
the Shiloh I wind project—which was executed in 2006, and is one of its larger PPAs—is set to
expire. Three more PPAs are then set to expire in 2028 and 2029. If the Wilsona solar project is
added to the City’s renewables portfolio, Palo Alto’s renewable resources would be expected to
provide about 57.5% of total sales in 2022. Additionally, the Wilsona project would enable the
City to meet its Carbon Neutral Plan goal as well as the state’s 50% RPS mandate through 2028.
City of Palo Alto Page 12
Figure 3 illustrates the City’s existing renewable resource commitments, with the Wilsona
project included as a “pending” resource. Also shown are reference lines indicating the level of
renewables that would be needed to achieve a 50% RPS, and the level that would produce a
carbon neutral electric supply portfolio. (The volume of renewable energy certificates (RECs)
that need to be procured each year in order for the City to achieve a 100% carbon neutral
electric supply portfolio is shown as well. The large volume of RECs required from 2013 through
2016 is largely due to the impacts of the current drought, which has reduced the output of the
City’s two hydroelectric resources.) These reference lines indicate that the inclusion of Wilsona
in the City’s renewable resources portfolio would enable the City to achieve greater than a 50%
RPS level and a 100% carbon neutral supply portfolio through long-term renewable and hydro
resources through 2028, even under slightly dry hydrological conditions7.
Figure 3 – Palo Alto’s Renewable Resources with Wilsona
7 Note that the City’s electric needs may change over time from the forecast shown in Figure 3. Load forecasts are
updated annually and staff is aware of forces reducing customer electricity needs—such as energy efficiency
improvements from appliance standards and increasingly stringent building codes as well as increasing local
generation, particularly from rooftop PV systems. On the other hand, increasing attention to electrification of
natural gas using appliances such as water and space heaters as well as increasing penetration of EVs create an
upward pressure on electric loads. Regardless of load trends, staff is confident that sufficient renewable supplies
can be secured to meet future RPS requirements and carbon neutral goals.
City of Palo Alto Page 13
As indicated in Figure 3, staff projects that adding the Wilsona PPA to the City’s renewables
portfolio would cause a surplus of carbon neutral electric supplies from 2026 through 2028.
However, this will be true only if hydrologic conditions are close to (or wetter than) the long-
term average level and all of the renewable resources that the City has contracted for that are
still under development (plus the Wilsona project) are completed on-time and deliver the
expected amount of energy to the City. As the year 2013 through 2016 data points on the
carbon neutral reference line indicate, “dry hydro” years are becoming increasingly common in
northern California, and they can have a tremendous negative impact on the output of the
City’s hydroelectric resources. In such years, even the addition of the Wilsona PPA and all of the
other contracted resources that are still under development would not be sufficient to achieve
a carbon neutral supply portfolio without the purchase of RECs. Also, it is the City’s experience
that some renewable energy projects that are contracted for experience significant
development delays, or end up not being built at all. The City’s experience in this regard is
consistent with the broader renewables market. The California Energy Commission, for
instance, has estimated the failure rate for renewables contracts to be between thirty and forty
percent.8 The City itself has cancelled three renewable PPAs it executed because the projects
did not proceed as planned.
If, however, the City’s carbon neutral electric supply portfolio exceeds the amount of
generation needed to achieve carbon neutrality in any given year, the City would have the
ability to either “bank” the RECs associated with that generation for use in a later time period,
or sell the surplus into the short-term markets. Prices for short-term REC sales are currently
expected to be fairly advantageous for the City over the long-term, so these surplus positions
would likely result in little if any financial loss for the City.
Section D.1 of the City’s Energy Risk Management (ERM) Policy prohibits speculative buying and
selling of energy products. Under the ERM Policy, “speculation” is defined as “buying energy
not needed for meeting forecasted load or selling energy that is not owned.” Because the
Wilsona project has the potential to lead to surplus electric purchases, including during the
2026 through 2028 time period, staff recommends that Council waive application of the ERM
Policy’s anti-speculation requirement to the City’s participation in the Wilsona PPA. Staff’s
recommendation is based on the information set forth above, including the variability of the
City’s hydroelectric resources and potential uncertainties associated with the viability and
timeliness of renewable energy projects in the City’s portfolio that are currently under
development.
Table 2 provides a summary of renewable energy project volumes and the associated annual
green premium amounts for the City’s committed renewable energy supplies as well as the PPA
8 According to the CEC: “Data from the Energy Commission’s [Investor Owned Utility] contract database indicates
that since the start of the RPS Program, about 30 percent of long-term RPS contracts (10 years or more) approved
by the California Public Utilities Commission (CPUC) have been cancelled. The contract failure rate increases to
about 40 percent when also considering contracts that have been delayed.” California Energy Commission. 2011
Integrated Energy Policy Report. Publication Number: CEC-100-2011-001-LCF. 2011.
City of Palo Alto Page 14
under consideration. As shown in the table, the annual green premium for the Wilsona PPA is
estimated at -$1.1 million. This means that the contract is expected to cost the City $1.1 million
per year less than brown power purchases would, based on current forward projections for
brown power costs. If Council approves the Wilsona PPA, the total rate impact for all
renewable supplies would be only 0.123¢/kWh—well within the 0.5¢/kWh rate impact limit
Council established for the RPS goal.
Table 2 – Summary of the City’s Current Renewable Energy Supplies and the Proposed Project
Delivery
Begins
Annual
Generation
(GWh)
Levelized
Price
($/MWh)
Adjusted
Brown
Market
Price
($/MWh)
Green
Premium
($/MWh)
Total
Annual
Green
Premium
($1000)
Small Hydro Before 2000 10.0 N/A N/A 0 0
High Winds Dec. 2004 48.2 57.6 55.0 2.6 123
Shiloh I Wind Jun. 2006 64.5 63.0 69.5 (6.5) (419)
Santa Cruz Feb. 2006 9.9 62.3 59.3 3.0 29
Ox Mountain Apr. 2009 43.9 59.0 67.5 (8.5) (375)
Keller Canyon Aug. 2009 14.9 70.9 83.9 (13.0) (194)
Johnson Canyon Mar. 2013 10.4 123.6 67.3 56.3 588
San Joaquin Jun. 2013 30.3 118.1 75.6 42.4 1,285
Kettleman Aug. 2015 53.5 77.0 60.1 16.9 903
Hayworth Solar Dec. 2015 63.7 68.7 65.0 3.7 234
Frontier Solar May 2016 52.5 69.0 67.1 1.9 98
Elevation Oct. 2016 100.8 68.8 72.7 (4.0) (399)
W. Antelope Oct. 2016 50.4 68.8 69.2 (0.4) (22)
Total Committed Projects 553 Total Committed Green Premium 1,852
Wilsona Jun. 2021 75 36.8 51.4 (14.6) (1,095)
Total with Wilsona
(but without Shiloh) 563 Total Green Premium
with Wilsona (without Shiloh) 1,176 *
* The annual green premium associated with a rate impact of 0.5¢/kWh is equal to $4.8 million
G. Alternative to Approving the Wilsona PPA
As shown in Figure 3 above, if all of the contracted resources that are still under development
are ultimately completed and operate according to expectations, the City’s existing portfolio of
resources is expected to be sufficient to allow the City to satisfy its carbon neutral supply goal
and comply with the state RPS mandate until about 2025. As noted earlier, the rationale for
issuing an RFP in 2015 to satisfy a supply need starting in 2021 was that it would allow the City
to execute a contract for a resource that could make use of the 30% ITC—before it dropped to
10% at the end of 2016.
However, when Congress unexpectedly extended the ITC for several years in mid-December
2015, this created a sudden change in the landscape for renewable energy—and also
City of Palo Alto Page 15
undermined one of the key reasons for issuing this RFP. The impact of this policy change on the
Wilsona project is that it makes it more attractive to potential financiers, and therefore makes
it a more viable project. (Note that after Congress extended the ITC, staff requested a contract
price reduction, but HEPA declined.) On the other hand, it also means it is more likely now that
if the proposed PPA was rejected, staff could issue another RFP in 2018 or 2019 and obtain an
attractively-priced project.
But, as discussed above, there are certain factors that could potentially push renewable energy
prices higher over the next few years—in particular, the wave of new renewables procurement
that is expected to begin around 2018 or 2019 as utilities around the state attempt to meet
their post-2020 RPS requirements. Given this uncertainty around future renewable energy
market prices, and given how attractive the proposed PPA’s contract price is (it is lower than
any other published price for a solar PV resource in the U.S. that staff is aware of), staff
recommends approving the proposed PPA rather than issuing another RFP in a few years to fill
the City’s RPS needs after 2021.
Commission Review and Recommendation
On January 13, 2016, the UAC reviewed staff’s recommendation that Council approve the
proposed PPA with HEPA, delegate execution authority to the City Manager or his designee,
and waive the City’s investment-grade credit rating requirement and anti-speculation
requirement as they may apply to this agreement.
The UAC discussed the proposed PPA, asking questions about the potential impacts of grid
congestion on the project, the environmental attributes of the proposed site, staff’s reasons for
issuing an RFP in 2015 for a contract with a 2021 start date, and the contract provisions
designed to address potential development cost increases. The UAC also heard from Hecate
Energy’s Chief Operating Officer, Nicholas Bullinger, who attended the meeting and spoke
briefly about his company’s track record of developing electric power facilities and the sources
of financing for its projects. Several Commissioners praised staff’s efforts on the RFP and the
contract negotiations, and expressed approval of the proposed PPA.
After discussion, the UAC voted unanimously (7-0) to recommend that Council approve the PPA
as presented by staff. The excerpted draft minutes from the UAC’s discussion of the PPA at its
January 13, 2016 meeting are provided as Attachment C.
Resource Impact
The cost of renewable energy supplies from Wilsona is expected to be up to $101 million over
the 40-year term of the agreement (if all three extension options are exercised). The annual
expected cost is up to $2.8 million. Approval of the PPA would result in a retail rate impact from
all renewable resources, including the Wilsona project, of up to 0.12¢/kWh in 2022. The
expected future cost for procuring renewable resources to meet the City’s RPS goal is already
included in the current five-year financial forecast.
City of Palo Alto Page 16
Policy Implications
Approval of the proposed PPA is in conformance with the City’s Long-term Energy Acquisition
Plan (LEAP), specifically the City’s Renewable Portfolio Standard to meet at least 33% of the
electric sales from renewable energy. Approval of the proposed PPA would also further the
City’s efforts to achieve a carbon neutral electric supply portfolio entirely through the
acquisition of additional “hard resources” that supply the City with both energy and
environmental attributes. Finally, approval of the proposed PPA would help the City satisfy its
obligations under SB 350 to meet at least 50% of its electric sales from renewable energy by
2030.
Environmental Review
Approval of this agreement does not meet the definition of a project under the California
Environmental Quality Act (CEQA), pursuant to Public Resources Code Section 21065. However,
the City intends to receive output from a project that will constitute a project for the purposes
of CEQA. The project developer will be responsible for acquiring necessary environmental
reviews and permits on the project to be developed.
During the development phase of the project, the PPA requires that the City receive and review
the project CEQA documents and the project’s environmental impacts. If the City determines
that the project will have a significant negative environmental impact, it can require HEPA to
develop and implement a remediation plan to mitigate these impacts. And if the environmental
impacts cannot be mitigated, the City is able to terminate the PPA.
Attachments:
Attachment A: Resolution to Approve the PPA with Hecate Energy Palo Alto LLC (PDF)
Attachment B: Power Purchase Agreement with Hecate Energy Palo Alto LLC (PDF)
Attachment C: Draft Excerpted Minutes of the January 13, 2016 UAC Meeting (PDF)
* NOT YET APPROVED *
Resolution No. _________
Resolution of the Council of the City of Palo Alto Approving a Long
Term Power Purchase Agreement with Hecate Energy Palo Alto LLC
for the Purchase of Solar Electricity
A. On April 16, 2012, Council approved an update to the Long-term Electric
Acquisition Plan’s (LEAP) strategy related to the Renewable Portfolio Standard (RPS). The
updated strategy specifies that the City’s objective is to reduce the carbon intensity of the
electric portfolio by pursuing a minimum level of renewable purchases of at least 33 percent of
retail electricity sales by 2015 within a rate impact cap of 0.5 cents per kilowatt-hour.
B. On March 4, 2013, Council approved a Carbon Neutral Plan, which enabled the
City to achieve a carbon neutral electric supply portfolio starting in calendar year 2013.
C. On October 7, 2015, the Governor approved Senate Bill (“SB”) 350, which
requires that all retail sellers of electricity in California, including publicly-owned utilities, serve
50 percent of their retail electricity sales with renewable energy by 2030.
D. The City is interested in purchasing power generated by renewable resources for
the benefit of its electric customers.
E. By purchasing renewable energy resources, the City will help reduce the
production of greenhouse gases, will meet its RPS requirements under SB 350 and LEAP, and
will meet its Carbon Neutral Plan goals.
F. Hecate Energy Palo Alto LLC (“HEPA”) through its parent company, Hecate
Energy LLC, proposed its project, the Wilsona solar photovoltaic plant, in response to the City’s
Request for Proposals 156876 (“RFP”) in May 2015. Its proposal is highly competitive with
other RFP respondent proposals.
G. The execution of a power purchase agreement (“PPA”) with HEPA is anticipated
to enable the City to meet a seven and a half percent portion of its goal of sourcing at least 33
percent of its electric needs from renewable resources and its goal to implement the Carbon
Neutral Plan.
H. Under the terms of this PPA, the City is allocated a 100 percent share of the
power from HEPA’s solar project located in Los Angeles County, California, which will yield
approximately 26 megawatts of plant net output when completed.
I. The PPA is for a twenty-five year base contract term and will allow the City to
extend the PPA at its sole option for up to three additional five-year terms.
ATTACHMENT A
* NOT YET APPROVED *
J. The City’s participation in the Hecate Energy Palo Alto PPA may result in surplus
electric purchases that are inconsistent with the anti-speculation requirement of section D.1 of
the City’s existing Energy Risk Management Policy, due to variability of the City’s hydroelectric
resources, and potential uncertainties associated with the timeliness and viability of the
renewable energy projects in the City’s portfolio still under development.
The Council of the City of Palo Alto does RESOLVE as follows:
SECTION 1. The Council approves the power purchase agreement (PPA) between
Hecate Energy Palo Alto LLC, as seller, and the City of Palo Alto, as buyer. The delivery term of
the PPA is up to forty (40) years, commencing upon the commercial operation date of the
planned electric generation facility, which date is expected to be no later than June 1, 2021. The
City will receive a 100 percent share of the facility’s net output. Spending authority under the
PPA shall not exceed one hundred one million dollars ($101,000,000).
SECTION 2. The Council delegates to the City Manager, or his designee, the authority
to execute the PPA with Hecate Energy Palo Alto LLC on behalf of the City, and the authority to
execute any documents necessary to administer the PPA that are consistent with the Palo Alto
Municipal Code and City Council approved policies.
SECTION 3. As permitted by section 2.30.290 of the Palo Alto Municipal Code, the
Council delegates to the City Manager, or his designee, the authority to exercise the three
extension term options, to extend the twenty-five year base contract to a full forty year
contract term for the City.
SECTION 4. With respect to the Council’s award of the PPA referred to in Section 1
above, the Council waives the creditworthiness requirements of Palo Alto Municipal Code
section 2.30.340(c), as that requirement may apply to Hecate Energy Palo Alto LLC.
SECTION 5. With respect to the Council’s award of the PPA referred to in Section 1
above, the Council waives the anti-speculation requirement of Section D.1 of the City’s existing
Energy Risk Management Policy, as that requirement may apply to surplus electricity purchases
caused by the City’s participation in the PPA with Hecate Energy Palo Alto LLC.
SECTION 6. The Council’s approval of this PPA does not meet the definition of a
project under the California Environmental Quality Act (CEQA), pursuant to Public Resources
Code Section 21065. However, the City intends to receive output from a project that will
constitute a project for the purposes of CEQA. The project developer will be responsible for
acquiring necessary environmental reviews and permits on the project to be developed. During
the development phase of the project, the City will become a “responsible agency” under the
CEQA proceedings. As such, the PPA allows for the City to review the project CEQA documents
and issue a notice of determination with respect to its review of the projects. Staff anticipates
working with the City Attorney’s Office and the Planning Department to undertake this
assessment and make a determination.
* NOT YET APPROVED *
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Senior Deputy City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative
Services
Execution Version
POWER PURCHASE AGREEMENT
Between
The City of Palo Alto
(as “Buyer”)
and
Hecate Energy Palo Alto LLC
(as “Seller”)
Dated as of _______________, 2016
ATTACHMENT B
TABLE OF CONTENTS – Page i
TABLE OF CONTENTS
PREAMBLE ......................................................................................................................1
RECITALS ......................................................................................................................1
GENERAL TERMS AND CONDITIONS .................................................................................1
ARTICLE I: DEFINITIONS; RULES OF INTERPRETATION ...............................................1
1.1 Definitions. .........................................................................................................1
1.2 Rules of Interpretation. ...................................................................................... 17
ARTICLE II TERM, PURCHASE AND SALE ....................................................................... 18
2.1 Conditions Precedent to Commencement of Term of Agreement ....................... 18
2.2 Agreement Term, Delivery Term, Acceleration and Extension .......................... 18
2.3 Purchase and Sale of the Output ........................................................................ 20
2.4 Price.................................................................................................................. 21
2.5 Test Energy ....................................................................................................... 22
2.6 Environmental Attributes .................................................................................. 22
2.7 Resource Adequacy........................................................................................... 23
2.8 Tax Credits and Incentives. ............................................................................... 23
2.9 CEQA. .............................................................................................................. 24
2.10 Right of First Refusal for Expansion Plant and Expansion Plant Output. ........... 25
2.11 Refurbishment of Plant...................................................................................... 26
ARTICLE III METERING AND BILLING ............................................................................. 27
3.1 Metering Requirements. .................................................................................... 27
3.2 Billing. .............................................................................................................. 28
3.3 Payment ............................................................................................................ 29
3.4 Billing Agent. ................................................................................................... 29
ARTICLE IV SELLER'S OBLIGATIONS............................................................................... 29
4.1 Development, Finance, Construction and Operation of the Plant. ...................... 29
4.2 General Obligations. ......................................................................................... 32
4.3 Construction Milestones. ................................................................................... 34
4.4 Milestone Excused Delay and Liquidated Damages........................................... 36
4.5 Obligation to Schedule and Deliver. .................................................................. 37
4.6 Output Obligations, Performance LDs and Buyer’s Right to Operate. ............... 40
ARTICLE V BUYER’S OBLIGATIONS ................................................................................ 42
5.1 Delivery and Transmission. ............................................................................... 42
5.2 Taxes. ............................................................................................................... 42
5.3 Notification of Transmission Outages. .............................................................. 42
ARTICLE VI FORCE MAJEURE ........................................................................................... 43
6.1 Remedial Action. .............................................................................................. 43
6.2 Notice. .............................................................................................................. 43
6.3 Termination Due To Force Majeure Event. ....................................................... 43
TABLE OF CONTENTS – Page ii
ARTICLE VII DEFAULT, REMEDIES AND TERMINATION ............................................ 44
7.1 Events of Default by Buyer. .............................................................................. 44
7.2 Events of Default by Seller................................................................................ 44
7.3 Termination for Default. ................................................................................... 45
7.4 Limitation of: Remedies, Liability and Damages. .............................................. 47
ARTICLE VIII REPRESENTATIONS AND WARRANTIES................................................. 48
8.1 Seller’s Representations and Warranties. ........................................................... 48
8.2 Buyer Representations and Warranties. ............................................................. 50
8.3 Covenants ......................................................................................................... 50
ARTICLE IX DEVELOPMENT, INTERIM AND PERFORMANCE ASSURANCE ............. 51
9.1 Grant of Security Interest/Remedies. ................................................................. 51
9.2 Development Assurance, Interim Assurance and Performance Assurance. ........ 52
9.3 Letter of Credit.................................................................................................. 54
ARTICLE X MISCELLANEOUS ........................................................................................... 56
10.1 Indemnification. ................................................................................................ 56
10.2 Assignment. ...................................................................................................... 57
10.3 Notices. ............................................................................................................. 58
10.4 Electronic Transmission .................................................................................... 59
10.5 Captions. ........................................................................................................... 59
10.6 No Third Party Beneficiary. .............................................................................. 59
10.7 No Dedication ................................................................................................... 59
10.8 Entire Agreement; Integration; Amendments..................................................... 59
10.9 Applicable Law. ................................................................................................ 60
10.10 Venue. .............................................................................................................. 60
10.11 Rule of Construction. ........................................................................................ 60
10.12 Attorneys’ Fees and Costs. ................................................................................ 60
10.13 Nature of Relationship. ..................................................................................... 61
10.14 Good Faith and Fair Dealing; Reasonableness. .................................................. 61
10.15 Severability. ...................................................................................................... 61
10.16 Confidentiality. ................................................................................................. 61
10.17 Cooperation. ..................................................................................................... 63
10.18 Audit. ................................................................................................................ 63
10.19 Mobile Sierra Doctrine. ..................................................................................... 63
10.20 Counterparts...................................................................................................... 63
10.21 Debt Liability Disclaimer. ................................................................................. 63
10.22 No Implied Waiver of Breach............................................................................ 64
SIGNATURE PAGE ................................................................................................................ 65
TABLE OF CONTENTS – Page iii
EXHIBITS
The following Exhibits constitute a part of this Agreement and are incorporated into this
Agreement by reference:
EXHIBIT A PLANT DESCRIPTION AND SITE DRAWINGS
EXHIBIT B ENVIRONMENTAL ATTRIBUTE TRANSFER FROM SELLER TO
BUYER
EXHIBIT C INSURANCE COVERAGES
EXHIBIT D SCHEDULING PROTOCOLS
EXHIBIT E-1 FORM OF MONTHLY PROGRESS REPORT
EXHIBIT E-2 COD CERTIFICATION
EXHIBIT F-1 FORM OF LETTER OF CREDIT
EXHIBIT F-2 FORM OF LENDER CONSENT AGREEMENT
EXHIIBT G EXPECTED ANNUAL ENERGY PRODUCTION
EXHIBIT H SELLER DOCUMENTATION CONDITIONS PRECEDENT
POWER PURCHASE AGREEMENT - Page 1 of 65
POWER PURCHASE AGREEMENT
PREAMBLE
This Power Purchase Agreement, together with the exhibits referenced herein, is made and entered
into as of the Execution Date, by and between the City of Palo Alto, a California chartered
municipal corporation (“Buyer”), and Hecate Energy Palo Alto LLC, a Delaware limited liability
company (“Seller”).
RECITALS
1. Seller intends to develop, finance, build, own and operate a solar photovoltaic electric
generating facility which shall obtain a Full Capacity Deliverability Status Finding from
the CAISO as described herein and be located at the Site.
2. Buyer is a municipal utility governed by the City of Palo Alto, by and through its Council,
which has all powers necessary and appropriate to a municipal corporation, including but
not limited to the authority granted by the City Charter, Article XI, Section 9(a) of the
California Constitution, California Government Code Section 39732 and California Public
Utilities Code Section 10002, to establish, purchase, and operate public works to furnish its
inhabitants with electrical power. Under this authority, Buyer is engaged in the business of
delivering electricity to its residential and commercial customers in Palo Alto, California,
and buying electricity with the intention of routinely taking physical delivery.
3. Buyer wishes to purchase the Output of the Plant to meet Buyer’s needs at a known price
and timing and intends to resell related Energy to its residential and commercial customers.
4. Buyer is willing to purchase, and Seller is willing to sell, the Output of the Plant, on the
terms and conditions and at the prices set forth in this Agreement.
NOW THEREFORE, in consideration of the recitals above and the following covenants, terms
and conditions, the Parties agree:
GENERAL TERMS AND CONDITIONS
ARTICLE I: DEFINITIONS; RULES OF INTERPRETATION
1.1 Definitions.
The following initially capitalized terms, whenever used in this Agreement, have the meanings set
forth below unless the context of their use otherwise indicates or they are otherwise defined in
other sections of this Agreement.
AC: Alternating current.
POWER PURCHASE AGREEMENT - Page 2 of 65
Accelerated Contract Delivery Start Date Notice: Has the meaning set forth in Section 2.2(c).
Agreement: Means this Power Purchase Agreement between Buyer and Seller, which is
comprised of the Preamble, Recitals, these General Terms and Conditions, and all appendices,
schedules, exhibits and any written supplements attached hereto and incorporated herein by
reference, as well as all written and signed amendments and modifications thereto.
Ancillary Services: Has the meaning set forth in the CAISO Tariff.
Attorneys’ Fees: Means reasonable attorneys’ fees and costs, including at trial and on appeal,
including an amount equal to the fair market value of legal services provided by attorneys
employed by it as well as any attorneys’ fees paid to third parties.
Availability Standards: Means the program set forth in Section 40.9 of the CAISO Tariff, as it
may be amended, supplemented or replaced (in whole or in part) from time to time, setting forth
certain standards regarding the desired level of availability for Resource Adequacy resources and
possible charges and incentive payments for performance thereunder.
Bankrupt: Means with respect to any entity, such entity (a) files a petition or otherwise
commences, authorizes or acquiesces in the commencement of a proceeding or cause of action
under any bankruptcy, insolvency, reorganization or similar Law, or has any such petition filed or
commenced against it and such case filed against it is not dismissed in sixty (60) calendar days, (b)
makes an assignment or any general arrangement for the benefit of creditors, (c) otherwise
becomes bankrupt or insolvent (however evidenced), (d) has a liquidator, administrator, receiver,
trustee, conservator or similar official appointed with respect to it or any substantial portion of its
property or assets, or (e) is generally unable to pay its debts as they fall due.
Battery Storage Facility: Has the meaning set forth in Section 2.12.
Battery Storage Facility Request: Has the meaning set forth in Section 2.12.
Business Day: Means any day except a Saturday, Sunday, or a Federal Reserve Bank holiday and
shall be between the hours of 8:00 a.m. and 5:00 p.m. local time for the relevant Party’s principal
place of business where the relevant Party, in each instance unless otherwise specified, shall be the
Party from whom the notice, payment or delivery is being sent and by whom the notice or payment
or delivery is to be received.
Buyer: Has the meaning in the Preamble, and any successor or permitted assignee.
CAISO: The California Independent System Operator Corporation, or its functional successor.
CAISO Tariff: The California Independent System Operator Corporation, Fifth Replacement
FERC Electric Tariff, as it may be amended, supplemented or replaced (in whole or in part) from
time to time.
Calculation Period: Means successive periods consisting of two (2) consecutive Contract Years
with the first Calculation Period commencing on the Contract Delivery Start Date, and with each
POWER PURCHASE AGREEMENT - Page 3 of 65
subsequent Calculation Period commencing on the twelve (12) month anniversary of the
commencement of the prior Calculation Period.
Calculation Period Deemed Delivered Energy Production: For each Calculation Period, an
amount expressed in MWh equal to the sum of (i) the total Output delivered by Seller to the Point
of Interconnection in such Calculation Period, plus (ii) the Seller Excused Energy Amount for such
Calculation Period.
Calculation Period Expected Energy Production: Means an amount expressed as MWh equal
to the sum of the Expected Annual Energy Production for the relevant two Contract Years during
each Calculation Period.
Capacity Attributes: Means any current or future defined characteristic (including the ability to
generate at a given capacity level, provide Ancillary Services, and ramp up or ramp down at a
given rate), certificate, tag, credit, flexibility, or dispatchability attribute, whether general in nature
or specific as to the location or any other attribute of the Plant, intended to value any aspect of the
capacity of the Plant to produce any and all Output, including any accounting construct so that the
maximum amount of Initial Capacity of the Plant may be counted toward Resource Adequacy
Requirements or any other measure by the CPUC, the CAISO, the FERC, or any other entity
invested with the authority under federal or state Law, to require Buyer to procure, or to procure at
Buyer’s expense, Resource Adequacy or other such Output.
CARB: Means the California Air Resources Board or any successor agency.
CEC: Means the California Energy Resources Conservation and Development Commission or
any successor agency.
CEC Certification and Verification: Means that the CEC has certified (or, with respect to
periods before the Plant has commenced commercial operation (as such term is defined by and
according to the CEC), that the CEC has pre-certified) that the Plant is an ERR for purposes of the
California Renewables Portfolio Standard and that all Output produced by the Plant qualifies as
generation from an ERR for purposes of the Plant.
CEQA: The California Environmental Quality Act, as it may be amended from time to time.
Change in Law: The enactment or issuance of any new Law, the amendment, alteration,
modification or repeal of any existing Law or any authoritative interpretation of any existing Law
issued by a competent court, tribunal or Governmental Authority contrary to the existing official
interpretation thereof, in each case coming into effect after the Execution Date and which must be
complied with in order for the Plant to be constructed and operated lawfully.
COD Certification: Seller’s certification of Commercial Operation in the form set forth as
Exhibit E-2, duly executed by Seller and its Licensed Professional Engineer.
Commercial Operation: The condition of the Plant whereby it is operating and able to produce
and deliver the Output to Buyer pursuant to the terms of this Agreement.
POWER PURCHASE AGREEMENT - Page 4 of 65
Commercial Operation Date: The date upon which Seller delivers the COD Certification to
Buyer in accordance with Section 4.3(d) and thereby notifies Buyer that Commercial Operation
has commenced.
Commercial Operation Milestone: Has the meaning set forth in Section 4.3(b)(vi).
Condition Precedent: Means each of, or one of, the conditions set forth in Section 2.1(a)(i)
through (iii), and “Conditions Precedent” shall refer to all of the conditions set forth in Section
2.1(a)(i) through (iii).
Conditional Use Permit a permit approving the conditional use for the development,
construction and operation of the Plant required and by any Governmental Authority..
Conditional Use Permitting Milestone: Has the meaning set forth in Section 4.3(b)(ii).
Confidential Information: Has the meaning set forth in Section 10.16(a).
Construction Milestone: Has the meaning set forth in Section 4.3(b)(v).
Construction Start Date: The date on which Seller delivers to Buyer a copy of the Notice to
Proceed that Seller has delivered to the EPC Contractor for the Plant.
Contract Delivery Start Date: Has the meaning set forth in Section 2.2(b)(i), or, if accelerated,
the meaning set forth in Section 2.2(c).
Contract Year: A period of twelve (12) consecutive months, with the first Contract Year
commencing at 12:00 a.m. on the Contract Delivery Start Date, and each subsequent Contract Year
commencing on the twelve (12) month anniversary of the Contract Delivery Start Date.
Contractual Obligations: As to Seller, any material agreement, instrument or undertaking to
which Seller is a party or by which it or any of its Plant property is bound.
Costs: With respect to a Non-Defaulting Party, (a) brokerage fees, commissions and other similar
third party transaction costs and expenses reasonably incurred by such Party either in terminating
any arrangement entered into pursuant to this Agreement or entering into new arrangements which
replace this Agreement and (b) all Attorneys’ Fees incurred by the Non-Defaulting Party in
connection with the termination of this Agreement.
CPRA: Has the meaning set forth in Section 10.16(a).
CPUC: Means the California Public Utilities Commission or any successor entity.
Credit Rating: Means, with respect to any entity, (a) the rating then assigned to such entity’s
unsecured senior long-term debt obligations (not supported by third party credit enhancements) or
(b) if such entity does not have a rating for its unsecured senior long-term debt obligations, then the
rating assigned to such entity as an issuer rating by S&P and/or Moody’s. If the entity is rated by
both S&P and Moody’s and such ratings are not equivalent, the lower of the two ratings shall
POWER PURCHASE AGREEMENT - Page 5 of 65
determine the Credit Rating. If the entity is rated by either S&P or Moody’s, but not both, then the
available rating shall determine the Credit Rating.
Cure: Has the meaning set forth in Section 9.3(b).
DA Price: The resource specific locational marginal price (“LMP”) applied to the PNode
applicable to the Plant in the CAISO Day-Ahead Market.
Daily LD Amount: For each day or portion of a day for which delay liquidated damages are
payable under Section 4.4(b), an amount equal to the total amount of Development Assurance
required hereunder divided by 365.
Damage Payment: Means (a) the dollar amount to be posted as Development Assurance pursuant
to Section 9.2(a)(i) hereof, less (b) amounts collected by Buyer as the Daily LD Amount pursuant
to Section 4.4(b), if any.
Day-Ahead Market: Has the meaning set forth in the CAISO Tariff.
Defaulting Party: Means the Party that is subject to an Event of Default.
Delivery Term: Has the meaning set forth in Section 2.2(b)(i), or if extended, the meaning set
forth in Section 2.2(d).
Development Assurance: Means the collateral provided by Seller to Buyer to secure Seller’s
obligations hereunder in accordance with Section 9.2(a)(i) of this Agreement.
Development Progress Report: Means the report similar in form and content attached hereto as
Exhibit E-1.
Discretionary Curtailment: Has the meaning set forth in Section 4.5(c)(ii)(A).
Dispatch Down Period: The period of curtailment of delivery of Output from the Plant that is not
Discretionary Curtailment and results from:
(a) A curtailment ordered by the CAISO (whether directly or through a Scheduling
Coordinator or the Participating Transmission Owner), for any reason, including,
but not limited to, any System Emergency, any warning of an anticipated System
Emergency, or any warning of an imminent condition or situation which could
jeopardize the CAISO’s or Participating Transmission Owner’s electric system
integrity or the integrity of other systems to which the CAISO or the Participating
Transmission Owner is connected;
(b) A curtailment ordered by the Participating Transmission Owner or distribution
operator (if interconnected to distribution or sub-transmission system) for any
reason, including but not limited to, (i) any situation that affects normal function of
the electric system including, but not limited to any abnormal condition that
requires action to prevent circumstances such as equipment damage, loss of load, or
abnormal voltage conditions, (ii) any warning, forecast or anticipation of
POWER PURCHASE AGREEMENT - Page 6 of 65
conditions or situations that jeopardize the Participating Transmission Owner’s
electric system integrity or the integrity of other systems to which the Participating
Transmission Owner is connected; or (iii) as a result of scheduled or unscheduled
maintenance or construction on the Participating Transmission Owner’s
transmission facilities or distribution operator’s facilities that prevents the delivery
or receipt of Output to or at the Point of Interconnection; or
(c) A curtailment in accordance with Seller’s obligations under its Interconnection
Agreement with the Participating Transmission Owner or distribution operator;
provided, that any of the foregoing events (a) through (c) shall not have been solely
caused by the acts or omissions of Buyer.
Distribution Upgrades: Has the meaning set forth in the CAISO Tariff.
EA Agency: Any local, state or federal entity, or any other Person, that has responsibility for or
jurisdiction over a program involving transferability of Environmental Attributes, including,
without limitation, the Clean Air Markets Division of the United States Environmental Protection
Agency (together with any successor agency, the “EPA”), the CEC, the CPUC, CARB, and any
successor commission or agency thereto.
Early Termination Date: Has the meaning set forth in Section 7.3(a)(i).
Electric System Upgrades: Means any Network Upgrades, Distribution Upgrades, or
Interconnection Facilities that are determined to be necessary by the CAISO or Participating
Transmission Owner, as applicable, to physically and electrically interconnect the Plant to the
Participating Transmission Owner’s electric system for receipt of Energy at the Point of
Interconnection.
Eligible Intermittent Resource: Has the meaning set forth in the CAISO Tariff.
Eligible Intermittent Resource Protocols or EIRP: Has the meaning set forth in the CAISO
Tariff, including but not limited to Appendix Q attached thereto.
Eligible LC Bank: Means either a U.S. commercial bank, or a foreign bank issuing a Letter of
Credit through its U.S. branch; and in each case the issuing U.S. commercial bank or foreign bank
must be acceptable to Buyer in its sole discretion and such bank must have a Credit Rating of at
least: (a) “A-, with a stable designation” from S&P and “A3, with a stable designation” from
Moody’s, if such bank is rated by both S&P and Moody’s; or (b) “A-, with a stable designation”
from S&P or “A3, with a stable designation” from Moody’s, if such bank is rated by either S&P or
Moody’s, but not both, even if such bank was rated by both S&P and Moody’s as of the date of
issuance of the Letter of Credit but ceases to be rated by either, but not both of those ratings
agencies.
Eligible Renewable Energy Resource: Has the meaning set forth in California Public Utilities
Code Section 399.12 and California Public Resources Code Section 25741, as either code
provision is amended or supplemented from time to time.
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Energy: Means three-phase, 60-cycle alternating current electric energy measured in MWh and
net of auxiliary loads and station electrical uses (unless otherwise specified). For purposes of the
definition of “Environmental Attributes”, the word “energy” shall have the meaning set forth in
this definition.
Environmental Attributes: Any and all credits, benefits, emissions reductions, offsets, and
allowances, howsoever entitled, attributable to the generation from the Plant or Expansion Plant(s)
(to the extent of sales to Buyer of Expansion Plant Output pursuant to Section 2.10), and its
displacement of conventional energy generation. Environmental Attributes include, without
limitation, Renewable Energy Credits, and all of the following: (a) any avoided emissions of
pollutants to the air, soil or water such as sulfur oxides (SOx), nitrogen oxides (NOx), carbon
monoxide (CO) and other pollutants; (b) any avoided emissions of carbon dioxide (CO2), methane
(CH4) and other greenhouse gases (GHGs) that have been determined by the United Nations
Intergovernmental Panel on Climate Change to contribute to the actual or potential threat of
altering the Earth’s climate by trapping heat in the atmosphere; and (c) the reporting rights to these
avoided emissions such as Environmental Attributes Reporting Rights.
Environmental Attributes Reporting Rights: The rights of a purchaser of Environmental
Attributes to report the ownership of accumulated Environmental Attributes in compliance with
federal or state law, if applicable, and to a federal or state agency or any other party at the
discretion of the Environmental Attributes’ purchaser, and include without limitation those
Environmental Attribute Reporting Rights accruing under Section 1605(b) of the Energy Policy
Act of 1992 and any present or future federal, state, or local law, regulation or bill, and
international or foreign emissions trading program. Environmental Attributes are accumulated on
a kWh basis and one Environmental Attribute represents the amount of Environmental Attributes
associated with one (1) MWh of Energy. Environmental Attributes do not include (i) any Energy,
capacity, reliability or other power attributes from the Plant or Expansion Plant(s), if any, or (ii)
tax credits associated with the construction or operation of the Plant, Expansion Plant(s), if any, or
any other associated contract or right, and other financial incentives in the form of credits, rebates,
reductions, or allowances associated with the Plant, Expansion Plant(s), if any, or any other
associated contract or right, that are applicable to a state or federal income taxation obligation.
Environmental Laws: Any and all federal, state and local laws, including statutes, regulations,
rulings, orders, administrative interpretations and other governmental restrictions and
requirements relating to the discharge of air pollutants, water pollutants or process waste water or
otherwise relating to the environment or hazardous substances, as amended from time to time.
EPA: Has the meaning set forth in the definition of EA Agency.
EPC Contract: The Seller’s engineering, procurement and construction contract with the EPC
Contractor.
EPC Contractor: An engineering, procurement, and construction contractor, or if not utilizing an
engineering, procurement, and construction contractor, the entity having lead responsibility for the
management of overall construction activities, selected by Seller, with substantial experience in
the engineering, procurement, and construction of utility-scale solar photovoltaic power plants.
POWER PURCHASE AGREEMENT - Page 8 of 65
ERR: Has the meaning set forth in the definition of Eligible Renewable Energy Resource.
Event of Default: Has the meanings set forth in Section 7.1 as to Buyer, and Section 7.2 as to
Seller.
Execution Date: Means the date on which all of the Conditions Precedent set forth in Section
2.1(a) have been satisfied or waived in writing by both Parties.
Expansion Plant: Any expansion of the Plant from its Initial Capacity, or any other electricity
generating facility owned or controlled by Seller or its affiliates, located at the Site. Each such
expansion of the Plant or additional facility shall be deemed to be an “Expansion Plant.”
Expansion Plant Output: All capacity, Output, associated Environmental Attributes, Ancillary
Services, contributions towards Resource Adequacy or reserve requirements (if any) and any other
reliability or power attributes produced by Seller at any Expansion Plant.
Expected Annual Energy Production: Means an amount expressed as MWh equal to the
expected Energy associated with the Output to be produced by the Plant based on its Expected
Initial Capacity for each Contract Year during the Delivery Term, including degradation, as set
forth on Exhibit G.
Expected Initial Capacity: Has the meaning set forth in Section 2.3(c)(i).
Extended Delivery Term: Has the meaning set forth in Section 2.2(d).
Extended Delivery Term Option Exercise Notice: Has the meaning set forth in Section 2.2(d).
FCDS Finding Milestone: Has the meaning set forth in Section 4.3(b)(vii).
FERC: The Federal Energy Regulatory Commission and any successor organization.
Financing Milestone: Has the meaning set forth in Section 4.3(b)(iv).
Force Majeure Event: Any act, event or circumstance that wholly or partly delays or prevents a
Party from timely performing obligations under this Agreement or from complying with
conditions required under this Agreement, only to the extent that such act, event or circumstance is
(x) reasonably unforeseeable, (y) directly or indirectly beyond the reasonable control of and
without the fault or negligence of, or caused by, the Party relying thereon as justification for such
delay, nonperformance, or noncompliance, and (z) the Party seeking to have its performance
obligation(s) excused thereby has taken all reasonable precautions and measures in order to
prevent or avoid such event or mitigate the effect of such event on such Party’s ability to perform
its obligations under this Agreement and which by the exercise of due diligence such Party could
not reasonably have been expected to avoid and has been unable to overcome.
(a) Subject to the foregoing, events that could qualify as Force Majeure Events include
the following:
POWER PURCHASE AGREEMENT - Page 9 of 65
(i) acts of God or the elements, extreme or severe weather conditions,
explosion, fire, epidemic, landslide, mudslide, sabotage, lightning,
earthquake, flood or similar cataclysmic event;
(ii) war (declared or undeclared), blockade, civil insurrection, riot, civil
disturbance, acts of the public enemy (including acts of terrorism),
sabotage, revolution, expropriation or confiscation;
(iii) except in the case of (b)(vii) below, strike, work stoppage or other labor
dispute or difficulty caused or suffered by a Party (in which case the
affected Party shall have no obligation to settle the strike or labor dispute on
terms it deems unreasonable);
(iv) any restraint or restriction imposed by Law or other acts or omissions of
Governmental Authorities, whether federal, state or local, which by the
exercise of due diligence and in compliance with applicable Law a Party
could not reasonably have been expected to avoid and to the extent which,
by exercise of due diligence and in compliance with applicable Law, such
Party has been unable to overcome (so long as the affected Party has not
applied for or assisted such act by a Governmental Authority);
(v) emergencies declared by the Transmission Provider or any other authorized
successor or regional transmission organization or any state or federal
regulator or legislature requiring a forced curtailment of the Plant or making
it impossible for the Transmission Provider to transmit Energy, including
Energy to be delivered pursuant to this Agreement; provided that, if a
curtailment of the Plant pursuant to this subsection (a)(v) would also meet
the definition of a Dispatch Down Period, then it shall be treated as a
Dispatch Down Period for purposes of this Agreement; or
(b) A “Force Majeure Event” shall not include:
(i) economic conditions that render a Party’s performance of this Agreement at
the Price unprofitable or otherwise uneconomic (including Buyer’s ability
to buy Energy or Environmental Attributes at a lower price, or Seller’s
ability to sell Energy or Environmental Attributes at a higher price, than the
Price);
(ii) a governmental act by Buyer that delays or prevents Buyer from timely
performing its obligations under this Agreement;
(iii) a Plant equipment failure, except where such failure is caused by a Force
Majeure Event of the specific type described in any of subsections (a)(i)
through (a)(v) above;
(iv) failure or delay in grant of Permits or approvals of any type for the
construction, operation or maintenance of the Plant, except where such
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failure is caused by a Force Majeure Event of the specific type described in
any of subsections (a)(i) through (a)(v) above;
(v) Discretionary Curtailment;
(vi) failures or delays by the Participating TO and/or the CAISO in entering
into, or performing under, any agreements with Seller contemplated by this
Agreement;
(vii) a strike, work stoppage or labor dispute limited only to any one or more of
Seller, Seller’s affiliates, the EPC Contractor or subcontractors thereof or
any other third party employed by Seller to work on the Plant;
(viii) a Party’s inability to pay amounts due to the other Party under this
Agreement, except if such inability is caused solely by a Force Majeure
event that disables physical or electronic facilities necessary to transfer
funds to the payee Party;
(ix) Seller’s failure to obtain additional funds, including funds authorized by a
state or the federal government or agencies thereof, to supplement the
payments made by Buyer pursuant to this Agreement;
(x) Seller’s inability to obtain sufficient fuel, power or materials to operate the
Plant, except where such failure is caused by a Force Majeure Event of the
specific type described in any of subsections (a)(i) through (a)(v) above;
(xi) a Forced Outage except where such Forced Outage is caused by an event of
Force Majeure of the specific type described in any of subsections (a)(i)
through (a)(v) above; or
(xii) a failure to complete, or a delay in completing, interconnection or Electric
System Upgrades by the Commercial Operation Milestone, including by
any third party.
Forecasting Service: Has the meaning set forth in Section 4.5(d).
Forced Outage: Means any unplanned reduction or suspension of the electrical output from the
Plant or unavailability of the Output in whole or in part from a unit in response to a mechanical,
electrical, or hydraulic control system trip or operator-initiated trip in response to an alarm or
equipment malfunction and any other unavailability of a unit for operation, in whole or in part, for
maintenance or repair that is not a Planned Outage and not the result of Force Majeure.
FPA: Has the meaning set forth in Section 8.1(c)(i).
Full Capacity Deliverability Status or FCDS: Has the meaning set forth in the CAISO Tariff.
Full Capacity Deliverability Status Finding or FCDS Finding: A written confirmation from
the CAISO that the Plant is eligible for FCDS.
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GAAP or Generally Accepted Accounting Principles: Means the standards for accounting and
preparation of financial statements established by the Federal Accounting Standards Advisory
Board (or its successor agency) or any successor standards adopted pursuant to relevant Securities
Exchange Commission rule.
Gains: With respect to any Party, an amount equal to the present value of the economic benefit to
it, if any (exclusive of Costs), resulting from the termination of the Agreement for the remainder of
the Term, determined in a commercially reasonable manner, subject to Section 7.3 hereof. Factors
used in determining economic benefit may include reference to information either available to it
internally or supplied by one or more third parties, including quotations (either firm or indicative)
of relevant rates, prices, yields, yield curves, volatilities, spreads or other relevant market data in
the relevant markets, market price referent, market prices for a comparable transaction, forward
price curves based on economic analysis of the relevant markets, settlement prices for a
comparable transaction at liquid trading hubs (e.g., NYMEX), all of which should be calculated
for the remainder of the Term to determine the value of the Output.
Governmental Authority: Any federal or state government, or political subdivision thereof,
including, without limitation, any municipality, township or county, or any entity or authority
exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to
government, including, without limitation, any corporation or other entity owned or controlled by
any of the foregoing.
Incentives: Any and all tax credits, including Section 45 Credits and Section 48 Credits,
deductions, allowances, depreciation and exemptions applicable to federal, state and local taxes
and any other payment, credit, deduction, benefit, grant or monetary incentive provided by any
federal, state or local Governmental Authority or any Person, whether now in effect or arising in
the future, in each case arising from the activities contemplated by this Agreement, including any
“Renewable Energy Production Incentive Payments” from the U.S. Department of Energy and any
“Energy Investment Tax Credit” described in Section 48 of the Internal Revenue Code of 1986, as
it may be amended or supplemented from time to time. Notwithstanding the foregoing, Incentives
shall not include anything that qualifies as Output (including any Environmental Attributes).
Indemnified Party: Has the meaning set forth in Section 10.1(b).
Indemnifying Party: Has the meaning set forth in Section 10.1(b).
Ineligible LC Bank: Has the meaning set forth in Section 9.3(c)(i)(A).
Ineligible LC Bank Notice Period: Has the meaning set forth in Section 9.3(c)(i).
Initial Capacity: Has the meaning set forth in Section 2.3(c)(ii).
Interconnection Agreement: The agreement and associated documents (or any successor
agreement and associated documentation) by and among Seller, the Participating TO and the
CAISO governing the terms and conditions of Seller’s interconnection with the CAISO grid,
including any description of the plan for interconnection of the Plant to the Participating TO’s
system.
POWER PURCHASE AGREEMENT - Page 12 of 65
Interconnection Agreement Milestone: Has the meaning set forth in Section 4.3(b)(i).
Interconnection Facilities: Has the meaning set forth in the CAISO Tariff.
Interim Assurance: The collateral provided by Seller to Buyer to secure Seller’s obligations
hereunder in accordance with Section 9.2(a)(ii) of this Agreement.
kWh: Means kilowatt-hour (AC).
Law: Means any statute, law, treaty, rule, regulation, CEC guidance document, ordinance, code,
permit, enactment, injunction, order, writ, decision, authorization, judgment, decree or other legal
or regulatory determination or restriction by a court or Governmental Authority of competent
jurisdiction, including any of the foregoing that are enacted, amended, or issued after the
Execution Date, and which becomes effective after the Execution Date; or any binding
interpretation of the foregoing.
LC Notice: Has the meaning set forth in Section 9.3(c).
Local Capacity Area: Has the meaning set forth in the CAISO Tariff.
Lender(s): Any Person(s) providing money or extending credit (including any capital lease) to
Seller, including in the form of debt or tax equity, for (a) the construction of the Plant, (b) the term
or permanent financing of the Plant, or (c) working capital or other ordinary business requirements
for the Plant. “Lender(s)” shall not include any trade creditor(s) of Seller.
Letter of Credit: Means an irrevocable, non-transferable standby letter of credit issued by Wells
Fargo, N.A., or other banking institution acceptable to Buyer in its sole discretion, the form of
which must be substantially as contained in Exhibit F-1 to this Agreement; provided, that, if the
issuer is a U.S. branch of a foreign commercial bank, Buyer may require changes to such form, the
issuer must be an Eligible LC Bank on the date of Transfer, and the issuing Letter of Credit amount
may not be greater than the Maximum Issuing Amount if the total amount of collateral posted by
the Seller in the form of Letter of Credit exceeds ten million dollars ($10,000,000.00) on the date
of Transfer.
Licensed Professional Engineer: Means a Person acceptable to Buyer in its reasonable judgment
who (a) is licensed to practice engineering in California, (b) has training and experience in the
power industry specific to the technology of the Plant, (c) has no economic relationship,
association, or nexus with Seller or Buyer, other than to meet the obligations of Seller pursuant to
this Agreement, (d) is not a representative of a consultant, engineer, contractor, designer or other
individual involved in the development of the Plant or of a manufacturer or supplier of any
equipment installed at the Plant, and (e) is licensed in an appropriate engineering discipline for the
required certification being made.
LMP: Has the meaning set forth in the definition of DA Price.
Losses: With respect to any Party, an amount equal to the present value of the economic loss to it,
if any (exclusive of Costs), resulting from the termination of this Agreement for the remainder of
the Term, determined in a commercially reasonable manner, subject to Section 7.3 hereof. Factors
POWER PURCHASE AGREEMENT - Page 13 of 65
used in determining the loss of economic benefit may include reference to information either
available to it internally or supplied by one or more third parties, including quotations (either firm
or indicative) of relevant rates, prices, yields, yield curves, volatilities, spreads or other relevant
market data in the relevant markets, market price referent, market prices for a comparable
transaction, forward price curves based on economic analysis of the relevant markets, settlement
prices for a comparable transaction at liquid trading hubs (e.g. NYMEX), all of which should be
calculated for the remainder of the Term to determine the value of the Output. If the
Non-Defaulting Party is the Seller, then in addition to lost payments for Output pursuant to this
Agreement, “Losses” shall exclude any associated loss of investment tax credits and other lost tax
benefits.
Maximum Issuing Amount: Means the amount of a Letter of Credit to be issued by an Eligible
LC Bank, which cannot exceed the lesser of (a) sixty percent (60%) of the total collateral posted by
Seller in the form of Letter of Credit including the Letter of Credit to be issued or (b) twenty-five
million dollars ($25,000,000.00), without Buyer’s prior written consent.
Milestones: Means the key development activities required for the construction and operation of
the Plant, as set forth more particularly in Section 4.3(a).
MW: Megawatt (AC).
MWh: Megawatt-hour (AC).
Network Upgrades: Has the meaning set forth in the CAISO Tariff.
Non-Defaulting Party: Has the meaning set forth in Section 7.3(a).
Notice to Proceed: The full notice to proceed provided by Seller to the EPC Contractor following
execution of the EPC Contract between Seller and such EPC Contractor and satisfaction of all
conditions to performance of such contract, by which Seller authorizes such EPC Contractor to
begin construction of the Plant without any delay or waiting periods.
Output: The capacity, Energy, Environmental Attributes, Ancillary Services, contributions
towards Resource Adequacy, reserve requirements (if any), and any and all other reliability or
power attributes which are or can be produced by or associated with the Plant.
Overproduction Energy Price: Has the meaning set forth in Section 2.4(a).
Participating Intermittent Resource: Has the meaning set forth in the CAISO Tariff.
Participating TO or Participating Transmission Owner: An entity that (a) owns, operates and
maintains transmission lines and associated facilities and/or has entitlements to use certain
transmission lines and associated facilities, and (b) has transferred to the CAISO operational
control of such facilities and/or entitlements to be made of the CAISO Grid. For purposes of this
Agreement, the Participating TO is Southern California Edison.
Participating TO System: The transmission system owned by the Participating TO.
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Parties: Buyer and Seller, and their respective successors and permitted assignees.
Party: Buyer or Seller, and each such Party’s respective successors and permitted assignees.
Performance Assurance: The collateral provided by Seller to Buyer to secure Seller’s
obligations hereunder in accordance with Section 9.2(a)(iii) of this Agreement.
Performance LDs: Has the meaning set forth in Section 4.6(b).
Permits: All material federal, state or local authorizations, certificates, certifications,
pre-certifications, permits, licenses and approvals required by any Governmental Authority for the
construction, ownership, operation and maintenance of the Plant, other than the Conditional Use
Permit.
Permitting Milestone: Has the meaning set forth in Section 4.3(b)(iii).
Person: An individual, partnership, corporation, business trust, limited liability company, joint
stock company, trust, unincorporated association, joint venture, Governmental Authority or other
entity.
Planned Outage: Means the removal of equipment from service availability for inspection and/or
general overhaul of one or more major equipment groups. To qualify as a Planned Outage, the
maintenance (a) must actually be conducted during the Planned Outage, and in Seller’s sole
discretion must be of the type that is necessary to reliably maintain the Plant, (b) cannot be
reasonably conducted during Plant operations, and (c) causes the generation level of the Plant to be
reduced by at least ten percent (10%) of the Initial Capacity.
Plant: The power generation facilities to be constructed, owned and operated by Seller located on
the Site for the generation and delivery of electricity, including the step-up transformer, revenue
quality meter and all other facilities up to the Point of Interconnection, but not including any
Expansion Plant.
PNode: Has the meaning set forth in the CAISO Tariff.
Point of Interconnection: The point on the electrical system where the Plant is physically
interconnected with the Participating TO System, which is anticipated to be at the Wilsona
Substation.
Pre-FCDS Energy Price: Has the meaning set forth in Section 2.4(b).
Price: The price set forth in Section 2.4.
Project: Has the meaning set forth in Section 2.9(c)(i).
Prudent Utility Practice: Has the meaning in the CAISO Tariff.
QF: Has the meaning set forth in Section 8.1(c)(1).
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Real-Time Market: Has the meaning set forth in the CAISO Tariff.
REC or Renewable Energy Credit: Has the meaning set forth in California Public Utilities Code
Section 399.12(h) and CPUC Decision 08-08-028, as may be amended from time to time or as
further defined or supplemented by applicable law.
Report Period means the interval between dates when Seller must deliver each Development
Progress Report to Buyer according to Section 4.3(c)(i)-(iii), as applicable.
Requirements of Laws: Collectively, any federal, state or local law, treaty, franchise, rule or
regulation, or any order, writ, judgment, injunction, decree, award or determination of any
arbitrator or court or other Governmental Authority, in each case applicable to or binding upon
Seller or Buyer or any of its property or to which Seller or Buyer or any of its respective properties
are subject.
Resource Adequacy: Means an obligation of load serving entities, including Buyer, that requires
Buyer to procure a certain amount of electric generating capacity.
Resource Adequacy Requirements: Has the meaning set forth in Section 2.7(a).
SCADA: Has the meaning set forth in Section 3.1.
Scheduling Coordinator: Means a qualified entity designated by Buyer to provide the
Scheduling Coordinator Functions for the Plant pursuant to this Agreement.
Scheduling Coordinator Functions: Means the functions specified in “Responsibilities of a
Scheduling Coordinator” of the CAISO Tariff undertaken by an entity certified by the CAISO as
qualifying as a Scheduling Coordinator pursuant to the CAISO Tariff.
Section 45 Credits: Those tax credits available under Section 45 of Subtitle A, Chap. 1A, Part IV
of the Internal Revenue Code of 1986, as amended, or any other similar state, federal or local tax
credits, deductions, payments or benefits arising from the generation and sale of electricity using
qualifying renewable resources, not including any Environmental Attributes.
Section 48 Credits: Those tax credits available under Section 48(a)(3)(A)(i) and 48(a)(5) of the
Internal Revenue Code of 1986, as amended, or any other similar state, federal or local tax credits,
deductions, payments or benefits arising from the investment in qualifying energy properties, not
including any Environmental Attributes.
Seller: Has the meaning in the Preamble, and any successor or permitted assignee.
Seller Excused Energy Amount: Means, for each Calculation Period, an amount expressed in
MWh, equal to the aggregate amount of reduction(s) in delivered Output during such Calculation
Period as a result of Dispatch Down Periods, Discretionary Curtailment, Force Majeure Events,
Buyer’s breach or default hereunder or failure to accept delivered Output, or Forced Outages to the
local transmission or distribution system.
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Seller Execution: Means the date an authorized representative of Seller duly executes this
Agreement as evidenced by the date set forth next to its signature on the Signature Page hereof.
Seller’s Parent: Means Hecate Energy, LLC
Shortfall: Has the meaning set forth in Section 4.6(b).
Site: The description of the Plant and Site Drawings as described on Exhibit A.
Site Drawings: Has the meaning set forth on Exhibit A.
Substitute Bank Period: Has the meaning set forth in Section 9.3(c).
Substitute Letter of Credit: Has the meaning set forth in Section 9.3(c).
System Emergency: Has the meaning set forth in the CAISO Tariff.
Term: Has the meaning set forth in Section 2.2(a).
Termination Payment: Means, with respect to the Non-Defaulting Party, the sum of (a) the
Losses or Gains, and Costs, which such Party incurs as a result of the termination of this
Agreement pursuant to Section 7.3, plus (b) the sum of all amounts then owed to the
Non-Defaulting Party by the defaulting Party determined as of the Early Termination Date.
Test Energy: Output (to the extent available) generated by the Plant and delivered to the Point of
Interconnection prior to the Contract Delivery Start Date.
Transfer: Means with respect to Letters of Credit the delivery of the Letter of Credit conforming
to the requirements of this Agreement, by Seller or an Eligible LC Bank to Buyer or delivery of an
executed amendment to such Letter of Credit (extending the term or varying the amount available
to Buyer thereunder, if acceptable to Buyer) by Seller or Eligible LC Bank to Buyer.
Two Year Minimum Production Threshold: For each Calculation Period, an amount expressed
in MWhs equal to eighty percent (80%) of the Calculation Period Expected Energy Production for
such Calculation Period. For the avoidance of doubt, an example of the Two Year Minimum
Production Threshold is the sum of 80% of the Calculation Period Expected Energy Production for
the first Contract Year of such Calculation Period plus 80% of the Calculation Period Expected
Annual Energy Production for the second Contract Year of such Calculation Period.
Watch: Has the meaning set forth in Section 9.3(c).
WREGIS: The Western Renewable Energy Generation Information System, or any successor
renewable energy tracking program.
POWER PURCHASE AGREEMENT - Page 17 of 65
1.2 Rules of Interpretation.
The following rules of interpretation shall apply in addition to those set forth in Sections 10.3,
10.4, 10.5, 10.6, 10.8, 10.11, 10.13, 10.14, 10.15, 10.17, 10.20 and 10.22:
(a) The term “month” shall mean a calendar month unless otherwise indicated, and a
“day” shall be a 24-hour period beginning at 12:00:01 a.m. Pacific Prevailing Time
and ending at 12:00:00 midnight Pacific Prevailing Time; provided that a “day”
may be 23 or 25 hours on those days on which daylight savings time begins and
ends.
(b) Unless otherwise specified herein, all references to any agreement or other
document of any description shall be construed to give effect to amendments,
supplements, modifications or any superseding agreement or document as then
existing at the applicable time to which such construction applies.
(c) Capitalized terms used in this Agreement, including the exhibits hereto, shall have
the meaning set forth in Section 1.1, unless otherwise specified.
(d) Unless otherwise specified herein, references in the singular shall include
references in the plural and vice versa, pronouns having masculine or feminine
gender shall be deemed to include the other, and words denoting natural persons
shall include partnerships, firms, companies, corporations, joint ventures, trusts,
associations, organizations or other entities (whether or not having a separate legal
personality). Other grammatical forms of defined words or phrases have
corresponding meanings.
(e) References to a particular article, section, subsection, paragraph, subparagraph,
appendix or attachment shall, unless specified otherwise, be a reference to that
article, section, subsection, paragraph, subparagraph, appendix or attachment in or
to this Agreement.
(f) Any reference in this Agreement to any natural person, Governmental Authority,
joint powers agency, corporation, partnership or other legal entity includes its
permitted successors or assigns or to any natural person, Governmental Authority,
joint powers agency, corporation, partnership or other legal entity succeeding to its
functions.
(g) All references to dollars are to U.S. dollars.
(h) The term “includes” and “including” when used in this Agreement shall be by way
of example only and shall not be considered in any way to be in limitation, whether
or not so specified.
POWER PURCHASE AGREEMENT - Page 18 of 65
ARTICLE II
TERM, PURCHASE AND SALE
2.1 Conditions Precedent to Commencement of Term of Agreement.
(a) Conditions Precedent. The Term of this Agreement shall not commence until the
occurrence of all of the following:
(i) Seller Execution;
(ii) At least five (5) Business Days before Seller Execution, Buyer receives
from Seller the conditions precedent documentation listed in Exhibit H; and
(iii) This Agreement has been approved by the Palo Alto City Council, and duly
executed by the authorized representatives of Buyer.
(b) Failure to Meet All Conditions Precedent. If the Conditions Precedent set forth in
Sections 2.1(a) are not satisfied or waived in writing by both Parties, then either
Party may terminate this Agreement effective upon receipt of notice by the other
Party. Neither Party shall have any obligation or liability to the other, including for
a Termination Payment or otherwise, by reason of such termination.
2.2 Agreement Term, Delivery Term, Acceleration and Extension.
(a) Agreement Term. The term of this Agreement shall commence, and this
Agreement shall be effective, upon the satisfaction or written waiver of the
Conditions Precedent set forth in Section 2.1(a) of this Agreement and, unless
earlier terminated pursuant to an express provision of this Agreement, shall remain
in effect until the conclusion of the Delivery Term (the “Term”).
(b) Delivery Term.
(i) The Parties agree that the delivery term shall mean: a period of delivery of
Output of twenty-five (25) Contract Years beginning with the first date that
Buyer accepts delivery of the Output from the Plant in connection with this
Agreement following Seller’s demonstration of satisfaction of the items
listed in this Section 2.2(b)(ii) (the “Contract Delivery Start Date”) and
continuing until the end of the twenty-fifth (25th) Contract Year (“Delivery
Term”), unless terminated as provided by the terms of this Agreement;
provided that, the Parties agree that (x) the Contract Delivery Start Date
shall occur on June 1, 2021, which may be accelerated pursuant to Section
2.2(c), and (y) the Delivery Term shall end on May 31, 2046, which may be
extended pursuant to Section 2.2(d). For the avoidance of doubt, the
maximum Delivery Term shall not extend past the fortieth (40th)
anniversary of the Contract Delivery Start Date.
POWER PURCHASE AGREEMENT - Page 19 of 65
(ii) The Contract Delivery Start Date shall occur as soon as practicable once all
of the following have been satisfied:
(aa) Seller delivers the COD Certification set forth at Exhibit E-2 to
Buyer and, if applicable, an Expected Annual Energy Production
table in the form attached hereto as Exhibit G updating the Expected
Annual Energy Production originally calculated based on the
Plant’s Expected Initial Capacity and provided pursuant to Section
2.1(a)(ii) for its Initial Capacity (which shall remain subject to the
limits set forth in Section 2.3(b)(ii));
(bb) Buyer shall have received and accepted the Performance Assurance
in accordance with the relevant provisions of Article 9.2(a)(iii) of
the Agreement;
(cc) Seller shall have obtained the requisite CEC Certification and
Verification for the Plant and delivered a copy of same to Buyer;
(dd) all of the applicable Conditions Precedent in Section 2.1(a)
have been satisfied or waived in writing;
(ee) Seller shall have demonstrated satisfaction of Seller’s other
obligations under this Agreement that commence prior to or as of
the Delivery Term, including taking all necessary steps to allow the
RECs transferred to Buyer to be tracked in WREGIS;
(ff) Seller shall have provided Buyer with a copy of the notice letter
from the Participating Transmission Owner authorizing the Plant to
commence commercial operation; and
(gg) unless Seller has been directed by Buyer not to participate in the
Participating Intermittent Resource program, Buyer shall have
received written notice from the CAISO that the Plant is certified as
a Participating Intermittent Resource to the extent such Participating
Intermittent Resource status exists and is available at such time as
the conditions in subsections (aa) through (ff) of this Section
2.2(b)(ii) are satisfied.
(c) Buyer Acceleration of Contract Delivery Start Date. Buyer may, in its sole
discretion, accelerate the Contract Delivery Start Date to a new date no more than
six (6) months prior to the Contract Delivery Start Date, unless otherwise agreed in
writing by the Parties. Subject to this Section 2.2(c), if Buyer desires so to
accelerate the Contract Delivery Start Date, it shall deliver six (6) months prior
written notice to Seller specifying the new Contract Delivery Start Date (the
“Accelerated Contract Delivery Start Date Notice”), which shall thereafter for
all purposes be deemed to be the “Contract Delivery Start Date”.
Notwithstanding the foregoing, Seller and Buyer may at any time mutually agree in
POWER PURCHASE AGREEMENT - Page 20 of 65
writing to accelerate the Contract Delivery Start Date to a date earlier than the
Contract Delivery Start Date.
(d) Extension of End of Delivery Term. Buyer may, in its sole discretion, extend the
end of the Delivery Term by up to an additional fifteen (15) years, in one or more
five (5)-year increments each and all at the same Price set forth in Section 2.6 (each,
an “Extended Delivery Term”). Subject to this Section 2.2(d), if Buyer desires so
to extend the Delivery Term, it shall deliver a written notice (“Extended Delivery
Term Option Exercise Notice”) to Seller by not later than three hundred sixty-five
(365) calendar days prior to the end of the Delivery Term specifying the Extended
Delivery Term, which shall thereafter for all purposes be deemed to be the
“Delivery Term”.
2.3 Purchase and Sale of the Output.
(a) Purchase and Sale of Output. During the Delivery Term, Seller shall sell and
deliver, or cause to be delivered, and Buyer shall purchase and receive, or cause to
be received, the Output (subject to Section 2.4(a)) at the Point of Interconnection,
and Buyer shall pay Seller the Price in accordance with the terms of this
Agreement, unless specifically excused by the terms of this Agreement. In no
event shall Seller have the right to procure any element of the Output from sources
other than the Plant for sale or delivery to Buyer under this Agreement, or sell
Output from the Plant to a third party. Buyer shall be the only party that may claim
credit for the Output (subject to Section 2.4(a)), as may be available to Buyer from
time to time. Buyer shall have no obligation to receive or purchase Output from
Seller prior to or after the Delivery Term, except for Test Energy. Seller shall be
responsible for any costs or charges associated with the Output or its delivery of the
Output up to the Point of Interconnection. Buyer shall be responsible for any costs
or charges imposed on or associated with the Output after its receipt at and from the
Point of Interconnection.
(b) Title and Risk of Loss. As between the Parties, Seller shall be deemed to be in
exclusive control (and responsible for any damages or injury caused thereby) of all
Output purchased by Buyer prior to the Point of Interconnection, and Buyer shall
be deemed to be in exclusive control (and responsible for any damages or injury
caused thereby) of all Output purchased by Buyer at and from the Point of
Interconnection. Title to and risk of loss as to all Output purchased by Buyer shall
pass from Seller to Buyer at the Point of Interconnection. Seller warrants that it
shall deliver all Output to Buyer free and clear of all liens, security interests, claims
and encumbrances or any interest therein or thereto created by any Person other
than Buyer.
(c) Capacity of Plant.
(i) Expected Initial Capacity. Seller and Buyer each acknowledge and agree
that as of the Execution Date the Parties expect that the generation
capability of the Plant as of the Commercial Operation Date shall be 26
POWER PURCHASE AGREEMENT - Page 21 of 65
MW AC, net of all auxiliary loads, station electrical uses, and electrical
losses (the “Expected Initial Capacity”). Seller shall complete and deliver
to Buyer the Expected Annual Energy Production table in the form attached
hereto as Exhibit G based on the Expected Initial Capacity pursuant to
Section 2.1(a)(ii).
(ii) Actual Initial Capacity. Seller shall use commercially reasonable efforts to
ensure that the installed capacity of the Plant determined as of the
Commercial Operation Date (the “Initial Capacity”) is same as the
Expected Initial Capacity, but in no event shall be less than 25 MW AC or
more than 27 MW AC, and shall be determined based upon the sum of the
nameplate ratings (AC) of all Plant inverters. If applicable, Seller shall
update the Expected Annual Energy Production table it delivered to Buyer
pursuant to Section 2.1(a)(ii) and 2.3(c)(i) above, to reflect the Plant’s
Initial Capacity (which shall remain subject to the installed capacity
limitations set forth in this sub-section) and deliver such revised table to
Buyer pursuant to Section 2.2(b)(ii)(aa).
2.4 Price.
Subject to the adjustments described in Sections 2.4(a) and (b) and related to Performance
LDs under the provisions of Section 4.6, during the period of delivery of any Test Energy
and during the Delivery Term, for Output delivered or tendered to Buyer at the Point of
Interconnection, Buyer shall pay Seller a price per MWh of Output equal to Thirty Six
Dollars and Seventy-Six Cents ($36.76) per MWh (“Price”). The Price shall be the total
compensation owed by Buyer for the Output delivered or tendered to Buyer during the
period of delivery of any Test Energy and during the Delivery Term, as adjusted as
follows:
(a) Overproduction Output Price. For any and all Output in excess of one hundred five
percent (105%) of the Expected Annual Energy Production for the then-current
Contract Year, if any, Buyer shall pay Seller a price per MWh of Output that is the
lesser of (i) ninety percent (90%) of the Price or (ii) the hourly DA Price at the Point
of Interconnection (either (i) or (ii) being referred to as the “Overproduction
Energy Price”), subject to: (i) Buyer shall be obligated to purchase any and all
Output delivered or tendered to Buyer in excess of one hundred five percent
(105%) up to and including one hundred twenty percent (120%) of the Expected
Annual Energy Production for the then-current Contract Year and (ii) Buyer shall
have the right, but not the obligation to purchase, Output in excess of one hundred
twenty percent (120%) or more of the Expected Annual Energy Production for the
then-current Contract Year, and, if applicable, subject to Section 2.4(b). If Buyer
chooses not to exercise this right of first refusal in sub-section (ii) above, Seller
may sell such Output to a third party so long as such third party sale does not affect
or impair in any material way Seller’s ability to meet its obligations or Buyer’s
rights with respect to this Agreement as determined by Buyer in its reasonable
discretion; and/or
POWER PURCHASE AGREEMENT - Page 22 of 65
(b) Pre-FCDS Energy Price. For any and all Output delivered or tendered to Buyer
prior to the date on which Seller has obtained a Full Capacity Deliverability Status
Finding from the CAISO, if any, Buyer shall pay Seller a price per MWh of Output
equal to ninety percent (90%) of the Price (“Pre-FCDS Energy Price”) and, if
applicable, subject to Section 2.4(a).
For the avoidance of doubt, if both conditions (a) and (b) above occur, then Buyer
shall pay Seller the Price adjusted by both (a) and (b), and if only one condition (a)
or (b) above occurs, then Buyer shall pay Seller the Price adjusted by either (a) or
(b), as applicable.
2.5 Test Energy.
For a period of up to ninety (90) days prior to the commencement of the Delivery Term,
Buyer shall purchase and accept from Seller at the Point of Interconnection and pay for as
described in Section 2.4, the Output relating to any Test Energy pursuant to the terms of
this Agreement; provided that the decision to produce and deliver Test Energy hereunder
shall be at the sole discretion of Seller. All Test Energy shall be scheduled in accordance
with the scheduling protocols set forth in Exhibit D, as may be modified by the Parties
pursuant to Section 4.1(g).
2.6 Environmental Attributes.
(a) Purchase and Sale of Environmental Attributes. During the Term, Seller shall sell
and transfer to Buyer, and Buyer shall purchase and receive from Seller, all right,
title and interest in and to the Environmental Attributes associated with the Output,
if any, whether now existing or subsequently generated or acquired (other than by
direct purchase from a third party) by Seller, or that hereafter come into existence,
during the Term, as a component of the Output purchased by Buyer from Seller
hereunder. Subject to Section 2.6(c), Seller agrees to transfer and make such
Environmental Attributes available to Buyer immediately to the fullest extent
allowed by applicable Law upon Seller’s production or acquisition of the
Environmental Attributes. Seller agrees to convey and hereby conveys all such
Environmental Attributes to Buyer as included in the delivery of the Output from
the Plant. Seller shall not assign, transfer, convey, encumber, sell or otherwise
dispose of all or any portion of the Environmental Attributes to any Person other
than Buyer. As of the Effective Date and continuing throughout the Term, Seller
represents and warrants that Seller holds the rights to all Environmental Attributes
from the Plant, the Plant qualifies and is certified by the CEC as an ERR and the
Plant’s Output qualifies under the California Renewable Portfolio Standards
requirements. To the extent that a Change in Law occurs after the Effective Date
that causes this representation and warranty to be false or misleading, it shall not be
an Event of Default if Seller has used commercially reasonable efforts to comply
with such Change in Law and takes all actions as determined by Buyer in its
reasonable discretion to implement any change or improvement to the Plant to
maintain such certification or qualification.
POWER PURCHASE AGREEMENT - Page 23 of 65
(b) Buyer’s Right to Report Ownership of Environmental Attributes. During the Term,
Seller shall not report to any Person or entity that the Environmental Attributes
granted hereunder to Buyer belong to anyone other than Buyer, and Buyer may
report under any program that such Environmental Attributes purchased hereunder
belong to it.
(c) Documentation of Environmental Attributes. Seller shall document the production
of Environmental Attributes under this Agreement by delivering with each invoice
to Buyer such attestations or other documents as may be required by Exhibit B.
Seller agrees to promptly and cooperatively update or modify Exhibit B, as
necessary, to ensure that Buyer receives full and complete title to, and the ability to
record with any EA Agency as its own, all of the Environmental Attributes
purchased hereunder. At Buyer’s request, the Parties, each at their own expense,
shall execute all such documents and instruments in order to transfer the
Environmental Attributes specified in this Agreement, to Buyer or its designees, as
Buyer may reasonably request. In the event of the promulgation of a scheme
involving Environmental Attributes administered by an EA Agency, upon
notification by an EA Agency that any transfers contemplated by this Agreement
shall not be recorded, the Parties shall promptly cooperate in taking all reasonable
actions necessary so that such transfer can be recorded. Each Party shall promptly
give the other Party copies of all documents it submits to the EA Agency to
effectuate any transfers.
2.7 Resource Adequacy.
(a) Resource Adequacy Requirements. During the Delivery Term, Seller grants,
pledges, assigns and otherwise commits to Buyer all of the Plant’s Initial Capacity,
including Capacity Attributes from the Plant, to enable Buyer to meet its Resource
Adequacy or successor program requirements, as the CPUC, CAISO and/or other
regional entity may prescribe, including submission of a supply plan or Resource
Adequacy plan (“Resource Adequacy Requirements”). From the Execution
Date, and for the duration of the Delivery Term, Seller shall take all commercially
reasonable actions, including complying with all applicable registration and
reporting requirements, and executing any and all documents or instruments
necessary to enable Buyer to use all of the capacity of the Plant, including Capacity
Attributes, to be committed by Seller to Buyer pursuant to this Agreement to meet
Buyer’s Resource Adequacy Requirements during the Delivery Term.
(b) Availability Standards. Seller shall be responsible for all costs, charges, expenses,
penalties, and obligations resulting from Availability Standards, if applicable, and
Seller shall be entitled to retain all credits, payments, and revenues, if any, resulting
from Seller achieving or exceeding Availability Standards, if applicable.
2.8 Tax Credits and Incentives.
Buyer acknowledges and agrees that all Incentives shall be owned by Seller, and that Buyer
shall not claim Incentives. Buyer agrees to cooperate with Seller, as may be necessary, to
POWER PURCHASE AGREEMENT - Page 24 of 65
allow maximization of the value of, and realization of, all Incentives; provided that Buyer
shall not be required to incur additional costs or accept any diminution in value of its rights
under this Agreement or of the Output purchased hereunder. In addition, Buyer shall not
take any action (except as otherwise permitted under this Agreement), that would in any way
reduce or eliminate the availability to Seller of any Incentives, including the Section 45
Credits and the Section 48 Credits, and Buyer shall forego any credits or benefits available to
it (other than Environmental Attributes), including rights to purchase of Test Energy, to the
extent necessary to allow Seller to obtain the full benefit of the Incentives, but in no event
shall Buyer be required to forego receipt of Output after the Contract Delivery Start Date.
2.9 CEQA.
(a) CEQA Determinations. Any and all CEQA requirements for or related to the
development of the Plant shall be the responsibility of Seller; provided, that, Buyer
reserves any and all of its rights and powers under CEQA that may be applicable,
appropriate, and within Buyer’s jurisdiction, including the power in its sole
discretion to:
(i) review the Plant’s environmental impacts;
(ii) prepare and/or review environmental documents and studies;
(iii) review mitigation measures and/or alternatives in order to avoid or lessen
any significant environmental impacts resulting from the Plant;
(iv) determine that any significant impacts that cannot be mitigated are
acceptable due to overriding considerations; or
(v) decide to terminate this Agreement due to any significant adverse
environmental effects resulting from the Plant that were unable to be
mitigated and were unacceptable for lack of overriding considerations in
Buyer’s reasonable discretion.
(b) Seller’s Responsibility to Provide CEQA Documents. Seller shall be required to
provide to Buyer final (and executed, if applicable) copies of all CEQA documents
within ten (10) days of their approval by the CEQA lead agency.
(c) Conditions Precedent to Buyer Purchase. The Parties therefore acknowledge and
agree that Buyer has no obligation to purchase the Output under this Agreement
until all of the following have occurred:
(i) Seller has complied with all applicable CEQA requirements in connection
with its permitting, construction and operation of the Plant (the “Project”);
(ii) Buyer has, as part of such CEQA compliance, been designated as a
“Responsible Agency” for the Project under Section 15096 of the CEQA
Guidelines;
POWER PURCHASE AGREEMENT - Page 25 of 65
(iii) Buyer has satisfactorily complied with all applicable requirements of
Section 15096 relating to the Project, as determined by Buyer in its
reasonable discretion consistent with CEQA requirements;
(iv) Buyer has notified Seller that Buyer elects not to terminate the PPA
pursuant to Section 2(a)(v); and
(iv) the applicable period for any legal challenges under CEQA relating to the
Plant has expired without any such challenge having been filed or, in the
event of any such challenge, the challenge has been determined adversely to
the challenger by final judgment or settlement.
(d) Buyer Termination of Agreement. If Buyer decides not to approve the purchase of
Output from the Plant and to terminate this Agreement as described in Section
2.9(a)(v), Buyer shall give Seller written notice thereof and this Agreement shall
terminate within sixty (60) calendar days from the giving of such notice. Any
termination under this Section 2.9(c) shall be “no-fault”, and neither Party shall
have any liability to the other arising out of such termination, and Buyer shall
promptly return to Seller all Development Assurance less any LD Amount paid by
or due and payable by Seller prior to the date of such termination for reasons
unrelated to this Section 2.9. For the avoidance of doubt, this Section 2.9(c) shall
not affect the rights and remedies associated with any other termination rights set
forth in this Agreement.
2.10 Right of First Refusal for Expansion Plant and Expansion Plant Output.
(a) Buyer’s Right of First Refusal for Development of Expansion Plant. During the
Term, Seller may, in exercising its sole discretion, determine, from time to time, to
develop, finance, construct and/or operate an Expansion Plant. Each time such a
determination is made, Seller shall notify Buyer of such determination and shall
offer, in writing, to sell the Expansion Plant Output to Buyer. The offer shall
include the price to be paid by Buyer for the Expansion Plant Output, the term, and
other principal terms and conditions of the proposed sale. If Buyer wishes to accept
such offer to purchase all (but not less than all) of the Expansion Plant Output,
Buyer shall so notify Seller within ninety (90) calendar days of its receipt of such
offer. Buyer and Seller shall promptly thereafter enter into good faith negotiation
of commercial modifications to this Agreement incorporating such Expansion
Plant Output offer. Until the revised Agreement incorporating an Expansion Plant
is executed, Seller’s proposal, accepted by Buyer (including any modifications
agreed upon in writing by both Parties), shall control all dealings between the
Parties relating to the Expansion Plant. Should any issue arise that is not covered
by such documentation, the terms of this Agreement (prior to amendment for the
Expansion Plant or Expansion Plant Output) shall apply.
(b) Buyer’s Right to Purchase Expansion Plant Output. If Buyer does not accept
Seller’s offer to purchase the Expansion Plant Output within ninety (90) calendar
days of receipt of Seller’s offer, Seller shall be deemed authorized to offer to sell
POWER PURCHASE AGREEMENT - Page 26 of 65
that portion of the Expansion Plant Output to one or more third parties at a price and
on other terms and conditions which, taken as a whole, are at least as favorable to
Seller as the price and other terms and conditions set forth in Seller’s offer to
Buyer. If Seller offers to disaggregate the Expansion Plant Output for the purpose
of selling the same to multiple independent buyers, Seller shall notify Buyer, in
writing, of the terms and conditions of such offers, and Buyer shall again have the
right of first refusal consistent with the terms set forth above for each of the lesser
amounts being offered to the third parties. If Buyer does not purchase the
Expansion Plant Output and Seller sells such Expansion Plant Output to a third
party, Seller shall promptly certify, in writing, to Buyer that the terms and
conditions of sale of such Expansion Plant Output to such third party, taken as a
whole, are at least as favorable to Seller as the price and other terms and conditions
set forth in Seller’s offer to Buyer, and, Seller shall provide the relevant final
contract and any other supporting documentation for such certification by Buyer.
Upon the sale of such Expansion Plant Output in compliance with this Agreement,
Buyer shall have no further rights to be offered or to purchase such Expansion Plant
Output. Buyer’s refusal, in writing, of the Expansion Plant Output from one
Expansion Plant shall not affect Buyer’s right to purchase the Expansion Plant
Output from a subsequently developed Expansion Plant under the terms of this
Agreement. Notwithstanding any provision to the contrary herein, Seller shall not
sell or provide the Expansion Plant Output to any third party, unless Seller can do
so without compromising in any material way its ability to provide the Output or
Expansion Plant Output, if any, to Buyer hereunder. The materiality of any such
impact shall be determined by Buyer, acting in its reasonable discretion.
2.11 Refurbishment of Plant.
During the Term, Seller may refurbish the Plant, alter components of the Plant, replace
components of the Plant, add additional solar modules or inverters, or replace solar
modules or inverters with more powerful solar modules or inverters, in order to increase
the Plant estimated peak AC capability up to the lesser of the Initial Capacity or to the
amount allowed by the Interconnection Agreement; provided, however, that Seller may not
perform any refurbishment to increase capacity higher than the Initial Capacity without the
prior written consent of Buyer, and Buyer shall have the right, in its sole discretion, to
accept or decline to permit any such refurbishment that may increase the Initial Capacity.
2.12 Optional Battery Storage at the Site.
At any time and multiple times during the Term, Buyer may, upon written request (“Battery
Storage Facility Request”), ask Seller to review and evaluate the development of a battery
storage facility or facilities capable of storing up to 25 MWh located at the Site (“Battery Storage
Facility”). The Battery Storage Facility Request may ask Seller to develop a detailed proposal or
may include a detailed proposal (or a combination thereof) for the development of the Battery
Storage Facility. Seller hereby agrees to review, develop and/or evaluate the Battery Storage
Facility Request in good faith and to use its best efforts to take all actions and to do all things
necessary, proper or advisable to consummate, make effective and comply with the development
of the Battery Storage Facility. Within sixty (60) days of receipt of any Battery Storage Facility
POWER PURCHASE AGREEMENT - Page 27 of 65
Request, Seller shall provide a written response to Buyer describing in detail the feasibility of the
development of a Battery Storage Facility, upon what terms and why, and including supporting
documentation and such other information as Buyer may reasonably request. Seller agrees to
negotiate the terms and conditions for the development of such Battery Storage Facility in good
faith; provided, however, that Seller shall not be required to add any such storage unit(s) to the
Plant unless and until Seller, Buyer and any Lenders each (in their sole and absolute discretion)
approves the technical details of such unit(s) and appropriate amendments to this Agreement or
negotiation of a separate battery storage agreement, including additional compensation related to
such unit(s).
ARTICLE III
METERING AND BILLING
3.1 Metering Requirements.
The transfer of Output from Seller to Buyer shall be measured by revenue quality metering
equipment at the Point of Interconnection or another nearby location reasonably acceptable
to Buyer. Such metering equipment, including any equipment required for communicating
meter data (e.g., a dedicated data line) to Buyer or the CAISO, shall be selected, provided,
installed, owned, maintained and operated, at Seller’s sole cost and expense, by Seller or its
designee in accordance with applicable CAISO rules. Seller shall exercise reasonable care
consistent with Prudent Utility Practice in the maintenance and operation of any such
metering equipment, and shall test and verify the accuracy of each meter at least annually.
Seller shall inform Buyer sufficiently in advance of the time and date of these tests to
permit Buyer to be present, and shall permit Buyer to be present, at such tests and to
receive the results of such tests. Subject to Buyer paying the cost of any update or upgrade
to such metering equipment pursuant to a new requirement of the CAISO, the Participating
TO or any other Governmental Authority, adopted after the Contract Delivery Start Date,
each of Seller’s meters shall be accurate to the metering specifications then in effect for
CAISO meter accuracy. Seller shall further install and maintain all equipment and data
circuits necessary to transmit all monitored real time supervisory control and data
acquisition (“SCADA”) system data and real time data from the CAISO meter to the
CAISO and, if applicable, Buyer’s Scheduling Coordinator, while adhering to both CAISO
and, if applicable, Buyer’s Scheduling Coordinator’s communications protocols. Seller
shall provide Buyer with a copy of each certificate of compliance issued by CAISO, if any.
Seller shall provide Buyer and, if applicable, its Scheduling Coordinator access to all
monitored SCADA points to be used at their discretion in real time monitoring. Buyer, at
its sole cost and expense, may install and maintain check meters and all associated
measuring equipment necessary to permit an accurate determination of the quantities of
Output delivered under this Agreement, provided the referenced equipment does not
interfere with Seller’s metering equipment. Seller shall permit Buyer or its Scheduling
Coordinator or its agent access to Seller’s Plant for the purpose of installing and
POWER PURCHASE AGREEMENT - Page 28 of 65
maintaining such check meters. Seller shall submit to the CAISO, or allow the CAISO to
retrieve, any meter data required by the CAISO related to the Plant output in accordance
with the CAISO’s settlement and billing protocol and meter data tariffs. Buyer shall have
reasonable access to relevant meters and associated facilities, as well as real time access to
all meter data, as is necessary for Buyer or, if applicable, its Scheduling Coordinator to
perform its duties as scheduling coordinator and comply with the requirements of the
CAISO Tariff.
3.2 Billing.
Seller shall provide to Buyer on or before the tenth (10th) day of each month an invoice for
the Output for the prior month based upon meter data for Output delivered in such
calendar month (taking into account any line losses to the Point of Interconnection),
enclosing reasonably appropriate supporting CAISO documentation and any
corresponding attestation that may be required pursuant to Section 2.6(c). Such invoice
may be transmitted by e-mail to UtilityCommoditySettlements@cityofpaloalto.org, or to
any other e-mail address designated, in writing by Buyer. Should either Seller or Buyer
determine at a later date, but in no event later than two (2) years after the original invoice
date, that the invoice amount was incorrect, that Party shall promptly notify, in writing,
the other Party of the error. If the amount invoiced was lower than the amount that should
have been invoiced, then Buyer shall, upon receiving verification of the error and
supporting documentation from Seller, pay any undisputed portion of the difference
within thirty (30) calendar days of receipt of verification. If the amount invoiced was
higher than the amount that should have been invoiced, then Seller shall, upon receiving
verification of the error and supporting documentation from Buyer, pay any undisputed
portion of the difference within thirty (30) calendar days of receipt of verification. Any
such adjusted amount owing by Seller or Buyer shall be subject to the interest rate as
designated in Section 3.3, running from the original due date of payment.
POWER PURCHASE AGREEMENT - Page 29 of 65
3.3 Payment.
For Output delivered to Buyer pursuant to this Agreement, Buyer or its agent shall pay
Seller by electronic transfer of funds by the later of the twentieth (20th) day of the month or
the tenth (10th) Business Day after the invoice is received in accordance with Section 3.2,
subject to Buyer’s right to set-off any Daily LD Amount or Performance LDs owed by
Seller to Buyer as described in Sections 4.4(b)(iii) or 4.6(b)(iii), respectively. Payments
made after the due date shall be considered late and shall bear interest on the unpaid
balance at an annual rate equal to two percent (2%) plus the average daily prime rate as
determined from the "Money Rates" section of The Wall Street Journal for the days of the
late payment period multiplied by the number of calendar days elapsed from and including
the day after the due date, to and including the payment date. Interest shall be computed on
the basis of a 365-day year. In the event this index is discontinued or its basis is
substantially modified, the Parties shall agree on a substitute equivalent index. Should
Buyer in good faith dispute the amount of an invoice, Buyer or its agent may withhold such
disputed amounts until the dispute is resolved in accordance with Section 10.10. Such
disputed amounts shall bear interest at the interest rate described above. Failure of Buyer
or its agent to withhold any amount shall not constitute a waiver of Buyer’s right to
challenge such amount.
3.4 Billing Agent.
Seller agrees Buyer may designate an agent to act on its behalf for billing purposes, so long
as Buyer remains liable for its obligations under this Agreement.
ARTICLE IV
SELLER'S OBLIGATIONS
4.1 Development, Finance, Construction and Operation of the Plant.
During the Term, Seller covenants that at no cost to Buyer, unless otherwise specifically
stated in this Agreement, it shall:
(a) Develop, Finance and Construct the Plant. Design, develop, finance and construct
the Plant;
(b) Real-time Monitoring. Provide Buyer with access to a “real time” Plant monitoring
system (which, at a minimum, shall provide “real time” information regarding the
net output of the Plant) that is anticipated to be internet protocol-based and include
any applicable alarms required by Prudent Utility Practice;
(c) Permits. Seek, obtain, maintain, comply with and, as necessary, renew and modify
from time to time, all Permits, certificates or other authorizations or approvals,
including comply with any and all CEQA requirements for or related to the
POWER PURCHASE AGREEMENT - Page 30 of 65
development of the Plant and prepare any and all necessary CEQA documentation,
including any environmental impact studies, as described more specifically in
Section 2.9, which are necessary for the construction, operation and maintenance of
the Plant or required by any Requirements of Laws or Governmental Authority as
prerequisites to Seller’s performance of this Agreement;
(d) Operation and Maintenance - Compliance. Operate, maintain, and repair the Plant
in accordance with this Agreement, all Requirements of Laws applicable to Seller
or the Plant, all Contractual Obligations and Permits, and in accordance with
Prudent Utility Practice, including with respect to efforts to maintain availability of
the Expected Annual Energy Production subject to normal system wear-and-tear
and the panel degradation factor set forth on Exhibit G. Seller shall obtain in its
own name and at its own expense any and all pollution or environmental credits or
offsets necessary to operate the Plant in compliance with the Environmental Laws;
(e) Operation and Maintenance – Prudent Utility Practice. Operate and maintain in a
manner consistent with Prudent Utility Practice the facilities it will own and
otherwise cooperate with the Participating TO in the physical interconnection of
the Plant to the Participating TO System in accordance with the Interconnection
Agreement;
(f) Insurance. Obtain and maintain the policies of insurance in the amounts and with
the coverages as set forth on Exhibit C;
(g) Outages. By October 1st of each year of the Delivery Term, provide each of Buyer
and, if applicable, its Scheduling Coordinator with an annual projection of
scheduled Planned Outages for the following calendar year. Should Seller make
any changes to such projection, it shall notify Buyer and, if applicable, its
Scheduling Coordinator of such changes at least fourteen (14) calendar days in
advance of any newly scheduled or rescheduled Planned Outage. If Buyer requests
a change to the scheduled date of any Planned Outage (including to a date set forth
in a change notice from Seller), Seller shall consider such request in good faith and
notify Buyer of its decision within seven (7) calendar days of receipt of Buyer’s
request. In no instance other than Saturdays, Sundays and federal holidays during
the period of reliability accounting (initially the period between June 1st and
September 30th but subject to changes selected at Buyer’s discretion for
conforming to CAISO availability assessment) shall Seller schedule Planned
Outages of more than twenty-four (24) hours during the Delivery Term. In
connection with any Planned Outage or Forced Outage in excess of one (1) MW of
Plant capacity, Seller shall notify Buyer and, if applicable, its Scheduling
Coordinator, as soon as practicable, of the percentage of Plant (based on percentage
of Output loss) expected to be out of service and how long the Planned Outage or
Forced Outage is expected to last. If the Planned Outage or Forced Outage is total
and is due to failure of the Plant rather than the transmission and distribution
system beyond the Point of Interconnection, Seller shall give Buyer and, if
applicable, its Scheduling Coordinator at least four (4) hours’ prior notice before
re-energizing the Plant. In addition, Seller shall comply with Buyer’s Scheduling
POWER PURCHASE AGREEMENT - Page 31 of 65
Coordinator’s scheduling protocols, as may be changed from time to time. A copy
of the scheduling protocols prepared jointly by the Parties as of the Execution Date
and then-anticipated to be appropriate as of the Commercial Operation Date is
attached as Exhibit D. The Parties agree, within thirty (30) days after achievement
of the Construction Milestone to commence reviewing the appropriateness of such
scheduling protocols and work together (including meeting in-person) and, if
applicable, with Buyer’s Scheduling Coordinator to make and complete prior to the
delivery of Test Energy under Section 2.5, any modifications necessary to ensure
the scheduling protocols’ consistency with the CAISO Tariff, its Operating
Procedures and Business Practice Manuals, and the then-planned operating
procedures for the Plant; provided that, during the Delivery Term, Buyer shall
provide Seller with any revised scheduling protocols within a reasonable period of
time to the extent, if applicable, its Scheduling Coordinator provides the same to
Buyer;
(h) Interconnection. Perform all studies, pay all fees, obtain all necessary approvals
and execute all necessary agreements to secure the interconnection, distribution
and/or transmission arrangements, including negotiate and enter into an
Interconnection Agreement sufficient to allow Seller to deliver the Output to the
Point of Interconnection and into the CAISO-controlled grid for sale to Buyer
pursuant to the terms of this Agreement;
(i) FCDS Status and Copy of Finding. Ensure that its interconnection, distribution
and/or transmission arrangements shall provide for Full Capacity Deliverability
Status as of the FCDS Finding Milestone (unless extended pursuant to Section 4.4)
and throughout the remainder of the Delivery Term. Seller shall provide to Buyer a
copy of the FCDS Finding within fifteen (15) days of such finding having been
obtained from the CAISO. All costs or amounts designated in the Plant’s full
capacity deliverability study to obtain FCDS or any costs and expenses incurred by
Seller for FCDS studies shall be Seller’s sole responsibility.
(j) Participating Generator Agreement and Meter Service Agreement. Negotiate and
enter into a Participating Generator Agreement and a Meter Service Agreement for
CAISO Metered Entities with the CAISO, the load control area operator for the
Participating TO System, to which the Plant is interconnected. Buyer shall pay for
or reimburse Seller for any such costs or charges associated with these agreements,
except to the extent such cost or charge is required to be paid by Seller under this
Agreement in Sections 3.1 and 4.1(h). Seller shall cooperate with Buyer to
minimize any such costs as are to be reimbursed by Buyer;
(k) Start-ups and Shut-downs. Coordinate all Plant start-ups and shut-downs, in whole
or in part, with Buyer in accordance with CAISO scheduling protocols and the
reasonable protocols established by Buyer that are not inconsistent with the CAISO
Tariff and CAISO procedures; and
(l) Development Assurance, Interim Assurance and Performance Assurance. Fund
and maintain the Development Assurance and Interim Assurance, as applicable, to
POWER PURCHASE AGREEMENT - Page 32 of 65
assure Seller’s timely development of the Plant and achievement of Commercial
Operation and the Contract Delivery Start Date, including the performance of all
construction tasks; and fund and maintain the Performance Assurance to assure
Seller’s delivery of the Output to Buyer, all in accordance with Article IX.
4.2 General Obligations.
(a) Records. Seller shall keep complete and accurate operating and other records and
all other data for the purposes of proper administration of the Agreement, including
such records as may be required by any Governmental Authority or Prudent Utility
Practice;
(b) Organizational Good Standing and Compliance with Laws and Agreement. During
the Term of this Agreement, Seller shall continue to (i) preserve, renew and keep in
full force and effect its organizational existence and good standing, and take all
reasonable action to maintain all applicable Permits, rights, privileges, licenses and
franchises necessary or desirable in the ordinary course of its business; (ii) comply
with all Requirements of Laws, including Environmental Laws, applicable to Seller
or the Plant; and (iii) comply with all Contractual Obligations related to the
operation and maintenance of the Plant;
(c) Further Development Information. Seller shall provide to Buyer such other
information regarding the permitting, engineering, construction or operations of the
Plant as Buyer may from time to time reasonably request, subject to licensing or
other restrictions of Seller or a third party with respect to confidentiality, disclosure
or use; provided, nothing herein shall limit Buyer’s right to agree to confidentiality
or sign a confidentiality agreement in connection therewith before acquiring
knowledge of such information;
(d) CAISO Agreements. Seller shall enter into any agreements with the CAISO
required by the CAISO for generators delivering power into the CAISO-controlled
grid. Except for such costs and charges as are expressly identified in this
Agreement as Seller’s costs, Buyer shall reimburse Seller for all costs and charges
under such agreements. Seller shall cooperate with Buyer to minimize any such
costs as are to be reimbursed by Buyer;
(e) Financial Statements. If requested by Buyer, Seller shall deliver to Buyer (a)
within four (4) months following the end of each fiscal year, a copy of Seller’s and
Seller’s Parent’s annual report containing audited consolidated financial statements
for such fiscal year (or if not available, unaudited consolidated financial statements
for such fiscal year) and (b) within forty-five (45) calendar days after the end of
each of its first three (3) fiscal quarters of each fiscal year, a copy of Seller’s and
Seller’s Parent’s quarterly report containing unaudited consolidated financial
statements for such fiscal quarter. In all cases, the statements shall be for the most
recent accounting period and shall be prepared in accordance with GAAP and shall
be certified by the Chief Financial Officer or equivalent officer of Seller on behalf
of Seller and of Seller’s Parent on behalf of Seller’s Parent, dated no earlier than ten
POWER PURCHASE AGREEMENT - Page 33 of 65
(10) Business Days prior to delivery to Buyer (i) as fairly presenting the financial
condition of Seller and Seller’s Parent, as applicable, subject only to what would
typically be included in year-end audit adjustments and footnotes; provided,
however, that should any such statements not be available on a timely basis due to a
delay in preparation or certification, such delay shall not constitute an Event of
Default so long as Seller diligently pursues the preparation, certification and
delivery of the statements;
(f) Notice of Expected Initial Capacity. Within fifteen (15) calendar days of the later
of (i) obtaining the authority to construct for the Plant from the applicable
Governmental Authority or (ii) Seller’s receipt of the system impact and facility
cost studies from the Participating TO, Seller shall provide written notice to Buyer
stating the then-expected Initial Capacity of the Plant in MW AC (which shall be
subject to the Initial Capacity limits described in Section 2.3(c)(ii)) and specifying
other material key Plant design details;
(g) Site Size Requirement. Seller agrees and hereby certifies to Buyer that the Site
(including any proposed modification to the Site described in Section 4.2(h)) shall
be sufficient in size and scope to accommodate both the Plant and the potential
future build out of a Battery Storage Facility (whether the Parties agree to develop
the battery storage facilities or not). Seller acknowledges and agrees that Buyer’s
potential ability to add a Battery Storage Facility under Section 2.12 and the
obligation to size the Site accordingly in this Section 4.2(g) are material
inducements to Buyer to enter into this Agreement.
(h) Modification of Site. Seller shall not modify the Site without the prior written
consent of Buyer, which consent shall not be unreasonably withheld, conditioned
or delayed. With respect to any proposed Site modification Seller shall provide
written notice to Buyer describing the proposed Site modification, the reasons
therefor, and the extent of any impact such modification would have upon any and
all of the Milestones and including a revised Exhibit A reflective of the proposed
modification. Seller shall provide Buyer with other relevant information
reasonably requested by Buyer regarding the proposed Site modification. At all
times during this Agreement, Seller covenants that the Site (and any proposed Site
modification) shall be sufficient in size and scope to accommodate both the Plant
and a potential future build out the Battery Storage Facility as contemplated by
Section 2.12 (whether the Parties agree to develop the battery storage facilities or
not). Notwithstanding any provision to the contrary, any fees and costs related to
modifications contemplated by this Section 4.2(h) shall be subject to Section
10.12(a).
(i) Final Site Drawings. Seller shall provide to Buyer final Site Drawings ninety (90)
days prior to the Commercial Operation Date.
POWER PURCHASE AGREEMENT - Page 34 of 65
4.3 Construction Milestones.
(a) Seller Pursuit of Milestones. The Parties agree that time is of the essence in the
performance of Seller’s obligations under this Agreement. The Parties further
agree that the Milestones must be achieved in a timely fashion or Buyer shall suffer
damages which are difficult to estimate with reasonable certainty. Upon request,
Seller shall promptly provide Buyer with documentation satisfactory to Buyer,
acting in the reasonable exercise of Buyer’s discretion, to support the progress,
status and achievement of the Milestones by the dates set forth below (in addition to
the reports, notices, updates, certifications, documentation and materials described
in this Section 4.3 below).
(b) Individual Milestones. Seller covenants that it shall diligently pursue to
completion each of the following Milestones:
(i) By December 22, 2017, Seller shall have executed and delivered to Buyer
the Interconnection Agreement for the Plant (the “Interconnection
Agreement Milestone”);
(ii) By August 28, 2019, Seller shall have obtained the Conditional Use Permit
necessary, in final form, to commence construction of the Plant (the
“Conditional Use Permitting Milestone”);
(iii) By August 28, 2019, Seller shall have obtained all Permits necessary, in
final form, to commence construction of the Plant (the “Permitting
Milestone”);
(iv) By October 15, 2019, Seller shall have arranged for the financing of the
construction of the Plant or otherwise make funds available to commence
and complete construction (the “Financing Milestone”);
(v) By August 3, 2020, Seller shall have commenced construction of the Plant
(the “Construction Milestone”);
(vi) By June 1, 2021, Seller shall deliver the COD Certification to Buyer (the
“Commercial Operation Milestone”); and
(vii) By August 1, 2021, Seller shall have obtained a Full Capacity Deliverability
Status Finding from the CAISO (the “FCDS Finding Milestone”).
(c) Development Progress Reports. Seller shall regularly provide to Buyer
Development Progress Reports concerning the progress towards construction and
completion of each of the Milestones (including whether Seller has met or is on
target to meet each of the Milestones), which shall be substantially similar in form
and substance to that attached as Exhibit E, and include such additional information
as reasonably required by Buyer in its sole discretion. Seller shall also agree to
meetings between representatives of Buyer and Seller to review such monthly
reports and discuss Seller’s construction progress, as Buyer may request from time
POWER PURCHASE AGREEMENT - Page 35 of 65
to time. Seller shall deliver the Development Progress Report to Buyer describing
activities for the applicable Report Period no less frequently than:
(i) From the Execution Date until completion of the Interconnection
Agreement Milestone, on a bi-annual basis, with the first Development Progress
Report due under this Section 4.3(c)(i) on the date that is six (6) months after the
Execution Date and with each subsequent Development Progress Report due under
this Section 4.3(c)(i) on the date that is the six (6) calendar month anniversary of
the prior due date;
(ii) From the Interconnection Agreement Milestone until Seller delivers the
Notice to Proceed to the EPC Contractor for the Plant, on a quarterly basis, with the
first Development Progess Report due under this Section 4.3(c)(ii) on the date that
is fifteen (15) days after the close of the first full calendar quarter following Seller’s
achievement of the Interconnection Agreeent Milestone and with each subsequent
Development Progress Report due under this Section 4.3(c)(ii) on the date that is
fifteen (15) days after the close of each calendar quarter thereafter;
(iii) From the date Seller delivers the Notice to Proceed to the EPC Contractor
for the Plant until achievement of all Milestones, on a monthly basis, with the first
Development Progress Report due under this Section 4.3(c)(iii) on the date that is
fifteen (15) days after the close of the first full calendar month following Seller’s
delivery of the Notice to Proceed to the EPC Contractor for the Plant and with each
subsequent Development Progress Report due under this Section 4.3(c)(iii) on the
date that is fifteen (15) days after the close of each month thereafter. (d) Notice
of Commercial Operation Date and COD Certification. Seller shall provide written
notice to Buyer thirty (30) calendar days in advance of the anticipated Commercial
Operation Date, and shall provide Buyer with written weekly updates thereafter
detailing the status of Seller’s progress in achieving Commercial Operation until
the week preceding the Commercial Operation Date. Once Commercial Operation
of the Plant has commenced, Seller shall deliver to Buyer by electronic mail or
facsimile, with originals to follow by hand-delivery, courier or mail service, the
COD Certification in the form attached hereto as Exhibit E-2, which date of
delivery shall establish the Commercial Operation Date as described in the COD
Certification.
(e) Certification of Completion of Milestone. Within five (5) Business Days of the
completion of each Milestone (except for the Commercial Operation Milestone
which certification is described in subsection (d) above), Seller shall provide a
certification to Buyer (along with any relevant supporting documentation), stating
Seller’s achievement or satisfaction of each such Milestone. In addition, Seller
shall provide to Buyer additional information concerning Seller’s progress towards,
or confirmation of, achievement of the Milestones, as Buyer may reasonably
request from time to time.
(f) Notice of Failure to Achieve Milestone. Upon becoming aware that it shall, or is
reasonably likely to, fail to achieve any Milestone by the required date, for any
POWER PURCHASE AGREEMENT - Page 36 of 65
reason including a Force Majeure Event, Seller shall so notify Buyer, in writing, as
soon as is reasonably practical. Such notice shall provide information regarding the
cause of the delay, provide a revised estimated date for achievement of the
Milestone(s), and otherwise describe Seller’s plan for meeting the Milestone(s).
Seller’s notice shall also explain any impact such delay may or shall have on any
other Milestone, and measures to be taken to mitigate such impact.
4.4 Milestone Excused Delay and Liquidated Damages.
(a) Permitted Extensions to Milestones. In the event that a Force Majeure Event
causes a delay to the achievement of any Milestone then, and in each such case,
each Milestone deadline may be extended by that number of calendar days the
applicable Force Majeure Event actually delays completion of such Milestone.
For the avoidance of doubt, any extension of the deadline for one Milestone shall
not extend the deadline for completion of any other Milestones. Notwithstanding
the foregoing,
(i) in no event shall the combined extensions under this Section 4.4(a) for any
individual Milestone arising from Force Majeure Events exceed six (6) months in
the aggregate;
(ii) in no event shall the combined extensions under this Section 4.4(a) for all
Milestones combined arising from Force Majeure Events exceed twelve (12)
months in the aggregate; and
(iii) if on any given day two or more events cause delay to a Milestone at the same
time (i.e., occur concurrently), Seller shall only be entitled to one (1) day of delay
for such day.
(b) More Than Six (6) Months Excused Extensions; Daily LD Amount. If the
combined excused extensions for any individual Milestone exceed six (6) months
in the aggregate as set forth in Section 4.4(a)(i), Seller shall be liable to Buyer for
liquidated damages for each day or portion of a day of unexcused delay in an
amount equal to the Daily LD Amount. In Buyer’s sole discretion, Buyer shall be
entitled to collect the Daily LD Amount for the relevant number of unexcused days
of delay on a monthly basis within ten (10) days of Seller’s receipt of an invoice
from Buyer therefor by one or more of the following:
(i) drawing upon the Development Assurance or Interim Assurance, as applicable
(which shall be subject to the replenishment provisions set forth in Section 9.2(a)(i)
or (ii), respectively);
(ii) receiving payments from Seller; and/or
(iii) setting off against any amounts owed to Seller by Buyer for the purchase of
Output hereunder under Section 3.3.
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So long as Seller timely pays and continues to pay any and all of the Daily LD
Amount when due, Buyer shall not be permitted to terminate this Agreement for up
to twelve (12) months. The Parties agree that Buyer’s receipt of the Daily LD
Amount shall (x) not be construed as Buyer’s declaration that an Event of Default
has occurred under any provision of Article VII and (y) not limit Buyer’s right to
receive a Termination Payment or Damage Payment, as applicable, upon exercise
of Buyer’s default right pursuant to Article VII. Each Party agrees and
acknowledges that (I) the damages that Buyer would incur due to Seller’s delay in
achieving the Milestones would be difficult or impossible to predict with certainty
and (II) the Daily LD Amount is an appropriate approximation of such damages.
(c) More than Twelve (12) Months Excused Extensions or Non-Payment of Daily LD
Amount; Termination of Agreement. If for all Milestones the combined excused
extensions exceed twelve (12) months in the aggregate as described in Section
4.4(a)(ii), or if for any reason Seller fails to pay, or discontinues paying, any or all
of the Daily LD Amount when due, Buyer may terminate this Agreement by
written notice to Seller. This twelve (12) month period shall not be further extended
as a result of a Force Majeure Event, including a Force Majeure Event as
contemplated by Section 6.3. In Buyer’s sole discretion, Buyer shall be entitled to
collect the Damage Payment within ten (10) days of Seller’s receipt of an invoice
from Buyer therefor by one or more of the following:
(i) drawing upon the Development Assurance (which shall be subject to the
replenishment provision set forth in Section 9.2(a)(i));
(ii) receiving payments from Seller within ten (10) days of receipt of an invoice
from Buyer therefor; and/or
(iii) setting off against any amounts owed to Seller by Buyer for the purchase of
Output hereunder as set forth in Section 3.3.
If Seller fails to achieve the Milestones, including the Construction Milestone and
Commercial Operation Milestone, as permitted in and limited by the performance
excuse provisions set forth in this Section 4.4, only the damages or remedy set forth
in this Section 4.4(c), and no other, shall be available to Buyer; provided that, the
Parties agree that the prior sentence shall not in any way limit Buyer’s right to
receive a Damage Payment or Termination Payment, as applicable, including for
failure to achieve the Construction Milestone or Commercial Operation Milestone,
for any reason other than as described in this Section 4.4, including exercise of
Buyer’s default right pursuant to Article VII.
4.5 Obligation to Schedule and Deliver.
(a) Appointment of Scheduling Coordinator. As of the Execution Date, Buyer hereby
appoints Seller to act on behalf of Buyer as its Scheduling Coordinator under this
Agreement for the transmission, delivery and receipt of Output from the Plant
at the Point of Interconnection in accordance with all applicable CAISO and related
POWER PURCHASE AGREEMENT - Page 38 of 65
rules and protocols. At least ninety (90) days before the beginning of delivery of
Test Energy, Seller shall take all actions and execute and deliver to Buyer or the
CAISO all documents necessary to become and act as Buyer’s Scheduling
Coordinator. Seller as Scheduling Coordinator shall do all things reasonably
needed to comply with any obligations, and minimize any potential liability, under
the CAISO Tariff. Seller represents, warrants and certifies that Seller shall be
certified by the CAISO as a qualifying Scheduling Coordinator so long as it
provides Scheduling Coordinator Functions on behalf of Buyer for the Plant. Seller
as Buyer’s Scheduling Coordinator shall comply with all Scheduling Coordinator
Functions under the CAISO Tariff and shall conduct all scheduling for the Plant in
full compliance with the terms and conditions of this Agreement and the applicable
CAISO Tariff, all requirements of EIRP (if applicable) and protocols and
scheduling practices for Energy on a Day-Ahead basis or pursuant to the
Hour-Ahead Scheduling Process, as such terms are defined in the CAISO Tariff,
and the scheduling protocols attached hereto as Exhibit D. Commercial
arrangements for such transmission and delivery services shall be coordinated and
settled by the Scheduling Coordinator directly with the CAISO or other third
parties. Seller shall act as Scheduling Coordinator, and perform any and all duties
and responsibilities related thereto, at Seller’s own expense and at no charge to
Buyer at all time during its appointment as Scheduling Coordinator hereunder.
Buyer may at any time during the Term in its sole discretion and for any reason
replace Seller as Scheduling Coordinator (or any subsequent Scheduling
Coordinator) for the Plant with another Scheduling Coordinator upon fifteen (15)
days advance written notice; provided that in such event the Scheduling
Coordinator being replaced shall within ten (10) days of receipt of such notice
provide copies of all scheduling-related records, data, history and information to
the replacement Scheduling Coordinator simultaneously with written certification
of provision of the same to Buyer.
(b) General Confirmations. The Parties acknowledge their general understanding and
intent, subject to the terms and conditions of this Agreement, as follows:
(i) Seller shall use all reasonable efforts consistent with Prudent Utility
Practice to maximize the Output;
(ii) Seller shall be responsible to arrange for, and shall bear all risks associated
with, delivery of all Output to the Point of Interconnection;
(iii) Buyer shall be obligated to pay for all Output delivered to the Point of
Interconnection (subject to Section 2.4(a)); and
(iv) Buyer shall be responsible to arrange for, and shall bear all risks associated
with, acceptance and transmission of Output at and from the Point of
Interconnection.
(c) Curtailment Rights.
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(i) Mandatory Dispatch Down Periods. Seller shall reduce delivery amounts
as directed by the CAISO, Participating TO, or any successor thereof during
any Dispatch Down Period. For the avoidance of doubt, Buyer shall not be
required to pay Seller for the Output that Seller could have delivered to
Buyer but for such order.
(ii) Discretionary Curtailment.
(A) Buyer may require Seller to curtail deliveries of Output from the
Plant to the Point of Interconnection for any reason in Buyer’s sole
discretion (a “Discretionary Curtailment”) by delivering a
dispatch notice to Seller, provided that (1) such Discretionary
Curtailments shall be limited to a total of not more than twenty-five
percent (25%) of the Expected Annual Energy Production, with the
first fifty (50) hours of such amount in each Contract Year at no
charge to Buyer, and (2) the dispatch notices shall be consistent with
the operational characteristics set forth in Exhibit D. Seller shall
reduce the Plant’s delivered Output by the amount and for the period
set forth in each dispatch notice.
(B) In addition to paying Seller for all Output actually delivered and not
curtailed hereunder (subject to Section 2.4 and the adjustments in
(a) and/or (b)), Buyer shall pay Seller, on the date payment would
otherwise be due in respect of each month in which any
Discretionary Curtailment occurred after giving effect to the
maximum of fifty (50) hours of no-charge curtailment specified in
Section 4.5(c)(ii)(A)(1), an amount equal to (1) the amount of
Output that Seller could reasonably have delivered to Buyer but for
such Discretionary Curtailment multiplied by (2) the Price, the
Over-Production Energy Price and/or the Pre-FCDS Price, as
applicable.
(iii) Failure to Comply. If Seller fails to comply with a dispatch notice that
meets the requirements for a Discretionary Curtailment, then, for the
amount of Output (measured in MWhs of Output) that the Plant delivered in
contradiction to the dispatch notice, Seller shall pay Buyer the greater of:
(A) Two hundred percent (200%) of the aggregate Price for such MWhs
plus any penalties or other charges actually incurred resulting from
Seller’s failure to comply with the dispatch notice; and
(B) the CAISO’s Real-Time Market price for the applicable PNode for
such MWhs plus any penalties or other charges actually incurred
resulting from Seller’s failure to comply with the dispatch notice.
(d) Eligible Intermittent Resource; Participating Intermittent Resource; and Forecast
Fee.
POWER PURCHASE AGREEMENT - Page 40 of 65
(i) EIRP. Unless the Plant is not EIRP-eligible or as otherwise directed by
Buyer pursuant to Section 2.2(b)(ii)(gg), (i) Seller shall provide Buyer with a copy
of the notice from CAISO certifying the Plant as a Participating Intermittent
Resource as soon as practicable after Seller’s receipt of such notice of certification,
(ii) as of the first date of delivery of Test Energy and until the Plant receives
certification as a Participating Intermittent Resource, Seller, at its sole cost, shall
comply with EIRP and additional protocols issuec by the CAISO for Eligible
Intermittent Resources, and (iii) throughout the Delivery Term, Seller, at its sole
cost, shall participate in and comply with EIRP and all additional protocols issued
by the CAISO for a Participating Intermittent Resource. If the EIRP is no longer
made available by the CAISO or if Buyer directs Seller not to participate in such
program, then throughout the Delivery Term, Seller, at its sole cost, shall
participate in and comply with all other protocols, rules or regulations issued by the
CAISO for generating facilities providing energy on an intermittent basis.
Throughout the Delivery Term, Buyer in its limited capacity as Seller’s Scheduling
Coordinator shall facilitate communication with the CAISO and provide other
administrative materials to CAISO as necessary to satisfy Seller’s obligations as
Seller’s Scheduling Coordinator .
(ii) Forecast Fee. As an Eligible Intermittent Resource, the Scheduling
Coordinator shall schedule Plant Output based upon a day-ahead and hour-ahead
forecast developed by the CAISO (the “Forecasting Service”).
Seller shall bear all forecast fees imposed by the CAISO for use of the Forecasting
Service or any successor CAISO forecasting service up to and including
$0.10/MWh (irrespective of whether Seller uses its own forecasting service in
addition to the Forecasting Service). If such fees exceed this amount, the Parties
shall each be responsible for, and each agrees to pay, fifty percent (50%) of such
excess. Seller agrees to provide the Forecasting Service with sufficient data to
support a reasonably accurate and unbiased forecast with respect to the Output to be
sold by Seller to Buyer. To the extent the CAISO no longer provides the
Forecasting Service (or a successor Forecasting Service) for the Plant Output,
Seller and Buyer shall promptly coordinate to develop an alternative source for
day-ahead and hour-ahead forecast information to be used by the Scheduling
Coordinator for scheduling Plant Output.
4.6 Output Obligations, Performance LDs and Buyer’s Right to Operate.
(a) Two (2) Year Minimum Production Threshold. Seller guarantees that the
Calculation Period Deemed Delivered Energy Production for each Calculation
Period shall be no less than the Two (2) Year Minimum Production Threshold for
such Calculation Period in accordance with this Section 4.6. No less frequently
than quarterly during each year, Seller shall calculate and provide notice to Buyer
of the then-cumulative amount of the Seller Excused Energy Amount for such year,
along with an explanation in reasonable detail of the calculation thereof based on
historical Plant data, meteorological data, Output projections (including by the
CAISO, if applicable) and other relevant data. The calculation shall be subject to
POWER PURCHASE AGREEMENT - Page 41 of 65
review and approval by Buyer.
(b) Performance LDs. If, for any Calculation Period, the Calculation Period Deemed
Delivered Energy Production is less than the Two (2) Year Minimum Production
Threshold (any such shortfall, in MWh, a “Shortfall”), then Seller may cure such
Shortfall by paying or crediting Buyer liquidated damages based on the amount of
such Shortfall in an amount equal to (i) the amount of such Shortfall multiplied by
(ii) the per MWh Price in this Agreement multiplied by (iii) a factor of 1.2
(“Performance LDs”). In Buyer’s sole discretion, Buyer shall be entitled to collect
Performance LDs within ten (10) days of Seller’s receipt of an invoice from Buyer
therefor by one or more of the following:
(i) drawing upon the Performance Assurance (which shall be subject to the
replenishment provision set forth in Section 9.2(a)(iii);
(ii) receiving payments from Seller on a monthly basis within ten (10) days of
receipt of an invoice from Buyer therefor; and/or
(iii) setting off against any amounts owed to Seller by Buyer for the purchase of
Output hereunder as set forth in Section 3.3.
If for any Calculation Period Seller is obligated to pay or credit any Shortfall
damages hereunder, then, for purposes of calculating the Calculation Period
Deemed Delivered Energy Production for the immediately succeeding Calculation
Period, the amount of the Calculation Period Deemed Delivered Energy Production
for the first year in such succeeding Calculation Period shall be deemed to be equal
to the greater of (a) the actual Calculation Period Deemed Delivered Energy
Amount for such first year, or (b) eighty percent (80%) of the Calculation Period
Expected Annual Energy Production for such first year.
Except as otherwise expressly stated in this Section 4.6(b), the Performance LDs
shall be Buyer’s sole monetary remedy for any Shortfall or failure to produce the
Output or failure to maintain any specified Two Year Minimum Production
Threshold (subject to Buyer’s right to operate in Section 4.6(c)). The Parties agree
that Buyer’s receipt of the Performance LDs shall (x) not be construed as Buyer’s
declaration that an Event of Default has occurred under any provision of Article VII
and (y) not limit Buyer’s right to receive a Termination Payment upon exercise of
Buyer’s default right pursuant to Article VII. Each Party agrees and acknowledges
that (I) the damages that Buyer would incur due to Shortfall would be difficult or
impossible to predict with certainty and (II) the Performance LDs are an
appropriate approximation of such damages.
(c) [Reserved].
POWER PURCHASE AGREEMENT - Page 42 of 65
ARTICLE V
BUYER’S OBLIGATIONS
5.1 Delivery and Transmission.
Except for Seller’s obligations pursuant to Sections 3.1, 4.1(k), 4.1(l) and 4.5(d), Buyer
shall be solely responsible for paying costs and charges associated with the delivery and
receipt of the Output under this Agreement at the Point of Interconnection and for the
transmission and delivery of the Output from the Point of Interconnection to any other
point downstream of the Point of Interconnection (including, without limitation,
transmission costs and charges, competition transition charges, applicable control area
service charges, transmission congestion charges, inadvertent energy flows, any other
CAISO charges related to the transmission of such Output by the CAISO and any charge
assessed or collected in the future pursuant to any utility tariff or rate schedule, however
defined, for transmission or transmission-related service rendered by or for any
transmission-owning or operating entity). If and to the extent that Seller fails to comply
with the notice provisions in Section 4.1(g) concerning Forced Outages or with its
obligations as outlined in the previous sentence, Seller shall be wholly responsible for all
imbalances, deviations, or any other CAISO charges or penalties associated with such
Forced Outage or CAISO Tariff obligation (it being understood, however, that all such
charges and penalties (if any) shall be borne by Buyer if Seller has not failed to comply
with such provisions or obligations).
5.2 Taxes.
Buyer shall pay and be fully responsible for any sales, use, gross receipts, utility or other
taxes, assessments or fees, if any, incurred or imposed on the sale or transfer of Output
from Seller to Buyer under this Agreement. Buyer shall not be responsible for any taxes
measured on the net income of Seller, ad valorem taxes paid by Seller that are associated
with Seller’s rights and privileges relating to the Site or any taxes imposed as a result of
Seller’s corporate structure, including, without limitation, limited liability company or
other entity fees and taxes.
5.3 Notification of Transmission Outages.
Buyer shall exercise reasonable efforts to provide Seller with as much advance notice as
practicable of any Forced Outages on the Participating TO System or other transmission or
delivery facilities which is reasonably likely to result in a Dispatch Down Period.
POWER PURCHASE AGREEMENT - Page 43 of 65
ARTICLE VI
FORCE MAJEURE
6.1 Remedial Action.
Subject to the limitation on extensions of Milestones set forth in Section 4.4(a), a Party
shall not be liable to the other Party if the Party is prevented from performing its
obligations hereunder due to a Force Majeure Event. The Party rendered unable to fulfill
an obligation by reason of a Force Majeure Event shall take all action necessary to remove
such inability with all due speed and diligence. The non-performing Party shall be prompt
and diligent in attempting to mitigate the effects of and to remove the cause of its failure to
perform, and nothing herein shall be construed as permitting that Party to continue to fail to
perform after said cause has been removed. Notwithstanding the foregoing, the existence
of a Force Majeure Event shall not excuse any Party from its obligations to make payment
of amounts due hereunder.
6.2 Notice.
In the event of any delay or nonperformance resulting from a Force Majeure Event, the
Party suffering the Force Majeure Event shall, as soon as practicable under the
circumstances, notify the other Party, in writing, of the nature, cause, date of
commencement thereof and the anticipated extent of any delay or interruption in
performance.
6.3 Termination Due To Force Majeure Event.
If a Party is prevented in any material respect from performing any material obligations
under this Agreement solely due to a Force Majeure Event lasting for a period of twelve
(12) consecutive months or longer, the unaffected Party may terminate this Agreement,
without liability of either Party to the other, upon thirty (30) calendar days’ prior written
notice at any time following expiration of such period of twelve (12) consecutive months.
In such event, Buyer shall promptly return to Seller all Development Assurance, Interim
Assurance or Performance Assurance, as applicable, less any LD Amount paid by or due
and payable by Seller prior to the date of such termination for reasons unrelated to this
Section 6.3. For the avoidance of doubt, this Section 6.3 shall not affect the rights and
remedies associated with any other termination rights set forth in this Agreement.
POWER PURCHASE AGREEMENT - Page 44 of 65
ARTICLE VII
DEFAULT, REMEDIES AND TERMINATION
7.1 Events of Default by Buyer.
The following shall each constitute an “Event of Default” by Buyer:
(a) Buyer breaches any material obligation or covenant (other than one covered by
Section 7.1(b) or (c) of this Agreement) and fails to cure such breach within thirty
(30) calendar days after written notification of breach by Seller or, if the breach
cannot be cured within thirty (30) calendar days, such longer period as may be
necessary to cure such breach as long as Buyer is exercising diligent efforts to cure
such breach;
(b) Buyer fails to make any payment when due under this Agreement within thirty (30)
calendar days after written notice that such payment is due; or
(c) Buyer becomes Bankrupt.
7.2 Events of Default by Seller.
The following shall each constitute an “Event of Default” by Seller:
(a) Seller breaches any material obligation or covenant (other than ones covered by
Sections 7.2(b) through and including (k) of this Agreement or for which a remedy
is specified) and fails to cure such breach within thirty (30) calendar days after
written notification of breach by Buyer or, if the breach cannot be cured within
thirty (30) calendar days, such longer period as may be necessary to cure such
breach as long as Seller is exercising diligent efforts to cure such breach;
(b) Seller fails to make any payment when due under this Agreement within fifteen
(15) calendar days after written notice that such payment is due;
(c) Seller becomes Bankrupt;
(d) Seller consolidates or amalgamates with, or merges with or into, or transfers all or
substantially all of its assets to, another entity and, at the time of such consolidation,
amalgamation, merger or transfer, the resulting, surviving or transferee entity fails
to assume all the obligations of Seller under this Agreement to which it or its
predecessor was a party by operation of Law or pursuant to an agreement
reasonably satisfactory to Buyer;
(e) Seller sells or transfers the Output (or any individual component thereof),
Expansion Plant Output (or any individual component thereof), if any, the right to
the Output (or any individual component thereof), or the right to the Expansion
Plant Output (or any individual component thereof) to the extent that such
Expansion Plant Output is purchased by Buyer, to any Person other than Buyer.
POWER PURCHASE AGREEMENT - Page 45 of 65
(f) Seller fails to comply with the terms of Buyer’s right of first refusal as described in
Section 2.4(a) or 2.10 of this Agreement;
(g) Subject to Section 4.4, Seller fails, for any reason other than an unauthorized act or
omission by Buyer, to achieve the Construction Milestone;
(h) Subject to Section 4.4, Seller fails, for any reason other than an unauthorized act or
omission by Buyer, to achieve the Commercial Operation Milestone;
(i) If at any time during the Term of this Agreement, Seller delivers or attempts to
deliver to the Point of Interconnection for sale under this Agreement Output that
was not generated by the Plant;
(j) Failure by Seller to satisfy the creditworthiness or collateral requirements agreed to
pursuant to Sections 9.1, 9.2 or 9.3 of this Agreement; or
(k) Failure by Seller to achieve the Contract Delivery Start Date.
7.3 Termination for Default.
(a) Declaration of Early Termination Date. If an Event of Default with respect to a
defaulting Party shall have occurred, is continuing and has not been cured, the other
Party (the “Non-Defaulting Party”) shall have the right to:
(i) send notice, designating a day, no earlier than ten (10) calendar days after
the day such notice is deemed to be received as an early termination date of
this Agreement (“Early Termination Date”) on which to (A) collect the
Damage Payment if any Event of Default arose at any time prior to the
commencement of the Delivery Term, including an Event of Default
pursuant to Section 7.2(j), or (B) collect the Termination Payment (which
shall be calculated in accordance with Section 7.3(b)) if any Event of
Default arose during the Delivery Term;
(ii) accelerate all amounts owing between the Parties, terminate this Agreement
and end the Delivery Term effective as of the Early Termination Date;
(iii) withhold any payments due to the Defaulting Party under this Agreement;
(iv) suspend performance;
(v) exercise its rights pursuant to Section 9.1 of this Agreement to draw upon
and retain Development Assurance, Interim Assurance or Performance
Assurance, as applicable; and
(vi) exercise any other right or remedy available at Law or in equity to the extent
otherwise permitted under this Agreement.
(b) Calculation of Termination Payment.
POWER PURCHASE AGREEMENT - Page 46 of 65
(i) The Non-Defaulting Party shall calculate, in a commercially reasonable
manner, a Termination Payment as of the Early Termination Date. Third
parties supplying information for purposes of the calculation of Gains or
Losses may include dealers in the relevant markets, end-users of relevant
output, information vendors and other sources of market information. If the
Non-Defaulting Party uses the market price for a comparable transaction to
determine the Gains or Losses, such price should be determined by using
the average of market quotations provided by three (3) or more bona fide
unaffiliated market participants. If the number of available quotes is three,
then the average of the three quotes shall be deemed to be the market price.
Where a quote is in the form of bid and ask prices, the price that is to be
used in the averaging is the midpoint between the bid and ask price. The
quotes obtained shall be: (i) for a like amount, (ii) of the same Output, (iii)
at the same (or a reasonably equivalent) PNode, and (iv) for the remainder
of the Delivery Term, or in any other commercially reasonable manner.
(ii) If the Non-Defaulting Party’s aggregate Gains exceed its aggregate Losses
and Costs, if any, resulting from such termination of this Agreement, the
amount of the Termination Payment shall be zero.
(iii) The Non-Defaulting Party shall not have to enter into replacement
transactions to establish a Termination Payment.
(iv) The Termination Payment shall be the sole and exclusive remedy available
to the Non-Defaulting Party in connection with its termination of this
Agreement if any Event of Default arose during the Delivery Term, and
shall not include consequential, incidental, punitive, exemplary, indirect or
business interruption damages.
(c) Notice of Termination Payment. As soon as practicable after notice of termination,
notice shall be given by the Non-Defaulting Party to the Defaulting Party of the
amount of the Termination Payment due from the Defaulting Party to the
Non-Defaulting Party, if any. The notice shall include a written statement
explaining in reasonable detail the calculation of such amount and the sources for
such calculation. The Termination Payment shall be made to the Non-Defaulting
Party fifteen (15) calendar days after such termination payment notice is effective.
(d) Disputes Regarding Termination Payment. If the Defaulting Party disputes the
Non-Defaulting Party’s calculation of the Termination Payment, in whole or in
part, the Defaulting Party shall, within ten (10) calendar days of receipt of the
Non-Defaulting Party’s calculation of the Termination Payment, provide to the
Non-Defaulting Party a detailed written explanation of the basis for such dispute.
Following delivery of such a notice, disputes regarding the Termination Payment
shall be resolved in accordance with Section 10.10.
(e) Damage Payment. The Parties agree that the Damage Payment to be paid by Seller
for any Event of Default arising prior to the commencement of the Delivery Term
POWER PURCHASE AGREEMENT - Page 47 of 65
shall be considered liquidated damages and not a penalty, in accordance with
Section 7.4(D) and subject to Section 7.4(B).
7.4 Limitation of: Remedies, Liability and Damages.
(A) THE PARTIES CONFIRM THAT THE EXPRESS REMEDIES AND
MEASURES OF DAMAGES PROVIDED IN THIS AGREEMENT SATISFY
THE ESSENTIAL PURPOSES HEREOF.
(B) EXCEPT AS OTHERWISE PROVIDED HEREIN, THE RIGHTS AND
REMEDIES OF A PARTY PURSUANT TO THIS ARTICLE VII SHALL BE
CUMULATIVE AND IN ADDITION TO THE RIGHTS OF THE PARTIES
OTHERWISE PROVIDED IN THIS AGREEMENT.
(C) FOR BREACH OF ANY PROVISION FOR WHICH AN EXPRESS REMEDY
OR MEASURE OF DAMAGES IS PROVIDED, SUCH EXPRESS REMEDY OR
MEASURE OF DAMAGES SHALL BE THE SOLE AND EXCLUSIVE
REMEDY, THE OBLIGOR’S LIABILITY SHALL BE LIMITED AS SET
FORTH IN SUCH PROVISION AND ALL OTHER REMEDIES OR DAMAGES
AT LAW OR IN EQUITY ARE WAIVED, UNLESS THE PROVISION
PROVIDES THAT THE EXPRESS REMEDIES ARE IN ADDITION TO
OTHER REMEDIES THAT MAY BE AVAILABLE.
(D) IF NO REMEDY OR MEASURE OF DAMAGES IS EXPRESSLY PROVIDED
HEREIN, THE OBLIGOR’S LIABILITY SHALL BE LIMITED TO DIRECT
ACTUAL DAMAGES ONLY, SUCH DIRECT ACTUAL DAMAGES SHALL
BE THE SOLE AND EXCLUSIVE REMEDY AND ALL SUCH OTHER
REMEDIES OR DAMAGES AT LAW OR IN EQUITY ARE WAIVED UNLESS
EXPRESSLY HEREIN PROVIDED. NEITHER PARTY SHALL BE LIABLE
TO THE OTHER PARTY UNDER THIS AGREEMENT FOR ANY INDIRECT,
SPECIAL, INCIDENTAL, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL
DAMAGES, INCLUDING, WITHOUT LIMITATION, LOSS OF USE, LOSS OF
REVENUES, LOSS OF PROFIT, OR OTHER BUSINESS INTERRUPTION
DAMAGES, INTEREST CHARGES, COST OF CAPITAL OR CLAIMS OF ITS
CUSTOMERS OR MEMBERS TO WHICH SERVICE IS MADE, BY
STATUTE, IN TORT OR CONTRACT, UNDER ANY INDEMNITY
PROVISION OR OTHERWISE EXCEPT TO THE EXTENT PART OF AN
EXPRESS REMEDY OR MEASURE OF DAMAGES HEREIN. EXCEPT AS
SET FORTH IN ARTICLE IX AND EXCEPT TO THE EXTENT SELLER
VIOLATES ITS UNDERTAKING NOT TO PROVIDE OR SELL RIGHTS TO
PART OR ALL OF THE OUTPUT OR EXPANSION PLANT OUTPUT, IF
ANY, TO A PARTY OTHER THAN BUYER (EXCEPT AS SET FORTH IN
SECTION 2.4(A)), SELLER SHALL NOT BE LIABLE TO BUYER FOR
FAILURE TO PROVIDE ANY SPECIFIC AMOUNT OF OUTPUT
HEREUNDER.
POWER PURCHASE AGREEMENT - Page 48 of 65
(E) THE PARTIES ACKNOWLEDGE AND AGREE THAT THE (I) THE DAILY
LD AMOUNT SET FORTH IN SECTION 4.4(b), (II) THE DAMAGE
PAYMENT SET FORTH IN SECTION 4.4(c), (III) THE DAMAGE PAYMENT
SET FORTH IN SECTION 7.3(a)(i)(B), AND (IV) THE PERFORMANCE LDS
SET FORTH IN SECTION 4.6(b); ARE EACH REASONABLE AND
REPRESENT A FAIR AND GENUINE ESTIMATE OF THE DAMAGES THAT
WOULD OCCUR RELATED TO THE EVENTS DESCRIBED THEREIN. THE
PARTIES ACKNOWLEDGE THAT IT WOULD BE IMPRACTICABLE OR
EXTREMELY DIFFICULT TO FIX ACTUAL DAMAGES IN SUCH
CIRCUMSTANCES, AND THEREFORE THEY HAVE DEEMED THE
LIQUIDATED DAMAGES SET FORTH ABOVE TO BE THE AMOUNT OF
DAMAGE SUSTAINED BY BUYER OR SELLER UPON THE OCCURRENCE
OF SUCH CIRCUMSTANCES. THE PARTIES FURTHER AGREE THAT
PAYMENT OF SUCH AMOUNTS SHALL BE AS AND FOR LIQUIDATED
DAMAGES AND NOT AS A PENALTY AND ARE THEREFORE NOT
SUBJECT TO AVOIDANCE UNDER CALIFORNIA CIVIL CODE SECTION
1671.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES
8.1 Seller’s Representations and Warranties.
In addition to the representations and warranties set forth in other sections of this
Agreement, Seller represents and warrants to Buyer that as of Seller Execution:
(a) Seller is duly organized and validly existing as a limited liability company under
the laws of Delaware, and has the lawful power to engage in the business it
presently conducts and contemplates conducting in this Agreement, and Seller is
duly qualified in California and each jurisdiction wherein the nature of the business
transacted by it makes such qualification necessary;
(b) Seller has the legal power and authority to make and carry out this Agreement and to
perform its obligations hereunder; all such actions have been duly authorized by all
necessary proceedings on its part;
(c) Either:
(1) the Plant shall on the Commercial Operation Date be a "qualifying small
power production facility" (“QF”) as that term is defined in Section
3(17)(C) of the Federal Power Act (“FPA”) and shall be entitled to all of the
exemptions from regulation provided in 18 CFR §§ 292.601(c) and 292.602
applicable to a QF with the capacity of the Plant; and (B) no approval
POWER PURCHASE AGREEMENT - Page 49 of 65
(except with respect to "qualifying small power production facility" status
and market-based rate authorization under Section 205 of the FPA) with
respect to this Agreement is required from FERC; or
(2) Seller shall on the Commercial Operation Date be an "exempt wholesale
generator" as that term is defined in Section 1262(6) of the Public Utility
Holding Company Act of 2005, and (B) no approval (except with respect to
“exempt wholesale generator" status and market based rate authorization
under Section 205 of the FPA) with respect to this Agreement is required
from FERC. In the event that the Plant is not a "qualifying small power
production facility" that is exempt from Sections 205 and 206 of the FPA on
the Commercial Operation Date or any date thereafter, Seller shall make
appropriate filings under the Federal Power Act within sixty (60) calendar
days so as to comply with applicable law, subject at all times to the
provisions of Section 10.19 of this Agreement;
(d) The execution, delivery and performance of this Agreement by Seller shall not
conflict with its governing documents, any applicable laws, or any covenant,
agreement, understanding, decree or order to which Seller is a party or by which it
is bound or affected;
(e) This Agreement has been duly and validly executed and delivered by Seller and, as
of Seller Execution, constitutes a legal, valid and binding obligation of Seller,
enforceable in accordance with its terms against Seller, except to the extent that its
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the rights of creditors generally or by
general principles of equity;
(f) There are no actions, suits, proceedings or investigations pending or, to the
knowledge of Seller, threatened, in writing, against Seller or any of its affiliates, at
law or in equity, before any Governmental Authority, which individually or in the
aggregate are reasonably likely to have a materially adverse effect on the business,
properties or assets or the condition, financial or otherwise, of Seller, or to result in
any impairment of Seller’s ability to perform its obligations under this Agreement;
(g) It is not Bankrupt and there are no proceedings pending or being contemplated by it
or any of its affiliates, or, to its knowledge, threatened against it or its affiliates
which would result in it being or becoming Bankrupt; and
(h) It is, or shall be deemed for all purposes to be, a forward contract merchant within
the meaning of the U.S. Bankruptcy Code (as in effect as of the Execution Date of
this Agreement).
POWER PURCHASE AGREEMENT - Page 50 of 65
8.2 Buyer Representations and Warranties.
Buyer represents and warrants to Seller that as of the Execution Date:
(a) Buyer is a municipal corporation, duly organized and validly existing, and has the
lawful power to engage in the business it presently conducts and contemplates
conducting in this Agreement;
(b) Buyer has the legal power and authority to make and carry out this Agreement and
to perform its obligations hereunder and all such actions have been duly authorized
by all necessary proceedings on its part;
(c) The execution, delivery and performance of this Agreement by Buyer shall not
conflict with its governing documents, any applicable laws or any covenant,
agreement, understanding, decree or order to which Buyer is a party or by which it
is bound or affected;
(d) This Agreement has been duly and validly executed and delivered by Buyer and, as
of the Execution Date, constitutes a legal, valid and binding obligation of Buyer,
enforceable in accordance with its terms against Buyer, except to the extent that its
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the rights of creditors generally or by
general principles of equity;
(e) There are no actions, suits, proceedings or investigations pending or, to the
knowledge of Buyer, threatened, in writing, against Buyer, at law or in equity,
before any Governmental Authority, which individually or in the aggregate are
reasonably likely to have a materially adverse effect on the business, properties or
assets or the condition, financial or otherwise, of Buyer, or to result in any
impairment of Buyer’s ability to perform its obligations under this Agreement;
(f) It is not Bankrupt and there are no proceedings pending or being contemplated by it
or, to its knowledge, threatened against it which would result in it being or
becoming Bankrupt; and
(g) It is, or shall be deemed for all purposes to be, a forward contract merchant within
the meaning of the U.S. Bankruptcy Code (as in effect as of the Execution Date of
this Agreement).
8.3 Covenants.
(a) General Covenants. In addition to other covenants in this Agreement, each Party
covenants that throughout the Delivery Term:
(i) it shall continue to be duly organized, validly existing and in good standing
under the Laws of the jurisdiction of its formation;
POWER PURCHASE AGREEMENT - Page 51 of 65
(ii) it shall maintain (or obtain from time to time as required, including through
renewal, as applicable) all regulatory authorizations necessary for it to
legally perform its obligations under this Agreement; and
(iii) it shall perform its obligations under this Agreement in a manner that does
not violate any of the terms and conditions in its governing documents, any
contracts to which it is a party or any Law, rule, regulation, order or the like
applicable to it.
(b) Seller Covenants. In addition to other covenants in this Agreement, Seller
covenants that:
(i) Throughout the Delivery Term that it shall take no action or permit any
other Person or entity (other than Buyer) to take any action that would
impair in any way Buyer’s ability to rely on the Plant in order to satisfy its
Resource Adequacy Requirements; and
(ii) It shall comply with all CAISO Tariff requirements applicable to an
Interconnection Customer (as defined in the CAISO Tariff) and shall take
any other necessary action, including payment of fees and submission of
requests, applications or other documentation, to promote the completion of
the Electric System Upgrades prior to the Commercial Operation Date.
ARTICLE IX
DEVELOPMENT, INTERIM AND PERFORMANCE ASSURANCE
9.1 Grant of Security Interest/Remedies.
To secure its obligations under this Agreement and to the extent Seller delivers the
Development Assurance, Interim Assurance and/or Performance Assurance, as applicable,
hereunder, Seller hereby grants to Buyer, as the secured party, a first priority security
interest in, and lien on (and right of setoff against), and assignment of, all such
Development Assurance, Interim Assurance and/or Performance Assurance posted with
Buyer in the form of cash collateral and cash equivalent collateral and any and all proceeds
resulting therefrom or the liquidation thereof, whether now or hereafter held by, on behalf
of, or for the benefit of, Buyer. Within thirty (30) calendar days of the delivery of the
Development Assurance, Interim Assurance or Performance Assurance, as applicable,
Seller agrees to take such action as Buyer reasonably requires in order to perfect a
first-priority security interest in, and lien on (and right of setoff against), such
Development Assurance, Interim Assurance or Performance Assurance and any and all
proceeds resulting therefrom or from the liquidation thereof, respectively. Upon or any
time after the occurrence or deemed occurrence and during the continuation of an Event of
Default or an Early Termination Date, Buyer, as the Non-Defaulting Party, may do any one
or more of the following:
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(a) exercise any of the rights and remedies of a secured party with respect to all
Development Assurance, Interim Assurance or Performance Assurance, as applicable,
including any such rights and remedies under the law then in effect;
(b) exercise its rights of setoff against any and all property of Seller, as the Defaulting
Party, in the possession of the Buyer or Buyer’s agent;
(c) draw on any outstanding Letter of Credit issued for its benefit; and
(d) liquidate all Development Assurance, Interim Assurance or Performance Assurance, as
applicable, then held by or for the benefit of Buyer free from any claim or right of any
nature whatsoever of Seller, including any equity or right of purchase or redemption by
Seller.
Buyer shall apply the proceeds of the collateral realized upon the exercise of any such
rights or remedies to reduce Seller’s obligations under the Agreement (Seller remaining
liable for any amounts owing to Buyer after such application), subject to the Buyer’s
obligation to return any surplus proceeds remaining after such obligations are satisfied in
full.
9.2 Development Assurance, Interim Assurance and Performance Assurance.
(a) Provision of Security by Seller. Except as set forth in Section 2.1(b), Seller agrees
to deliver to Buyer collateral to secure its obligations under this Agreement which
Seller shall maintain in full force and effect for the period posted with Buyer, as
follows:
(i) Development Assurance. Development Assurance pursuant to this Section
9.2(a)(i) in the amount of Five Million Two Hundred Thousand Dollars
($5,200,000.00) (equal to $200 per kW AC multiplied by the Expected
Initial Capacity) and in the form of cash or a Letter of Credit within ten (10)
calendar days following the Execution Date until Seller posts the Interim
Assurance or Performance Assurance pursuant to Section 9.2(a)(ii) or (iii)
below with Buyer, as applicable; provided that, if Buyer collects or is
entitled to collect a Daily LD Amount by drawing upon the Development
Assurance pursuant in Section 4.4(b)(i), Seller agrees that within ten (10)
Business Days following written notice from Buyer related thereto, Seller
shall replenish the Development Assurance by an amount equal to the
encumbered Development Assurance;
(ii) Interim Assurance. Interim Assurance pursuant to this Section 9.2(a)(ii) in
the amount of Two Million Six Hundred Thousand Dollars ($2,600,000,00)
and in the form of cash or a Letter of Credit from the Commercial Operation
Date until the Seller posts Performance Assurance pursuant to Section
9.2(a)(iii) below; provided that, (A) with Buyer’s consent, Seller may elect
to apply a portion of the Development Assurance posted pursuant to Section
9.2(a)(i) toward the Interim Assurance posted pursuant to this Section
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9.2(a)(ii); and (B) Seller shall not be required to deliver to Buyer the Interim
Assurance if the Commercial Operation Date occurs on the same date as the
Contract Delivery Start Date; and (C) if Buyer collects (or is entitled to
collect) a Daily LD Amount for failure to achieve the Milestones by
drawing upon the Interim Assurance pursuant to Section 4.4(b), Seller
agrees that within ten (10) Business Days following written notice from
Buyer related thereto, Seller shall replenish the Interim Assurance by an
amount equal to the encumbered Interim Assurance; and
(iii) Performance Assurance. Performance Assurance pursuant to this Section
9.2(a)(iii) in the amount of Two Million Six Hundred Thousand
($2,600,000.00) (equal to $100 per kW AC multiplied by the Expected
Initial Capacity) and in the form of cash or a Letter of Credit from the
Contract Delivery Start Date and ending at the expiration of the Delivery
Term; provided that, (A) with Buyer’s consent, Seller may elect to apply a
portion of the Development Assurance or Interim Assurance posted
pursuant to Section 9.2(a)(i) or 9.2(a)(ii) toward the Performance
Assurance posted pursuant to this Section 9.2(a)(iii), as applicable; and (B)
if Buyer collects or is entitled to collect Performance LDs by drawing upon
the Performance Assurance pursuant in Section 4.6(b), Seller agrees that
within ten (10) Business Days following written notice from Buyer related
thereto, Seller shall replenish the Performance Assurance by an amount
equal to the encumbered Performance Assurance.
The amount of Development Assurance, Interim Assurance and Performance
Assurance required under this Agreement shall not be deemed a limitation of
damages.
(b) Use of Development Assurance.
Buyer shall be entitled to draw upon the Development Assurance posted by Seller
for its Daily LD Amount until the Development Assurance is exhausted, subject to
the provision for replenishment set forth in Section 9(a)(1). Buyer shall also be
entitled to draw upon the Development Assurance for any damages arising upon
Buyer’s declaration of an Early Termination Date.
(c) Termination of Development Assurance.
If (i) Buyer terminates this Agreement pursuant to Section 2.1(b) or 2.9(c), or (ii)
after the Commercial Operation Date (as extended pursuant to Section 4.4(a)), no
damages are due and owing to Buyer under this Agreement; then in either case
Seller shall no longer be required to maintain the Development Assurance, and
Buyer shall return to Seller the Development Assurance, plus interest under the
applicable account, less the undisputed amounts drawn in accordance with Section
9.2(b), if any. The Development Assurance (or portion thereof) shall be returned
within thirty (30) calendar days of Seller’s provision of the Interim Assurance or
Performance Assurance unless, with Buyer’s consent, Seller elects to apply the
POWER PURCHASE AGREEMENT - Page 54 of 65
Development Assurance (or a portion thereof) toward the Interim Assurance or
Performance Assurance posted pursuant to Section 9.2(a)(ii) or (iii), as applicable.
(d) Use of Interim Assurance.
Buyer shall be entitled to draw upon the Interim Assurance posted by Seller for any
damages arising in or during the time period from the Commercial Operation Date
until the Contract Delivery Start Date upon Buyer’s declaration of an Early
Termination Date.
(e) Termination of Interim Assurance.
If after the Contract Delivery Start Date, no damages are due and owing to Buyer
under this Agreement, then Seller shall no longer be required to maintain the
Interim Assurance, and Buyer shall return to Seller the Interim Assurance, plus
interest under the applicable account, less the amounts drawn in accordance with
Section 9.2(d). The Interim Assurance (or portion thereof) shall be returned to
Seller within thirty (30) calendar days of Seller’s provision of the Performance
Assurance unless, with Buyer’s consent, Seller elects to apply the Interim
Assurance posted pursuant to Section 9.2(a)(ii) toward the Performance Assurance
posted pursuant to Section 9.2(a)(iii), as applicable.
(f) Return of Performance Assurance and Interest.
Buyer shall return the unused portion of Development Assurance, Interim
Assurance or Performance Assurance, as applicable, including the payment of any
interest due thereon to Seller within thirty (30) days after the following has
occurred: (i) the Term of the Agreement has ended, or subject to Section 7.3, an
Early Termination Date has occurred, as applicable; and (ii) all payment
obligations of the Seller arising under this Agreement, including payments
pursuant to a Damage Payment, Termination Payment, indemnification payments
or other damages are paid in full (whether directly or indirectly such as through
set-off or netting).
9.3 Letter of Credit.
Development Assurance, Interim Assurance or Performance Assurance provided in the
form of a Letter of Credit shall be subject to the following provisions:
(a) Renewal of Letter of Credit. If Seller has provided a Letter of Credit pursuant to
any of the applicable provisions in this Article Nine, then Seller shall renew or
cause the renewal of each outstanding Letter of Credit on a timely basis in
accordance with this Agreement.
(b) Failure of Letter of Credit and Cure. In the event the issuer of such Letter of Credit
at any time (i) fails to maintain the requirements of an Eligible LC Bank or Letter of
Credit, (ii) indicates its intent not to renew such Letter of Credit, or (iii) fails to
honor Buyer’s properly documented request to draw on such Letter of Credit, Seller
POWER PURCHASE AGREEMENT - Page 55 of 65
shall cure such occurrence by complying with either (A) or (B) below in an amount
equal to the outstanding Letter of Credit, and by completing the action within five
(5) Business Days after the date of Buyer’s notice to Seller of an occurrence listed
in this subsection (Seller’s compliance with either (A) or (B) below is considered
the “Cure”):
(A) providing a substitute Letter of Credit that is issued by an Eligible LC Bank,
other than the bank which is the subject of Buyer’s notice to Seller in
Section 9.3(b) above, or
(B) posting cash.
If Seller fails to cure or if such Letter of Credit expires or terminates without a full
draw thereon by Buyer, or fails or ceases to be in full force and effect at any time
that such Letter of Credit is required pursuant to the terms of this Agreement, then
Seller shall have failed to meet the creditworthiness or collateral requirements of
Section 9.2.
(c) Substitute Letter of Credit. Notwithstanding the foregoing in Section 9.3(b), if, at
any time, the issuer of such Letter of Credit has a Credit Rating on “credit watch”
negative or developing by S&P, or is on Moody’s “watch list” under review for
downgrade or uncertain ratings action (either a “Watch”), then Buyer may make a
demand to Seller by notice (“LC Notice”) to provide a substitute Letter of Credit
that is issued by an Eligible LC Bank, other than the bank on a Watch (“Substitute
Letter of Credit”). The Parties shall have thirty (30) Business Days from the LC
Notice to negotiate a Substitute Letter of Credit (“Substitute Bank Period”).
(i) If the Parties do not agree to a Substitute Letter of Credit by the end of the
Substitute Bank Period, then Buyer shall provide Seller with Notice within
five (5) Business Days following the expiration of the Substitute Bank
Period (“Ineligible LC Bank Notice Period”) that either:
(A) Buyer agrees to continue accepting the then currently outstanding
Letter of Credit from the bank that is the subject of the LC Notice,
but such bank shall no longer be an Eligible LC Bank (“Ineligible
LC Bank”) and Buyer shall not accept future or renewals of Letters
of Credit from the Ineligible LC Bank; or
(B) the bank that is the subject of the LC Notice is an Ineligible LC
Bank and Seller shall then have thirty (30) days from the date of
Buyer’s Notice to Cure pursuant to Section 8.5(b) and, if Seller fails
to Cure, then the last paragraph in Section 9.3(b) shall apply to
Seller.
(ii) If the Parties have not agreed to a Substitute Letter of Credit and Buyer fails
to provide a Notice during the Ineligible LC Bank Notice Period above,
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then Seller may continue providing the Letter of Credit posted immediately
prior to the LC Notice.
(d) Letter of Credit Costs. In all cases, the reasonable costs and expenses of
establishing, renewing, substituting, canceling, increasing, reducing, or otherwise
administering the Letter of Credit shall be borne by Seller.
ARTICLE X
MISCELLANEOUS
10.1 Indemnification.
(a) Seller Indemnification Prior to Commercial Operation Date. Up to and including
the Contract Delivery Start Date, Seller shall indemnify, defend, and hold harmless
Buyer, and its City Council members, officers, agents and employees, from any
claim, liability, loss, injury or damage arising out of, or in connection with, the
negligence, willful misconduct or violation of applicable law by Seller and/or its
agents, employees or sub-contractors, excepting only loss, injury or damage caused
by the negligence, willful misconduct or violation of applicable law of personnel
employed by Buyer to the extent caused by such negligence, willful misconduct or
violation of applicable law of Buyer’s employed personnel. If an Indemnified
Party determines that it is entitled to defense and indemnification under this Section
10.1, such Indemnified Party shall promptly notify the Indemnifying Party in
writing of the losses, and provide all reasonably necessary or useful information,
and authority to settle and/or defend the losses. No settlement that would impose
costs or expense upon the Indemnified Party shall be made without such Party’s
prior written consent.
(b) Seller and Buyer Indemnification after Commercial Operation Date. After the
Contract Delivery Start Date, each Party (“Indemnifying Party”) shall defend,
indemnify and hold harmless the other Party and its officers, directors, employees,
agents, affiliates and representatives and, in the case of Buyer, its City Council
members (each, an “Indemnified Party”) from and against any and all losses,
including but not limited to losses arising from personal injury or death, or damage
to property, but only to the extent such losses result from or arise out of the
negligence, willful misconduct or violation of applicable law by the Indemnifying
Party, its employees, subcontractors or agents. If an Indemnified Party determines
that it is entitled to defense and indemnification under this Section 10.1, such
Indemnified Party shall promptly notify the Indemnifying Party in writing of the
losses, and provide all reasonably necessary or useful information, and authority to
settle and/or defend the losses. No settlement that would impose costs or expense
upon the Indemnified Party shall be made without such Party’s prior written
consent.
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10.2 Assignment.
(a) General Assignment. Except as provided in Sections 10.2 (b) and (c), neither Party
shall assign this Agreement or its rights hereunder without the prior written consent
of the other Party, which consent shall not be unreasonably withheld, conditioned
or delayed so long as among other things (i) the assignee assumes the transferring
Party’s payment and performance obligations under this Agreement, (ii) the
assignee agrees in writing to be bound by the terms and conditions hereof, (iii) the
transferring Party delivers financial statements, information and other evidence
satisfactory to the non-transferring Party of the proposed assignee’s technical and
financial capability to fulfill the assigning Party’s obligations hereunder and (iv)
the transferring Party delivers such tax and enforceability assurance as the other
Party may reasonably request. Seller shall be responsible for reimbursement of
Buyer’s Attorneys’ Fees related to this Section 10.2(a) as described in Section
10.12(a).
(b) Assignment to Financing Providers. Notwithstanding any provision to the contrary
in this Section 10.2, Seller shall be permitted to assign this Agreement as collateral
for any financing or refinancing of the Plant with the prior written consent of the
Buyer, which consent shall not be unreasonably withheld, conditioned or delayed.
If Buyer gives its consent, then such consent shall be in a form substantially similar
to the Form of Lender Agreement attached hereto as Exhibit F-2; provided that (i)
Buyer shall not be required to consent to any additional terms or conditions beyond
those contained in Exhibit F-2, including extension of any cure periods or
additional remedies for financing providers and (ii) Seller shall be responsible for
reimbursement of Buyer’s Attorneys’ Fees as described in Section 10.12(a).
(c) Assignment in Connection with a Change in Control. Notwithstanding any
provision to the contrary in this Section 10.2, any direct or indirect change of
control of Seller (whether voluntary or by operation of Law) shall be deemed an
assignment and shall require the prior written consent of Buyer, which consent
shall not be unreasonably withheld, conditioned or delayed. At Buyer’s request,
Seller shall promptly deliver financial statements, information and other evidence
satisfactory to Buyer regarding the proposed change of control of Seller. Seller
shall be responsible for reimbursement of Buyer’s Attorneys’ Fees related to this
Section 10.2(c) as described in Section 10.12(a).
(d) Unauthorized Assignment. Any assignment or purported assignment in violation
of this Section 10.2 is void.
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10.3 Notices.
Unless otherwise expressly allowed hereunder, any notice, demand, request, or
communication required or authorized by this Agreement shall be delivered either by hand,
facsimile, electronic mail, overnight courier or mailed by certified mail, return receipt
requested with postage prepaid, to:
City of Palo Alto
250 Hamilton Avenue, 8th Floor
Palo Alto, CA 94301
Attention: Senior Deputy City Attorney / Utilities
Fax: (650) 329-2646
Email: jessica.mullan@cityofpaloalto.org
with a copy to:
City of Palo Alto
250 Hamilton Avenue, 3rd Floor
Palo Alto, CA 94301
Attention: Director of Utilities
Fax: (650) 329-2946
Email:
on behalf of Buyer;
and to:
Hecate Energy Palo Alto LLC
115 Rosa Parks Blvd.
Nashville, TN 37203
Attention: Chris Bullinger
Telephone: 480-239-5617
Email: cbullinger@hecateenergy.com
with a copy to:
Hecate Energy, LLC
300 S. Wacker Dr., Ste. 1850
Chicago, IL 60606
Attention: Craig Overmyer
Telephone: 312-357-9621
Email: covermyer@hecateenergy.com
on behalf of Seller.
The designation and titles of the person to be notified or the address of such person may be
changed at any time by written notice delivered in the manner set forth in this Section 10.3.
POWER PURCHASE AGREEMENT - Page 59 of 65
Whenever this Agreement requires or permits delivery of a “notice” (or requires a Party to
“notify”), the Party with such right or obligation shall provide a written communication in
the manner specified herein. Any such notice, demand, request, or communication shall be
deemed received (i) if delivered by the delivering Party by hand, facsimile or electronic
mail on the Business Day on which such notice was transmitted if received before 5:00
p.m. (and if received after 5:00 p.m., on the next Business Day) at the receiving party’s
notice address specified in this Section 10.3; or (ii) upon receipt by the receiving Party if
sent by overnight courier or mailed by certified mail, return receipt requested with postage
prepaid; or (iii) if notice is required in the form of sub-sections (i) and (ii), then on the
earlier of (i) or (iii).
10.4 Electronic Transmission.
Facsimile or electronic or PDF transmission shall be the same as delivery of an original
document; provided that, at the request of either Party, the other Party shall confirm
facsimile or electronic or PDF signatures by signing and delivering an original document;
provided further, however, that the execution and delivery of this Agreement and its
counterparts shall be subject to Section 10.20.
10.5 Captions.
All titles, subject headings, section titles and similar items are provided for the purpose of
reference and convenience and are not intended to be inclusive, definitive or to affect the
meaning of the contents or scope of the Agreement.
10.6 No Third Party Beneficiary.
No provision of the Agreement is intended to, nor shall it in any way, inure to the benefit of
any customer, property owner or any other third party, so as to constitute any such Person a
third party beneficiary under the Agreement, or of any one or more of the terms hereof, or
otherwise give rise to any cause of action in any Person not a Party hereto.
10.7 No Dedication.
No undertaking by one Party to the other under any provision of the Agreement shall
constitute the dedication of that Party's system or any portion thereof to the other Party or
to the public or affect Seller as an independent entity and not a public utility.
10.8 Entire Agreement; Integration; Amendments.
This Agreement, together with the Preamble and each and every exhibit, appendix,
attachment, amendment, schedule and any written supplements hereto, if any, constitutes
the entire, integrated agreement between the Parties and supersedes any and all prior oral or
written understandings. No amendment, addition to or modification of any provision
hereof shall be binding upon the Parties, and neither Party shall be deemed to have waived
any provision or any remedy available to it, unless such amendment, addition, modification
or waiver is made, in writing, and signed by a duly authorized officer or representative of
POWER PURCHASE AGREEMENT - Page 60 of 65
the Parties.
10.9 Applicable Law.
This Agreement and the rights and duties of the Parties hereunder shall be construed,
enforced and performed in accordance with the laws of the state of California, and/or the
laws of the United States, as applicable, without regard to principles of conflicts of law
which may direct the application of the laws of another jurisdiction.
10.10 Venue.
The Parties hereby submit to the exclusive jurisdiction of the federal courts for the
Northern District of the State of California; provided, however, that if such federal courts
sitting in the Northern District of the State of California refuse jurisdiction, the Parties
agree to the exclusive jurisdiction of the state courts sitting in the County of Santa Clara,
State of California.
10.11 Rule of Construction.
This Agreement shall be considered for all purposes as prepared through the joint efforts of
the Parties and shall not be construed against one Party or the other as a result of the
preparation, substitution, submission or other event of negotiation, drafting or execution
hereof.
10.12 Attorneys’ Fees and Costs.
(a) Buyer’s Costs Due to Seller’s Change. Notwithstanding any provision to the
contrary herein, Buyer shall be entitled to recover from Seller, upon Buyer’s
request, Buyer’s Attorneys’ Fees associated with the review, evaluation,
negotiation, execution and/or delivery of any and all documents, consents,
amendments, modifications or restatements related to this Agreement pursuant to
Sections 4.2(h), 10.2(a), 10.2(b), and 10.2(c) and, if such actions require any
actions beyond the giving of notice by Buyer, any and all other Seller-initiated
proposed modifications (whether agreed to or not) of any and all terms or
conditions of this Agreement which include, by way of illustration, but not of
limitation: Milestones, Price, Capacity, quantity of Output, Point of
Interconnection, FCDS Finding and/or Discretionary Curtailment. The Parties
agree that this Section 10.12(a) shall be interpreted inclusively and broadly, with
the intention of reimbursing Buyer for its legal fees, expenses and costs rather than
not.
(b) Judicial Action. If a suit or action is instituted to enforce or interpret any term of
this Agreement, the prevailing party in any suit or action brought to enforce or
interpret the provisions of this Agreement shall be entitled to recover its Attorneys’
Fees at any hearing, any trial, on appeal, and on any petition for review or other trial
court or appellate proceeding. In addition, the prevailing party shall be entitled to
recover its Attorneys’ Fees incurred in enforcing its rights under this Agreement in
POWER PURCHASE AGREEMENT - Page 61 of 65
connection with any nonjudicial action or the exercise of nonjudicial remedies, and
in any administration, arbitrative, mediation or dispute resolution process or
proceeding.
10.13 Nature of Relationship.
The duties, obligations and liabilities of the Parties are intended to be several and not joint
or collective. The Agreement shall not be interpreted or construed to create an association,
joint venture, fiduciary relationship or partnership between Seller and Buyer or to impose
any partnership obligation or liability or any trust or agency obligation or relationship upon
either Party. Seller and Buyer shall not have any right, power or authority to enter into any
agreement or undertaking for, or act on behalf of, or act as or be an agent or representative
of or otherwise bind the other Party.
10.14 Good Faith and Fair Dealing; Reasonableness.
The Parties agree to act reasonably and in accordance with the principles of good faith and
fair dealing in the performance of this Agreement. Unless expressly provided otherwise in
this Agreement, (i) wherever the Agreement requires the consent, approval or similar
action by a Party, such consent, approval or similar action shall not be unreasonably
withheld, conditioned or delayed, and (ii) wherever the Agreement gives a Party a right to
determine, require, specify or take similar action with respect to matters, such
determination, requirement, specification or similar action shall be reasonable, unless a
different standard is otherwise specified in this Agreement.
10.15 Severability.
Should any provision of the Agreement be or become void, illegal or unenforceable, the
validity or enforceability of the other provisions of the Agreement shall not be affected and
shall continue in full force and effect. The Parties shall, however, use their best endeavors
to agree on the replacement of the void, illegal, or unenforceable provision(s) with legally
acceptable clauses which correspond as closely as possible to the sense and purpose of the
affected provision.
10.16 Confidentiality.
(a) Public Records Act and Confidential Information Designated by Seller. Seller
acknowledges that Buyer is a public agency subject to the disclosure requirements
of the California Public Records Act, Cal. Gov. Code § 6250 et seq. (“CPRA”). If
documents or information submitted to Buyer contain Seller’s proprietary and
confidential information and Seller claims that such information falls within one or
more CPRA exemptions, Seller must clearly mark such information
“CONFIDENTIAL AND PROPRIETARY”, and identify the specific lines
containing such information (the “Confidential Information”). Buyer shall
disclose such Confidential Information to third parties only to the extent required
by California law (including, without limitation, the California Constitution, the
CPRA and the Brown Act) as set forth in this Section 10.16.
POWER PURCHASE AGREEMENT - Page 62 of 65
(b) Disclosure of Confidential Information by Buyer. In the event of a third party
request for Buyer to disclose such Confidential Information, Buyer shall make
reasonable efforts to provide notice to Seller prior to disclosure. If Seller contends
that any Confidential Information is exempt from the CPRA and wishes to prevent
disclosure, Seller shall obtain a protective order, injunctive relief or other
appropriate remedy from a court of law in Santa Clara County before Buyer’s
deadline for responding to the CPRA request. If Seller fails to obtain such remedy
prior to Buyer’s deadline for responding to the CPRA request, Seller agrees that
Buyer may disclose the requested Confidential Information. Seller further agrees
that Buyer shall have no liability to Seller arising out of any disclosure by Buyer of
any Seller Confidential Information before Seller has timely obtained an order,
injunctive relief or other appropriate remedy to prevent Buyer from making the
requested third party disclosure. Each Party shall be bound by its obligations of
confidentiality hereunder for a period of two (2) years from the expiration or earlier
termination of this Agreement.
(c) Non-Confidential Information. Notwithstanding anything to the contrary in this
Section 10.16, nothing shall restrict any Party from using or disclosing confidential
information in any manner it chooses which (i) is or becomes generally available to
the public other than as a result of a disclosure directly or indirectly by the
disclosing Party or its representative(s); (ii) was within the using or disclosing
Party’s possession prior to it being furnished hereunder, provided that such
information is not subject to another confidentiality agreement with, or other
contractual, legal or fiduciary obligation of confidentiality to, any other party with
respect to such information; (iii) is rightfully obtained by a Party from third parties
authorized to make such disclosure without restriction; (iv) is legally required to be
disclosed by judicial or other governmental action as determined by such Party’s
attorney acting in good faith (including, but not limited to, the California
Constitution, the CPRA and the Brown Act); or (v) is disclosed without a duty of
confidentiality to a third party by, or with the authorization of, the disclosing Party;
or (vi) is independently developed by the recipient.
(d) Disclosure to the City Council of Palo Alto. Notwithstanding any provision to the
contrary in this Section 10.16, Buyer shall be permitted to disclose this Agreement
and related information to the City Council of Palo Alto for the express purpose of
obtaining approval to execute this Agreement, including any written amendment
or modification thereto.
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10.17 Cooperation.
The Parties agree to reasonably cooperate with each other in the implementation and
performance of the Agreement. Such duty to cooperate shall not require either Party to act
in a manner inconsistent with its rights under the Agreement.
10.18 Audit.
Both Parties shall maintain all records relating to the other Party or this Agreement for a
minimum of two (2) years after the expiration or earlier termination of the Term and shall
permit the other Party, upon reasonable notice, at its sole expense and during normal
working hours, to examine such records as the requesting Party deems reasonably
necessary to protect its rights.
10.19 Mobile Sierra Doctrine.
Notwithstanding any provision of this Agreement, the Parties intend that the standard of
review for changes to any rate, charge, classification, term or condition of this Agreement
proposed by a Party shall be the “Mobile-Sierra public interest” standard of review, as
stated by the United States Supreme Court in Morgan Stanley Capital Group Inc. v. Public
Utility District No. 1 of Snohomish County, 554 U.S. 1164 (2008) and consistent with the
order of the Supreme Court in NRG Power Marketing LLC, et al. v. Maine Public Utilities
Commission et al., No. 08-674, 130 S.Ct 693 (2010). Any modifications proposed by a
non-contracting third party or FERC acting sua sponte shall be the most stringent standard
permissible under applicable law.
10.20 Counterparts.
This Agreement may be executed in one or more counterparts and by different Parties on
separate counterparts, all of which shall be deemed one and the same agreement and each
of which shall be deemed an original. Delivery of an executed counterpart of this
Agreement by fax or other electronic means shall be deemed as effective as delivery of an
originally executed counterpart. Any Party delivering an executed counterpart of this
Agreement by facsimile or other electronic means shall also deliver an originally executed
counterpart, but the failure of any Party to deliver an originally executed counterpart of this
Agreement shall not affect the validity or effectiveness of this Agreement.
10.21 Debt Liability Disclaimer.
For the avoidance of doubt, the Buyer, including, but not limited to, any source of funding
for Buyer, any General Fund of Buyer or any special self-insurance program, is not liable
for any debts, liabilities, settlements, liens, or any other obligations of the Seller or its heirs,
successors or assigns. Buyer shall not be liable for and shall be held harmless and
indemnified by Seller for (a) any claims or damages arising out of any other contract to
which Seller is a party, and (b) subject to Section 10.1(b), any tortious action or inaction,
negligent error in judgment, act of negligence, intentional tort, negligent mistakes or other
POWER PURCHASE AGREEMENT - Page 64 of 65
acts taken or not taken by the Seller, its employees, agents, servants, invitees, guests or
anyone acting in concert with or on behalf of the Seller.
10.22 No Implied Waiver of Breach.
Waiver by a Party of any breach of a specific provision of this Agreement shall not be
construed as a waiver of any other breach of that term or any other term of this Agreement.
[SIGNATURE PAGE ON NEXT PAGE]
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SIGNATURE PAGE
IN WITNESS WHEREOF, each of the Parties have caused this Agreement to be duly
executed as of the day, month and year set forth next to each of the Parties’ signatures below.
SELLER:
Hecate Energy Palo Alto LLC
By:
Name: Chris Bullinger
Title:Manager
Date: January 6, 2016
BUYER:
CITY OF PALO ALTO
APPROVAL AS TO FORM:
By:
Name:
Title: Senior Deputy City Attorney
Date:
CITY OF PALO ALTO
APPROVAL BY ADMINISTRATIVE
SERVICES DIRECTOR
By:
Name: Lalo Perez
Title: Administrative Services Director
Date:
CITY OF PALO ALTO
APPROVAL BY UTILITIES DIRECTOR
By:
Name:
Title: Utilities Director
Date:
CITY OF PALO ALTO
APPROVAL BY CITY MANAGER
By:
Name: James Keene
Title: City Manager
Date:
CITY OF PALO ALTO
APPROVAL BY MAYOR
By:
Name:
Title: Mayor
Date:
EXHIBIT A – Page 1
EXHIBIT A
PLANT DESCRIPTION AND SITE DRAWINGS
Plant Description
Plant name: Wilsona Solar
Plant physical address: Near the corner of 240th St. and E Palmdale Blvd. in Palmdale, CA 93591
Total number of units at the Plant: 26 inverters of 1 MWac capacity each
Technology type (including any applicable model): PV solar modules connected to solar inverters
that connect to the grid via transformers
Interconnection Point of Plant: Wilsona Substation (Pnode: WILSONA_6_N001)
Local Capacity Area: N/A
Nameplate capacity of the Plant: 26 MWac
Description of units: More than 80,000 photovoltaic solar modules mounted on trackers and
connected to 26 inverters that convert DC power to AC Power. The inverters are connected to the
grid via transformers
Site Drawings
Site Map:
The term, “Site” as defined in the Agreement means the following parcel description upon which
the generating facility is located and as identified in the following topographical map and Assessed
Parcel Number, and the below Interconnection Facilities and metering configuration as evidenced
in the related diagram (collectively, the “Site Drawings”):
[INSERT MAP]
Assessed Parcel No.: ______________
Interconnection Facilities and metering diagram:
The Plant shall use the following Interconnection Facilities and metering configuration as
identified in this one-line diagram included in this Exhibit A:
[INSERT ONE-LINE DIAGRAM FOR
INTERCONNECTION FACILITIES AND METERING]
EXHIBIT B - Page 1
EXHIBIT B
ENVIRONMENTAL ATTRIBUTE TRANSFER FROM SELLER TO BUYER
Participation in the Western Renewable Energy Generation Information System. Seller shall, at its
sole expense take all actions and execute all documents or instruments necessary to ensure that all
WREGIS Certificates associated with all Renewable Energy Credits corresponding to all delivered
Output are issued and tracked for purposes of satisfying the applicable requirements of the
California Renewables Portfolio Standard and transferred in a timely manner to Buyer for Buyer’s
sole benefit. Seller shall comply with all applicable laws, including, without limitation, the
WREGIS Operating Rules, regarding the certification and transfer of such WREGIS Certificates
to Buyer and Buyer shall be given sole title to all such WREGIS Certificates. Seller shall be
deemed to have satisfied the warranty in this EXHIBIT B, paragraph (h) provided that Seller
fulfills its obligations under this EXHIBIT B, paragraphs (a) through (h) below. In addition:
(a) Prior to the Contract Delivery Start Date, Seller shall register the Plant with WREGIS and
establish an account with WREGIS (“Seller’s WREGIS Account”), which Seller shall
maintain until the end of the Delivery Term. Seller shall transfer the WREGIS Certificates
using “Forward Certificate Transfers” (as described in the WREGIS Operating Rules)
from Seller’s WREGIS Account to the WREGIS account(s) of Buyer or the account(s) of a
designee that Buyer identifies by Notice to Seller (“Buyer’s WREGIS Account”). Seller
shall be responsible for all expenses associated with registering the Plant with WREGIS,
establishing and maintaining Seller’s WREGIS Account, paying WREGIS Certificate
issuance and transfer fees, and transferring WREGIS Certificates from Seller’s WREGIS
Account to Buyer’s WREGIS Account.
(b) Seller shall cause Forward Certificate Transfers to occur on a monthly basis in accordance
with the certification procedure established by the WREGIS Operating Rules. Since
WREGIS Certificates shall only be created for whole MWh amounts of Energy generated,
any fractional MWh amounts (i.e., kWh) shall be carried forward until sufficient
generation is accumulated for the creation of a WREGIS Certificate.
(c) Seller shall, at its sole expense, ensure that the WREGIS Certificates for a given calendar
month correspond with the Energy corresponding to delivered Output for such calendar
month as evidenced by the Plant’s metered data.
(d) Due to the ninety (90) day delay in the creation of WREGIS Certificates relative to the
timing of invoice payment under Section 3.3, Buyer shall make an invoice payment for a
given month in accordance with Section 3.3 before the WREGIS Certificates for such
month are formally transferred to Buyer in accordance with the WREGIS Operating Rules
and this EXHIBIT B. Notwithstanding this delay, Buyer shall have all right and title to all
such WREGIS Certificates upon payment to Seller in accordance with Section 3.3.
(e) A “WREGIS Certificate Deficit” means any deficit or shortfall in WREGIS Certificates
delivered to Buyer for a calendar month as compared to the delivered Energy for the same
calendar month (“Deficient Month”), after taking into account applicable delays in the
EXHIBIT B - Page 2
issuance of WREGIS Certificates referenced in the prior paragraph or otherwise arising
under WREGIS Operating Rules. If any WREGIS Certificate Deficit is caused, or the
result of any action or inaction, by Seller, then Seller shall take all actions reasonably
necessary to remedy such circumstances and failure to do so shall be a breach hereunder by
Seller.
(f) Without limiting Seller’s obligations under this EXHIBIT B, to the extent a WREGIS
Certificate Deficit is caused by an error or omission of WREGIS, the Parties shall
cooperate in good faith to cause WREGIS to correct its error or omission.
(g) If WREGIS changes the WREGIS Operating Rules after the Execution Date or applies the
WREGIS Operating Rules in a manner inconsistent with this EXHIBIT B after the
Execution Date, the Parties promptly shall modify this EXHIBIT B as reasonably required
(i) to cause and enable Seller to transfer to Buyer’s WREGIS Account a quantity of
WREGIS Certificates for each given calendar month that corresponds to the delivered
Energy in the same calendar month or (ii) as may otherwise be reasonably appropriate to
address such inconsistency.
(h) Seller warrants that all necessary steps to allow the Renewable Energy Credits transferred
to Buyer to be tracked in the Western Renewable Energy Generation Information System
shall be taken prior to the first delivery under this Agreement.
EXHIBIT C – Page 1
EXHIBIT C
INSURANCE COVERAGES
At its own expense, Seller shall secure and maintain during the Term the following insurance with
the coverage amounts indicated for occurrences during and arising out of Seller’s performance of
this Agreement. Such insurance shall be placed with responsible and reputable insurance
companies as determined by Buyer in its reasonable discretion in compliance with Requirements
of Laws applicable to Seller.
(a) Workers’ Compensation/Employer’s Liability. Seller shall maintain Workers’
Compensation Insurance and Employer’s Liability Insurance which comply with
Requirements of Laws applicable to Seller.
(b) Automobile Liability. Seller shall maintain Automobile Liability Insurance in compliance
with Requirements of Laws applicable to Seller, including coverage for owned, non-owned
and hired automobiles for both bodily injury (including death) and property damage,
including automobile liability contractual endorsement and uninsured/underinsured
motorist protection endorsements.
(c) Third Party Liability. Seller shall maintain third party liability insurance in compliance
with Requirements of Laws applicable to Seller on a project-specific basis covering against
legal responsibility to others as a result of bodily injury, property damage and personal
injury arising from the operation and maintenance of the Plant. Such policy shall be written
with a limit of liability not less than $10,000,000 and a deductible not to exceed $10,000.
Such liability may be in any combination of primary and excess/umbrella. Coverage shall
include, but not be limited to, premises/operations, explosion, collapse, underground
hazards, broad form property damage and personal injury liability. Such coverage shall not
contain exclusions for punitive or exemplary damages.
(d) Property Insurance. Seller shall maintain third party property insurance on a
project-specific basis covering cost of repairing Plant and or interconnection equipment to
operational condition. Such policy shall be written with coverage sufficient to replace and
rebuild the Plant. Coverage shall include, but not be limited to, fire, storm damage,
equipment failure, damage to equipment precluding operation under prudent utility
practice, premises/operations, explosion, collapse, underground hazards, broad form
property damage.
Upon the request from Buyer, Seller shall promptly provide Buyer with applicable insurance
certificates confirming the insurance coverages required above.
EXHIBIT E-1 – Page 1
EXHIBIT D
SCHEDULING PROTOCOLS
Dated: ___________, 2016
The following scheduling protocols shall govern the scheduling of Output from the Plant pursuant
to that certain Power Purchase Agreement dated as of ___, 2016, by and between the City of Palo
Alto and Hecate Energy Palo Alto LLC (the “Agreement”). Capitalized terms not defined herein
have the meanings set forth in the Agreement.
1. Test Energy
Pursuant to Section 2.3(a) of the Agreement all Test Energy shall be scheduled in accordance with
the following procedure:
All Test Energy produced by the Plant will be scheduled in accordance with CAISO Operating
Procedure No. 5320 (Resource Trial Operation and Test Energy Process), as such may be amended
from time to time. Pursuant to CAISO Operating Procedure No. 5320, pre-commercial resources
are required to make arrangements with the CAISO for executing Trial Operations.
I. At least ten (10) calendar days prior to the first planned Trial Operation date Seller shall
provide Buyer a Test Energy schedule for the Plant. The Test Energy schedule shall
include the following information:
a. Expected MW output for each hour during the testing period;
b. Start and Stop times of the test;
c. NRI Test Energy Template; and
d. Any operating constraints or testing limits that may impact the testing process.
II. At least seven (7) calendar days prior to the first planned Trial Operation date (not
including the submittal date and the date the test is requested to begin), the Scheduling
Coordinator shall submit an outage request to the CAISO for the Test Energy schedule
provided by Seller.
III. Pending CAISO’s approval of the outage request for Trial Operations and testing, the
Scheduling Coordinator shall coordinate with Seller and CAISO to perform Plant testing.
2. Scheduling Protocols
The Scheduling Coordinator shall submit Bids for forecasted Plant Output to the CAISO in
accordance with the CAISO Tariff and Business Practice Manuals, as the same may be amended or
revised from time to time.
I. Forecasts
EXHIBIT E-1 – Page 2
Plant Output shall be scheduled according to Section 4.5(d) of the Agreement.
II. Submission of Bids
For each trade date, Scheduling Coordinator will develop and submit Bids for Plant Output into the
CAISO markets in accordance with the CAISO market timelines. Day-ahead and real-time Bids
for Plant Output shall be consistent with the CAISO forecast. Bids may consist of Self-Schedules,
economic Bids, or a combination of Self-Schedules and economic Bids. Self-Schedule Bids shall
be equal to the applicable CAISO forecasted Output, and economic Bids shall be limited to an
amount not to exceed the applicable CAISO forecasted Output.
III. Dispatch Notices
Scheduling Coordinator shall provide dispatch notices to Buyer to communicate CAISO
day-ahead and real-time market awards. Dispatch notices may include, but are not limited to, the
following information: (i) scheduled Plant output by applicable operating interval, (ii) start-up
instructions, (iii) shut-down instructions, (iv) ramping instructions, and (v) other information that
may be relevant to the scheduled operations of the Plant.
a. Day-Ahead Dispatch Notices. Dispatch Notices for Day-Ahead market awards will be
provided to Buyer through a form of electronic communication as mutually agreed upon by
Buyer and Scheduling Coordinator.
b. Real-Time Dispatch Notices. Dispatch Notices for Real-Time market awards will be
provided to Buyer through Scheduling Coordinator’s automated SCADA control system,
whereby Scheduling Coordinator will send a generator operating set point directly to the
Plant’s control systems.
3. Outage Coordination
Pursuant to the Agreement, Seller shall provide Scheduling Coordinator with all information
required to submit timely outages to the CAISO in accordance with the CAISO Tariff and outage
coordination procedures. Scheduling Coordinator shall perform all outage coordination activities
on behalf of the Plant, including but not limited to, submission of planned and forced outages to
the CAISO through use of CAISO’s Outage Management System (OMS), in accordance with the
CAISO Tariff and outage coordination procedures.
I. Communicating Outages to Scheduling Coordinator
a. Required Information
Seller shall provide the following information to Scheduling Coordinator at the time Seller submits
a request for a planned or forced outage:
EXHIBIT E-1 – Page 3
Name of Facility
CAISO Resource ID
Start Date/Time of the Outage
End Date/Time of the Outage
Explanation for Reason of Outage
Unit Availability During the Outage
Emergency Return to Service Time (if called upon by the CAISO)
II. Outage Submission Timeline
Planned Outage requests must be submitted to Scheduling Coordinator at least seven (7) days in
advance of the start date of the outage; whereby the seven (7) day period shall not include the date
on which the request is submitted, or the start date of outage. Outage requests submitted less than
seven (7) days in advance of the start date of the outage will automatically be designated by the
CAISO as a Forced Outage (unless otherwise approved by the CAISO as a Planned Outage).
Outages that occur in the active day (or real-time) must be reported to Scheduling Coordinator as
soon as possible.
4. Discretionary Curtailment
Pursuant to Section 4.4(c), Buyer may require Seller to curtail deliveries of Energy from the Plant
for any reason in Buyer’s reasonable discretion by delivering a dispatch notice to the Scheduling
Coordinator. Scheduling Coordinator shall provide dispatch notices for discretionary curtailments
to Seller in accordance with the procedure described in Section 2(III) of this Exhibit D.
EXHIBIT E-1 – Page 4
EXHIBIT E-1
FORM OF DEVELOPMENT PROGRESS REPORT
Development Progress Report
[Plant Name] Plant
[Report Month and Year]
[Date of Report]
This Development Progress Report describes the construction and status and progress toward the
achievement of each of the Milestones of the [Plant Name] Plant, which guaranteed Commercial
Operation Milestone is _____, for the _____ [insert period that report is due as required under
Section 4.3(c)] and year of ____________ (“Report Period”) as required pursuant to Section
4.3(c) of that certain Power Purchase Agreement by and between _________ (“Seller”), and the
City of Palo Alto (“Buyer”), dated ____________ (the “Agreement”). (Capitalized terms used in
this report but not defined herein shall have the meanings set forth in the Agreement.)
This report shall be completed and delivered by Seller to ___________________ at Buyer,
together with all attachments and exhibits. Buyer should direct any questions about this report to
_______________ at Seller.
1. General Plant Description
Please provide a general description of the Plant, including its location, Site size,
technology type, nameplate capacity, interconnection point, ownership, and any other
information relevant to a general description of the Plant.
2. Property Acquisition Activities and Site Control
In this section, please include information on property acquisition or site control activities
for the Plant, including the date of execution of significant documents, and information on
the expecting timing of future significant activities.
a. Prior Period’s Activities
Please provide a description and dates of all major Site acquisition or control related
activities completed prior to the Report Period.
b. Report Period’s Activities
Please describe in detail the Site acquisition or control related activities that occurred
during the Report Period.
EXHIBIT E-1 – Page 5
c. Next Period’s Activities
Please describe the Site acquisition or control related activities that are expected to be
performed during the period following the Report Period.
3. Permitting
In this section, please provide information on each of the Conditional Use Permit and other
Permits required for the construction of the Plant and the status thereof. List the applicable
governmental agency, the type of application/approval requested, and the dates (expected
or actual) of significant activity. Significant activity includes, but is not limited to,
application submission, notice of complete application, notice of preparation, public
hearing or comment period, draft documents and/or approvals, final documents and/or
approvals, notice of determination and/or issuance of permit. If the government agency
maintains a website with information on the approval process for the Plant, please provide
a link.
a. Prior Period’s Activities
Please provide a description of all major activities related to the Conditional Use
Permit and other Permits completed prior to the Report Period.
b. Report Period’s Activities
Please describe in detail the activities related to Permits that occurred during the Report
Period.
c. Next Period’s Activities
Please list the activities related to Permits that are expected to be performed during the
period following the Report Period.
4. Interconnection
EXHIBIT E-1 – Page 6
In this section, please provide a description of all major interconnection related
activities, dates of completion of significant activities and the expected timing of future
significant activities including, but not limited to, information on the status of
interconnection studies, Interconnection Agreements, design and construction of
Interconnection facilities (e.g., substations, switchyards, gen-ties, system protection
schemes, telecommunications equipment to the extent not already covered in the Plant
construction information in Section 8), network upgrades, and grid outage and/or
interconnection schedules, and information related to Full Capacity Deliverability
Status Finding applications, studies, timing, correspondence and . Describe any and all
factors that may affect the ability of the Plant to deliver Energy to the Buyer.
a. Prior Period’s Activities
Please provide a description of all major interconnection related activities completed
prior to the Report Period.
b. Report Period’s Activities
Please describe in detail the Interconnection related activities that occurred during the
Report Period.
c. Current Period’s Activities
Please list the Interconnection related activities that are expected to be performed
during the period following the Report Period.
5. Design and Engineering
In this section, please provide information on the design and engineering of the Plant.
a. Prior Period’s Activities
Please provide a description and dates of all major design and engineering related
activities, including dates of completion of significant activities and expected timing of
future activities.
b. Report Period’s Activities
Please describe in detail the design and engineering related activities that occurred
during the Report Period.
c. Current Period’s Activities
Please list the design and engineering related activities that are expected to be
performed during the period following the Report Period.
6. Financing
EXHIBIT E-1 – Page 7
In this section, please include information on each separate phase of financing for the
Plant. Include information on debt, equity and/or federal or state loans or grant.
b. Report Period’s Activities
Please describe in detail the financing related activities that occurred during the Report
Period.
c. Current Period’s Activities
Please list the financing related activities that are expected to be performed during the
period following the Report Period.
7. Major Equipment Procurement
In this section, please include information on all major equipment to be procured for all
portions of the Plant to be completed by Seller, including switchyards, substations and any
other interconnection equipment, in addition to generating and auxiliary equipment.
a. Prior Period’s Activities
Please provide a description and dates of all major equipment procurement related
activities completed prior to the Report Period, including the date of execution of
significant documents, and information on the expected timing of future significant
activities.
b. Report Period’s Activities
Please describe in detail the Major Equipment Procurement related activities that
occurred during the Report Period.
c. Next Period’s Activities
Please list the Major Equipment Procurement related activities that are expected to be
performed during the period following the Report Period.
8. Construction
In this section, please include information on the status of any construction-related factors
that may affect the ability of the Plant to deliver the Output to the Buyer. Include
information on the Plant infrastructure, generating equipment, and major auxiliary
equipment. Also include information on the substations, switchyards, gen-ties,
telecommunications equipment or other interconnection facilities that are the direct
responsibility of the Plant.
a. Prior Period’s Activities
EXHIBIT E-1 – Page 8
Please provide a summary of the status and progress of each major construction activity
for all portions of the Plant, including a schedule showing expected or actual dates as
applicable. Provide the name of the EPC Contractor, the date of execution of the EPC
Contract, and the date of issuance of a full notice to proceed (or equivalent). For each
major type of equipment, break out the number of each item (to be) installed and/or
commissioned in each period.
Please attach a copy of the all of the progress reports received during the previous
Report Period from the EPC Contractor pursuant to the construction contract between
Seller and EPC Contractor.
b. Report Period’s Activities
Please describe in detail the Construction related activities that occurred during the
Report Period.
c. Current Period’s Activities
Please list the Construction related activities that are expected to be performed during
the period following the Report Period.
9. Startup and Commissioning
In this section, please include information on the status of activities related to preparation
for Commercial Operation, including equipment testing, commissioning, release to
operations, requirements of the grid operator, and any other activities that must be
conducted before the Plant may deliver Output to the grid and/or declare Commercial
Operation (as evidenced by delivery of the COD Certification).
a. Prior Period’s Activities
Please provide a description of all major startup and commissioning activities related to
preparation for Commercial Operation completed prior to the Report Period.
b. Report Period’s Activities
Please describe in detail the Startup and Commissioning related activities that occurred
during the Report Period.
c. Current Period’s Activities
Please list the Startup and Commissioning related activities that are expected to be
performed during the period following the Report Period.
10. Milestones Schedule
EXHIBIT E-1 – Page 9
a. [Insert Gantt chart]
b. Milestone Schedule
a. Please describe the status and progress toward or achievement of each Milestone in
the construction schedule for the Plant, including dates of completion of completed
Milestone(s) and the expected date of completion of uncompleted Milestone(s).
The expected date is the current best estimate, and may change from time to time as
better information becomes available.
c. Remedial Action Plan
Please describe any issues which Seller expects in its reasonable judgment may
adversely affect the schedule, including the cause of the delay and what remedial
actions Seller intends to take to ensure that each of the Milestones shall be attained by
their required dates.
III. Pictures
If available, please provide pictures documenting construction and startup progress of the Plant.
The information contained in this Seller’s Development Progress Report is true and
accurate and reflects, to the best of Seller’s knowledge, the current status of the construction of the
Plant as of the date specified below.
Seller:
By:_______________________________
Name:_____________________________
Title:______________________________
Date:______________________________
EXHIBIT E-2 – Page 1
EXHIBIT E-2
COD CERTIFICATION
This COD Certification (“Certification”) is delivered by ___________ (“Seller”) to The City of
Palo Alto (“Buyer”) in accordance with the terms of that certain Power Purchase Agreement dated
as of the Execution Date (“Agreement”) by and between Seller and Buyer. All capitalized terms
used in this Certification but not otherwise defined herein shall have the respective meanings
assigned to such terms in the Agreement. Seller hereby certifies and represents to Buyer the
following:
1. Commercial Operation occurred on: __________ [date]
2. The Plant equipment representing _________ MW AC of Initial Capacity has been
installed, tested and is capable of generating Output in accordance with the manufacturer’s
specifications.
3. The Plant is substantially complete and capable of delivering Output as described in the
Agreement.
4. The CAISO has provided notification of Commercial Operation in accordance with the
CAISO Tariff, and documentation of such notification is attached hereto or shall be
provided to Buyer promptly upon Seller’s receipt thereof.
EXECUTED by Seller this ______ day of _____________, 20__.
By: _________________________________
Name: ______________________________
Title: _______________________________
The undersigned, a licensed professional engineer, hereby certifies that, to its current knowledge,
the foregoing is substantially true and correct.
[LICENSED PROFESSIONAL ENGINEER]
By: _________________________________
Name: ______________________________
Title: _______________________________
EXHIBIT E-2 – Page 2
RECEIVED by Buyer this ____ date of ______________, 20__
which date shall be the Commercial Operation Date.
By: _________________________________
Name: ______________________________
Title: _______________________________
EXHIBIT F-1 – Page 1
EXHIBIT F-1
FORM OF LETTER OF CREDIT
Issuing Bank Letterhead and Address
STANDBY LETTER OF CREDIT NO. XXXXXXXX
Date: [Insert issue date]
Beneficiary: City of Palo Alto Applicant: [Insert name and address
of Applicant]
250 Hamilton Avenue
Palo Alto, CA 94301
Attention: Credit Risk Management
Letter of Credit Amount: [insert amount]
Expiry Date: [insert expiry date]
Ladies and Gentlemen:
By order of [insert name of Applicant] (“Applicant”), we hereby issue in favor of the City of Palo
Alto (the “Beneficiary”) our irrevocable standby letter of credit No. [insert number of letter of
credit] (“Letter of Credit”), for the account of Applicant, for drawings up to but not to exceed the
aggregate sum of U.S. $ [insert amount in figures followed by (amount in words)] (“Letter of
Credit Amount”). This Letter of Credit is available with [insert name of issuing bank, and the
city and state in which it is located] by sight payment, at our offices located at the address stated
below, effective immediately, and it shall expire at our close of business on [insert expiry date]
(the “Expiry Date”).
Funds under this Letter of Credit are available to the Beneficiary against presentation of the
following documents:
1. Beneficiary’s signed and dated sight draft in the form of Exhibit A hereto, referencing this
Letter of Credit No. [insert number] and stating the amount of the demand; and
2. One of the following statements signed by an authorized representative or officer of
Beneficiary:
EXHIBIT F-1 – Page 2
A. “Pursuant to the terms of that certain [insert name of the agreement] (the “Agreement”),
dated [insert date of the Agreement], between Beneficiary and [insert name of Seller under
the Agreement], Beneficiary is entitled to draw under Letter of Credit No. [insert number]
amounts owed by [insert name of Seller under the Agreement] under the Agreement; or
B. “Letter of Credit No. [insert number] shall expire in thirty (30) days or less and [insert
name of Seller under the Agreement] has not provided replacement security acceptable to
Beneficiary.
Special Conditions:
1. Partial and multiple drawings under this Letter of Credit are allowed;
2. All banking charges associated with this Letter of Credit are for the account of the Applicant;
3. This Letter of Credit is not transferable; and
4. The Expiry Date of this Letter of Credit shall be automatically extended without a written
amendment for a period of one year and on each successive Expiry Date, unless at least sixty
(60) days before the then current Expiry Date, we notify you by registered mail or courier that
we elect not to extend the Expiry Date of this Letter of Credit for such additional period.
We engage with you that drafts drawn under and in compliance with the terms of this Letter of
Credit shall be duly honored upon presentation, on or before the Expiry Date (or after the Expiry
Date as provided below), at our offices at [insert issuing bank’s address for drawings].
All demands for payment shall be made by presentation of originals or copies of documents; or by
facsimile transmission of documents to [insert fax number], Attention: [insert name of issuing
bank’s receiving department], with originals or copies of documents to follow by overnight mail.
If presentation is made by facsimile transmission, you may contact us at [insert phone number] to
confirm our receipt of the transmission. Your failure to seek such a telephone confirmation does
not affect our obligation to honor such a presentation.
Our payments against complying presentations under this Letter of Credit shall be made no later
than on the sixth (6th) banking day following a complying presentation.
Except as stated herein, this Letter of Credit is not subject to any condition or qualification. It is our
individual obligation, which is not contingent upon reimbursement and is not affected by any
agreement, document, or instrument between us and the Applicant or between the Beneficiary and
the Applicant or any other party.
Except as otherwise specifically stated herein, this Letter of Credit is subject to and governed by
the Uniform Customs and Practice for Documentary Credits, 2007 Revision, International
Chamber of Commerce (ICC) Publication No. 600 (the “UCP 600”); provided that, if this Letter
of Credit expires during an interruption of our business as described in Article 36 of the UCP 600,
we shall honor drafts presented in compliance with this Letter of Credit within thirty (30) days
after the resumption of our business and effect payment accordingly.
EXHIBIT F-1 – Page 3
The law of the State of New York shall apply to any matters not covered by the UCP 600.
For telephone assistance regarding this Letter of Credit, please contact us at [insert number and
any other necessary details].
Very truly yours,
[insert name of issuing bank]
By:
Authorized Signature
Name: [print or type name]
Title:
EXHIBIT F-1 – Page 4
Attachment 1 to Exhibit F-1
SIGHT DRAFT
TO: [INSERT NAME AND ADDRESS OF PAYING BANK]
AMOUNT: $________________________ DATE: __________________________
AT SIGHT OF THIS DEMAND PAY TO THE ORDER OF THE CITY OF PALO ALTO THE
AMOUNT OF U.S.$________(______________ U.S. DOLLARS)
DRAWN UNDER [INSERT NAME OF ISSUING BANK] LETTER OF CREDIT NO.
XXXXXX.
REMIT FUNDS AS FOLLOWS:
[INSERT PAYMENT INSTRUCTIONS]
DRAWER
BY:___________________________
NAME AND TITLE
EXHIBIT F-2 – Page 1
EXHIBIT F-2
FORM OF LENDER CONSENT AGREEMENT
CONSENT AND AGREEMENT
This CONSENT AND AGREEMENT (“Consent and Agreement”) is entered into as of
____________________, between the City of Palo Alto (“Buyer”), and _________________, as
collateral agent1 (in such capacity, “Financing Provider”), for the benefit of various financial
institutions (collectively, the “Secured Parties”) providing financing to _______ (“Seller”).
Buyer, Seller, and the Financing Provider shall each individually be referred to as a “Party” and
collectively as the “Parties”.
Recitals
A. Pursuant to that certain Power Purchase Agreement dated as of ________________
(as amended, modified, supplemented or restated from time to time, as including all related
agreements, instruments and documents, collectively, the “Assigned Agreement”) between Buyer
and Seller, Buyer has agreed to purchase energy from Seller.
B. The Secured Parties have provided, or have agreed to provide, to Seller financing
(including a financing lease) pursuant to one or more agreements (the “Financing Documents”),
and require that Financing Provider be provided certain rights with respect to the “Assigned
Agreement” and the “Assigned Agreement Accounts,” each as defined below, in connection
with such financing.
C. In consideration for the execution and delivery of the Assigned Agreement, Buyer
has agreed to enter into this Consent and Agreement for the benefit of Seller.
Agreement
1. Definitions. Any capitalized term used but not defined herein shall have the meaning
specified for such term in the Assigned Agreement.
2. Consent. Subject to the terms and conditions below, Buyer consents to and approves the
pledge and assignment by Seller to Financing Provider pursuant to the [Security Agreement] of
(a) the Assigned Agreement, and (b) the accounts, revenues and proceeds of the Assigned
Agreement (collectively, the “Assigned Agreement Accounts”).
1 This form assumes that a collateral agent will hold the security on behalf of a syndicate of lenders and
therefore, the consent would be signed by the collateral agent in such capacity for the benefit of the secured parties. If
that is not the case, please modify.
EXHIBIT F-2 – Page 2
3. Limitations on Assignment. Financing Provider acknowledges and confirms that,
notwithstanding any provision to the contrary under applicable law or in any Financing Document
executed by Seller, Financing Provider shall not assume, sell or otherwise dispose of the Assigned
Agreement or any of Financing Provider’s rights under the Assigned Agreement (whether by
foreclosure sale or other liquidation sale, conveyance in lieu of foreclosure or otherwise) unless,
on or before the date of any such assumption, sale or disposition, Financing Provider or any third
party, as the case may be, assuming, purchasing or otherwise acquiring the Assigned Agreement
(a) cures any and all defaults of Seller under the Assigned Agreement which are capable of being
cured and which are not personal to the Seller, (b) executes and delivers to Buyer a written
assumption of all of Seller’s rights and obligations under the Assigned Agreement in form and
substance reasonably satisfactory to Buyer, (c) otherwise satisfies and complies with all
requirements of the Assigned Agreement, (d) provides such tax and enforceability assurance as
Buyer may reasonably request, and (e) is a Permitted Transferee (as defined below). Financing
Provider further acknowledges that the assignment of the Assigned Agreement and the Assigned
Agreement Accounts is for security purposes only and that Financing Provider has no rights under
the Assigned Agreement or the Assigned Agreement Accounts to enforce the provisions of the
Assigned Agreement or the Assigned Agreement Accounts unless and until an event of default has
occurred and is continuing under the Financing Documents between Seller and Financing Provider
(a “Financing Default”), in which case Financing Provider shall be entitled to all of the rights and
benefits and subject to all of the obligations which Seller then has or may have under the Assigned
Agreement to the same extent and in the same manner as if Financing Provider were an original
party to the Assigned Agreement.
“Permitted Transferee” means any person or entity who is reasonably acceptable to Buyer.
Financing Provider may from time to time, following the occurrence of a Financing Default, notify
Buyer in writing of the identity of a proposed transferee of the Assigned Agreement, which
proposed transferee may include Financing Provider, in connection with the enforcement of
Financing Provider’s rights under the Financing Documents, and Financing Provider shall deliver
to Buyer financial statements, information and other evidence satisfactory to Buyer of the
proposed transferee’s technical and financial capability to fulfill the Seller’s obligations under the
Assigned Agreement. Buyer shall, within thirty (30) Business Days of the later of its receipt of
such written notice and delivery of such financial statements, information and other evidence,
confirm to Financing Provider whether or not such proposed transferee is a “Permitted Transferee”
(together with a written statement of the reason(s) for any negative determination) it being
understood that if Buyer shall fail to so respond within such thirty (30) Business Days period such
proposed transferee shall be deemed to be a “Permitted Transferee”.
4. Cure Rights.
(a) Notice to Financing Provider by Buyer. Buyer shall, concurrently with the delivery
of any notice of an event of default under the Assigned Agreement (each, an “Event of Default”)
to Seller (a “Default Notice”), provide a copy of such Default Notice to Financing Provider
pursuant to Section 9(a) of this Consent and Agreement. In addition, Seller shall provide a copy of
the Default Notice to Financing Provider the next Business Day after receipt from Buyer,
independent of any agreement of Buyer to deliver such Default Notice.
EXHIBIT F-2 – Page 3
(b) Cure Period Available to Financing Provider Prior to Any Termination by Buyer.
Upon the occurrence of an Event of Default, subject to (i) the expiration of the relevant cure
periods provided to Seller under the Assigned Agreement, and (ii) Section 4(a) above, Buyer shall
not terminate the Assigned Agreement unless it or Seller provides Financing Provider with notice
of the Event of Default and affords Financing Provider an Additional Cure Period (as defined
below) to cure such Event of Default. For purposes of this Agreement “Additional Cure Period”
means (i) with respect to a monetary default, twenty (20) calendar days in addition to the cure
period (if any) provided to Seller in the Assigned Agreement, and (ii) with respect to a
non-monetary default, forty-five (45) calendar days in addition to the cure period (if any) provided
to Seller in the Assigned Agreement.
(c) Failure by Buyer to Deliver Default Notice. If neither Buyer nor Seller delivers a
Default Notice to Financing Provider as provided in Section 4(a), the Financing Provider’s
applicable cure period shall begin on the date on which notice of an Event of Default is delivered to
Financing Provider by either Buyer or Seller. Except for a delay in the commencement of the cure
period for Financing Provider and a delay in Buyer’s ability to terminate the Assigned Agreement
(in each case only if both Buyer and Seller fail to deliver notice of an Event of Default to Financing
Provider), failure of Buyer to deliver any Default Notice shall not waive Buyer’s right to take any
action under the Assigned Agreement and shall not subject Buyer to any damages or liability for
failure to provide such notice.
(d) Extension for Foreclosure Proceedings. If possession of the Plant (as defined in the
Assigned Agreement) is necessary for Financing Provider to cure an Event of Default and
Financing Provider commences foreclosure proceedings against Seller within thirty (30) calendar
days of receiving notice of an Event of Default from Buyer or Seller, whichever is received first,
Financing Provider shall be allowed a reasonable additional period to complete such foreclosure
proceedings, such period not to exceed ninety (90) calendar days; provided, however, that
Financing Provider shall provide a written notice to Buyer that it intends to commence foreclosure
proceedings with respect to Seller within ten (10) Business Days of receiving a notice of such
Event of Default from Buyer or Seller, whichever is received first. In the event Financing Provider
succeeds to Seller’s interest in the Plant as a result of foreclosure proceedings, the Financing
Provider or a purchaser or grantee pursuant to such foreclosure shall be subject to the requirements
of Section 3 of this Consent and Agreement.
5. Setoffs and Deductions. Each of Seller and Financing Provider agrees that Buyer shall
have the right to set off or deduct from payments due to Seller each and every amount due Buyer
from Seller whether or not arising out of or in connection with the Assigned Agreement.
Financing Provider further agrees that it takes the assignment for security purposes of the
Assigned Agreement and the Assigned Agreement Accounts subject to any defenses or causes of
action Buyer may have against Seller.
6. No Representation or Warranty. Seller and Financing Provider each recognizes and
acknowledges that Buyer makes no representation or warranty, express or implied, that Seller has
any right, title, or interest in the Assigned Agreement or as to the priority of the assignment for
security purposes of the Assigned Agreement or the Assigned Agreement Accounts. Financing
Provider further recognizes and acknowledges that it has relied exclusively on its own
investigation and due diligence with respect to and is responsible for satisfying itself as to the
EXHIBIT F-2 – Page 4
existence and extent of Seller’s right, title, and interest in the Assigned Agreement, and Financing
Provider hereby releases Buyer from any liability resulting from the assignment for security
purposes of the Assigned Agreement and the Assigned Agreement Accounts.
7. Amendment to Assigned Agreement. Financing Provider acknowledges and agrees that
Buyer may agree with Seller to modify or amend the Assigned Agreement, and that Buyer is not
obligated to notify Financing Provider of any such amendment or modification to the Assigned
Agreement. Financing Provider hereby releases Buyer from all liability arising out of or in
connection with the making of any amendment or modification to the Assigned Agreement.
8. Payments under Assigned Agreement. Buyer shall make all payments due to Seller under
the Assigned Agreement from and after the date hereof to __________, as depositary agent, to
ABA No. __________, Account No. __________, and Seller hereby consents to any and all such
payments being made in such manner. Each of Seller, Buyer and Financing Provider agrees that
each such payment by Buyer to such depositary agent of amounts due to Seller from Buyer under
the Assigned Agreement shall satisfy Buyer’s corresponding payment obligation under the
Assigned Agreement.
9. Miscellaneous.
(a) Notices. All notices hereunder shall be in writing and shall be deemed received (i)
at the close of business of the date of receipt, if delivered by hand or by facsimile or other
electronic means, or (ii) when signed for by recipient, if sent registered or certified mail, postage
prepaid, provided such notice was properly addressed to the appropriate address indicated on the
signature page hereof or to such other address as a party may designate by prior written notice to
the other parties, at the address set forth below:
If to Financing Provider:
Name:
Address:
Attn:
Telephone:
Facsimile:
Email:
If to Buyer:
Name:
Address:
EXHIBIT F-2 – Page 5
Attn:
Telephone:
Facsimile:
Email:
(b) No Assignment. This Consent and Agreement shall be binding upon and shall
inure to the benefit of the successors and assigns of Buyer, and shall be binding on and inure to the
benefit of the Financing Provider, the Secured Parties and their respective successors and
permitted transferees and assigns under the [loan agreement] and [security agreement].
(c) No Modification. This Consent and Agreement is neither a modification of nor an
amendment to the Assigned Agreement.
(d) Choice of Law. The parties hereto agree that this Consent and Agreement shall be
construed and interpreted in accordance with the laws of the State of California, excluding any
choice of law rules which may direct the application of the laws of another jurisdiction.
(e) No Waiver. No term, covenant or condition hereof shall be deemed waived and no
breach excused unless such waiver or excuse shall be in writing and signed by the party claimed to
have so waived or excused.
(f) Counterparts. This Consent and Agreement may be executed in one or more
duplicate counterparts, and when executed and delivered by all the parties listed below, shall
constitute a single binding agreement.
(g) No Third Party Beneficiaries. There are no third party beneficiaries to this Consent
and Agreement.
(h) Severability. The invalidity or unenforceability of any provision of this Consent
and Agreement shall not affect the validity or enforceability of any other provision of this Consent
and Agreement, which shall remain in full force and effect.
(i) Amendments. This Consent and Agreement may be modified, amended, or
rescinded only by writing expressly referring to this Consent and Agreement and signed by all
parties hereto.
(j) Attorneys’ Fees. If a suit or action is instituted to enforce or interpret any term of
this Consent and Agreement, the prevailing party in any suit or action brought to enforce or
interpret the provisions of this Agreement shall be entitled to recover its reasonable costs and
attorneys' fees at any hearing, any trial, on appeal, and on any petition for review or other trial
court or appellate proceeding. In addition, the prevailing party shall be entitled to recover its
reasonable costs and attorneys’ fees incurred in enforcing its rights under this Consent and
Agreement in connection with any nonjudicial action or the exercise of nonjudicial remedies, and
EXHIBIT F-2 – Page 6
in any administration, arbitrative, mediation or dispute resolution process or proceeding. In
addition, the prevailing party shall be entitled to recover an amount equal to the fair market value
of legal services provided by attorneys employed by it as well as any attorneys’ fees paid to third
parties.
(k) Rule of Construction. It is understood and agreed that the rule of construction that
a written agreement is to be construed against the party preparing or drafting such agreement shall
not be applicable to the interpretation of this Consent and Agreement, it being recognized that each
of Buyer and Financing Provider has contributed substantially and materially to the preparation of
this Consent and Agreement.
IN WITNESS WHEREOF, each of Buyer and Financing Provider has duly executed this Consent
and Agreement as of the date first written above.
[SIGNATURE BLOCKS]
ACKNOWLEDGEMENT
The undersigned hereby acknowledges the Consent and Agreement set forth above, makes the
agreements set forth therein as applicable to Seller, including the obligation of Seller to provide a
copy of any Default Notice it receives from Buyer to Financing Provider the next Business Day
after receipt by Seller, and confirms that the Financing Provider identified above and the Secured
Parties have provided or are providing financing to the undersigned.
________________________
[name of Seller]
By: _________________________________
Name: _______________________________
Title: ________________________________
EXHIBIT G – Page 1
EXHIBIT G
EXPECTED ANNUAL ENERGY PRODUCTION
Contract Year Expected Annual Energy Production (in MWh)
1 75,000
2 74,625
3 74,252
4 73,881
5 73,511
6 73,144
7 72,778
8 72,414
9 72,052
10 71,692
11 71,333
12 70,977
13 70,622
14 70,269
15 69,917
16 69,568
17 69,220
18 68,874
19 68,529
20 68,187
21 67,846
22 67,507
23 67,169
24 66,833
25 66,499
26 66,167
27 65,836
28 65,507
29 65,179
30 64,853
31 64,529
32 64,206
33 63,885
34 63,566
35 63,248
36 62,932
37 62,617
38 62,304
39 61,992
40 61,682
EXHIBIT G – Page 2
___ Dated as of Seller Execution, with the Expected Annual Energy Production for Contract Year 1
based on the Expected Initial Capacity of 26 MW AC and each subsequent Contract Year reduced
by a degradation factor of 0.5%.
___ Dated as of Commercial Operation Date, with the Expected Annual Energy Production for
Contract Year 1 based on the Initial Capacity of ___ MW AC (subject to the Initial Capacity
limitations described in Section 2.3(c)(2) of the Agreement and each subsequent Contract Year
reduced by a degradation factor of ___%.
Capitalized terms have the meanings set forth in that certain Power Purchase Agreement dated ___, by and
between the City of Palo Alto, as Buyer, and Hecate Energy Palo Alto LLC, as Seller.
EXHIBIT H – Page 1
EXHIBIT H
SELLER DOCUMENTATION CONDITION PRECEDENT
Seller shall provide to Buyer all of the following documentation at least five (5) Business Days
prior to the Seller Execution:
1. A copy of each of (A) the articles of incorporation, certificate of incorporation,
operating agreement or similar applicable organizational document of Seller and
(B) the by-laws or other similar document of Seller (collectively, “Charter
Documents”) as in effect, or anticipated to be in effect, on the Seller Execution.
2. A certificate signed by an authorized officer of Seller, dated no earlier than ten (10)
Business Days prior to the Seller Execution, certifying (A) that attached thereto is a
true and complete copy of the Charter Documents of the Seller, as in effect at all
times from the date on which the resolutions referred to in clause (B) below were
adopted to and including the date of such certificate; (B) that attached thereto is a
true and complete copy of resolutions duly adopted by the board of directors (or
other equivalent body) or evidence of all corporate or limited liability company
action, as the case may be, of Seller, authorizing the execution, delivery and
performance of this Agreement, and that such resolutions have not been modified,
rescinded or amended and are in full force and effect, and (C) as to the name,
incumbency and specimen signature of each officer of Seller executing this
Agreement.
3. A certificate from the jurisdiction of Seller’s incorporation or organization
certifying that Seller is duly organized, validly existing and in good standing under
the laws of such jurisdiction.
4. Evidence of Site control (e.g. lease with redacted price terms) satisfactory to Buyer.
5. A copy of the most recent financial statements (which may be unaudited) from
Seller and Seller’s Parent together with a certificate from the Chief Financial or
equivalent officer of Seller, dated no earlier than ten (10) Business Days prior to the
Seller Execution, to the effect that, to the best of such officer’s knowledge, (A) such
financial statements are true, complete and correct in all material respects and (B)
there has been no material adverse change in the financial condition, operations,
Properties, business or prospects of Seller since the date of such financial
statements.
6. A completed Expected Annual Energy Production table based on the Plant’s
Expected Initial Capacity in the form set forth at Exhibit G.
Utilities Advisory Commission Minutes Approved on: Page 1 of 4
UTILITIES ADVISORY COMMISSION SPECIAL MEETING
EXCERPTED DRAFT MINUTES OF JANUARY 13, 2016
ITEM 3. ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend
that the City Council Adopt a Resolution Approving a Power Purchase Agreement with Hecate
Energy Palo Alto LLC for up to 75,000 Megawatt-hours Per Year of Energy over a Term of up to
40 years for a Total Not to Exceed Amount of $101 Million
Senior Resource Planner Jim Stack summarized the written report. He explained that staff
issued a request for proposals (RFP) last spring in order to replace the energy provided by an
old wind energy contract that is set to expire in 2021, and also because the 30% federal
investment tax credit (ITC) was scheduled to fall to 10% at the end of 2016. He said that 41
project proposals were received in the spring 2015 RFP.
Commissioner Hall asked why staff decided to reject the other RFP proposals, and whether it
was for any reason other than cost. Stack explained that the evaluation criteria staff used
included price and value as well as project viability.
Stack described the Wilsona Solar Power Purchase Agreement (PPA) as having a capacity of 26
megawatts (MW), which would generate 7.5% of the City’s annual electric supply and would
have an online date of June 1, 2021. The levelized price is $36.76 per megawatt-hour (MWh)
over term of the PPA, which could range from 25 years to 40 years, and the project is located in
Los Angeles County near Palmdale. He noted that the City can request that Hecate build an
energy storage facility at the project site at any time, and that Hecate has some experience
developing such facilities. Stack discussed the risks of the proposed PPA and the risk mitigation
measures that are part of the contract, which include having the project developer post
development and performance assurance deposits in amounts that are significantly greater
than those that have been posted for all of the other renewable energy PPAs the City has
executed.
Stack stated that the proposed PPA could deliver more energy than the City needs in 2021
through 2028 in the event that all the other solar projects that the City has contracted with are
completed and the hydroelectric generation is average or better. He noted that in 2028, earlier
renewable PPAs expire creating the need for more renewable energy.
Stack said that the electric portfolio is highly affected by hydro conditions and that, in wet
hydro conditions, surplus renewable energy would be sold in the market, but that the RECs
DRAFT
ATTACHMENT C
Utilities Advisory Commission Minutes Approved on: Page 2 of 4
could be banked to meet Renewable Portfolio Standard (RPS) goals as well to maintain carbon
neutrality.
Stack explained that the green premium for the Wilsona project is estimated at -$1.1 million
per year, and that this commitment would bring the City’s total committed green premium
level for all renewable energy projects down to $1.2 million per year, which is equal to a rate
impact of about 0.12 cents/kWh.
Stack stated that in late December Congress passed a multi-year extension of the 30% federal
ITC, which, along with the passage of the state’s 50% RPS law last summer, changed the
landscape for renewable energy in California. He noted that the ITC extension undermined one
of the main drivers for issuing the RFP in 2015, and that if the City rejected the proposed PPA
staff could still issue another RFP in 2018 or 2019 and execute a PPA for a project that would
still be able to capture the 30% federal ITC.
Commissioner Schwartz asked what happens if there is too much solar being generated in the
area where this project is located and it gets curtailed, and what mitigation measures we have
to reduce congestion. Stack explained that there are typically no physical constraints on the
project delivering energy to the grid, but rather that at times when there is too much energy
being generated or too little demand for the energy the market price of the energy from the
project can go negative. In those situations the City would likely want to curtail the project’s
energy in order to avoid those negative prices, and the proposed PPA includes a provision
allowing the City to avoid paying the developer for the first 50 hours per year of curtailment
that it requests. This provision is different from the City’s other PPAs, which all require that the
City pay for all of energy that gets curtailed at its own request.
Commissioner Ballantine noted that there could actually be scenarios where there is too much
energy being generated in southern California and not enough demand for it, such that the
electricity actually does need to physically flow from southern California to northern California.
Compliance Manager Debbie Lloyd added that this issue of grid congestion and over-generation
is largely a California Independent System Operator (CAISO) market design issue. She explained
that for all of the energy consumed in Palo Alto, the City has to pay the CAISO a northern
California load price; and all of the City’s generating resources get paid by the CAISO a price
that’s specific to their locations on the grid. So congestion problems manifest themselves as
price differentials between the price the City pays for its load and the price it gets paid by the
CAISO for the energy generated by its resources.
Nicholas Bullinger, Chief Operating Officer of Hecate Energy, was in attendance at the meeting,
and Chair Foster invited him to speak. Bullinger described his company’s background, noting
that it focuses on the development of a range of different energy technologies, although it
started out focusing on natural gas-powered generation. He described the financing that the
company plans to use for the project and stated that they have partnered with other cities in
the past. He explained that they have large solar projects with the City of Los Angeles.
Utilities Advisory Commission Minutes Approved on: Page 3 of 4
Commissioner Hall asked Bullinger about the fact that permitting and CEQA review for the
project have not been completed yet, and whether there may be any issues with protected
species at the project site. Bullinger stated that the project site is on disturbed agricultural land
so it will not have any issues with protected species, and that the site has many advantages
including being located close to high voltage transmission facilities.
Commissioner Eglash asked why the City sought this contract in 2015 since it wouldn’t be online
for many years. Stack said that the primary factor that led staff to issue the RFP in 2015 was
the fact that at the time the RFP was issued the 30% federal ITC was slated to drop to 10% at
the end of 2016, and that staff was concerned that renewable energy prices would increase
significantly after that time.
Commissioner Eglash said it was worth taking a moment to review the success of the City’s RPS
program and the carbon neutral portfolio. He also appreciated the fact that staff included a
section in the report and presentation explaining the alternative to approving the project. He
noted that the price appears to be so low as to make the project unbuildable, but that he was
happy with the risk mitigation measures included in the PPA, particularly the large development
security that the developer is required to provide.
Vice Chair Cook congratulated staff on this contract. He asked if there were any provisions
included in the PPA to adjust the contract price in the event that the project’s development
costs turn out to be much higher than expected. Stack said that there are no price adjustment
mechanisms included in the PPA, and that the developer holds all of the price risk related to
development costs. He added that there are off-ramps included in the contract allowing the
City to terminate the PPA in the event the developer experiences problems getting the project
built and fails to meet the contractual deadline for starting construction.
ACTION:
Chair Foster made a motion that the UAC recommend that the City Council adopt a resolution
to:
1. Approve a Power Purchase Agreement (PPA) with Hecate Energy Palo Alto LLC
(HEPA), a Delaware limited liability company, for the acquisition of up to 75,000
Megawatt-hours (MWh) per year of energy from the Wilsona solar project (Wilsona)
over a maximum of forty years at a total cost not to exceed $101 million; and
2. Waive the application of the investment-grade credit rating requirement of Section
2.30.340(d) of the Palo Alto Municipal Code, which applies to energy companies that
do business with the City, as HEPA will provide a $5.2 million letter of credit as a
development assurance deposit, and a subsequent $2.6 million letter of credit as a
performance assurance deposit.
3. Delegate to the City Manager or his designee, the authority to execute on behalf of
the City the PPA with HEPA, the three contract term extension options available to
the City under the PPA, and any documents necessary to administer the agreements
that are consistent with the Palo Alto Municipal Code and City Council approved
policies.
Utilities Advisory Commission Minutes Approved on: Page 4 of 4
4. Waive the application of the anti-speculation requirement of Section D.1 of the
City’s Energy Risk Management Policy as it may apply to surplus electricity purchases
resulting from the City’s participation in the Wilsona PPA, due to the variability of
the City’s hydroelectric resources.
Commissioner Danaher seconded the motion. The motion carried unanimously (7-0) with Chair
Foster, Vice Chair Cook, and Commissioners Ballantine, Danaher, Eglash, Hall, and Schwartz
voting yes.
City of Palo Alto (ID # 6485)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 2/16/2016
City of Palo Alto Page 1
Council Priority: Environmental Sustainability
Summary Title: Palo Alto CLEAN Program Updates and Extension
Title: Utilities Advisory Commission Recommendation that the City Council
Adopt a Resolution to Continue the Palo Alto Clean Local Energy Accessible
Now (CLEAN) Program at the Current Contract Price of $0.165 per kilowatt-
hour for Local Solar Resources and at the Avoided Cost Level ($0.081 to
$0.082 per kilowatt-hour) for Local Non-solar Eligible Renewable Resources
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) request that the Finance Committee
recommend that the City Council:
1. Adopt a resolution (Attachment A) to:
a. Maintain the Palo Alto CLEAN program price for local solar energy resources at
the current price of 0.165 dollars per kilowatt-hour ($/kWh) for a 20-year or 25-
year contract term, and continue with a program limit of 3 megawatts (MW);
and
b. Reduce the Palo Alto CLEAN program price for local non-solar eligible renewable
energy resources to the updated avoided cost of such energy ($0.081/kWh for a
20-year contract term, or $0.082/kWh for a 25-year contract term), from the
prior avoided cost projection ($0.093/kWh for a 20-year contract term, or
$0.094/kWh for a 25-year contract term), and continue with a separate program
limit of 3 MW specifically for local non-solar eligible renewable resources; and
2. Approve the attached amended CLEAN program Power Purchase Agreement (PPA)
(Attachment B) to implement the recommended changes.
The resolution (Attachment A) included as part of this Staff Report incorporates the above
recommendations. The amended Palo Alto CLEAN Eligibility Rules and Requirements, which
implement the above recommendations, are shown in Exhibit A-1 attached to the resolution. As
noted above, staff also seeks approval of an amended PPA (Attachment B) included with this
staff report, which incorporates the above recommendations.
City of Palo Alto Page 2
Council has previously delegated authority to the City Manager to make additional changes to
the CLEAN Program PPA that are approved by the City Attorney’s office as may be otherwise
necessary to implement the recommendations that are approved by Council.
Executive Summary
In March 2012 the Council adopted the Palo Alto CLEAN program (also commonly referred to as
a feed-in tariff, or FIT, program). The program was designed to address the Long-term Electric
Acquisition Plan (LEAP) objective to enhance supply reliability through the pursuit of local
generation opportunities, and to complement the City of Palo Alto Utilities’ (CPAU’s) existing PV
Partners solar rebate program. Palo Alto CLEAN created an additional alternative for property
owners by enabling them to build a new solar system on their property and sell the energy to
CPAU under a long-term, fixed-rate, standardized contract rather than use the energy on site.
Though solar developers expressed interest in Palo Alto CLEAN in 2012, the initial contract price
($0.14 per kilowatt-hour (kWh) for a 20-year term) proved insufficient to facilitate the most
common business model used by project developers, which involves a third-party investor
leasing roof space from a property owner. Council increased the Palo Alto CLEAN price to
$0.165/kWh in December 2012. In May 2015, Council added a 25-year contract term option,
and expanded the program to include non-solar eligible renewable energy resources, setting
their contract prices at the avoided cost level ($0.093/kWh for a 20-year contract or
$0.094/kWh for a 25-year contract).
Although the avoided cost of local solar resources has declined since Council’s May 2015
decision, the UAC and staff recommend continuing the contract of $0.165/kWh for local solar
projects. The UAC and staff also recommend continuing to offer non-solar eligible renewable
energy resources a CLEAN price equal to the avoided cost of the energy produced by those
resources—which is currently estimated at $0.081/kWh for a 20-year term, and $0.082/kWh for
a 25-year term.
Background
CPAU has a long history of supporting solar power. It initiated the PV Partners program in 1999
to provide rebates to residential and commercial customers who install solar for their own use,
and in 2007 the program was expanded to meet the requirements of the State’s Million Solar
Roofs Bill (Senate Bill 1 (SB1), 2006). CPAU is mandated by SB1 to offer rebates through the PV
Partners until the total SB1 program budget of $13 million has been exhausted, which is
expected to occur within a year. Currently, $585,000 in funds remain unreserved for
commercial solar PV systems. All residential rebate funds were reserved as of August 2014.
In March 2012, the City expanded its support for local distributed generation by launching Palo
Alto CLEAN (Clean Local Energy Accessible Now) with a price of $0.14/kWh for a 20-year
contract (Staff Report 2548, Resolution 9235). The program, which was set to expire in
December 2012, expanded the options available to property owners by enabling them to sell
City of Palo Alto Page 3
energy directly to CPAU under a standardized long-term contract instead of using the energy on
site. After receiving no response to the program, in December 2012, Council extended the
CLEAN program and increased the rate to $0.165/kWh for a 20-year contract (Staff Report
3316, Resolution 9308). In February 2014, Council extended the CLEAN program again at the
rate to $0.165/kWh for a 20-year contract, and increased the program capacity limit to 3 MW
(Staff Report 4378, Resolution 9393).
On April 22, 2014, the City Council adopted the Local Solar Plan (Staff Report 4608, Resolution
9402), which set the overarching goal of meeting 4% of the City’s total energy needs from local
solar by 2023 and unified the City’s approach toward local solar and described a set of diverse
strategies for meeting the 4% target in a cost-effective manner that does not create a burden
on non-solar customers. Prior programs, incentives, and policies involving solar installed in the
City—including specifically PV Partners, net energy metering, and Palo Alto CLEAN—are
integrated into the Local Solar Plan strategies. The CLEAN program plays an integral role in
achieving the Local Solar Plan goal contributing about 0.5% of the City’s total energy needs
once the program’s 3 MW cap on local solar projects is reached.
In December 2014, staff presented a recommendation to the UAC to continue the CLEAN
program for solar resources at the $0.165/kWh for a 20-year contract, while also adding a 25-
year contract term option and expanding the program to non-solar renewable energy
resources, setting the price for those resources at the avoided cost level ($0.093 /kWh for a 20-
year contract, $0.094/kWh for a 20-year contract) (UAC report). The staff recommendation also
included maintaining the 3 MW cap on solar resources, and not adopting a cap on the
participation of eligible non-solar resources since they would be compensated at the avoided
cost and did not cause any impact on rates. The UAC unanimously supported the
recommendations concerning solar resources, but did not support the recommendation to
expand the program to non-solar renewable energy resources, siting insufficient justification in
the staff report for the addition of these resources.
In March 2015, staff presented the same recommendation described above to the Finance
Committee, with the addition of a 3 MW participation cap on eligible non-solar resources and
an expanded discussion of the extension of the program to non-solar resources in the report
(Staff Report 5428). The Finance Committee considered staff’s and the UAC’s
recommendations, and committee members expressed no concerns with the proposals to add
a 25-year contract term option or to expand the program to non-solar eligible renewable
energy resources. However, Committee members expressed serious concern about the
proposal to continue offering the contract price of $0.165/kWh for solar resources, rather than
a lower rate closer to the current avoided cost of that solar energy. Ultimately the Finance
Committee voted unanimously to recommend that Council expand the CLEAN program to non-
solar resources, but to set the contract prices for both solar and non-solar resources equal to
those resources’ avoided costs (for solar resources, $0.103/kWh for a 20-year contract and
$0.104/kWh for a 25-year contract; for non-solar resources, $0.093 /kWh for a 20-year
contract, $0.094/kWh for a 20-year contract).
City of Palo Alto Page 4
In May 2015, Council considered the UAC and Finance Committee recommendations (Staff
Report 5849) and were advised that reducing the CLEAN Program price for solar resources
(from 16.5¢/kWh to 10.3¢/kWh or 10.4 ¢/kWh, depending on contract term length) also has
implications for a City project (solar installations on City-owned parking garages) and a City
program (the Community Solar Program) under design at the time. The Council voted to:
extend the CLEAN program again at the rate of $0.165/kWh for a 20-year contract for solar
resources; add a 25-year contract term option; and expand the program to include non-solar
eligible renewable energy resources—setting contract prices for such resources at the level of
their avoided cost, which at the time was $0.093/kWh for a 20-year contract or $0.094/kWh for
a 25-year contract, and setting a separate 3 MW program capacity limit on such resources.
One important consideration in Council’s decision to maintain the contract rate of $0.165/kWh
for solar resources, rather than reducing it to the avoided cost level as the Finance Committee
advocated, was the expectation that the Public Works Department would soon be executing a
lease of rooftop space at several downtown parking garages with a company that would use
that space to develop a group of solar facilities (totaling about 1.5 MW of capacity) that would
participate in the CLEAN program. Although negotiations with that vendor later fell through, at
the time staff anticipated that the City would receive about $155,000 per year in revenue from
that lease, and Council specified that those revenues should be directed to the Electric Fund in
order to mitigate the impact on electric ratepayers of maintaining a CLEAN program rate for
solar resources that was greater than their avoided cost. On January 25, Council approved a
lease agreement with a solar developer to construct solar PV systems (for a total of 1.3 MW) on
four city-owned parking structures with an annual lease payment of $20,000 per year plus the
installation of electric vehicle chargers (Staff Report 6535) with the expectation that the
develop would submit an application to the CLEAN program.
The City received its very first application to the Palo Alto CLEAN program on January 8 for a
113 kW solar carport installation at the Unitarian Universalist Church of Palo Alto for a 25-year
contract term. When the application for the city-owned garages has been received and
processed, approximately half of the total 3 MW program capacity will remain.
The CLEAN program has prompted developers to take a serious look at the cost of developing
solar projects in Palo Alto, and some of them shared that information with CPAU staff. At the
same time, the solar project permitting processes at the development center have been
improved based on input gathered from solar developers. In addition, in response to frequent
requests from developers for detailed information about the City’s electrical distribution
system, staff is in the process of developing a map showing the locations of likely low-cost
interconnection points. In addition, several public utilities across the country have called CPAU
to discuss how to follow Palo Alto’s lead and develop a CLEAN program in their own service
areas.
Discussion
City of Palo Alto Page 5
Value of Local Solar Resources
When establishing the CLEAN price of $0.165/kWh in December 2012, Council reviewed the
market value of local solar energy and determined that, beyond the value of the energy itself,
there were additional financial and environmental benefits to increasing local solar generation.
In May 2015, when Council re-affirmed the $0.165/kWh price, staff estimated the cost of
buying remote solar energy outside of Palo Alto and transmitting it to Palo Alto was
$0.103/kWh (including renewable energy value, transmission and capacity) for a 20-year
contract. Therefore, purchasing the energy generated from 3 MW of local solar projects at
$0.165/kWh was expected to cost about $310,000 per year more than buying the same energy
outside of Palo Alto (and having it transported to Palo Alto). This extra cost is equivalent to a
0.26% increase in the electric utility’s costs.
However, at the time Council re-affirmed the $0.165/kWh price, Public Works staff was nearing
the end of negotiations on a lease agreement of parking garage rooftop space to a solar
developer—who intended to install solar systems on these rooftops totaling about 1.5 MW, and
have those resources participate in the CLEAN program—that was expected to provide
approximately $150,000 per year in lease payments to the City. In May 2015, when it re-
affirmed the $0.165/kWh price for solar resources, Council also directed that the roughly
$150,000 per year in lease payments under this arrangement be allocated to the Electric Fund
to offset the additional cost to ratepayers of providing a contract price exceeding the avoided
cost of the energy generated through the program. Council determined that this additional
cost (after being offset by the $150,000 per year in lease payments) was acceptable as a means
to encourage local solar installations and in light of additional benefits of encouraging local
solar generation.
Unfortunately, lease negotiations between the City and the solar developer foundered and the
City ceased negotiations with the developer1. The City then began lease negotiations with
another respondent to the RFP, which were successfully concluded when Council approved a
lease agreement on January 25, 2016 (Staff Report 6535). The lease agreement includes lease
payments of $20,000 per year to the City, which is significantly lower than the $150,000 per
year that was being discussed with the first developer. However, the lease terms require
installation of 18 new Level 2 electric vehicle chargers and electrical infrastructure to support
an additional 80 future new Level 2 chargers. The electrical vehicle chargers and infrastructure
have a significant value that is in addition to the rent. Additionally, the Council Policy and
Services Committee is expected in the near future to discuss options for changing the City’s
current policy of free use of electric vehicle chargers. Changes to the policy may result in the
generation of revenue from the new electric vehicle chargers that could be used to offset the
additional cost to ratepayers of the $0.165/kWh CLEAN program price, in addition to the
$20,000 per year in rent payments.
1 See this staff report for an explanation of staff’s June 29, 2015 recommendation to reject the developer’s
proposal: http://www.cityofpaloalto.org/civicax/filebank/documents/48009.
City of Palo Alto Page 6
Updated Value of Renewable Energy
In April 2015, the City released an RFP for renewable energy projects that could deliver energy
to the City starting in 2021. Although the City has not yet approved a Power Purchase
Agreement (PPA) resulting from this RFP, the responses that the City received to this
solicitation can be used to estimate the current value of renewable energy in California. Of the
41 project proposals received in this RFP, staff placed the 10 highest-ranking proposals on a
“shortlist”; the average proposed price of these shortlisted proposals was $0.055/kWh2. On a
levelized basis over a 20-year term, the cost to deliver that energy to Palo Alto, combined with
the capacity related benefits that local solar would provide, is projected to be an additional
$0.034/kWh for a total value of local solar energy of $0.089/kWh. Over a 25-year term, the
levelized delivery- and capacity-related cost is $0.035/kWh for a total value of local solar energy
of $0.09/kWh.
When Council re-affirmed the $0.165/kWh price in May 2015, the avoided cost for solar energy
was estimated to be $0.103/kWh for a 20-year term, and $0.104/kWh for a 25-year term. The
$0.014/kWh reduction in the estimated avoided cost of local solar energy from then to now is
entirely due to a reduction in the estimated value of the renewable energy itself. Previously,
the energy value was based on the last long-term renewable PPA that the City executed; this
agreement, signed in June 2014, was to buy energy from a 25 MW solar energy project in
central California at a cost of about $0.069/kWh (Staff Report 4791, Resolution 9416).
The energy generated by 3 MW of local solar projects would supply about 0.5% of the City’s
total electricity needs. Table 1 below shows the history of the Palo Alto CLEAN price since the
program started as well as the proposed CLEAN price for solar resources for a 20-year contract
term.
2 Note that the price for the proposed PPA under consideration by the Finance Committee (Staff Report 6517) is
only $0.03676/kWh for a 25-year term.
City of Palo Alto Page 7
Table 1 – Palo Alto CLEAN Program Prices for Local Solar
Council
Approval
Avoided Cost of Local
Solar Generation *
($/kWh)
CLEAN
Price
($/kWh)
Annual Cost above
Avoided Cost
(Rate Impact)
Total Excess
Cost over 20-
year Term
March 2012 0.136 0.140 $15,000 (0.01%)
for 2 MW cap $300,000
December 2012 0.116 0.165 $160,000 (0.10%)
for 2 MW cap $3.2 million
February 2014 0.099 0.165 $332,500 (0.27%)
for 3 MW cap $6.45 million
May 2015 0.103 0.165 $310,000 (0.26%)
for 3 MW cap $6.2 million
Current
Proposal 0.089 0.165 $380,000 (0.32%)
for 3 MW cap $7.6 million
* The cost of buying remote solar energy outside of Palo Alto and transmitting it to Palo Alto.
As shown in Table 1, based on the current total avoided cost estimates, the cost of continuing
the $0.165/kWh CLEAN price for 3 MW of solar PV projects is about $380,000 per year more
than buying the same energy outside of Palo Alto (and transporting it to Palo Alto). This is
equivalent to a 0.32% increase in the electric utility’s costs.
For non-solar local eligible renewable energy resources, the estimated avoided cost
experienced a similar reduction based on the results of the City’s recent renewable energy RFP.
The energy generated by 3 MW of local non-solar renewable energy projects would supply
about 2.2% of the City’s total electricity needs (assuming that the projects are “baseload”
resources that operate at a high capacity around-the-clock). For these resources, the current
estimated avoided costs are $0.081/kWh for a 20-year term, and $0.082/kWh for a 25-year
term – which are down from $0.093/kWh and $0.094/kWh, respectively, in May 2015. Table 2
compares the current proposal to the price offered since May 2015 when non-solar resources
were first eligible for the Palo Alto CLEAN program. Note that the excess cost is zero since the
price is set equal to the avoided cost.
Table 2 – Palo Alto CLEAN Program Prices for Local Non-Solar Eligible Renewables
Council
Approval
Avoided Cost of Local Non-
Solar Renewable Generation
* ($/kWh)
CLEAN
Price
($/kWh)
Annual Cost above
Avoided Cost
(Rate Impact)
Total Excess
Cost over 20-
year Term
May 2015 0.093 0.093 $0 (0%)
for 3 MW cap $0
Current
Proposal 0.081 0.081 $0 (0%)
for 3 MW cap $0
* The cost of buying remote baseload renewable energy and transmitting it to Palo Alto.
City of Palo Alto Page 8
Figure 1 illustrates the make-up of the various components of the total value of local solar and
non-solar renewable energy. When the Council approved increasing the CLEAN contract price
for solar resources from $0.14/kWh to $0.165/kWh in December 2012, they found that the
increase was justified because local solar resources provide some additional benefits to the
community that would be extremely difficult to quantify. These additional benefits of solar
resources include:
keeping a portion of the City’s electric expenditures within the community, which
provides revenue for local economic development;
reducing the need for new transmission lines, thus reducing the environmental impacts
of the electric system and improving reliability in transmission-constrained regions like
the Greater Bay Area;
providing shade to local buildings and parking structures, which reduces the need for
energy to provide cooling; and
the potential—if the solar facility is paired with an energy storage system or employs
modern inverters—to provide resiliency to the City’s electric distribution system.
These additional benefits are shown in Figure 1, making up the difference between the current
quantifiable avoided cost of local solar energy ($0.089/kWh) and the current contract price
($0.165/kWh).
City of Palo Alto Page 9
Figure 1 – Breakdown of the Total Value of Local Solar and Non-Solar Renewables
Implications of CLEAN Price on City Programs and Projects
The CLEAN Program price for solar resources has implications for a City project (Solar
Installations on City-Owned Parking Garages), a City program (the Community Solar Program),
and the Palo Alto CLEAN Program in general. Reducing the contract price under the CLEAN
Program for solar resources may negatively impact these initiatives.
Solar Installations on City-Owned Parking Garages Project
In March 2014, the City released a Request for Proposals (RFP) for the installation and
operation of a solar PV system at one or more of the five City-owned parking structures (Staff
Report 4540). The RFP was structured to solicit projects that could be eligible to participate in
the Palo Alto CLEAN Program providing an estimated 1.5 MW of local solar capacity. After
negotiations ceased with one contractor, Public Works staff completed negotiations for a site
lease for the project on four garages for a total of 1.3 MW with another contractor. The
contactor is expecting that the rooftop solar installations will receive a CLEAN contract at a
price of 16.5 ¢/kWh for a 25-year contract term3. The project may not be viable or significant
changes to the lease may be required if the CLEAN Program price is reduced.
3 As of February 3, the CLEAN program for this project has not been submitted, but staff is in contact with the
developer and expects the application to be submitted very shortly.
City of Palo Alto Page 10
CLEAN Program Participation
The Palo Alto CLEAN Program received the first application from a solar PV project in January 8,
2016 and expects to receive the second application for the City parking structures by mid-
February. Staff expects that as the rebates from the PV Partners program get used up and with
the end of the Net Energy Metering (NEM) on the horizon, interest in the CLEAN program will
increase despite the comparatively high rates that property owners in Palo Alto charge for
leasing their rooftop space, as well as the lack of space available to install ground-mounted or
parking structure-based projects.
Community Solar Program
As part of the Local Solar Plan, staff is developing a voluntary community solar share program,
which would be available to all electric ratepayers and would primarily benefit community
members who do not have good solar access but want to participate in a local solar project.
This program anticipates finding a host site (possibly a City facility) that would have a Power
Purchase Agreement (PPA) with the City similar to the CLEAN PPA and at the CLEAN price. If
the CLEAN contract price is reduced and a community solar PPA price is reduced to the same
level, it may impact the feasibility of the community solar program. The City could decide to set
a different contract price for the output from the community solar project, but may have
difficulty explaining how it could offer a different contract price to the community solar project
than to other local solar projects through the CLEAN Program.
Recommendation
The UAC and staff recommend that the current CLEAN price of $0.165/kWh for solar projects
continue. As solar system costs have continued to decrease, it is anticipated that at the current
contract price the CLEAN program may attract its first participants in 2016. In addition, the UAC
and staff recommend continuing to offer non-solar eligible renewable energy resources a
CLEAN price equal to the avoided cost of the energy produced by those resources, which is
currently estimated at $0.081/kWh for a 20-year term, and $0.082/kWh for a 25-year term.
Additionally, the UAC and staff recommend continuing with program caps of 3 MW each for the
local solar and the non-solar local renewable resources.
Commission Review and Recommendation
The UAC considered staff’s recommendation at its December 2, 2015 meeting. Some
commissioners had questions about how the avoided cost of renewable energy is calculated,
and requested that staff enumerate the various non-monetary benefits that local solar
resources provide. Commissioner Balantine noted that local generation resources cannot
provide one of the benefits staff cited (grid resiliency in the event of an earthquake or other
emergency situation) unless they use the most modern type of inverters available. But the
commissioners was largely supportive of the staff recommendation.
City of Palo Alto Page 11
After its discussion, the UAC voted 4-0 (with Vice Chair Cook and Commissioners Balantine,
Eglash and Danaher voting yes, and Chair Foster and Commissioners Hall and Schwartz absent)
to recommend that the City Council:
1. Maintain the Palo Alto CLEAN program price for local solar energy resources at the
current price of 0.165 dollars per kilowatt-hour ($/kWh) for a 20-year or 25-year
contract term, and continue with a program limit of 3 megawatts (MW); and
2. Reduce the Palo Alto CLEAN program price for local non-solar eligible renewable energy
resources to the updated avoided cost of such energy ($0.081/kWh for a 20-year
contract term, or $0.082/kWh for a 25-year contract term), from the prior avoided cost
projection ($0.093/kWh for a 20-year contract term, or $0.094/kWh for a 25-year
contract term), and continue with a separate program limit of 3 MW specifically for local
non-solar eligible renewable resources.
The draft notes from the UAC’s December 2, 2015 meeting are provided as Attachment C.
In response to the UAC’s comments at its December 2, 2015 meeting, staff added Figure 1,
which shows the breakdown of the value provided by local solar and non-solar renewable
energy resources to this report.
Resource Impact
Staff estimates the current cost of buying energy from solar resources outside of Palo Alto is
$0.089/kWh (including transmission and capacity) for a 20-year contract, or $0.09/kWh for a
25-year contract. Purchasing the energy generated from 3 MW of local solar projects at
$0.165/kWh is expected to cost about $380,000 per year more than buying the same energy
outside of Palo Alto. This is equivalent to a 0.32% increase in the electric utility’s costs. If the
program increased costs by $380,000 per year, staff has determined that the system average
electric rate would have to increase by $0.0004/kWh. This is equivalent to a bill impact of
$1.85 per year for the median residential customer using 410 kWh/month, or $2.80 per year for
a residential customer using 650 kWh/month.
Changing the program price offered to local, non-solar renewable energy projects is not
expected to impact the cost to the Utility since the recommended price for those projects is
equal to the value of acquiring such projects outside the City.
In addition to the energy costs described above, staff time is associated with marketing and
project review. The project review can be absorbed with existing staff over the life of the
program, and costs will be recovered through project review fees. The additional marketing will
require about 0.1 FTE of staff time and may involve an additional budget for marketing
materials, which would be requested through the annual budget process. The marketing work
will be absorbed by existing staff, but will decrease time spent on other account management
and efficiency program delivery activities.
City of Palo Alto Page 12
Policy Implications
The recommendation to continue the CLEAN program supports the City’s carbon neutral
electric supply portfolio policy as well as the LEAP Objective to enhance supply reliability
through the pursuit of local generation opportunities.
Environmental Review
Adoption of this resolution is not subject to California Environmental Quality Act (CEQA) review
under California Public Resources Code section 21080(b)(8), because the price adopted reflects
the reasonable cost of the CLEAN Program’s operating expenses, including the cost of
purchasing renewable energy from local renewable energy generating systems and the value of
local benefits to CPAU and its ratepayers. Approval of the amended CLEAN program PPA is not
a project under CEQA, and therefore, no environmental assessment is necessary.
Attachments:
Attachment A: Resolution Continuing the Palo Alto CLEAN Program (with Exhibit A-1
Revised Program Rules) (PDF)
Attachment B: Updated Palo Alto CLEAN Power Purchase Agreement (PDF)
Attachment C: Excerpted Minutes of the December 2 2015 UAC Meeting (PDF)
Attachment A
*NOT YET APPROVED*
151026 jjs 01-0024 1
Resolution No. _________
Resolution of the Council of the City of Palo Alto Continuing the Palo Alto
Clean Local Accessible Now Program at the Same Contract Rate of 16.5¢/kWh
for Solar Resources and Decreasing the Contract Rate for Non-Solar
Renewable Energy Resources to 8.1¢/kWh to 8.2¢/kWh Based on the
Reduced Avoided Cost of Local Renewable Energy
R E C I T A L S
A. On March 5, 2012, the City approved the Palo Alto Clean Local Energy Accessible
Now (CLEAN) Program (or feed-in tariff). Under the Palo Alto CLEAN Program, participants who
build a new solar generating system in Palo Alto may obtain a long-term, fixed-price contract
with the City to sell the energy from the system to the City’s electric utility.
B. Council extended the program beyond its original termination date of December
31, 2012 and has periodically reviewed the contract price and program cap.
C. On May 27, 2015, Council approved Resolution 9512, which continued Palo Alto
CLEAN at the contract price of $0.165 per kilowatt-hour (kWh) for local solar resources, added a
25-year contract term option, and expanded the program’s eligibility to local non-solar eligible
renewable energy resources, establishing contract prices of $0.093 per kWh for a 20-year term
or $0.094 per kWh for a 25-year term for such resources. These contract rates were set to be
equal to the then current estimated avoided cost of the energy generated by these resources.
The resolution further established separate program caps of 3 megawatts (MW) of generating
capacity for both the solar and non-solar resources.
D. As solar system costs have continued to decrease, and as the deadline for the
steep reduction in the federal ITC approaches, it is anticipated that at the current contract price
the CLEAN program may attract its first participants in 2016.
E. In April 2015, the City released a Request for Proposals for projects that could
deliver renewable energy to the City, and results indicate that the avoided cost of energy
generated by renewable resources has dropped since Council adopted a CLEAN Program price
for local non-solar resources in May 2015.
F. The City therefore wants to continue the CLEAN program for solar resources at
the same contract price and program parameters (including the separate 3 megawatt (MW)
caps applicable to the solar and non-solar portions of the program), while reducing the contract
prices available to local non-solar eligible renewable resources to $0.081 per kWh for a 20-year
term or $0.082 per kWh for a 25-year term for such resources, which is equal to the current
estimated avoided cost of energy generated by these resources.
Attachment A
*NOT YET APPROVED*
151026 jjs 01-0024 2
The Council of the City of Palo Alto (“City”) RESOLVES:
SECTION 1. The Council adopts revised Palo Alto CLEAN Program Eligibility Rules
Requirements, set forth in Exhibit 1 attached to this Resolution.
SECTION 2. The Council authorizes the City Manager or his designee to sign contracts
for the output of one or more solar, or other non-solar eligible renewable energy resource
meeting the CLEAN Program Eligibility Rules and Requirements described in Section 1. The total
CLEAN Program cost commitment made by the City during the life of the program shall not
exceed $25,000,000, which is sufficient for a program cap of 3 MW of local solar generating
capacity and 3 MW of local, non-solar generating capacity over a 25-year contract term.
SECTION 3. The Council finds that the City of Palo Alto Utilities’ (CPAU’s) purchase of
energy from local renewable sources provides additional local benefits to CPAU when
compared to energy purchased outside Palo Alto, which in turn become benefits to CPAU
ratepayers and the local community. These benefits include a reduction in CPAU’s costs and
energy losses associated with energy transmission and distribution, and a reduction in CPAU’s
capacity requirements. When the City purchases energy from local sources, a portion of the
City’s electric expenditures remain within the community, which provides revenue for local
economic development. Locating generation near load centers can also reduce the need for
new transmission lines, thus reducing the environmental impacts of the electric system and
improving reliability in transmission-constrained regions like the Greater Bay Area. When solar
systems are installed on rooftops and parking facilities, the shade created reduces the energy
required for cooling and creates value for vehicle owners. In addition, as new technology and
energy storage systems are developed, the local renewable energy generation, in combination
with storage systems, has the potential to provide resiliency to the City’s electric distribution
system. Further, local renewable energy generation that participates in the CLEAN Program
provides long-term certainty and value to the entire community—benefits that are not
provided when such energy is sold to the City on a short-term basis or used on-site. The
Council therefore finds that offering the Palo Alto CLEAN Program to participants is a
reasonable cost of providing electric service to CPAU’s electric customers.
SECTION 4. The Council finds that the adoption of this resolution is not subject to
California Environmental Quality Act review under California Public Resources Code section
21080(b)(8), because the rate adopted reflects the reasonable cost of the CLEAN Program’s
operating expenses, including the cost of purchasing renewable energy from local solar
generating systems, and the value of local benefits to CPAU and its ratepayers as described in
SECTION 3 of this resolution. Approval of the amended CLEAN Program Eligibility Rules and
//
//
Attachment A
*NOT YET APPROVED*
151026 jjs 01-0024 3
Requirements attached to the Resolution as Exhibit 1 is not a project under CEQA, and
therefore, no environmental review is required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ _______________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ _______________________
Senior Deputy City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
PALO ALTO CLEAN (CLEAN LOCAL ENERGY ACCESSIBLE NOW)
PROGRAM ELIGIBILITY RULES AND REQUIREMENTS
Effective __________
A. PARTICIPATION ELIGIBILITY:
The Palo Alto Clean Local Energy Accessible Now Program (the “CLEAN Program”) is open to
participation by any Eligible Renewable Energy Resource, as defined in Section D.4, that
satisfies these Program Eligibility Rules and Requirements.
B. TERRITORIALITY REQUIREMENT:
In order to be eligible to participate in the CLEAN Program, an Eligible Renewable Energy
Resource must be located in and generating electricity from within the utility service area of
the City of Palo Alto.
C. PRICES AND TERM FOR ELIGIBLE RENEWABLE RESOURCES:
The following purchase price shall apply to the electricity produced by an Eligible
Renewable Energy Resource participating in the Program, except as provided in Section D.5.
Solar Energy Resources:
Contract Term Contract Price
20 years $0.165 / kWh
25 years $0.165 / kWh
Other, Non-Solar Eligible Renewable Energy Resources:
Contract Term Contract Price
20 years $0.081 / kWh
25 years $0.082 / kWh
D. ADDITIONAL RULES AND REQUIREMENTS:
1.The owner of the Eligible Renewable Energy Resource shall enter into an Eligible
Renewable Energy Resource Power Purchase Agreement (“PPA”) with the City of Palo
Alto prior to delivering energy to the City.
2.The maximum, aggregate generation capacity from all solar facilities participating in the
CLEAN Program is three (3) Megawatts (“MW”) (the “Program Capacity”, based on the
generating facility’s California Energy Commission rating, CEC-AC). Generating capacity
from non-solar, eligible renewable energy resources will not be counted towards this 3
MW cap for the solar program. Instead non-solar, local eligible renewable energy
resources will be subject to a 3 MW cap of their own.
3.An application for participation in the CLEAN Program to sell output to the City (the
“Application”) may be submitted at any time. Applications will be considered in the
EXHIBIT 1 to ATTACHMENT A
PALO ALTO CLEAN (CLEAN LOCAL ENERGY ACCESSIBLE NOW)
PROGRAM ELIGIBILITY RULES AND REQUIREMENTS
Effective __________
order received.
4. Eligible Renewable Energy Resource means an electric generating facility that: (a) is
defined and qualifies as an “eligible renewable energy resource” under California Public
Utilities Code Section 399.12(e) and California Public Resources Code Section 25471,
respectively, as amended; and (b) meets the territoriality requirement set forth in
Section B.
5. The California Energy Commission’s (“CEC”) certification of the Eligible Renewable
Energy Resource shall be required within six (6) months of the commercial operation
date of the generating facility; the facility’s owner shall provide written notice of the
CEC’s certification to the City within ten (10) business days of receipt of said
certification. If the City agrees, in its sole discretion, to take delivery of the generating
facility’s electricity prior to the CEC’s certification, then, as the facility’s electricity
cannot be considered in fulfillment of the City’s RPS requirements, the price that the
City will pay for the generating facility’s electricity (the “Pre-Certification Price”) will be
set to $0.076 per kWh (for a 20-year contract term) or $0.08 per kWh (for a 25-year
contract term), based on the estimated levelized cost of brown power over a 20-year or
25-year period, respectively. Upon the CEC’s certification of the generating facility and
the provision of notice of such certification to the City in accordance with this section,
the City will pay the Price set forth in Section C of these CLEAN Program Rules and
Requirements and the PPA (collectively referred to as the “Contract Price”) for the
generating facility’s electricity delivered on and after the date of the CEC’s certification.
The City will, in its sole discretion, “true-up”, as appropriate, the difference between the
Contract Price and the Pre-Certification Price for any electricity received and paid for by
the City, effective as of the date of certification of the Eligible Renewable Energy
Resource.
6. If an Eligible Renewable Energy Resource is authorized to participate in the CLEAN
Program, then that Resource shall not be entitled to receive any rebate or other
incentive from the City’s Photovoltaic (PV) Partners Program or any other similar
incentive program funded by the City’s ratepayers. To the extent any rebate or
incentive is paid to the owner of the Resource, that rebate or incentive shall be
disgorged and refunded to the City upon 30 days’ notice, if the Eligible Renewable
Energy Resource continues to participate in the CLEAN Program. If a rebate or an
incentive has been paid to the Eligible Renewable Energy Resource, then that Resource
shall be ineligible to participate in the CLEAN Program.
7. All electricity generated by the Eligible Renewable Energy Resource shall be delivered
only to the City. No portion of the electricity may be used to offset any load of the
generating facility (other than incidental loads associated with operating the generating
facility).
8. A metering and administration fee will be charged to each Eligible Renewable Energy
PALO ALTO CLEAN (CLEAN LOCAL ENERGY ACCESSIBLE NOW)
PROGRAM ELIGIBILITY RULES AND REQUIREMENTS
Effective __________
Resource that participates in the CLEAN Program. See Utilities Rate Schedule E-15
(Electric Service Connection Fees).
040914 jrm 0180042 1
POWER PURCHASE AGREEMENT
ELIGIBLE RENEWABLE ENERGY RESOURCE
(Palo Alto Clean Local Energy Accessible Now Program)
This Power Purchase Agreement - Eligible Renewable Energy Resource, dated, for convenience,
, 20 (the “Effective Date”), is entered into by and between the CITY OF PALO
ALTO, a California chartered municipal corporation, and ,
a corporation (individually, a “Party” and, collectively, the “Parties”).
RECITALS
1.The Buyer has adopted and implemented its CLEAN Program, which allows an owner of a
qualifying electric generation system to sell to the Buyer the power output of a small-scale distributed
generation Eligible Renewable Energy Resource, subject to the CLEAN Program’s rules and requirements.
2.The Seller owns or operates and desires to interconnect its Facility in parallel with Buyer’s
Distribution System and sell the Energy produced by its Facility, net of Station Service Load, directly to the
Buyer in furtherance of the CLEAN Program.
3.The Parties do not intend this Agreement to constitute an agreement by the Buyer to provide
retail electrical service to the Seller.
4.The Parties wish to enter into a power purchase agreement for the sale and purchase of the
Output of the Facility. The Parties will enter into a separate “Interconnection Agreement” in connection
with this Agreement.
NOW THEREFORE, in consideration of the foregoing recitals and the following covenants,
terms and conditions, the Parties agree, as follows:
AGREEMENT
1.1 DEFINITIONS
The initially capitalized terms, whenever used in this Agreement, have the meanings set forth
below, unless they are otherwise herein defined. The terms “include,” “includes,” and “including,” when
used in this Agreement, shall mean, respectively, “include, without limitation,“ “includes, without
limitation” and “including, without limitation.”
“Agreement” means this Power Purchase Agreement – Eligible Renewable Energy Resource between the
Buyer and the Seller.
“Business Day” means any day except a Saturday, Sunday, or a day that the City observes as a regular
holiday under Palo Alto Municipal Code section 2.08.100(a).
“Buyer” refers to the City of Palo Alto, California, with a principal place of business at 250 Hamilton
Avenue, Palo Alto, California 94301.
“Buyer’s Distribution System” means the wires, transformers, and related equipment used by the Buyer to
deliver electric power to the Buyer’s retail customers, typically at sub-transmission level voltages or lower.
“CAISO” means the California Independent System Operator Corporation, or successor entity.
“CAISO Tariff” means the CAISO FERC Electric Tariff, as amended.
“Capacity” means the ability of a generator at any given time to produce Energy at a specified rate, as
ATTACHMENT B
040914 jrm 0180042 2
measured in megawatts (“MW”) or kilowatts (“kW”), and any reporting rights associated with it.
“Capacity Attributes” means any current or future defined characteristic, certificate, tag, credit, or
ancillary service attribute, whether general in nature or specific as to the location or any other attribute of
the Facility, intended to value any aspect of the Contract Capacity of the Facility to produce Energy or
ancillary services, including contributions towards Resource Adequacy (including those requirements
defined in Section 40 of the CAISO Tariff) or reserve requirements (if any), and any other reliability or
power attributes.
“CEC” means the California Energy Resources Conservation and Development Commission, or successor
agency.
“Certificate of RPS Eligibility” means a certificate issued by the CEC as evidence of RPS Certification of
the Facility.
“City” means the government of the City of Palo Alto, California.
“CLEAN Program” refers to the Palo Alto Clean Local Energy Accessible Now Program, a renewable
energy program established by the City by adoption of resolution number , dated , of the
Palo Alto City Council, whereby the Buyer will purchase from the Seller the Output of Eligible Renewable
Energy Resources that meet specified criteria set forth in the City’s applicable ordinances and resolutions.
“Commercial Operation” means the period of operation of the Facility, once the Commercial Operation
Date has occurred.
“Commercial Operation Date” means the date specified in the Commercial Operation Date Confirmation
Letter, which the Parties execute and exchange in accordance with this Agreement.
“Contract Capacity” means the installed electrical Capacity available upon the Commercial Operation
Date of the Facility in an amount, as specified in Exhibit “PPA-A.” “Contract Capacity” is measured at the
Buyer’s revenue meter at the Delivery Point and is net of any Station Service Loads, any applicable Facility
step-up transformer losses, and distribution losses on Buyer’s Distribution System up to the Delivery Point.
“Contract Price” means the price paid by the Buyer to the Seller for the Output generated at the Facility
and received by the Buyer, as set forth in Exhibit “PPA-A.”
“CPUC” means the California Public Utilities Commission, or successor agency.
“Delivery Point” means the point of interconnection to Buyer’s Distribution System, where the Buyer
accepts title to the Output.
“Delivery Term” has the meaning set forth in Section 14.2 hereof.
“Eligible Renewable Energy Resource” means an electric generating facility that is defined and qualified
as an “eligible renewable energy resource” under California Public Utilities Code Section 399.12(e) and
California Public Resources Code Section 25471, respectively, as amended.
“Energy” means electrical energy generated from the Facility and delivered to Buyer’s Distribution System
with the voltage and quality required by the Buyer, and measured in megawatt-hours (“MWh”) or kilowatt-
hours (“kWh”), as metered at the Delivery Point.
“Facility” means the qualifying renewable energy generation equipment and associated power conditioning
and interconnection equipment that deliver the Output to the Buyer at the Delivery Point.
“FERC” means the Federal Energy Regulatory Commission, or successor agency.
040914 jrm 0180042 3
“Forced Outage” means an unplanned outage of one or more of the Facility’s components that results in a
reduction of the ability of the Facility to produce Capacity.
“Force Majeure” means an event or circumstance, which prevents a Party from performing its obligations
under this Agreement, and which is not in the reasonable control of, or the result of negligence of, the Party
claiming Force Majeure, and which by the exercise of due diligence is unable to overcome or cause to be
avoided. “Force Majeure” shall include: (a) An act of nature, riot, insurrection, war, explosion, labor
dispute, fire, flood, earthquake, storm, lightning, tidal wave, backwater caused by flood, act of the public
enemy, terrorism, or epidemic; (b) Interruption of transmission or generation services as a result of a
physical emergency condition (and not congestion-related or economic curtailment) not caused by the fault
or negligence of the Party claiming Force Majeure and reasonably relied upon and without a reasonable
source of substitution to make or receive deliveries hereunder, civil disturbances, strike, labor disturbances,
labor or material shortage, national emergency, restraint by court order or other public authority or
governmental agency, actions taken to limit the extent of disturbances on the electrical grid; or (c) Other
similar causes beyond the control of the Party affected, which causes such Party could not have avoided by
the exercise of due diligence and reasonable care. A Party's financial incapacity, the Seller’s ability to sell
the Output at a more favorable price or under more favorable conditions, or the Buyer’s ability to acquire
the Output at a more favorable price or under more favorable conditions or other economic reasons shall
not constitute an event of Force Majeure. “Force Majeure” does not include a Forced Outage to the extent
such event is not caused or exacerbated by an event of Force Majeure, as described above, and does not
include the Seller’s inability to obtain financing, permits, or other equipment and instruments necessary to
plan for, construct, or operate the Facility.
“Good Utility Practice” means those practices, methods and acts that would be implemented and followed
by prudent operators of electric energy generating facilities in the western United States, similar to the
Facility, during the relevant time period, which practices, methods and acts, in the exercise of prudent and
responsible professional judgment in the light of the facts known at the time the decision was made, could
reasonably have been expected to accomplish the desired result consistent with good business practices,
reliability, and safety. The Seller acknowledges that its use of Good Utility Practice does not exempt it
from performing any of its obligations arising under this Agreement. “Good Utility Practice” includes, at a
minimum, those professionally responsible practices, methods and acts described in the preceding
paragraph that comply with manufacturers’ warranties, restrictions in this Agreement, the interconnection
requirements of Buyer, the requirements of governmental authorities, and WECC and NERC standards.
“Good Utility Practice” also includes the taking of reasonable steps to ensure that:
(a) Equipment, materials, resources, and supplies, including spare parts inventories, are available
to meet the Facility’s needs;
(b) Sufficient operating personnel are available at all times and are adequately experienced and
trained and licensed as necessary to operate the Facility properly and efficiently, and are capable
of responding to reasonably foreseeable emergency conditions at the Facility and emergencies
whether caused by events on or off the Facility’s site;
(c) Preventive, routine, and non-routine maintenance and repairs are performed on a basis that
ensures reliable, long-term and safe operation of the Facility, and are performed by
knowledgeable, trained, and experienced personnel utilizing proper equipment and tools;
(d) Appropriate monitoring and testing are performed to ensure equipment is functioning as
designed; and
(e) Equipment is not operated in a reckless manner, in violation of manufacturer’s guidelines or in
a manner unsafe to workers, the general public, or the connecting utility’s electric system or
contrary to environmental laws, permits or regulations or without regard to defined limitations
such as, flood conditions, safety inspection requirements, operating voltage, current, volt ampere
reactive (VAR) loading, frequency, rotational speed, polarity, synchronization, and control system
limits; and equipment and components are designed and manufactured to meet or exceed the
standard of durability that is generally used for electric energy generating facilities operating in the
western United States and will function properly over the full range of ambient temperature and
weather conditions reasonably expected to occur at the Facility site and under both normal and
emergency conditions.
040914 jrm 0180042 4
“Green Attributes” refers to the definition set forth in the Standard Terms and Conditions, Appendix A-2,
as amended, Decision D.07-02-011, as modified by D.07-05-057, of the CPUC, which incorporates the
definition of “Environmental Attributes” set forth in the Standard Terms and Conditions, Appendix A-1, as
amended, D. 04-06-014. “Green Attributes” includes any and all credits, benefits, emissions reductions,
environmental air quality credits, offsets, and allowances, howsoever entitled, attributable to the generation
from the Facility, and its displacement of conventional energy generation, whether existing now or arising
in the future. “Green Attributes” includes RECs, as well as (1) any avoided emissions of pollutants to the
air, soil or water, such as sulfur oxides (“SOx”), nitrogen oxides (“NOx”), carbon monoxide (“CO”) and
other pollutants; (2) any avoided emissions of carbon dioxide (“CO2”), methane (“CH4”), nitrous oxide,
hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, and other greenhouse gases (“GHGs”) that have
been determined by the United Nations Intergovernmental Panel on Climate Change, or otherwise by law,
to contribute to the actual or potential threat of altering the Earth’s climate by trapping heat in the
atmosphere; and (3) the reporting rights to these avoided emissions such as Green Tag Reporting Rights
and RECs. “Green Tag Reporting Rights” are the right of a Green Tag Purchaser to report the ownership
of accumulated Green Tags in compliance with federal or state law, if applicable, and to a federal or state
agency or any other party at the Green Tag Purchaser’s discretion, and include those Green Tag Reporting
Rights accruing under Section 1605(b) of the Energy Policy Act of 1992 and any present or future federal,
state, or local law, regulation or bill, and international or foreign emissions trading program. Green Tags
are accumulated on a kWh basis and one Green Tag represents the Green Attributes associated with one (1)
MWh of Energy. “Green Attributes” do not include (i) any Energy, Capacity, reliability, or other power
attributes of the Facility, (ii) production or investment tax credits associated with the construction or
operation of the Facility and other financial incentives in the form of credits, grants, reductions, or
allowances associated with the Facility that are applicable to a state or federal income taxation obligation,
(iii) fuel-related subsidies or “tipping fees” that may be paid to Seller to accept certain fuels, or local
subsidies received by the generator for the destruction of particular pre-existing pollutants or the promotion
of local environmental benefits, or (iv) emission reduction credits encumbered, used or created by the
Facility for compliance with or sale under local, state, or federal operating and/or air quality permits or
programs. If the Facility is a biomass or landfill facility and the Seller receives any tradable Green
Attributes based on the Facility’s greenhouse gas reduction benefits or other emission offsets attributed to
its fuel usage, the Seller shall provide the Buyer with sufficient Green Attributes to ensure that there are
zero net emissions associated with the production of electricity from the Facility. “Green Attributes”
includes any other environmental credits or benefits recognized in the future and attributable to Energy
generated by the Facility during the Term that may not be represented by Green Tag Reporting Rights or
RECs, unless otherwise excluded herein. Any Green Attributes provided under this Agreement shall be
documented by RECs, or any other representation of the environmental benefits of the Output, the monthly
cumulative total of which shall be provided to the Buyer, as specified herein.
“Interconnection Agreement” refers to the agreement between the Buyer and the Seller, specific to the
interconnection of the Facility to Buyer’s Distribution System.
“NERC” means the North American Electric Reliability Corporation, or successor organization.
“NCPA” means Northern California Power Agency, a California joint action agency, or successor agency.
“Output” means all Capacity associated with Contract Capacity and associated Energy made available
from the Facility, as well as any Capacity Attributes, Green Attributes, or other attributes existing now or in
the future associated with Contract Capacity and/or associated Energy. “Output” does not include
production or investment tax credits associated with the construction or operation of the Facility and other
financial incentives in the form of credits, grants, reductions, or allowances associated with the Facility that
are applicable to a state or federal income taxation obligation.
“Planned Outage” means an outage, scheduled in advance, of one or more of the Facility’s components
that results in a reduction of the ability of the Facility to produce Capacity.
040914 jrm 0180042 5
“Pre-Certification Price” means the contract price to be paid for all Energy delivered to the Buyer prior to
the RPS Certification Date, as specified in Exhibit “PPA-A”.
“Renewable Energy Credit” or “REC” has the meaning set forth in Section 399.12(h)(1) and (2) of the
California Public Utilities Code, and includes a certificate of proof that one unit of electricity was generated
by an Eligible Renewable Energy Resource. Currently, RECs are used to convey all Green Attributes
associated with electricity production by a renewable energy resource. RECs are accumulated on a kWh
basis and one REC represents the Green Attributes associated with the generation of 1 MWh (1,000 kWhs)
from the Facility. For purposes of this Agreement, the term REC shall be synonymous with the term Green
Tag, green ticket, bundled or unbundled renewable energy credit, tradable renewable energy certificates, or
any other term used to describe the documentation that evidences the renewable and Green Attributes
associated with electricity production by an Eligible Renewable Energy Resource.
“Renewables Portfolio Standard” or “RPS” means the standard adopted by the State of California
pursuant to Senate Bill 2 1st Extraordinary Session (SBX1 2, Chapter 1, Statutes 2011-12), and California
Public Utilities Code Sections 399.11through 399.31, inclusive, as may be amended, setting minimum
renewable energy targets for local publicly owned electric utilities.
“Reservation Deposit” means the monetary deposit submitted by the Seller (or the Facility sponsor on
behalf of the Seller) to secure a reservation of the CLEAN Program’s prices. The Reservation Deposit is
set forth in Exhibit “PPA-A.”
“Resource Adequacy” means a requirement by a governmental authority or in accordance with its FERC-
approved tariff, or a policy approved by a local regulatory authority, that is binding upon either Party and
that requires that Party to procure a certain amount of electric generating capacity.
“RPS Certification” means certification by the CEC that the Facility qualifies as an Eligible Renewable
Energy Resource for RPS purposes, and that all Energy produced by the Facility qualifies as generation
from an Eligible Renewable Energy Resource, as evidenced by a Certificate of RPS Eligibility.
“RPS Certification Date” means the date on which the RPS Certification begins, as specified in the
Certificate of RPS Eligibility.
“Seller” means with a principal place of business at
, , .
“Station Service Load” means the electrical loads associated with the operation and maintenance of the
Facility, which may at times be supplied from the Facility’s Energy.
“Term” has the meaning set forth in Section 14.1 hereof.
“WECC” means the Western Electricity Coordinating Council, the regional entity responsible for
coordinating and promoting regional bulk electric system reliability in the Western Canada and the United
States, or any successor organization.
2.0 SELLER’S GENERATING FACILITY, PURCHASE PRICE AND PAYMENT
2.1 Facility. This Agreement governs the Buyer’s purchase of the Output from the Facility,
as described in Exhibit “PPA-A.” The Seller shall not modify the Facility to increase or decrease the
Contract Capacity after the Commercial Operation Date.
2.2 Products Purchased. During the Delivery Term, the Seller shall sell and deliver, or cause
to be delivered, and the Buyer shall purchase and receive, or cause to be received, the Output from the
Facility. The Seller shall not have the right to procure the Output from sources other than the Facility for
sale or delivery to the Buyer under this Agreement or to substitute the Output.
040914 jrm 0180042 6
2.3 Delivery Term. The Delivery Term shall commence on the Commercial Operation Date under this
Agreement, and shall continue for an uninterrupted period of twenty (20) years. This period will commence
on the first day of the calendar month immediately following the Commercial Operation Date. As evidence
of the Commercial Operation Date, the Parties shall execute and exchange the “Commercial Operation
Date Confirmation Letter,” attached hereto as Exhibit “PPA-B.” The Commercial Operation Date shall be
the date on which the Parties acknowledge, in writing, that the Facility starts operating and is otherwise in
compliance with applicable interconnection and system protection requirements, including the final
approvals by the City’s building department official.
2.4 Payment for Products Purchased.
2.4.1 Deliveries Prior to RPS Certification Date. Once the Facility has achieved
Commercial Operation, if the CEC has not issued a Certificate of RPS Eligibility for the Facility
or the Facility has not been registered with the appropriate entity for the tracking of Green
Attributes, the Buyer will pay the Seller for the Output by multiplying the Pre-Certification Price
by the quantity of Energy.
2.4.2 Deliveries After RPS Certification Date. Once the Facility has achieved
Commercial Operation, the CEC has issued a Certificate of RPS Eligibility for the Facility, and
the Facility has been registered with the appropriate entity for the tracking of Green Attributes, the
Buyer shall pay the Seller for all Output on or after the RPS Certification Date by multiplying the
Contract Price by the quantity of Energy.
2.4.3 True-up Upon Issuance of Certificate of RPS Eligibility. Once the Facility has
achieved Commercial Operation, the CEC has issued a Certificate of RPS Eligibility for the
Facility, and the Facility has been registered with the appropriate entity for the tracking of Green
Attributes, the Buyer will pay the Seller an amount equal to the difference between the Contract
Price and the Pre-Certification Price for the Output (a) that was delivered on or after the RPS
Certification Date and (b) for which the Seller has already received payment at the Pre-
Certification Energy Price.
2.4.4 Energy in Excess of Contract Capacity. The Seller shall not receive payment for
any Energy or Green Attributes delivered in any hour to the Buyer in excess of the following
amount of energy (in kilowatt-hours): 110% of the Contract Capacity (in kilowatts) multiplied by
one hour. Any payment in excess of this amount shall be refunded to the Buyer, on demand.
2.5 Billing. The Buyer shall pay the Seller by check or electronic funds transfer, on a
monthly basis, within thirty (30) days of the meter reading date.
2.6 Title and Risk of Loss. Title to and risk of loss related to the Output shall be transferred
from the Seller to the Buyer at the Delivery Point. The Seller warrants that it will deliver to the Buyer the
Output free and clear of all liens, security interests, claims, encumbrances or any interest therein or thereto
by any person, arising prior to the Delivery Point.
2.7 No Additional Incentives. The Seller warrants that it has not received any other
incentives funded by the Buyer’s ratepayers and it further agrees that, during the Term, it shall not seek
additional compensation or other benefits from the Buyer pursuant to the following programs of the Buyer:
(a) Photovoltaic (PV) Partners Program; (b) Power from Local Ultra-Clean Generation Incentive (PLUG-
In) Program; or (c) other similar programs that are or may be funded by the Buyer’s ratepayers.
040914 jrm 0180042 7
3.0 RPS CERTIFICATION; GREEN ATTRIBUTES
3.1 CEC Certification. The Seller, at its own cost and expense, shall obtain the RPS
Certification within six (6) months of the Commercial Operation Date. The Seller shall maintain the RPS
Certification at all times during the Delivery Term. The foregoing provision notwithstanding, the Seller
shall not be in breach of this Agreement and the Buyer shall not have the right to terminate this Agreement,
if the Seller’s failure to obtain or maintain the RPS Certification is due to a change in California law,
occurring after the Commercial Operation Date, so long as the Seller has used commercially reasonable
efforts to obtain and maintain the RPS Certification and the Seller’s actions or omissions did not contribute
to its inability to obtain and maintain the RPS Certification.
3.2 Obligation to Deliver Green Attributes. The Seller shall sell and deliver to the Buyer, and
the Buyer shall buy and receive from the Seller, all right, title, and interest in and to Green Attributes
associated with Energy, produced by the Facility and delivered to the Buyer at the Delivery Point, whether
now existing or that hereafter come into existence during the Term, except as otherwise excluded herein;
provided, the Buyer shall not be obligated to purchase and pay the Seller for any Green Attributes
associated with any amount of the Output, that is generated by any fuel which is not renewable and which
cannot be counted for the purpose of the production of Green Attributes. The Seller agrees to sell and make
all such Green Attributes available to the Buyer to the fullest extent allowed by applicable law, in
accordance with the terms and conditions of this Agreement. The Seller warrants that the Green Attributes
provided under this Agreement to the Buyer shall be free and clear of all liens, security interests, claims
and encumbrances.
3.3 Conveyance of Green Attributes. The Seller shall provide Green Attributes associated
with the Facility, which shall be documented and conveyed to the Buyer in accordance with the procedure
described in Exhibit “PPA-D.”
3.4 Additional Evidence of Green Attributes Conveyance. At the Buyer’s request, the Seller
shall provide additional reasonable evidence to the Buyer or to third parties of the Buyer’s right, title, and
interest in the Green Attributes and any other information with respect to Green Attributes, as may be
requested by the Buyer.
3.5 Modification of Green Attributes Conveyance Procedure. The Buyer may unilaterally
modify Exhibit “PPA-D” in order to reflect changes necessary in the Green Attributes conveyance
procedures, so that the Buyer may be able to receive and report the Green Attributes, purchased under this
Agreement, as belonging to the Buyer.
3.6 Reporting of Ownership of Green Attributes. The Seller shall not report to any person or
entity that the Green Attributes sold and conveyed to the Buyer belong to any person other than the Buyer.
The Buyer may report under any applicable program that Green Attributes purchased by the Buyer
hereunder belong to it.
3.7 Greenhouse Gas Emissions. The Seller shall comply with any laws and/or regulations
regarding the need to offset emissions of GHGs by delivering to the Buyer the Energy from the Facility
with a net zero GHG impact.
4.0 CONVEYANCE OF CAPACITY ATTRIBUTES
4.1 Conveyance of Resource Adequacy Capacity. The Seller shall not report to any person or
entity that the Resource Adequacy Capacity, as defined in the CAISO Tariff) associated with the Facility,
if any, belongs to a person other than the Buyer, which may report that Resource Adequacy Capacity
purchased hereunder belongs to it to fulfill the Resource Adequacy requirements, as defined in Section 40
of the CAISO Tariff, as amended, or any successor program. The Seller shall take those actions described
in Section 6.0 hereof, as applicable, to secure recognition of Resource Adequacy Capacity by the CAISO.
4.2 Conveyance of Other Capacity Attributes. In addition to the obligations imposed on the
040914 jrm 0180042 8
Seller under Section 4.1, the Seller will undertake any and all actions reasonably needed to enable the
Buyer to effect the recognition and transfer of any Capacity Attributes in addition Resource Adequacy, to
the extent that such Capacity Attributes exist now or will exist in the future; provided, if such actions
require any actions beyond the giving of notice by the Seller, then the Buyer shall reimburse all out-of-
pocket costs and charges of such actions.
4.3 Reporting of Ownership of Capacity Attributes. The Seller shall not report to any person
or entity that the Capacity Attributes sold and conveyed to the Buyer belong to any person other than the
Buyer. The Buyer may report under any such program that such Capacity Attributes purchased hereunder
belong to it.
5.0 METERING AND OPERATIONS
5.1 Timing of Outages. The Seller may not schedule or take any Planned Outage from 12:00
p.m. through 7:00 p.m. Pacific Time during the months of June through October.
5.2 Outage Reporting.
5.2.1 Buyer Request. The Seller is not required to report any Planned Outage or Forced
Outage, unless the Buyer first submits a written request to the Seller to commence Outage
reporting. Upon receipt of such a request, the Seller shall report all subsequent Planned Outages
and the Forced Outages according to the procedures described in subsections 5.2.2 and 5.2.3, and
shall continue such reporting until (a) the termination of this Agreement for any reason, or (b) the
Buyer subsequently provides written notice to the Seller that the Seller may cease such reporting
in the future.
5.2.2 Planned Outage Notifications. The Seller shall notify the Buyer at least 72 hours in
advance of any Planned Outage that would result in a reduction in the effective Output of the
Facility during the period over which the Planned Outage is scheduled. Notification shall be
provided by e-mail to the e-mail address (or addresses) set forth in Exhibit “PPA-F.”
5.2.3 Forced Outage Notifications. Within 24 hours of the occurrence of a Forced
Outage of the Facility that impacts the ability of the Facility to produce Energy, the Seller shall
notify the Buyer of the Forced Outage, including the Capacity of the Facility that is impacted, and
the expected duration of the Forced Outage. Within 24 hours of the return of the Facility to service
following the Forced Outage, the Seller shall notify the Buyer of the return-to-service details.
Notification shall be made by e-mail to the address (or addresses) set forth in Exhibit “PPA-F.”
5.3 Metering. The Buyer shall furnish and install one or more standard watt-hour meters to
read Energy generated by the Facility, and it will charge a meter fee to the Seller to cover the costs
associated with the meter’s purchase and installation. As requested, the Seller shall provide and install a
meter socket in accordance with the Buyer’s metering standards. The Buyer reserves the right to install
additional metering equipment at its sole cost and expense.
6.0 PARTICIPATING GENERATORS
6.1 Applicability. This Section 6.0 shall apply if the Facility meets the definition of a
“Participating Generator,” as may be defined by the CAISO Tariff. This Section 6.0 shall not apply if the
definition applies to the Facility only upon the election by the Seller. For the purposes of this Section 6.0,
all special terms not otherwise defined in Section 1.0 are defined in the CAISO Tariff.
6.2 Participating Generator Agreement. The Buyer will notify the CAISO of the Seller’s
interconnection to Buyer’s Distribution System. If the CAISO requires it, the Seller, at its own expense,
shall negotiate and enter in to two contracts, a “Participating Generator Agreement” and a “Meter Services
Agreement for CAISO Metered Entities,” with the CAISO.
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6.3 Scheduling Coordination. If the CAISO requires the Seller to enter in to a Participating
Generator Agreement, then the Seller shall designate NCPA as the Buyer’s scheduling coordinator. The
Buyer, acting in its sole discretion, may replace NCPA as the scheduling coordinator for the Facility. If
NCPA ceases to be the scheduling coordinator for the Facility and the Buyer has not, upon fourteen (14)
days’ prior written notice of inquiry from the Seller, appointed a replacement scheduling coordinator, then
the Seller shall have the right to appoint a replacement scheduling coordinator on the Buyer’s behalf.
Thereafter, the Buyer shall enter into all reasonable and appropriate agreements with such replacement
scheduling coordinator at its own costs.
6.4 Scheduling Procedure. The Buyer may require the Seller to provide the Buyer with
Energy forecasts on a periodic basis, as may be necessary for the Buyer to account for expected Facility
generation in its daily power scheduling process. The requirements are set forth in Exhibit “PPA-C.”
6.5 Modification of Scheduling and Outage Notification Procedure. The Buyer may
unilaterally modify Exhibit “PPA-C” to reflect changes necessary in the scheduling and Outage notification
procedures. The Buyer shall give the Seller reasonable notice of any such changes.
6.6 Provision of Other Equipment. If the Seller is required to enter into a Participating
Generator Agreement with the CAISO, then the Seller, at its own cost and expense, shall provide and
maintain data transmission-grade phone line and telecommunications equipment at the meter location that
complies with applicable requirements of the CAISO, the Buyer, and NCPA. Any meter installed by the
Seller shall comply at all times with the CAISO’s metering requirements. If the Seller fails to provide or
maintain any such required equipment or data connection, then the Buyer shall acquire, install and maintain
the same at the Seller’s sole cost and expense.
6.7 Designation as Resource Adequacy Resource. The Buyer may submit a written request
to the Seller to obtain the CAISO’s designation of the Facility as a Resource Adequacy Resource. Upon
receipt of such request, the Seller shall provide such information and undertake such steps as may be
required by the CAISO in order to complete such an assessment. If the Buyer makes such a request, then
the Buyer shall be responsible for the following: (1) any costs charged to the Seller by the CAISO as a
condition of applying for or receiving designation as a Resource Adequacy Resource, including any
deposits required during the study process or the cost of any related studies or deliverability assessments
performed by the CAISO; (2) the capital, installation, and maintenance costs of any additional equipment
required by the CAISO as a condition of receiving designation as a Resource Adequacy Resource; (3) the
costs of any Network Upgrades, as defined in the CAISO Tariff, as may be required by the CAISO,
provided, the Buyer shall receive any subsequent repayments from the CAISO or the Participating
Transmission Owner related to such upgrades; and (4) any charges or penalties assessed by the CAISO as a
consequence of the Facility’s designation as a Resource Adequacy Resource.
6.8 CAISO Charges. The Buyer shall be solely responsible for paying all costs and charges
associated with the receipt of Energy under this Agreement, at the Delivery Point, and for the transmission
and delivery of Energy from the Delivery Point to any other point downstream of the Delivery Point,
including transmission costs and charges, competition transition charges, applicable control area service
charges, transmission congestion charges, inadvertent energy flows, any other CAISO charges related to
the transmission of such Energy by the CAISO and any charge assessed or collected in the future pursuant
to any utility tariff or rate schedule, however defined, for transmission or transmission-related service
rendered by or for any transmission-owning or operating entity. The Seller will undertake any and all
actions reasonably needed to allow the Buyer to comply with any obligations, and minimize any potential
liability, under the CAISO tariff. If and to the extent that the Seller fails to comply with the notice
provision in Exhibit “PPA-C,” concerning Outages, or with its obligations as outlined in the previous
sentence, the Seller shall be wholly responsible for all imbalances, deviations, or any other CAISO charges
or penalties associated with such Outage or other CAISO Tariff obligation.
6.9 Inclusion in Metered Subsystem. At the option of the Buyer, the Facility may be
included within NCPA’s metered sub-system in connection with the scheduling of power over the CAISO
grid and related functions; provided, however, that such inclusion shall have no adverse effect on the
Facility’s operations or the Seller (or any such effect shall be fully mitigated by the Buyer). The Seller will
undertake any and all actions reasonably needed to allow the Buyer to comply with any obligations, and
040914 jrm 0180042 10
minimize any potential liability, under the CAISO Tariff; provided, that if such actions require any actions
beyond the giving of notice to be provided by the Buyer, then the Buyer shall reimburse the Seller for all
out-of-pocket costs and charges of such actions.
7.0 COMMERCIAL OPERATION DATE; REFUND OF RESERVATION DEPOSIT
7.1 Commercial Operation Date. The Facility shall achieve Commercial Operation by the
Commercial Operation Date deadline (the “Deadline”), which is one (1) year from the Effective Date.
7.2 Reservation Deposit. The Buyer acknowledges that, as of the Effective Date or other
date established by the Buyer, the Seller has provided the Reservation Deposit to the Buyer.
7.2.1 If the Commercial Operation Date occurs on or prior to the Deadline, the Buyer
shall refund to the Seller the Reservation Deposit without interest.
7.2.2 If the Commercial Operation Date commences within seventy (70) days of the
Deadline, the Seller, as liquidated damages and not as a penalty, shall relinquish its claim to a ten
percent (10%) portion of the amount of the Reservation Deposit for every full week transpiring
between the Deadline and the Commercial Operation Date, but the total amount to be relinquished
to the Buyer shall not exceed 100% of the Reservation Deposit.
7.2.3 If the Facility has not achieved Commercial Operation within seventy (70) days of
the Deadline, then the Buyer may terminate this Agreement without liability of either Party to the
other Party by giving written notice of termination to the Seller.
7.2.4 If the Seller gives notice of termination to terminate the Agreement before
Commercial Operation occurs, then the Buyer shall refund a percentage of the Reservation
Deposit equal to the following: the percentage to be refunded will equal A/B, where A equals the
number of days between the date of the Seller’s notice of termination, received by the Buyer, and
the Deadline, and B equals the number of days between the Effective Date and the Deadline.
7.3 Return of Reservation Deposit. The Buyer shall return to the Seller the Reservation
Deposit, without interest, in the event that (a) the Buyer furnishes written notice of the costs of
interconnection (defined in the Interconnection Agreement to include the costs related to the
Interconnection Facilities and Distribution Upgrades) to the Seller and (b) within thirty (30) days of receipt
of the notice regarding costs of interconnection, the Seller provides the Buyer with written notice that the
Seller does not intend to sign the Interconnection Agreement and does intend to proceed with the project.
8.0 REPRESENTATION AND WARRANTIES; COVENANTS
8.1 Representations and Warranties. On the Effective Date, each Party represents and
warrants to the other Party that:
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8.1.1 It is duly organized, validly existing and in good standing under the laws of the
jurisdiction of its formation;
8.1.2 The execution, delivery and performance of this Agreement is within its powers,
have been duly authorized by all necessary action and do not violate any of the terms and
conditions in its governing documents, any contracts to which it is a party or any law, rule,
regulation, order or the like applicable to it;
8.1.3 This Agreement and each other document executed and delivered in accordance
with this Agreement constitutes its legally valid and binding obligation enforceable against it in
accordance with its terms;
8.1.4 It is not bankrupt and there are no proceedings pending or being contemplated by it
or, to its knowledge, threatened against it which would result in it being or becoming bankrupt;
8.1.5 There is not pending or, to its knowledge, threatened against it or any of its
affiliates, if any, any legal proceedings that could materially adversely affect its ability to perform
its obligations under this Agreement; and
8.1.6 It is acting for its own account, has made its own independent decision to enter into
this Agreement and as to whether this Agreement is appropriate or proper for it based upon its
own judgment, is not relying upon the advice or recommendations of the other Party in so doing,
and is capable of assessing the merits of, and understands and accepts, the terms, conditions and
risks of this Agreement.
8.2 General Covenants. Each Party covenants that, during the Term:
8.2.1 It shall continue to be duly organized, validly existing and in good standing under
the laws of the jurisdiction of its formation;
8.2.2. It shall maintain (or obtain from time to time as required, including through
renewal, as applicable) all regulatory authorizations necessary for it to legally perform its
obligations under this Agreement; and
8.2.3 It shall perform its obligations under this Agreement in a manner that does not
violate any of the terms and conditions in its governing documents, any contracts to which it is a
party or any law, rule, regulation, order or the like applicable to it.
8.3 Covenant by Seller. The Seller covenants that, during the Term:
8.3.1 If the Eligible Renewal Energy Resource or the Facility is considered an ‘eligible
qualifying facility’ under applicable law and has a net power production capacity of greater than
one (1) megawatt, then the Seller covenants and agrees that, within thirty (30) days of the
Effective Date or longer period allowed by law, it will complete and file Form No. 556 or other
similar form with FERC as the same may be required by law.”
9.0 GENERAL CONDITIONS
9.1 Facility Care and Interconnection. During the Delivery Term, the Seller shall execute
and maintain an “Interconnection Agreement” with the Buyer, whereby the Seller shall pay and be
responsible for designing, installing, operating, and maintaining the Facility in accordance with all
applicable laws and regulations and shall comply with all applicable Buyer, WECC, FERC, and NERC
requirements, including applicable interconnection and metering requirements. The Seller shall also comply
with any modifications, amendments or additions to the applicable tariff and protocols. The Seller also shall
arrange and pay independently for any and all necessary costs under the Interconnection Agreement with
the Buyer.
040914 jrm 0180042 12
9.2 Standard of Care. The Seller shall: (a) operate and maintain the Facility in a safe manner
in accordance with its existing applicable interconnection agreements, manufacturer’s guidelines, warranty
requirements, Good Utility Practice, industry norms (including standards of the National Electrical Code,
Institute of Electrical and Electronic Engineers, American National Standards Institute, and the
Underwriters Laboratories, and in accordance with the requirements of all applicable federal, state and
local laws and the National Electric Safety Code, as such laws and code norms may be amended from time
to time; (b) obtain any governmental authorizations and permits required for the construction and operation
thereof. The Seller shall make any necessary and commercially reasonable repairs with the intent of
optimizing the availability of electricity to the Buyer. The Seller shall reimburse the Buyer for any and all
losses, damages, claims, penalties, or liability that the Buyer incurs as a result of the Seller’s failure to
obtain or maintain any governmental authorizations and permits required for the construction and operation
of the Facility throughout the Term.
9.3 Access Rights. The Buyer, its authorized agents, employees and inspectors shall have the
right to inspect the Facility on reasonable advance notice during normal business hours and for any
purposes reasonably connected with this Agreement or the exercise of any and all rights secured to the
Buyer by law, including, without limitation, its ordinances, resolutions, tariffs, utility rate schedules or
utilities rules and regulations. The Buyer shall make reasonable efforts to coordinate its emergency
activities with the safety and security departments, if any, of the Facility’s operator. The Seller shall keep
the Buyer advised of current procedures for communicating with the Facility operator’s safety and security
departments.
9.4 Protection of Property. Each Party shall be responsible for protecting its own facilities
from possible damage resulting from electrical disturbances or faults caused by the operation, faulty
operation, or non-operation of the other Party’s facilities and such other Party shall not be liable for any
such damages so caused.
9.5 Insurance. During the Term, the Seller shall obtain and maintain and otherwise comply
with the insurance requirements, as set forth in Exhibit “PPA-E.”
9.6 Buyer’s Performance Excuse; Seller Curtailment.
9.6.1 Buyer Performance Excuse. The Buyer shall not be obligated to accept or pay for
the Output during Force Majeure that affects the Buyer’s ability to accept Energy.
9.6.2 Seller Curtailment. The Buyer may require the Seller to interrupt or reduce
deliveries of Energy: (a) whenever necessary to construct, install, maintain, repair, replace,
remove, or investigate any of its equipment or part of the Buyer’s Distribution System or facilities;
or (b) if the Buyer determines that curtailment, interruption, or reduction is necessary due to a
System Emergency, as defined in the CAISO Tariff, an unplanned outage on Buyer’s Distribution
System, Force Majeure, or compliance with Good Utility Practice.
9.7 Notices of Outages. Whenever possible, the Buyer shall give the Seller reasonable notice
of the possibility that interruption or reduction of deliveries may be required.
9.8 No Additional Loads. The Seller shall not connect any loads not associated with Station
Service Loads at the location of the Facility in a manner that would reduce Energy provided from the
Facility to the Buyer hereunder. The Seller shall obtain separate retail electric service under the Buyer’s
rate schedules for the service of such additional loads.
10.0 FORCE MAJEURE
10.1 Effect of Force Majeure. A Party shall be excused from its performance under this
Agreement to the extent, but only to the extent, that its performance hereunder is prevented by Force
Majeure. A Party claiming Force Majeure shall exercise due diligence to overcome or mitigate the effects
040914 jrm 0180042 13
of Force Majeure; provided, that nothing in this Agreement shall be deemed to obligate the Party affected
by Force Majeure (a) to forestall or settle any strike, lock-out or other labor dispute against its will; or (b)
for Force Majeure affecting the Seller only, to purchase electric power to cure Force Majeure.
10.2 Remedial Action. A Party shall not be liable to the other Party if the Party is prevented
from performing its obligations hereunder due to Force Majeure. The Party rendered unable to fulfill an
obligation by reason of Force Majeure shall take all action necessary to remove such inability with all due
speed and diligence. The nonperforming Party shall be prompt and diligent in attempting to remove the
cause of its failure to perform, and nothing herein shall be construed as permitting that Party to continue to
fail to perform after that cause has been removed. Notwithstanding the foregoing, the existence of Force
Majeure shall not excuse any Party from its obligations to make payment of amounts due hereunder.
10.3 Notice of Force Majeure. In the event of any delay or nonperformance resulting from
Force Majeure, the Party directly impacted by Force Majeure shall, as soon as practicable under the
circumstances, notify the other Party, in writing, of the nature, cause, date of commencement thereof and
the anticipated extent of any delay or interruption in performance.
10.4 Termination Due to Force Majeure. If a Party will be prevented from performing its
material obligations under this Agreement for an estimated period of twelve (12) consecutive months or
longer due to Force Majeure, then the unaffected Party may terminate this Agreement, without liability of
either Party to the other, upon thirty (30) Days’ prior written notice at any time during Force Majeure.
11.0 INDEMNITY
11.1 Indemnity by the Seller. The Seller shall indemnify, defend, and hold harmless the
Buyer, its elected and appointed officials, directors, officers, employees, agents, and representatives against
and from any and all losses, claims, demands, liabilities and expenses, actions or suits, including reasonable
costs and attorney’s fees, resulting from, or arising out of or in any way connected with claims by third
parties associated with (A) (i) Energy delivered at the Delivery Point; (ii) the Seller’s operation and/or
maintenance of the Facility; or (iii) the Seller’s actions or inactions with respect to this Agreement, and (B)
any loss, claim, action or suit, for or on account of injury, bodily or otherwise, to, or death of, persons, or
for damage to or destruction of property belonging to the Buyer or other third party, excepting only such
loss, claim, action or suit as may be caused solely by the willful misconduct or gross negligence of the
Buyer, its agents, employees, directors or officers.
11.2 Indemnity by the Buyer. The Buyer shall indemnify, defend, and hold harmless the
Seller, its directors, officers, employees, agents, and representatives against and from any and all losses,
claims, demands, liabilities and expenses, actions or suits, including reasonable costs and attorney’s fees
resulting from, or arising out of or in any way connected with claims by third parties associated with acts of
the Buyer, its officers, employees, agents, and representatives, relating to: (A) Energy delivered by the
Seller under this Agreement after the Delivery Point, and (B) any loss, claim, action or suit, for or on
account of injury, bodily or otherwise, to, or death of, persons, or for damage to or destruction of property
belonging to the Seller or other third party, excepting only such loss, claim, action or suit as may be caused
solely by the willful misconduct or gross negligence of the Seller, its agents, employees, directors or
officers.
12.0 LIMITATION OF DAMAGES
EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT THERE IS NO WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND ANY AND ALL
IMPLIED WARRANTIES ARE DISCLAIMED. LIABILITY SHALL BE LIMITED TO DIRECT
ACTUAL DAMAGES ONLY, SUCH DIRECT ACTUAL DAMAGES SHALL BE THE SOLE AND
EXCLUSIVE REMEDY AND ALL OTHER REMEDIES OR DAMAGES AT LAW OR IN EQUITY
ARE WAIVED UNLESS EXPRESSLY HEREIN PROVIDED. NEITHER PARTY SHALL BE LIABLE
FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES,
LOST PROFITS OR OTHER BUSINESS INTERRUPTION DAMAGES, BY STATUTE, IN TORT OR
040914 jrm 0180042 14
CONTRACT, UNDER ANY INDEMNITY PROVISION OR OTHERWISE. UNLESS EXPRESSLY
HEREIN PROVIDED, AND SUBJECT TO THE PROVISIONS OF SECTION 11 (INDEMNITY), IT IS
THE INTENT OF THE PARTIES THAT THE LIMITATIONS HEREIN IMPOSED ON REMEDIES
AND THE MEASURE OF DAMAGES BE WITHOUT REGARD TO THE CAUSE OR CAUSES
RELATED THERETO, INCLUDING THE NEGLIGENCE OF ANY PARTY, WHETHER SUCH
NEGLIGENCE BE SOLE, JOINT OR CONCURRENT, OR ACTIVE OR PASSIVE.
13.0 NOTICES
Notices shall, unless otherwise specified herein, be given, in writing, and may be delivered by
hand delivery, United States mail, overnight courier service, facsimile or electronic messaging (e-mail) to
the addresses set forth in Exhibit “PPA-F.”. Whenever this Agreement requires or permits delivery of a
“notice” (or requires a Party to “notify”), the Party with such right or obligation shall provide a written
communication in the manner specified below. A notice sent by facsimile transmission or electronic mail
will be recognized and shall be deemed received on the Business Day on which such notice was transmitted
if received before 5 p.m. Pacific Time (and if received after 5 p.m., on the next Business Day) and a notice
by overnight mail or courier shall be deemed to have been received two (2) Business Days after it was sent
or such earlier time as is confirmed by the receiving Party unless it confirms a prior oral communication, in
which case any such notice shall be deemed received on the day sent. A Party may change its addresses by
providing notice of same in accordance with this provision. A Party may request a change to Exhibit “PPA-
F” as necessary to keep the information current.
14.0 TERM, TERMINATION EVENT AND TERMINATION
14.1 Term. The Term shall commence upon the execution by the duly authorized representatives
of each of the Parties, and shall remain in effect until the conclusion of the Delivery Term, unless
terminated sooner pursuant to the terms and conditions of this Agreement. All indemnity rights shall
survive the termination of this Agreement for twelve (12) months.
14.2 Delivery Term. The Delivery Term of the Agreement is _______ years and is defined as
the period of time from the Commercial Operation Date through the expiration or early
termination of this Agreement.
14.3 Termination Event.
14.3.1 The Buyer shall have the right, but not the obligation, to terminate this Agreement
upon the occurrence of any of the following, each of which is a “Termination Event”: (a) The
Facility has not achieved Commercial Operation within seventy (70) days following the Deadline;
(b) After the Commercial Operation Date, the Seller has not sold or delivered Energy from the
Facility to the Buyer for a period of twelve (12) consecutive months; (c) If the Facility does not
obtain RPS Certification within six (6) months of the Commercial Operation Date and maintain
RPS Certification as required by Section 3.2; or (d) The Seller breaches any other material
obligation of this Agreement.
14.3.2 The Seller shall have the right, but not the obligation, to terminate this Agreement
upon the occurrence of any of the following, each of which is a “Termination Event”: (a) The
Buyer fails to make a payment due and payable under this Agreement within thirty (30) days after
written notice that such payment is due; or (b) The Buyer breaches any other material obligation
of this Agreement. The preceding sentence notwithstanding, the Seller may terminate this
Agreement without cause at any time prior to the Commercial Operation Date, subject to the
provisions of Section 7 of this Agreement.
14.4 Time to Cure. None of the events described in Section 14.2.1 and 14.2.2 shall constitute
a Termination Event if the Buyer or the Seller cures the event, failure, or circumstance within thirty (30)
days after receipt of written notification sent by the other Party, seeking termination, or such longer period
as may be necessary to cure so long as the Party subject to the Terminating Event is exercising diligent
efforts to cure.
14.5 Termination.
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14.5.1 Declaration of a Termination Event. If a Termination Event has occurred and is
continuing, the Party with the right to terminate shall have the right to: (a) send notice, designating
a day, no earlier than thirty (30) days after such notice is deemed to be received (as provided in
Section 13), as an early termination date of this Agreement (the “Early Termination Date”), unless
the Seller has timely communicated with the Buyer and the Parties have agreed to resolve the
circumstances giving rise to the Termination Event; (b) accelerate all amounts owing between the
Parties; and (c) terminate this Agreement and end the Delivery Term effective as of the Early
Termination Date.
14.5.2 Release of Liability for Termination Event. Upon termination of this Agreement
pursuant to this section neither Party shall be under any further obligation or subject to liability
hereunder, except with respect to the indemnity provision in Section 11 hereof, which shall remain
in effect for a period of 12 months following the Early Termination Date.
14.6 No Limitation on Damages. Nothing in this Agreement shall be deemed or construed to
limit a Party’s right to recover damages from the other Party, except as otherwise provided in this
Agreement.
15.0 RELEASE OF DATA
Except as may be exempt from disclosure under applicable law, the Seller authorizes the Buyer to
release to any regulatory authority having jurisdiction over the Facility or a Party, or to any request made
pursuant to the California Constitution or the California Public Records Act, information regarding the
Facility, including the Seller’s name and location, operational characteristics, the Term of this Agreement,
the Facility resource type, the scheduled Commercial Operation Date, the actual Commercial Operation
Date, the Contract Capacity, payments made to the Seller and Energy production information. The Seller
acknowledges that this information may be made publicly available.
16.0 ASSIGNMENT
Neither Party shall assign this Agreement or its rights hereunder without the prior written consent
of the other Party, which consent shall not be unreasonably withheld.
16.1 Upon the written request of the Seller, the Buyer will execute a “Lender Consent and
Agreement” between the Seller and the Seller’s lender(s), if any, in the form acceptable to the Parties;
provided, for illustration purposes only, an exemplar is attached hereto as Exhibit “PPA-G.”
16.2 Notwithstanding the foregoing, no Consent and Agreement shall be required for:
16.2.1 Any assignment or transfer of this Agreement by the Seller to an affiliate of the
Seller, provided that such affiliate’s creditworthiness is equal to or better than that of Seller, as
reasonably determined by the non-assigning or non-transferring Party; or
16.2.2 Any assignment or transfer of this Agreement by the Seller or the Buyer to a
person succeeding to all or substantially all of the assets of such Party, provided that such person’s
creditworthiness is equal to or greater than that of such Party, as reasonably determined by the
non-assigning or non-transferring Party.
16.2.3 Notification of any assignment or transfer of this Agreement under Section 16.2.1
or 16.2.2 shall be given to the non-assigning or non-transferring Party in accordance with Exhibit
“PPA-F.”
17.0 APPLICABLE LAW, VENUE, ATTORNEYS’ FEES, AND INTERPRETATION
This Agreement will be governed by and construed in accordance with the laws of the State of
California. The Parties will comply with applicable laws pertaining to their obligations arising under this
040914 jrm 0180042 16
Agreement. In the event that an action is brought, the Parties agree that trial of such action will be vested
exclusively in the state courts of California or in the United States District Court for the Northern District
of California in the County of Santa Clara, State of California. The prevailing party in any action brought to
enforce the provisions of this Agreement may recover its reasonable costs and attorneys' fees expended in
connection with that action. If a court of competent jurisdiction finds or rules that any provision of this
Agreement, the Exhibits, or any amendment thereto is void or unenforceable, the unaffected provisions of
this Agreement, the Exhibits, or any amendment thereto will remain in full force and effect. The Parties
agree that the normal rule of construction to the effect that any ambiguity is to be resolved against the
drafting party will not be employed in the interpretation of this Agreement or any Exhibit or any
amendment thereof.
18.0 SEVERABILITY
If any provision in this Agreement is determined to be invalid, void or unenforceable by any court
having jurisdiction, such determination shall not invalidate, void, or make unenforceable any other
provision, agreement or covenant of this Agreement and the Parties shall use their best efforts to modify
this Agreement to give effect to the original intention of the Parties.
19.0 COUNTERPARTS; INTERPRETATION OF CONFLICTING PROVISIONS
This Agreement may be executed in one or more counterparts, each of which shall be deemed an
original and all of which shall be deemed one and the same Agreement. Delivery of an executed
counterpart of this Agreement by facsimile or portable document format (“PDF”) transmission will be
deemed as effective as delivery of an originally executed counterpart. Each Party delivering an executed
counterpart of this Agreement by facsimile or PDF transmission will also deliver an originally executed
counterpart, but the failure of any Party to deliver an originally executed counterpart of this Agreement will
not affect the validity or effectiveness of this Agreement. In the event of a conflict between the Agreement
and any, some or all of the Exhibits, the document imposing the more specific duty or obligation will
prevail.
20.0 GENERAL
No amendment to or modification of this Agreement shall be enforceable unless reduced to writing and
executed by both Parties. This Agreement shall not impart any rights enforceable by any third party other
than a permitted successor or assignee bound to this Agreement. Waiver by a Party of any default by the
other Party shall not be construed as a waiver of any other default. The headings used herein are for
convenience and reference purposes only.
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21. EXHIBITS
The following exhibits shall be deemed incorporated in and made a part of this Agreement.
Exhibit “PPA-A” - Facility Description, Prices, and Reservation Deposit
Exhibit “PPA-B” - Commercial Operation Date Confirmation Letter
Exhibit “PPA-C” - Scheduling and Outage Notification Procedure
Exhibit “PPA-D” - Green Attributes Reporting and Conveyance Procedures
Exhibit “PPA-E” - Insurance Requirements
Exhibit “PPA-F” - Notices
Exhibit “PPA-G” - Form of Lender Consent and Agreement
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed by their
authorized representatives as of the Effective Date.
CITY OF PALO ALTO SELLER
APPROVED AS TO FORM
Senior Deputy City Attorney
APPROVED
City Manager
Director of Utilities
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EXHIBIT “PPA-A”
Facility Description, Rates, and Reservation Deposit
Program Rates
Contract Term: Twenty (20) or twenty-five (25) years
Contract rate: $0.165 per kWh for solar resources
$0.08193 per kWh for non-solar resources, 20 year contract term
$0.08294 per kWh for non-solar resources, 25 year contract term
Pre-certification rate: $0.08 per kWh
Reservation Deposit
Reservation Deposit ($20/kW of Contract Capacity) $
Service address:
Facility Description:
Contract Capacity: kW (CEC-AC), based on solar array rating (Panel rated
output at PV USA test conditions x inverter efficiency)
Facility primary fuel/technology:
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EXHIBIT “PPA-B”
Commercial Operation Date Confirmation Letter
In accordance with the terms of the Power Purchase Agreement (Palo Alto CLEAN), dated
(the “Agreement”) by and between the City of Palo Alto, as the Buyer, and
, as the Seller, this Confirmation Letter serves to
document the Parties’ agreement that (i) the conditions precedent to the occurrence of the Commercial
Operation Date have been satisfied, and (ii) the Buyer has received Energy, as specified in the Agreement,
as of , . The actual installed Contract Capacity is kW.
This Confirmation Letter shall confirm the Commercial Operation Date, as defined in the Agreement, as of
the date referenced in the preceding sentence.
IN WITNESS WHEREOF, each Party has caused this letter to be duly executed by its authorized
representative as of the date of last signature provided below:
Buyer Seller
By: By:
Name: Name:
Title: Director of Utilities Title:
Date: Date:
In recognition of the Commercial Operation Date relative to the Effective Date of the Agreement by
and between the Buyer and the Seller, the Seller hereby calculates the amount to return, if any, of the
Seller’s deposit, as follows:
Original Reservation Deposit Amount: $
Commercial Operation Date Deadline:
□ Commercial Operation Date is prior to Deadline
□ Commercial Operation Date occurred weeks following the Deadline, meaning that %
of the Reservation Deposit is relinquished by Seller per Section 7.2.2 of the Power Purchase
Agreement.
Amount (if any) of Reservation Deposit to return to the Seller is: $
040914 jrm 0180042 20
EXHIBIT “PPA-C”
Scheduling and Outage Notification Procedure
C.1 Applicability. This Exhibit” PPA-C” shall apply if the Facility is subject to Section 6.0
of this Agreement.
C.2 Annual Operations Forecast
C.2.1 By the tenth (10th) day September of each calendar year, the Seller will provide
NCPA with an annual operations forecast detailing hourly expected generation and all proposed
planned Outages for the next calendar year. The annual operations forecast for the calendar year
shall be provided by not later than ninety (90) days prior to the scheduled Commercial Operation
Date of the Generating Facility.
C.2.2 NCPA may request modifications to the annual operations forecast at any time,
and the Seller shall use good faith efforts to accommodate the requested modifications.
C.2.3 The Seller shall not conduct Planned Outages at times other than as set forth in
its annual operations forecast, unless approved in advance by NCPA, which approval shall not be
withheld or delayed unreasonably.
C.2.4 The Seller shall not schedule or conduct Planned Outages from 12:00 p.m.
through 7:00 p.m. Pacific Time during the months of June through October.
C.3. Short Term Operations Forecasts
C.3.1. Quarterly Operations Forecast
C.3.1.1 By the fifth (5th) day of January, April and July of each Contract Year,
the Seller shall provide a calendar quarter-operations forecast by hour of expected
generation and all proposed Planned Outages for the next full calendar quarter and the
twelve (12) months following that calendar quarter. As an example, by January 5, 2014,
the Seller would provide a calendar quarter-operations forecast by hour of expected
generation for the period, April 1, 2014 through June 30, 2014, and identify all proposed
Planned Outages for the period, April 1, 2014 through June 30, 2015.
C.3.1.2 NCPA will approve or require modifications to the proposed calendar
quarter-operations forecast within ten (10) days of receipt of the forecast.
C.3.1.3 If required by NCPA, the Seller will provide a modified calendar
quarter-operations forecast within seven (7) days after receipt of required modifications
from NCPA.
C.3.2 Weekly Update
C.3.2.1 By 14:00 of each Wednesday, the Seller shall provide an electronic
update, in a format specified by NCPA, to the calendar quarter-operations forecast for the
following seven (7) days (Thursday through the next Wednesday).
C.3.2.2 The weekly update shall include hourly expected generation and all
proposed planned Outages for the relevant seven (7) day period.
C.4 Outage Detail for Annual and Short Term Operations Forecasts. Outage information
provided by the Seller shall include, at a minimum, the start time and stop time of the Outage, capacity out
of service (kW), the equipment that is or will be out of service, and the reason for the Outage.
040914 jrm 0180042 21
C.5 General Scheduling Protocols
C.5.1 Daily Modifications to Forecasts. Unless otherwise mutually agreed, the Seller
may make changes to the weekly update to the calendar quarter-operations forecast by providing
such changes to NCPA prior to 08:00 of the day that is two (2) Business Days before the active
scheduling day as determined by the WECC prescheduling calendar. Example: For power that is
scheduled for generation or delivery on Friday, March 29, 2014, changes must be submitted to
NCPA by 08:00 on Wednesday, March 27, 2014.
C.5.2 Hourly Modifications to Active Schedules. Unless otherwise mutually agreed,
the Seller may request changes to active schedules by providing such changes to NCPA with a
minimum of four (4) hours’ notice prior to the applicable CAISO market deadline (e.g. Hour
Ahead Scheduling Process (“HASP”) Scheduling deadline, as defined in the CAISO Tariff).
Active day Schedule changes are not binding. Changes to active Schedules are limited to two (2)
changes per day, excluding forced Outages, unless otherwise agreed to between the Parties. One
request for a Schedule change, of one-hour or multiple-hours duration, constitutes one Schedule
change. Example: For power that is scheduled for generation or delivery in hour ending 15:00 (for
the period from 14:01 to 15:00), changes must be submitted to NCPA by 10:00.
C.5.3. Unforeseen Circumstances. At the Seller’s request, NCPA may, but is not
required to, modify the Schedules for the Generation Facility Output due to unforeseen
circumstances in accordance with the above scheduling timeline constraints described in this
Exhibit PPA-C.
C.5.4. Absence of Forecasts. In the absence of forecasts and schedules as required by
this Agreement or this Exhibit, NCPA shall utilize the most current information the Seller
provides in the development and submission of Schedules.
C.6 Outage Reporting Protocols
C.6.1. Notification. The Seller shall notify NCPA of all planned or forced Outages of
the Generating Facility to ensure compliance with the CAISO Outage Coordination and
Enforcement Protocols.
C.6.1.1 Outage information provided by the Seller shall include, at a minimum,
the start time and stop time of the Outage, Capacity out of service (kW), equipment out of
service, and the reason for the Outage.
C. 6.1.2 Seller shall provide the Planned Outages not included in the annual
operations forecast, the calendar quarter-operations forecast, or the weekly update, to
NCPA at least four (4) Business Days prior to the start of the requested outage.
C. 6.1.3 At any time prior to the start of a Planned Outage, the CAISO may
deny the Outage due to a System Emergency (as defined in the CAISO Tariff) or as
otherwise permitted under the CAISO Tariff. If NCPA receives notice that the CAISO
has denied an Outage in accordance with the CAISO Tariff, NCPA will notify the Seller
as soon as possible and the Seller shall modify the planned Outage as required by the
CAISO.
C.6.2 Commencement of an Outage. The Seller shall not begin any Planned Outage
without the prior approval of NCPA and the CAISO.
C.6.3 Forced Outages
C.6.3.1 The Seller shall report the Forced Outages to NCPA within twenty (20)
040914 jrm 0180042 22
minutes of such Outages.
C.6.3.2 The Seller’s notice of a Forced Outage sent to NCPA shall include the
reason for the Outage (if known), expected duration of the Outage, and the Capacity
reduction.
C.6.3.3 By the end of the next Business Day following the day on which a
Forced Outage has occurred, the Seller shall provide to NCPA a detailed written report,
specifying the reason for the Outage, expected duration of such Outage, capacity
reduction, and actions taken to mitigate such Outage.
C.6.4 Return to Service. The Seller shall notify NCPA as soon as possible, but in any
case before the Generating Facility is returned to service.
C.7 Notices. All Scheduling notices and Schedules shall be submitted to NCPA by phone,
fax or email, or other means as may be mutually agreed by the Parties, to the persons designated in Exhibit
“PPA-F.”
C.8 Changes in Scheduling and Outage Procedure. The Buyer shall revise Exhibit “PPA-C,”
or, as appropriate, give written notice to the Seller regarding the revision, and issue a new Exhibit
“PPA-C,” which shall then become part of the Agreement to reflect changes in the scheduling and outage
notification procedure.
040914 jrm 0180042 23
EXHIBIT “PPA-D”
Green Attributes Reporting and Conveyance Procedures
D.1 Additional Definitions for the Conveyance of Green Attributes
D.1.1 “Certificate Transfers” means the process, as described in the WREGIS
Operating Rules, whereby a WREGIS account holder may request that WREGIS Certificates from
a specific generating unit shall be directly deposited to another WREGIS account.
D.1.2 “WREGIS Certificates” means a certificate created within the WREGIS system
that represents all Renewable and Green Attributes from one MWh of electricity generation from
an Eligible Renewable Energy Resource that is registered with WREGIS.
D.1.3 “WREGIS Operating Rules” means the document published by WREGIS that
governs the operation of the WREGIS system for registering, tracking, and conveying, among
others, RECs produced from Eligible Renewable Energy Resources that shall be registered with
WREGIS.
D.1.4 “WREGIS” means Western Renewable Energy Generation Information System.
D.2 RECs. Green Attributes shall be conveyed by the Seller to the Buyer through RECs,
which shall be registered tracked and conveyed to the Buyer, using WREGIS.
D.3 WREGIS Registration. Prior to the Commercial Operation Date, the Buyer will register
the Facility in the Buyer’s WREGIS account on behalf of the Seller. The Buyer shall charge back to the
Seller any costs of registering and maintaining the registration of the Facility with WREGIS. The Seller
shall provide to the Buyer any documents required by WREGIS and assign the Seller’s rights to register the
Facility in WREGIS, using agreements provided by WREGIS.
D.4 B u yer ’s W REGI S Acco unt . The Buyer shall, at its sole expense, establish and maintain
the Buyer’s WREGIS account sufficient to accommodate the WREGIS Certificates produced by the output
of the Facility. The Buyer shall be responsible for all expenses associated with (A) establishing and
maintaining the Buyer’s WREGIS Account, and (B) subsequently transferring or retiring WREGIS
Certificates.
D.5 Qualified Reporting Entity. The Buyer shall be the Qualified Reporting Entity (as such
term is defined by WREGIS) for the Facility, and shall be responsible for providing the metered Output
data to WREGIS.
D.6 Reporting of Environmental Attributes. In lieu of the Seller’s transfer of the WREGIS
Certificates using Certificate Transfers from the Seller’s WREGIS account to the Buyer’s WREGIS
account, the Buyer shall report the Facility as being held directly in its WREGIS account, which will
preclude the Seller from reporting the Facility in its own WREGIS account.
D.6.1 By avoiding the use of Certificate Transfers, there will be no transaction costs to
the Seller or the Buyer for the Certificate Transfers that would otherwise be used.
D.6.2 WREGIS Certificates for the Facility will be created on a calendar month basis
in accordance with the certification procedure established by the WREGIS Operating Rules in an
amount equal to the Energy generated by the Project and delivered to the Buyer in the same
calendar month.
D.6.3 WREGIS Certificates will only be created for whole MWh amounts of energy
generated. Any fractional MWh amounts (i.e., kWh) will be carried forward until sufficient
generation is accumulated for the creation of a WREGIS Certificate and all such accumulated
040914 jrm 0180042 24
MWh of Environmental Attributes will then be available to Buyer.
D.6.4 If a WREGIS Certificate Modification (as such term is defined by WREGIS)
will be required to reflect any errors or omissions regarding the Green Attributes from the Facility,
then the Buyer will manage the submission of the WREGIS Certificate Modification.
D.6.5 Due to the expected delay in the creation of WREGIS Certificates relative to the
timing of invoice payments under Section 2, the Buyer will normally be making an invoice
payment for the Output for a given month in accordance with Section 2 before the WREGIS
Certificates for such month may be created in the Buyer’s WREGIS account. Notwithstanding this
delay, the Buyer shall have all right and title to all such WREGIS Certificates upon payment to the
Seller in accordance with Section 2.
D.7 Changes in Green Attributes Reporting and Conveyance Procedures. The Buyer shall
revise this Exhibit “PPA-D,” as appropriate, give written notice to the Seller regarding the revision, and
issue a new Exhibit “PPA-D,” which shall then become part of this Agreement in the event that:
D.7.1 WREGIS changes the WREGIS Operating Rules (as defined by WREGIS) after
the Effective Date or applies the WREGIS Operating Rules in a manner inconsistent with this
Exhibit “PPA-D” after the Effective Date; or,
D.7.2 WREGIS is replaced as the primary method that the Buyer uses for conveyance
of Green Attributes, or additional methods to convey all Green Attributes, are required.
040914 jrm 0180042 25
EXHIBIT “PPA-E”
Insurance Requirements
CONTRACTORS TO THE CITY OF PALO ALTO (CITY), AT THEIR SOLE EXPENSE, WILL FOR THE TERM OF THE
CONTRACT OBTAIN AND MAINTAIN INSURANCE IN THE AMOUNTS FOR THE COVERAGE SPECIFIED BELOW,
AFFORDED BY COMPANIES WITH A BEST’S KEY RATING OF A-:VII, OR HIGHER, LICENSED OR
AUTHORIZED TO TRANSACT INSURANCE BUSINESS IN THE STATE OF CALIFORNIA.
AWARD IS CONTINGENT ON COMPLIANCE WITH CITY’S INSURANCE REQUIREMENTS, AS SPECIFIED,
BELOW:
REQUIRED
TYPE OF COVERAGE
REQUIREMENT
MINIMUM LIMITS
EACH
OCCURRENCE AGGREGATE
YES
YES
WORKER’S COMPENSATION
AUTOMOBILE LIABILITY
STATUTORY
STATUTORY
YES
COMMERCIAL GENERAL
LIABILITY, INCLUDING
PERSONAL INJURY, BROAD FORM
PROPERTY DAMAGE BLANKET
CONTRACTUAL, AND FIRE LEGAL
LIABILITY
BODILY INJURY
PROPERTY DAMAGE
BODILY INJURY & PROPERTY DAMAGE
COMBINED.
$1,000,000
$1,000,000
$1,000,000
$2,000,000
$2,000,000
$2,000,000
YES
COMPREHENSIVE AUTOMOBILE
LIABILITY, INCLUDING, OWNED,
HIRED, NON-OWNED
BODILY INJURY
- EACH PERSON
- EACH OCCURRENCE
PROPERTY DAMAGE
BODILY INJURY AND PROPERTY
DAMAGE, COMBINED
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
NO
PROFESSIONAL LIABILITY,
INCLUDING, ERRORS AND
OMISSIONS, MALPRACTICE
(WHEN APPLICABLE), AND
NEGLIGENT PERFORMANCE
ALL DAMAGES
$1,000,000
YES
THE CITY OF PALO ALTO IS TO BE NAMED AS AN ADDITIONAL INSURED: PROPOSER, AT ITS SOLE COST AND
EXPENSE, SHALL OBTAIN AND MAINTAIN, IN FULL FORCE AND EFFECT THROUGHOUT THE ENTIRE TERM OF ANY RESULTANT AGREEMENT, THE INSURANCE COVERAGE HEREIN DESCRIBED, INSURING NOT ONLY PROPOSER AND ITS SUBCONSULTANS, IF ANY, BUT ALSO, WITH THE EXCEPTION OF WORKERS’ COMPENSATION, EMPLOYER’S
LIABILITY AND PROFESSIONAL INSURANCE, NAMING AS ADDITIONAL INSURES CITY, ITS COUNCIL MEMBERS,
OFFICERS, AGENTS, AND EMPLOYEES.
I. INSURANCE COVERAGE MUST INCLUDE:
A. A PROVISION FOR A WRITTEN THIRTY DAY ADVANCE NOTICE TO CITY OF CHANGE IN COVERAGE
OR OF COVERAGE CANCELLATION; AND
B. A CONTRACTUAL LIABILITY ENDORSEMENT PROVIDING INSURANCE COVERAGE FOR CONTRACTOR’S
AGREEMENT TO INDEMNIFY CITY – SEE, SAMPLE AGREEMENT FOR SERVICES.
II. SUBMIT CERTIFICATE(S) OF INSURANCE EVIDENCING REQUIRED COVERAGE, OR COMPLETE THIS
SECTION AND IV THROUGH V, BELOW.
A. NAME AND ADDRESS OF COMPANY AFFORDING COVERAGE (NOT AGENT OR BROKER):
B. NAME, ADDRESS, AND PHONE NUMBER OF YOUR INSURANCE AGENT/BROKER:
040914 jrm 0180042 26
C. POLICY NUMBER(S):
D. DEDUCTIBLE AMOUNT(S) (DEDUCTIBLE AMOUNTS IN EXCESS OF $5,000 REQUIRE CITY’S PRIOR
APPROVAL):
III. AWARD IS CONTINGENT ON COMPLIANCE WITH CITY’S INSURANCE REQUIREMENTS, AND
PROPOSER’S SUBMITTAL OF CERTIFICATES OF INSURANCE EVIDENCING COMPLIANCE WITH THE
REQUIREMENTS SPECIFIED HEREIN.
IV. ENDORSEMENT PROVISIONS, WITH RESPECT TO THE INSURANCE AFFORDED TO “ADDITIONAL
INSURES”
A. PRIMARY COVERAGE
WITH RESPECT TO CLAIMS ARISING OUT OF THE OPERATIONS OF THE NAMED INSURED, INSURANCE AS
AFFORDED BY THIS POLICY IS PRIMARY AND IS NOT ADDITIONAL TO OR CONTRIBUTING WITH ANY
OTHER INSURANCE CARRIED BY OR FOR THE BENEFIT OF THE ADDITIONAL INSURES.
B. CROSS LIABILITY
THE NAMING OF MORE THAN ONE PERSON, FIRM, OR CORPORATION AS INSURES UNDER THE POLICY
SHALL NOT, FOR THAT REASON ALONE, EXTINGUISH ANY RIGHTS OF THE INSURED AGAINST ANOTHER,
BUT THIS ENDORSEMENT, AND THE NAMING OF MULTIPLE INSUREDS, SHALL NOT INCREASE THE TOTAL
LIABILITY OF THE COMPANY UNDER THIS POLICY.
C. NOTICE OF CANCELLATION
1. IF THE POLICY IS CANCELED BEFORE ITS EXPIRATION DATE FOR ANY REASON OTHER THAN THE
NON-PAYMENT OF PREMIUM, THE ISSUING COMPANY SHALL PROVIDE CITY AT LEAST A THIRTY (30) DAY
WRITTEN NOTICE BEFORE THE EFFECTIVE DATE OF CANCELLATION.
2. IF THE POLICY IS CANCELED BEFORE ITS EXPIRATION DATE FOR THE NON-PAYMENT OF PREMIUM,
THE ISSUING COMPANY SHALL PROVIDE CITY AT LEAST A TEN (10) DAY WRITTEN NOTICE BEFORE THE
EFFECTIVE DATE OF CANCELLATION.
V. PROPOSER CERTIFIES THAT PROPOSER’S INSURANCE COVERAGE MEETS THE ABOVE
REQUIREMENTS:
THE INFORMATION HEREIN IS CERTIFIED CORRECT BY SIGNATURE(S) BELOW. SIGNATURE(S) MUST BE
SAME SIGNATURE(S) AS APPEAR(S) ON SECTION II, ATTACHMENT A, PROPOSER’S INFORMATION FORM.
Firm:
Signature:
Name:
(Print or type name)
Signature:
Name:
(Print or type name)
040914 jrm 0180042 27
NOTICES SHALL BE MAILED TO:
PURCHASING AND
CONTRACT ADMINISTRATION
CITY OF PALO ALTO
P.O. BOX 10250
PALO ALTO, CA 94303.
040914 jrm 0180042 28
EXHIBIT “PPA-F”
Notices
Contract Administration
BUYER: SELLER:
City of Palo Alto
Utilities Resource Management
250 Hamilton Avenue
Palo Alto, CA 94301
Ph: 650-329-2689
Email: UtilityCommoditySettlements@CityofPaloAlto.Org
Billing and Settlements
BUYER: SELLER:
City of Palo Alto
Utilities Resource Management
250 Hamilton Avenue
Palo Alto, CA 94301
Ph: 650-329-2689
Email: UtilityCommoditySettlements@CityofPaloAlto.Org
Forecasting and Outage Reporting under Section 6 of this Agreement
Planned Outages:
BUYER: SELLER:
Northern California Power Agency Real-
Time Dispatch
651 Commerce Drive
Roseville, CA 95678
Ph: 916-786-3518
Forced Outages
BUYER: SELLER:
Northern California Power Agency Real-
Time Dispatch
651 Commerce Drive
Roseville, CA 95678
Ph: 916-786-3518
Forecasting and Scheduling
BUYER: SELLER:
Northern California Power Agency
Operations and Pre-Scheduling
651 Commerce Drive
Roseville, CA 95678
Ph: 916-786-0123
040914 jrm 0180042 29
EXHIBIT “PPA-G”
Form of Lender Consent and Agreement
This CONSENT AND AGREEMENT (this “Consent”), dated as of , 20 , is entered into
by and among the CITY OF PALO ALTO, a California chartered municipal corporation (the “City”),
, a corporation (the “Lender),” by its agent,
(the “Administrative Agent”), and , a
corporation (the “Borrower”) (collectively, the “Parties”). Unless otherwise defined, all
capitalized terms have the meaning given in the Contract (as hereinafter defined).
RECITALS
A. Borrower intends to develop, construct, install, test, own, operate and use an approximately
MW electric generating facility located in the city of Palo Alto in the State of California, known as
the Project (the “Project”).
B. In order to partially finance the development, construction, installation, testing, operation and
use of the Project, Borrower has entered into that certain financing agreement dated as of
(as amended, amended and restated, supplemented or otherwise modified from time to time, the “Financing
Agreement”), among Borrower, the financial institutions from time to time parties thereto (collectively, the
“Lenders”) , and Administrative Agent for the Lenders, pursuant to which, among other things, Lenders
have extended commitments to make loans and other financial accommodations to, and for the benefit of,
Borrower.
C. The City and Borrower have entered into that certain Power Purchase Agreement, dated as of
(attached hereto and incorporated herein by reference, as amended, amended and restated,
supplemented or otherwise modified from time to time in accordance with the terms thereof and hereof, the
“Power Purchase Agreement”).
D. The City and Borrower have entered into that certain Interconnection Agreement, dated as of
_ (attached hereto and incorporated herein by reference, as amended, amended and restated,
supplemented or otherwise modified from time to time in accordance with the terms thereof and hereof, the
“Interconnection Agreement”).
E. Pursuant to a security agreement executed by Borrower and Administrative Agent for the
Lenders (as amended, amended and restated, supplemented or otherwise modified from time to time, the
“Security Agreement”), Borrower has agreed, among other things, to assign, as collateral security for its
obligations under the Financing Agreement and related documents (collectively, the “Financing
Documents”), all of its right, title and interest in, to and under the Power Purchase Agreement and
Interconnection Agreement to Administrative Agent for the benefit of itself, the Lenders and each other
entity or person providing collateral security under the Financing Documents.
F. It is a requirement under the Financing Agreement that the Parties hereto execute this Consent.
AGREEMENT
NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, and intending to be legally bound, the Parties agree, as follows:
1. CONSENT TO ASSIGNMENT. The City acknowledges the assignment referred to in Recital E
above, consents to an assignment of the Power Purchase Agreement and Interconnection Agreement
pursuant thereto, and agrees with Administrative Agent, as follows:
(a) Administrative Agent shall be entitled (but not obligated) to exercise all rights and to cure any
040914 jrm 0180042 30
defaults of Borrower under the Power Purchase Agreement or Interconnection Agreement, as the
case may be, subject to applicable notice and cure periods provided in the Power Purchase
Agreement and Interconnection Agreement. Upon receipt of notice from Administrative Agent,
the City agrees to accept such exercise and cure by Administrative Agent if timely made by
Administrative Agent under the Power Purchase Agreement or Interconnection Agreement, as the
case may be, and this Consent. Upon receipt of Administrative Agent's written instructions and to
the extent allowed by law, the City agrees to make directly to such account as Administrative
Agent may direct the City, in writing, from time to time, all payments to be made by the City to
Borrower under the Power Purchase Agreement or Interconnection Agreement, as the case may
be, from and after the City’s receipt of such instructions, and Borrower consents to any such
action. The City shall not incur any liability to Borrower under the Power Purchase Agreement,
Interconnection Agreement, or this Consent for directing such payments to Administrative Agent
in accordance with this subsection (a).
(b) The City will not, without the prior written consent of Administrative Agent (such consent not
to be unreasonably withheld), (i) cancel or terminate the Power Purchase Agreement or
Interconnection Agreement, or consent to or accept any cancellation, termination or suspension
thereof by Borrower, except as provided in the Power Purchase Agreement or Interconnection
Agreement and in accordance with subparagraph 1(c) hereof, (ii) sell, assign or otherwise dispose
(by operation of law or otherwise) of any part of its interest in the Power Purchase Agreement or
Interconnection Agreement, except as provided in the Power Purchase Agreement or
Interconnection Agreement, or (iii) amend or modify the Power Purchase Agreement or
Interconnection Agreement in any manner materially adverse to the interest of the Lenders in the
Power Purchase Agreement and Interconnection Agreement as collateral security under the
Security Agreement.
(c) The City agrees to deliver duplicates or copies of all notices of default delivered by the City
under or pursuant to the Power Purchase Agreement or Interconnection Agreement to
Administrative Agent in accordance with the notice provisions of this Consent. The City shall
deliver any such notices concurrently with delivery of the notice to Borrower under the Power
Purchase Agreement or Interconnection Agreement. To the extent that a cure period is provided
under the Power Purchase Agreement or Interconnection Agreement, Administrative Agent shall
have the same period of time to cure the breach or default that Borrower is entitled to under the
Power Purchase Agreement or Interconnection Agreement, except that if the City does not deliver
the default notice to Administrative Agent concurrently with delivery of the notice to Borrower
under the Power Purchase Agreement or Interconnection Agreement, then as to Administrative
Agent, the applicable cure period under the Power Purchase Agreement or Interconnection
Agreement shall begin on the date on which the notice is given to Administrative Agent. If
possession of the Project is necessary to cure such breach or default, and Administrative Agent or
its designee(s) or assignee(s) declare Borrower in default and commence foreclosure proceedings,
Administrative Agent or its designee(s) or assignee(s) will be allowed a reasonable period to
complete such proceedings so long as Administrative Agent or its designee(s) continue to perform
any monetary obligations under the Power Purchase Agreement or Interconnection Agreement, as
the case may be. The City consents to the transfer of Borrower's interest under the Power Purchase
Agreement and Interconnection Agreement to the Lenders or Administrative Agent or their
designee(s) or assignee(s) or any of them or a purchaser or grantee at a foreclosure sale by judicial
or nonjudicial foreclosure and sale or by a conveyance by Borrower in lieu of foreclosure and
agrees that upon such foreclosure, sale or conveyance, the City shall recognize the Lenders or
Administrative Agent or their designee(s) or assignee(s) or any of them or other purchaser or
grantee as the applicable party under the Power Purchase Agreement and Interconnection
Agreement (provided that such Lenders or Administrative Agent or their designee(s) or
assignee(s) or purchaser or grantee assume the obligations of Borrower under the Power Purchase
Agreement and Interconnection Agreement, including, without limitation, satisfaction and
compliance with all credit provisions of the Power Purchase Agreement and Interconnection
Agreement, if any, and provided further that such Lenders or Administrative Agent or their
designee(s) or assignee(s) or purchaser or grantee has a creditworthiness equal to or better than
040914 jrm 0180042 31
Borrower, as reasonably determined by City).
(d) In the event that either the Power Purchase Agreement or Interconnection Agreement, or both
is rejected by a trustee or debtor-in-possession in any bankruptcy or insolvency proceeding, and if,
within forty-five (45) days after such rejection, Administrative Agent shall so request, the City
will execute and deliver to Administrative Agent a new power purchase agreement or
interconnection agreement, as the case may be, which power purchase agreement or
interconnection agreement shall be on the same terms and conditions as the original Power
Purchase Agreement or Interconnection Agreement for the remaining term of the original Power
Purchase Agreement or Interconnection Agreement before giving effect to such rejection, and
which shall require Administrative Agent to cure any defaults then existing under the original
Power Purchase Agreement or Interconnection Agreement. Notwithstanding the foregoing, any
new renewable power purchase agreement or interconnection agreement will be subject to all
regulatory approvals required by law. The City will use good faith efforts to promptly obtain any
necessary regulatory approvals.
(e) In the event Administrative Agent, the Lenders or their designee(s) or assignee(s) elect to
perform Borrower's obligations under the Power Purchase Agreement and Interconnection
Agreement, succeed to Borrower’s interest under the Power Purchase Agreement and
Interconnection Agreement, or enter into a new power purchase agreement or interconnection
agreement as provided in subparagraph 1(d) above, the recourse of the City against Administrative
Agent, Lenders or their designee(s) and assignee(s) shall be limited to such Parties’ interests in the
Project, and the credit support required under the Power Purchase Agreement and Interconnection
Agreement, if any.
(f) In the event Administrative Agent, the Lenders or their designee(s) or assignee(s) succeed to
Borrower's interest under the Power Purchase Agreement and Interconnection Agreement,
Administrative Agent, the Lenders or their designee(s) or assignee(s) shall cure any then-existing
payment and performance defaults under the Power Purchase Agreement or Interconnection
Agreement, except any performance defaults of Borrower itself, which by their nature are not
susceptible of being cured. Administrative Agent, the Lenders and their designee(s) or assignee(s)
shall have the right to assign all or a pro rata interest in the Power Purchase Agreement and
Interconnection Agreement to a person or entity to whom Borrower’s interest in the Project is
transferred, provided such transferee assumes the obligations of Borrower under the Power
Purchase Agreement and Interconnection Agreement and has a creditworthiness equal to or better
than Borrower, as reasonably determined by the City. Upon such assignment, Administrative
Agent and the Lenders and their designee(s) or assignee(s) (including their agents and employees)
shall be released from any further liability thereunder accruing from and after the date of such
assignment, to the extent of the interest assigned.
2. REPRESENTATIONS AND WARRANTIES. The City hereby represents and warrants that as
of the date of this Consent:
(a) It (i) is duly formed and validly existing under the laws of the State of California, and (ii) has
all requisite power and authority to enter into and to perform its obligations hereunder and under
the Power Purchase Agreement and Interconnection Agreement, and to carry out the terms hereof
and thereof and the transactions contemplated hereby and thereby;
(b) the execution, delivery and performance of this Consent, the Power Purchase Agreement and
the Interconnection Agreement have been duly authorized by all necessary action on its part and
do not require any approvals, material filings with, or consents of any entity or person which have
not previously been obtained or made;
(c) each of this Consent, the Power Purchase Agreement, and the Interconnection Agreement is in
full force and effect;
040914 jrm 0180042 32
(d) each of this Consent, the Power Purchase Agreement, and the Interconnection Agreement has
been duly executed and delivered on its behalf and constitutes its legal, valid and binding
obligation, enforceable against it in accordance with its terms, except as the enforceability thereof
may be limited by (i) bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors’ rights generally and (ii) general equitable principles (whether considered
in a proceeding in equity or at law);
(e) there is no litigation, arbitration, investigation or other proceeding pending for which the City
has received service of process or, to the City’s actual knowledge, threatened against the City
relating solely to this Consent, the Power Purchase Agreement, or the Interconnection Agreement
and the transactions contemplated hereby and thereby;
(f) the execution, delivery and performance by it of this Consent, the Power Purchase Agreement,
and the Interconnection Agreement, and the consummation of the transactions contemplated
hereby, will not result in any violation of, breach of or default under any term of any material
contract or material agreement to which it is a party or by which it or its property is bound, or of
any material requirements of law presently in effect having applicability to it, the violation, breach
or default of which could have a material adverse effect on its ability to perform its obligations
under this Consent;
(g) neither the City nor, to the City’s actual knowledge, any other party to the Power Purchase
Agreement or Interconnection Agreement, is in default of any of its obligations thereunder; and
(h) to the City’s actual knowledge, (i) no Force Majeure Event exists under, and as defined in, the
Power Purchase Agreement or Interconnection Agreement and (ii) no event or condition exists
which would either immediately or with the passage of any applicable grace period or giving of
notice, or both, enable either the City or Borrower to terminate or suspend its obligations under the
Power Purchase Agreement or the Interconnection Agreement.
Each of the representations and warranties set forth herein shall survive the execution and delivery
of this Consent and the consummation of the transactions contemplated hereby.
3. NOTICES. All notices required or permitted hereunder shall be given, in writing, and shall be
effective (a) upon receipt if hand delivered, (b) upon telephonic verification of receipt if sent by facsimile
and (c) if otherwise delivered, upon the earlier of receipt or three (3) Business Days after being sent
registered or certified mail, return receipt requested, with proper postage affixed thereto, or by private
courier or delivery service with charges prepaid, and addressed as specified below:
If to the City:
[ ]
[ ]
[ ]
Telephone No.: [ ]
Facsimile No.: [ ]
Attn: [ ]
If to Administrative Agent:
[ ]
[ ]
[ ]
Telephone No.: [ ]
Facsimile No.: [ ]
Attn: [ ]
040914 jrm 0180042 33
If to Borrower:
[ ]
[ ]
[ ]
Telephone No.: [ ]
Facsimile No.: [ ]
Attn: [ ]
Any party shall have the right to change its address for notice hereunder to any other location within the
United States by giving thirty (30) days written notice to the other parties in the manner set forth above.
4. ASSIGNMENT, TERMINATION, AMENDMENT. This Consent shall be binding upon and
benefit the successors and assigns of the Parties hereto and their respective successors, transferees and
assigns (including without limitation, any entity that refinances all or any portion of the obligations under
the Financing Agreement). The City agrees (a) to confirm such continuing obligation, in writing, upon the
reasonable request of (and at the expense of) Borrower, Administrative Agent, the Lenders or any of their
respective successors, transferees or assigns, and (b) to cause any successor-in-interest to the City with
respect to its interest in the Power Purchase Agreement or Interconnection Agreement to assume, in writing
and in form and substance reasonably satisfactory to Administrative Agent, the obligations of City
hereunder. Any purported assignment or transfer of the Power Purchase Agreement or Interconnection
Agreement not in conjunction with the written instrument of assumption contemplated by the foregoing
clause (b) shall be null and void. No termination, amendment, or variation of any provisions of this Consent
shall be effective unless in writing and signed by the parties hereto. No waiver of any provisions of this
Consent shall be effective unless in writing and signed by the party waiving any of its rights hereunder.
5. GOVERNING LAW. This Consent shall be governed by the laws of the State of California
applicable to contracts made and to be performed in California. The federal courts or the state courts
located in California shall have exclusive jurisdiction to resolve any disputes with respect to this Consent
with the City, Assignor, and the Lender or Lenders irrevocably consenting to the jurisdiction thereof for
any actions, suits, or proceedings arising out of or relating to this Consent.
6. COUNTERPARTS. This Consent may be executed in one or more duplicate counterparts, and
when executed and delivered by all the parties listed below, shall constitute a single binding agreement.
7. SEVERABILITY. In case any provision of this Consent, or the obligations of any of the Parties
hereto, shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining
provisions, or the obligations of the other Parties hereto, shall not in any way be affected or impaired
thereby.
8. ACKNOWLEDGMENTS BY BORROWER. Borrower, by its execution hereof, acknowledges
and agrees that neither the execution of this Consent, the performance by the City of any of the obligations
of the City hereunder, the exercise of any of the rights of the City hereunder, or the acceptance by the City
of performance of the Power Purchase Agreement by any party other than Borrower shall (1) release
Borrower from any obligation of Borrower under the Power Purchase Agreement or Interconnection
Agreement, (2) constitute a consent by the City to, or impute knowledge to the City of, any specific terms
or conditions of the Financing Agreement, the Security Agreement or any of the other Financing
Documents, or (3) except as expressly set forth in this Consent, constitute a waiver by the City of any of its
rights under the Power Purchase Agreement or Interconnection Agreement. Borrower and Administrative
Agent acknowledge hereby for the benefit of City that none of the Financing Agreement, the Security
040914 jrm 0180042 34
Agreement, the Financing Documents or any other documents executed in connection therewith alter,
amend, modify or impair (or purport to alter, amend, modify or impair) any provisions of the Power
Purchase Agreement.
CITY OF PALO ALTO ADMINISTRATIVE AGENT
APPROVED AS TO FORM
Senior Deputy City Attorney
BORROWER
APPROVED
City Manager
Director of Utilities
Utilities Advisory Commission Minutes Approved on: Page 1 of 4
DRAFT EXCERPTED MINUTES OF THE DECEMBER 2, 2015
UTILITIES ADVISORY COMMISSION MEETING
ITEM 2. ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend
that the City Council Adopt a Resolution to Continue the Palo Alto Clean Local Energy Accessible
Now (CLEAN) Program at the Current Contract Price of $0.165 per kilowatt-hour for Local Solar
Resources and at the Avoided Cost Level ($0.081 to $0.082 per kilowatt-hour) for Local Non-
solar Eligible Renewable Resources
Senior Resource Planner Jim Stack noted that staff returns every year near the end of the year
to update the program and the value (or "avoided cost") of local renewable supplies. He
discussed the history of the program as it changed from when the program was first adopted in
March 2012. He noted that when the Finance Committee last reviewed the program, it voted to
reduce the contract price for solar resources from 16.5 cents/kWh to the avoided cost at the
time (9.3 cents/kWh), however the Council ultimately approved continuing the 16.5 cents/kWh
price, but directed that the rent revenues from an impending project to put solar PV on City
parking garage rooftops be allocated to the Electric Fund to offset the rate impact of paying a
contract price that exceeds the avoided cost. Stack noted that despite the avoided cost being
lowered based on the latest renewable energy request for proposals, staff recommends that
the 16.5 cent/kWh price be continued.
Commissioner Eglash asked why, given the direction from Council in May, this topic is coming
back to the UAC now. Stack said that it is prudent to revisit the value of solar and the program
annually. Assistant Director Jane Ratchye added that it has been a full year since this item was
last discussed by the UAC.
Commissioner Eglash said he expects as the cost of solar has fallen and continues to fall, that
the CLEAN price should eventually be attractive to someone. Stack reminded that the federal
Investment Tax Credit (ITC) is scheduled to fall significantly at the end of 2016, which will
change the economics for projects. Commissioner Eglash noted that the value of solar has
fallen and the excess cost (the amount by which the CLEAN contract price exceeds the local
solar avoided cost) has grown, but it is still small compared to the impact to the electric utility
from the drought so he is persuaded to agree with the staff recommendation to maintain the
16.5 cent/kWh price.
DRAFT
ATTACHMENT C
Utilities Advisory Commission Minutes Approved on: Page 2 of 4
Commissioner Ballantine commented that additional equipment is required for local solar
installations to provide local grid resiliency because if there is a power outage, solar systems
employing standard inverters will all shut off as well and will not continue to provide power to
the building or the grid. He said that supply reliability is an interesting issue and the City may
want to think about encouraging or requiring systems to use new grid technology so that all the
inverters for these systems don’t turn off when we really want them to be operating. He said
that installations operating independent of the utility system may be considered too. He noted
that there could be a technical situation with the inverters in the event of a voltage variation
that could lead to reduced reliability. He suggested that the program should consider this
problem in its design. He added that if the program does not have any takers, maybe there are
other issues such as obtaining financing that could be solved. He said that perhaps a different
incentive structure could be contemplated with a focus on the loading of the distribution
system since there could be a location on the distribution system that would benefit more from
the addition of distributed generation, but that as certain types of renewables come online, the
City may see negative impacts on the system in some areas.
Commissioner Danaher asked how the avoided cost of the non-solar renewable energy was
calculated. Stack explained that the non-solar renewable energy is calculated by looking at the
general cost of renewable energy based on results from the latest Request for Proposals (RFP)
for baseload-type projects like a biomass generator, and adding in additional values provided by
local generation, such as reduced transmission costs, resource adequacy capacity requirements,
and distribution system losses. Commissioner Danaher asked why the avoided cost of solar was
higher than for non-solar local renewables. Ratchye replied that it is because energy prices
tend to be higher in the middle of the day, which coincides with when solar systems are
generating energy.
Commissioner Eglash suggested that the breakdown of the value of solar could be added to the
report to clarify all the parts that make up the avoided cost, and noted that a prior staff report
had provided that detail. Stack said that the breakdown of the components of the avoided cost
could be added to the report as it goes to the Finance Committee and Council for consideration.
Vice Chair Cook agreed that the Council would benefit from seeing this diagram of the makeup
of the avoided costs.
Commissioner Danaher said that he still doesn’t understand why local solar is more valuable
than solar from Central Valley transmitted to the City. Stack summarized the aspects of the
avoided costs including the losses and transmission costs. Ratchye noted that the difference
between the avoided cost (about 8.9 cents/kWh) and the CLEAN price was part of the findings
made by Council when it last approved the CLEAN price. She pointed to Attachment A of the
report, the draft resolution, which lists the additional values of local solar in Section 3 including:
“a portion of the City’s electric expenditures remain within the community, which provides
revenue for local economic development”, reducing the need for new transmission lines,
shading which can reduce the energy required for building cooling and create value for vehicle
owners, and resiliency of the City’s distribution system in combination with other equipment
such as electric storage systems (e.g. batteries).
Utilities Advisory Commission Minutes Approved on: Page 3 of 4
Commissioner Ballantine suggested that with grid support capable inverters, the local resiliency
value can be realized. Without that, it can't provide local resiliency. He said that there must be
grid support capable inverters, or storage, or direct wiring to load to actually have a local
resiliency benefit.
Commissioner Danaher said that the goal is to have the cleanest possible resources at the
lowest possible cost. He said that he would rather not subsidize local solar if it can be found
outside the City for a better price. He would prefer one price for solar and a premium price for
solar that can actually provide local reliability. He noted that the extra $380,000 per year for 25
years (the difference between the solar avoided cost and the CLEAN price of 16.5 cents/kWh)
could pay for extra staff, which could be more valuable.
Vice Chair Cook said that there is great interest in having solar locally and that Commissioner
Danaher is a new commissioner without the benefit of those prior discussions.
Commissioner Danaher said that if there were grid support capable inverters included, then the
value would be increased and the price could be increased.
Commissioner Ballantine said that factoring grid support capability into the proposal would
take time and can't be done overnight. He said that this is what we have right now and he
supports it.
Commissioner Eglash recommends approval of continuing the CLEAN price at 16.5 cents/kWh,
noting that the proposal is the same as Council action just 7 months ago. Ratchye explained
that the situation is different from the Council action in May 2015 in some significant ways. She
reminded that the Finance Committee voted unanimously to reduce the CLEAN price for local
solar to the avoided cost, but that the Council ultimately decided to continue the 16.5
cents/kWh price after directing that the expected revenue from the expected lease for the City
garage solar systems be allocated to the Electric Fund to cover the excess cost for the portion of
the program cap that was planned to be used by that project. However, the lease negotiations
are proceeding with a new vendor and the lease payments are significantly less than the
original proposal. In addition, Ratchye reminded that the avoided cost of local solar has
declined consistent with the latest renewable energy RFP results.
Commissioner Eglash said that the Council and community recognize the value of local solar
and that it has been consistent in its support for the extra costs above the market value. He
noted that he opposed such a high CLEAN price when it was initially presented to the UAC, but
supports the recommendation tonight because of the strong support for solar in the
community.
Commissioner Danaher recommended that the report that moves on to the Council explicitly
enumerate the benefits of local solar.
Utilities Advisory Commission Minutes Approved on: Page 4 of 4
ACTION:
Commissioner Eglash made a motion that the UAC recommend that Council support the staff
recommendation. Vice Chair Cook seconded the motion. The motion carried by a 3-0 vote with
Vice Chair Cook and Commissioners Eglash and Ballantine voting yes, Commissioner Danaher
abstaining and Chair Foster and Commissioners Hall and Schwartz absent.
City of Palo Alto (ID # 6490)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 2/16/2016
City of Palo Alto Page 1
Summary Title: Residential/Commercial Impact Fee Studies
Title: Commercial and Residential Impact Fee Nexus Studies and Recommend
Affordable Housing Impact Fees
From: City Manager
Lead Department: Planning and Community Environment
Recommendation
Staff recommends that the Finance Committee review the Residential and Commercial Impact
Fee Nexus Studies and forward the Studies to the City Council with a recommendation for
adoption of the affordable housing impact fees shown in Table 1, below.
Executive Summary
Staff recommends that the Finance Committee review the Residential and Commercial Impact
Fee Nexus Studies and recommend adoption of new affordable housing impact fees as follows:
Table 1. Existing and Proposed Affordable Housing Fees
Existing Fees Proposed Fees
Office/R&D $19.85/sf $35/sf
Hotel $19.85/sf $30/sf
Retail/Restaurant/Other $19.85/sf $19.85/sf
Market Rate Single Family Detached* 7.5 to 10% of sales price $95/sf
Market Rate Single Family Attached* 7.5 to 10% of sales price $50/sf
Market Rate Condo* 7.5 to 10% of sales price $50/sf
Market Rate Rental Housing None $50/sf
*Market rate ownership housing projects are currently subject to City’s Affordable housing in lieu
fees. Market rate rental projects are exempt from this requirement.
Source: Department of Planning & Community Development, January 2016
In April of 2014, the City entered into contract with Strategic Economics and Vernazza Wolfe
Associates, Inc, (Consultant) to develop two nexus studies for commercial and residential
impact fees to mitigate the impact of new development on the demand for affordable housing.
City policy requires that impact fees be periodically reviewed to determine whether they are
set at appropriate levels.
City of Palo Alto Page 2
Final drafts of the two studies were provided to City staff in late November 2015. The Draft
Commercial Linkage Fee Nexus Study (Attachment A) and the Draft Residential Impact Fee
Nexus Study (Attachment B) are attached to this report.
Background
An impact fee is a monetary exaction that is charged by a local governmental agency to an
applicant in connection with approval of a development project for the purpose of mitigating
impacts of the project. There must be a “nexus” or connection between the fee and the actual
impacts of the project, and the fee must be “roughly proportional” to the impact the project is
creating. In order to establish a reasonable relationship between the development project and
the fee it is charged, cities typically commission “nexus studies.”
If a city has already established an impact fee through a nexus study, it is typical for a
municipality to periodically commission a new study to determine whether the fee level is
appropriately set.
City’s Affordable Housing Fund
Since 1974, the City of Palo Alto has recognized the need for programming and funding to
support affordable housing goals. In that year, the City began receiving Community
Development Block Grant (CDBG) funding, and created a below market rate (BMR) program
that required market-rate housing developers to include BMR units in their developments, or
collect in-lieu fees if including such units was impractical.
The City’s affordable housing programming expanded in 1977 with the creation of the
Commercial Housing Fund, which requires non-residential developments to pay an impact fee
based on the new net square footage of the project. Today, the City collects $19.85/square foot
of new net space for the fund. Along with the Home Investment Partnership Fund and the
Below Market Rate Emergency Fund, these five sub-funds make up the City’s Affordable
Housing Fund.
Palmer Decision
In 2009, the California Court of Appeal, in Palmer/Sixth Street Properties L.P. v. City of Los
Angeles, held that requiring inclusionary housing in new rental housing projects violates the
Costa Hawkins Act. The Costa Hawkins Act allows developers of new rental housing to set the
initial rental rate and provides that owners of existing housing may set the rental rate
whenever the units are vacated (“vacancy decontrol”). The Court found that limiting rents in
new rental housing to make them affordable violated the Costa Hawkins Act. It also found that
in-lieu fees were “inextricably intertwined” with the prohibited rent control and so also
prohibited. To date, legislative fixes exempting BMR programs from the Costa Hawkins Act have
not been successful.
City of Palo Alto Page 3
The City may still impose inclusionary requirements on for-sale housing, which is not affected
by Palmer. Rents can also be restricted if the developer agrees by contract to restrict rents in
exchange for a subsidy (i.e. loan) or a regulatory incentive, such as a density bonus. However,
the City has not been able to enforce the City’s current BMR ordinance on rental housing
projects receiving no subsidy or other incentive.
In response to Palmer, communities have completed nexus studies to determine the impact of
market rate rental housing on the need for affordable housing and then have imposed a
housing impact fee (as opposed to an in lieu fee) to mitigate the impact. Nexus studies also
usually examine the impact of market rate for-sale housing on the need for affordable housing
to provide additional justification for cities’ BMR requirements.
Housing Costs in Palo Alto
At about the same time as Palmer was decided, the economy began its slow recovery from the
Great Recession. This recovery started sooner and has come more quickly in Palo Alto than in
neighboring cities, and the costs associated with this recovery in the housing sector are
extreme.
Since 2010 the purchase price of an average priced home in Palo Alto has increased 259% from
$900,785 to $2,337,500.1 Rental costs have also skyrocketed from an average of $1,695 in 2010
to $3,105 in 2015.2 This rapid increase in housing costs has resulted in fewer people being able
to afford to either live or continue to live in Palo Alto, resulting in longer commute times,
heavier traffic, increased parking demand, and an overall decrease in the quality of life of all
affected.
The improved economy has also brought increased pressure on the non-residential market to
produce more office and commercial space and less residential space, further eroding the
potential for an improved housing stock. Land values have skyrocketed, but the pace of this
growth in value has not been matched with an up-to-date mitigation fee structure.
Twenty-One Elements
As early as 2008, the County of San Mateo and its twenty cities began discussing collaborative
options for the region to better plan for and share increased housing needs as part of the
housing element process. These conversations led to the creation of a housing element toolkit
called “Twenty-One Elements” that not only emphasizes shared responsibility in developing
housing elements, but took into account broader housing creation needs. Individual members
of the Twenty-One Element working group, joined by Palo Alto, hired a consultant to prepare
up-to-date nexus studies showing the impact of commercial and residential construction on the
need for affordable housing and to determine justified housing impact fees. Although the City
of Palo Alto is not a member of Twenty-One Elements, the City has continued to work with the
same consultant group, led by Strategic Economics, to produce two impact fee nexus studies.
1 Source: Trulia.com, January 4, 2016
2 Source: Rentjungle.com, January 4, 2016
City of Palo Alto Page 4
Discussion
In conjunction with staff input and management, Strategic Economics and Vernazza Wolfe
Associates, Inc. (the consultants) prepared two nexus studies: one for residential construction,
and one for commercial construction. Each used a similar methodology to generate data and
conclusions as shown in Table 2. More detail is provided in the nexus studies.
Table 2. Affordable Housing Nexus Studies -- Methodology Overview
Residential Commercial
1. Develop a prototype Single Family Detached Hotel
Single Family Attached Office/R&D/Medical Office3
Condominiums (sale)
Apartments (rental)
2. Determine Household
Income of Residents and
Disposable Income
X
3. Determine Employee
Density4 X
4. Number of New Worker
Households Created X X
5. Worker Household Incomes;
% Needing Affordable
Housing
X X
6. Affordability Gap between
cost to purchase/rent
housing and the cost to build
X X
7. Maximum Fee Calculation
X X
8. Feasibility Analysis X X
9. Recommended Fees X X
Source: Department of Planning & Community Development, January 2016
This is a standard methodology that is used in creating nexus studies of this nature and resulted
in the recommendations discussed below.
Commercial
3 A third commercial prototype was initially considered for a retail/restaurant/personal services but such a
prototype has only rarely been constructed in Palo Alto in recent years, and the staff’s recommendation is to
maintain the current fee of $19.85/new net square footage for retail/other based on the prior nexus study.
4 For each building prototype, an average employment density was defined based on a review of national survey
data for existing buildings and a review of recently completed linkage fees nexus studies in the Bay Area. A more
refined local assumption could be incorporated into the analysis based on business registry data if desired.
City of Palo Alto Page 5
The nexus study shows that the City could significantly raise its impact fees on hotels and
office/R&D/medical office space construction and recommends that the current fee of $19.85
be raised to $30 dollars/square foot for hotel, and to $35 for office/R&D/medical office.
The recommendations were developed based on the methodology summarized in Table 2, and
the consultant’s conclusion (in Step 7) that the maximum justifiable fees for each prototype are
$177 and $264/square foot, respectively. Then the feasibility analysis (in Step 8) concluded
that the maximum feasible fees for each prototype are $30 and $60 per square foot
respectively. The final recommendation (Step 9) of $35 per square foot for office/R&D/medical
office, which is more than 80% less than the possible maximum, and about 40% below the
feasible maximum, is based on a comparison of fees in neighboring jurisdictions and a
consideration of other relevant policy considerations including total development costs,
comparison to existing City fees, the role of the fee in the City’s overall housing strategy and the
overlap with residential impact fees. One additional factor to consider is that some percentage
of new workers may already be housed in Palo Alto or nearby communities.
The drivers for the recommended increases are the high level of returns for each prototype (the
project’s profitability). Revenues from office lease rates or hotel room rates are the basis for
calculating annual income from new commercial development. The total operational costs are
subtracted from the total revenues to calculate the annual net operating income. The return on
cost is then estimated by dividing the annual net operating income by the total development
costs. The fee levels were then added as an additional development cost to measure the
resulting change in the developer’s return on cost.
The key revenue and cost inputs to the financial pro forma analysis are based on market
research and published resources. The data inputs are explained in more detail below.
Revenues
To estimate income from commercial development, the pro forma analysis used rental
data from Costar for the Palo Alto market for existing retail and office buildings. A 10
percent revenue increase was applied to account for the value premium of new retail
and office/R&D space. To calculate hotel revenues, the Consultant Team interviewed
hotel managers of hotel properties in Palo Alto to determine average daily rates and
occupancy rates.5 The surveyed managers reported average rates of between $150 and
$400 for weekend, off-peak stays, and between $289 and $800 for peak, weekday stays.
Occupancy rates were reported at between 78 percent and 95 percent. Based on these
findings, the analysis estimated average daily rate at $240 per night, and occupancy
rates at 83 percent.
Direct and Indirect Costs
5 Properties surveyed include Hilton Garden Inn, Homewood Suites, The Epiphany, Hotel Keen, Dinah’s Garden
Hotel, Sheraton Palo Alto, and Garden Court Hotel.
City of Palo Alto Page 6
Cost estimates for the commercial prototypes include direct construction costs (site
work, building costs, and parking), indirect costs, financing costs, and developer
overhead and profit. Direct building construction cost estimates for office/ R&D/
medical office and retail/ restaurants/ services are based on RS Means, which is a data
source for construction cost data. Hotel construction costs were estimated based on
recent data from HVS Consulting and Smith Travel Research, and include costs for
Furniture, Fixtures, and Equipment (FF&E).
Land Costs
One of the critical cost factors for a commercial development project is land cost. To
determine the land value of sites zoned for commercial uses, the Consultant Team
analyzed recent sales transactions in Santa Clara County and reviewed third-party
property appraisals. The high average value of land per square foot in Palo Alto,
illustrated in Figure VI-5, is partly due to the relatively smaller average size of the sold
parcels. As a result, the Consultant Team estimated a commercial land value of $160 per
square foot, closer to the sub-market average.6 This approximate land cost is an
estimate for the purposes of this analysis; the value of any particular site is likely to vary
based on its location, amenities, and property owner expectations, among other factors.
Return on Cost Thresholds
In order to understand how the different fee levels impact financial feasibility, the
return on cost results can be compared to an investor’s expectations for each type of
development. The thresholds for this analysis were pegged to investor expectations
regarding overall capitalization rates (cap rate) for each product type in the Bay Area.
The cap rate, which is measured by dividing net income generated by a property by the
total project value, is a commonly used metric to estimate potential returns. Lower cap
rates signify high performing markets. In this analysis, the total project value is
equivalent to the total development cost. PWC Real Estate Investor Survey (Fourth
Quarter 2014) was the primary data source for determining cap rates for office/ R&D/
medical office and retail/ restaurant/ services uses. For hotel, cap rate data was
obtained from HVS, a consulting firm that tracks hotel markets. To ensure that the
financial analysis is conservative and does not reflect peak market conditions, the
thresholds selected for determining project feasibility are slightly higher than the
published cap rates. It was determined that the threshold for the return on cost is
between 6.75 percent and 7.0 percent for office/R&D/ medical office and retail/
restaurants/ services prototypes, and between 7.0 percent and 7.25 percent for hotel.
The financial feasibility analysis concluded that a fee of $30 per square foot or less is
feasible for hotel development. A fee of $60 per square foot or less is feasible for office
development. For hotel development, the recommended fee of $30 per square foot is
the maximum feasible fee based on the feasibility analysis. Even though the maximum
6 The commercial land value used in the proforma analysis is different from the calculated land value for the
affordability gap analysis because it is for commercially zoned land rather than multi-family zoned land.
City of Palo Alto Page 7
feasible fee is $60 per square foot for office/R&D, the recommended fee is $35per
square foot in order for the fee to be more compatible with the existing fees in other
local jurisdictions.
Neighboring Jurisdictions
Table 3, below (Figure VI-9 from the Commercial Linkage Fee Nexus Study) compares Palo Alto’s
existing commercial linkage fee and proposed fee scenarios with the linkage fees adopted by
nearby cities. As outlined in Table 1, at present, Palo Alto maintains a fee of $19.85 per square
foot for all commercial prototypes. This existing fee is similar to the linkage fees adopted by San
Francisco and Cupertino, which range from $16 to $24 per square foot, depending on the land
use. In most cases, cities have adopted higher fee levels for office/ R&D/ medical office uses
than for retail and hotel uses. For example, in Cupertino, the commercial linkage fee for hotel
and retail/ restaurants/ services is $10 per square foot, compared to $20 per square foot for
office/ R&D/ medical office uses. The maximum linkage fees calculated for all the commercial
prototypes, ranging from $177 to $295 per square foot are significantly higher than existing
linkage fees in neighboring Bay Area jurisdictions. Other cities in the Bay Area also have
commercial linkage fees that can be compared to the potential fee scenarios for Palo Alto
(Figure VI-10 in the Commercial Linkage Fee Nexus Study). The fee amounts vary significantly by
jurisdiction.
Table 3. Comparison to Neighboring Cities (Commercial)
Hotel Office/R&D Date Fee Adopted
Cupertino $10 $20 2015
Menlo Park (a) $8 $15 2014
Mountain View (b) $2.50 $25 2015
San Francisco (c) $18 $16-$24 2015
Sunnyvale (d) $7.50 $15 (e) 2015
Notes:
(a) Buildings 10,000 SF and under are exempt from fees. A new nexus study is currently
underway that may result in an updated fee.
(b) New gross floor area under 25,000 SF pays 50 percent of full fee.
(c) The fee for R&D is $16.01 and the fee for office is $24.03. The fee for a small enterprise is
$18.89.
(d) Approval of the proposed fees is pending a community process.
(e) The fee on the first 25,000 SF is discounted by 50 percent.
Sources: City staff and websites; Nonprofit Housing Association of Northern California, 2015;
Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
As noted earlier in this report, the nexus study identifies maximum justified fees for the hotel
prototype to be $177 per square foot and $264/square foot for the office/medical/R&D
prototype. However the recommended fees are $30 and $35 per square foot respectively. The
study not only looked at maximum justifiable fees, but also factored in the findings of the
City of Palo Alto Page 8
financial feasibility analysis, and a comparison of fees in neighboring jurisdictions. Other
relevant policy considerations referenced include: total development costs, comparison to
existing City fees, the role of the fee in the City’s overall housing strategy and the overlap with
residential impact fees. For hotel development, the recommended fee of $30 per square foot is
the maximum feasible fee based on the feasibility analysis. For office/medical/R&D, the
recommended fee of $35per square is approximately 40% less than the maximum feasible fee
of $60 per square foot, and was recommended to be more compatible with the existing fees in
other local jurisdictions.
Residential
The nexus study shows that the City could adopt significant impact fees on all four studied
prototypes (single family detached, single family attached, condominiums and apartments).
Maximum justified fees are $111/square foot for single family detached, $75/square foot for
single family detached, $90/square foot for condominiums, and $105/square foot for
apartments. The maximum feasible fees are somewhat less, as described further below.
The study recommends establishing a fee of $95/square foot for single family detached, a fee of
$50/square foot for single family attached, a fee of $50/square foot for condominiums, and a
fee of $50/square foot for apartments. The recommended fees are based on the results of the
financial feasibility analysis, a comparison with fees adopted in other Bay Area communities
and policy considerations including: comparison to existing City fees, role of the fee in City’s
overall housing strategy and potential overlap with the commercial linkage fee.
Similar to the commercial nexus findings, the driver for these fees is based on the high levels of
return expected on each prototype (the prototype’s profitability). Financial feasibility of the fee
options was tested using a pro forma model that measures the residual land value of a given
development project. Many pro forma models are structured to solve for the financial return
for the developer or investors (internal rate of return). In contrast, the residual land value
method of analysis solves for the value of the land. This method recognizes that the value of
land is inextricably linked to what can be built on it, and that development potential is heavily
influenced by zoning, lot size/configuration, neighborhood context, and other factors. The pro
forma model tallies all development costs (minus land) including direct construction costs,
indirect costs (including financing), and developer fees. Revenues from unit sales or rental
leases are then summed. The total project costs are then subtracted from the total project
revenues. The balance is the residual value, representing the price a developer would pay for
the land if pursuing that project. The fee levels were then added as an additional development
cost to measure the effect on the residual land value. Key inputs are described below.
Revenues
To estimate income from residential development, the analysis uses the sales prices and
monthly rents presented in Section III of the nexus study. These revenue assumptions
were based on a review of local and regional market data, including information on the
type of development that has been recently constructed or is planned or proposed in
Palo Alto; and current sales prices and rental rates of recently built residential
City of Palo Alto Page 9
development in Palo Alto and neighboring cities. For ownership projects (single-family
detached, single-family attached, and condominiums), the revenues are calculated by
multiplying the unit count by the sales price. For rental projects, the revenues were
estimated using an income capitalization approach. This valuation approach first
estimates the annual net operating income (NOI) of the apartment prototype, which is
the difference between total project income (annual rents) and project expenses,
including operating costs and vacancies. The NOI is then divided by the capitalization
rate (cap rate) to derive total project value.
Development Costs
Cost estimates for the residential prototypes include direct construction costs (site
work, building costs, and parking), indirect costs, financing costs, and developer
overhead and profit. Development cost estimates for the pro forma analysis are based
on RS Means and project proformas for recent projects in the region. Soft costs and
developer overhead/profit were calculated based on a review of similar project
proformas in the Bay Area. City fee calculations were provided by City staff.
Land Value
In order to understand what the different fee levels indicate regarding financial
feasibility, the residual land values for each fee scenario can be compared with the
market value of residential land in Palo Alto. If the residual value is higher than the
market value, the project is feasible. If the residual value is lower than the market price,
then the project is infeasible.
To determine the land value of sites zoned for lower density uses (single-family
detached and single family attached) and higher density multi-family residential uses
(condominiums and rental apartments), the Consultant Team analyzed recent sales
transactions in Southern San Mateo County and Northern Santa Clara County, and
reviewed third-party property appraisals. Figure VII-7 in the Residential Impact Fee
Nexus Study illustrates the results of the land value analysis for lower density single-
family detached and single family attached residential uses, while Figure VII-8 in the
Residential Impact Fee Nexus Study shows the value of properties zoned for higher
density multi-family residential uses. For lower density residential uses, values range
considerably depending on location and size, from $50 per square foot for the lower
quartile, to $172 per square foot for the upper quartile. For higher-density multi-family
housing, the range is between $96 and $228 per square foot, with a weighted average
(accounting for lot size) of $167. The majority of the sales shown in Figures VII-7 and VII-
8 were transactions that occurred earlier than 2014; today’s land values are likely to be
higher. Therefore, for this analysis, the estimated land value is estimated at between
$150 and $250 per square foot for higher density multi-family development, including
condominiums and apartments. For all prototypes, the market value of land is
presented as a range because the land value of properties is likely to vary depending on
location, size, and other conditions.
City of Palo Alto Page 10
The financial feasibility analysis concluded that a fee of $111 per square foot or less is feasible
for single-family detached development; a fee of $75 per square foot or less is feasible for
single-family detached development; a fee of $90 per square foot or less is feasible for
condominium development; and a fee of $85 per square foot or less is feasible for apartment
development. Although the financial feasibility analysis concluded that higher fees were
justified, the recommended fees are $95, $50, and $50 per square foot respectively. The
recommended fees are lower than the maximum justifiable fees in order to be more
comparable to surrounding jurisdictions. Even at the recommended fees, the fees will be higher
than other local jurisdictions with the exception of San Francisco, whose fees range from
$199,000 to $522,000 per unit, based on unit size.
Neighboring Jurisdictions
Table 4 below (and Figure VII-12 in the Residential Impact Fee Nexus Study), compares the fee
scenarios for Palo Alto with the current housing impact fees and in lieu fees in other nearby
cities. If either the maximum housing impact fee levels (Scenario 1) or the second-highest fee
levels (Scenario 2) were adopted in Palo Alto, they would significantly exceed the residential
impact fees charged in the neighboring jurisdictions in San Mateo and Santa Clara Counties.
However, San Francisco has adopted fees ranging from $199,000 to $522,000 per unit,
depending on the unit size, which are somewhat similar to the maximum fee levels calculated
for Palo Alto. If Palo Alto were to adopt the recommended fee levels its fees would be higher
than most other cities in San Mateo and Santa Clara Counties, but lower than the housing
impact fees in San Francisco.
The potential fee scenarios can also be compared with existing housing impact fees in other Bay
Area cities for regional context. This list is not an exhaustive inventory of all Bay Area cities with
housing impact fees, but it provides information about many cities that have fees on rental,
ownership or both types of housing. As shown in Figure VII-13 in the nexus study, housing fees
in other Bay Area cities vary significantly from city to city. None of the fees presented in Figure
VII-13 are as high as the maximum justified fee in Palo Alto. However, some of the cities, such
as Berkeley and Fremont, have impact fees that are similar to the lowest fee scenario evaluated
for Palo Alto.
Table 4. Comparison to Neighboring Cities (Residential)
Comparison with Impact Fees and In-Lieu Fees in Neighboring Jurisdictions
Palo Alto Fee Scenarios
Scenario 1 (Maximum) Per SF $111 $90 $75 $105 N/A
Per Unit $333,501 $189,037 $158,519 $101,906 Scenario 2 Per SF $95 $70 $50 $85 N/A
Per Unit $285,000 $147,000 $105,000 $82,571 Scenario 3 Per SF $75 $50 $40 $50 N/A
Per Unit $225,000 $105,000 $84,000 $48,571 Scenario 4
City of Palo Alto Page 11
Per SF $50 $30 $25 $30 N/A
Per Unit $150,000 $63,000 $52,500 $29,143
Impact Fees
Cupertino $15/SF $16.50/SF (a) $20/SF $25/SF 2015
Daly City $14/SF $18/SF (b) $22/SF $25/SF 2014
East Palo Alto $22/SF $22/SF $22-$44/SF (c) $22/SF 2014
Mountain View N/A N/A N/A $15/SF 2015
San Carlos (d) $23.54-$43.54/SF $20.59-$42.20/SF $20.59-$42.20/SF $23.54-$43.54/SF 2010
San Francisco (e) $199,698-$522,545/unit $199,698-$522,545/unit $199,698-$522,545/unit $199,698-$522,545/unit 2015
San Jose N/A N/A N/A $17/SF (f) 2014
Sunnyvale N/A N/A N/A $17/SF (g) 2015
Inclusionary Policies and In-Lieu Fees
Palo Alto 15%-20% 15%-20% 15%-20% N/A Mountain View 3% of Sales Price 3% of Sales Price 3% of Sales Price N/A 2015
San Jose (h) 15% or $17/SF in-lieu fee 15% or $17/SF in-lieu fee 15% or $17/SF in-lieu fee N/A 2014
Sunnyvale 7% of Sales Price 7% of Sales Price 7% of Sales Price N/A 2015
(a) This fee applies to small lot single family and townhomes.
(b) This fee applies to townhomes.
(c) Fee ranges from $22 per square foot for for-sale housing without structured parking to $44 per square foot for housing with structured parking.
(d) Fees shown as ranges. Actual fees charged depends on project size.
(e) Fee charged depends on unit size (number of bedrooms).
(f) Fee goes into effect in 2016. Developments approved by July 2016 are exempt with a longer exemption for downtown
development.
(g) Fees for projects that are between 4 and 7 units pay 50 percent of this fee.
(h) Inclusionary policy and in-lieu fee apply to for-sale developments of more than 20 units.
Sources: The Non-Profit Housing Association of Northern California; City of San Carlos Municipal Code; Vernazza Wolfe
Associates, Inc; Strategic Economics, 2015.
As noted earlier in this report, the residential nexus study identifies maximum justified fees for
the single-family detached prototype to be $111 per square foot, $90 per square foot for the
single-family attached prototype, $75 per square foot for the condominium prototype and
$105/square foot for the apartment prototype. However the recommended fees are $95, $50,
and $50 per square foot respectively. The study not only looked at the maximum justifiable
fees, but also factored in the findings of the financial feasibility analysis, a comparison of fees in
neighboring jurisdictions, and other policy considerations such as: total development costs,
comparison to existing City fees, the role of the fee in the City’s overall housing strategy and the
overlap with residential impact fees. The recommended fees were selected in order for the fee
to be more compatible with the existing fees in other local jurisdictions. Even at the
recommended fee levels, the City’s fees will be higher than all of the neighboring jurisdictions,
with the exception of San Francisco, whose fees range from $199,000 for a studio apartment to
$522,000 for a four-bedroom unit.
Comparison with Existing In-Lieu Fees for For-Sale Housing
The City has an inclusionary housing program that requires that 15 percent of the units in
market-rate developments consisting of five or more housing units must be sold at affordable
sales prices. This percentage increases to 20 percent on parcels larger than five acres. In some
cases, developers have the option of paying an in-lieu fee of between 7.5 and 10 percent of the
sales price or fair market value, whichever is greater. The developer must also pay a fee for
fractional units. Using the prototypes in Figure I-2 in the Draft Residential Impact Fee Nexus
Study, the fees collected under the existing method would be $228,225 for a 3,000 square foot
single family detached home, while the fee would be $285,000 if the fee were assessed at the
City of Palo Alto Page 12
recommended $95 per square foot. For the single-family detached prototype of 2,100 square
feet, the fee would be $124,950 under the existing inclusionary program and $105,000 if the
recommended fee were to be assessed at $50 per square feet. For the 2,100 condominium
prototype, the fee would be $104,250 under the existing program and $105,000 at the
recommended fee of $50 per square foot. The fees are comparable in most of the three
categories. The benefit of adopting the per square foot fees for the for-sale housing units would
be simplification, both in terms of calculating the fee, and in terms of administering the fee
program.
Conclusion
While fee levels can be assessed up to the maximum amount justified in the Nexus Study, in
practice, it is rare to assess fees at the maximum level and determining the appropriate level is
based on a variety of factors. Since studies are based largely on projections, cities recognize
there should be some allowance for market fluctuations and incorrect assumptions. Fee levels
may also be adjusted to incentivize certain land uses, so long as the fees of other uses are not
raised above the justified level. Thus in many neighboring cities, it is common to see lower level
fees applied to retail and hotel uses and higher fees applied to office. When setting fees, it is
also helpful to compare both the subject fee as well as the entire package of impact fees to
neighboring communities.
Timeline
The Finance Committee’s input will be used to inform preparation of an implementing
ordinance for consideration by the City Council. Staff is also preparing a companion ordinance
to reflect the Palmer decision and to update some administrative procedures. The Planning and
Transportation Commission will also have an opportunity to provide a recommendation (on the
ordinance) to the City Council.
If the City Council chooses to adopt new housing impact fees, the fees would become effective
after approval of the implementing ordinance. Under State law, ordinances implementing new
or higher impact fees go into effect 60 days (rather than the normal 30 days) following
adoption. The implementing ordinance would determine applicability to pending (pipeline)
projects.
Resource Impact
Adjusting affordable housing impact fees are anticipated to increase revenues to the City
making additional funding available for the preservation and construction of affordable housing
in Palo Alto.
Between fiscal year 2013 to 2015, the City received an average of $1.65 million for the
commercial housing fund. Based on the recommended fee adjustments for commercial
development, the commercial housing fund contributions could potentially increase by
approximately 85%.
City of Palo Alto Page 13
It is more difficult to project residential development and the City has not experienced a great
deal of housing development in the past few years. Adoption of the reports’ recommendations
would not only increase the amount of funding from newly constructed for-sale housing units,
but also create a new funding source from the construction of rental units. Budgetary actions
depend on the timing of City Council approval of an implementing ordinance.
Policy Implications
Adoption of a new housing impact fee structure for commercial and residential development
projects would support the City’s stated policy goals under the Affordable Housing Fund
program and the adopted Housing Element.
Affordable Housing Fund
As described earlier in this staff report, the City’s Affordable Housing Fund has provided
financial assistance for the development, acquisition and rehabiltiation of housing affordable to
less fortunate populations in the City. Since 1974, the City has committed resources to funding
this programming, and updating housing impact fees supported by nexus studies supports this
policy.
Housing Element
The City adopted its 2015-2025 Housing Element in November 2014. A housing element
contains a municipality’s vision and implementation concepts for providing housing for a
diverse population. The adopted Housing Element contains the following programs that support
the adoption of increased housing impact fees:
H3.1.2j) Conduct a nexus study to identify the impacts of market rate housing
and the need for affordable housing, and develop BMR rental policies based on
the results of the study.
H3.1.6 Require developers of employment-generating commercial and industrial
developments to contribute to the supply of low- and moderate-income housing
through the payment of commercial in-lieu fees as set forth in a nexus impact
fee study and implementing ordinances, thru a continuing program of updating
the commercial fee.
H3.4.3 Periodically review the housing nexus formula required under Chapter
16.47 of the Municipal Code to fully reflect the impact of new jobs on housing
demand and cost.
Environmental Review
Staff is seeking the Committee’s direction, which is not a project requiring analysis under the
California Environmental Quality Act (CEQA).
Attachments:
A: Draft Comercial Linkage Fee Nexus Study (PDF)
B: Draft Residential LInkage Fee Nexus Study (PDF)
Draft Report
Commercial Linkage Fee
Nexus Study
November 2015
prepared for: City of Palo Alto
Vernazza Wolfe Associates, Inc.
VWA
Attachment A
Table of Contents
I. EXECUTIVE SUMMARY .................................................................................................. 4
Introduction ...................................................................................................................................... 4
Background ...................................................................................................................................... 4
Report Organization ......................................................................................................................... 4
Implementation Options ................................................................................................................... 5
Nexus Analysis Results .................................................................................................................... 5
Policy Considerations ....................................................................................................................... 8
II. INTRODUCTION AND METHODOLOGY ...................................................................... 12
The Nexus Concept ....................................................................................................................... 12
Methodology ................................................................................................................................... 12
III. COMMERCIAL LINKAGE FEE NEXUS ANALYSIS ...................................................... 15
Nexus Analysis Steps .................................................................................................................... 15
IV. HOUSING AFFORDABILITY GAP ................................................................................. 53
Methodology ................................................................................................................................... 53
Estimating Affordable Rents and Sales Prices .............................................................................. 53
Estimating Housing Development Costs ........................................................................................ 60
Calculating the Housing Affordability Gap ..................................................................................... 64
V. MAXIMUM LINKAGE FEES ........................................................................................... 68
Maximum Fee Calculation ............................................................................................................. 68
VI. FEASIBILITY AND POLICY CONSIDERATIONS .......................................................... 69
Prototypes and Fee Levels ............................................................................................................ 69
Methodology ................................................................................................................................... 70
Key Inputs ...................................................................................................................................... 70
Results ........................................................................................................................................... 75
Policy Considerations ..................................................................................................................... 78
VII. GLOSSARY OF TERMS AND ACRONYMS .................................................................. 85
Glossary of terms ........................................................................................................................... 85
Definition of Acronyms ................................................................................................................... 88
List of Figures
Figure I-1. Maximum and Recommended Fee Levels by Prototype ............................................................ 5
Figure I-2. Commercial Prototypes ............................................................................................................... 6
Figure I-3. Calculation of Worker Household Income by Prototype ............................................................ 7
Figure I-4. Affordable Housing Gap ............................................................................................................. 7
Figure I-5. Maximum Commercial Linkage Fee by Prototype ..................................................................... 8
Figure I-6. Comparison of Commercial Linkage Fees in Palo Alto and Neighboring Jurisdictions ............ 8
Figure I-7. Comparison of Existing, Maximum, and Feasible Fee Levels by Prototype .............................. 9
Figure I-8. Commercial Linkage Fee Scenarios as Percent of Total Development Costs .......................... 11
Figure I-9. Total Fees and Permits per Square Foot ................................................................................... 11
Figure III-1. Description of Commercial Prototypes .................................................................................. 16
Figure III-2. Employment Density Data and Sources ................................................................................. 18
Figure III-3. Employment Density by Prototype ........................................................................................ 19
Figure III-4. Number of Worker Households by Prototype ........................................................................ 19
Figure III-5. Definition of Industries for Hotel Prototype .......................................................................... 19
Figure III-6. Definition of Industries for Office/ R&D/ Medical Office Prototype .................................... 20
Figure III-7. Average Annual Wage by Prototype ...................................................................................... 21
Figure III-8. Occupational Mix and Average Wages for Hotel Industry .................................................... 22
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office ............................ 31
Figure III-10. Household Income Categories ............................................................................................. 51
Figure III-11. Number of Worker Households by Income Category .......................................................... 52
Figure IV-1. Calculation of Affordable Rents in Santa Clara County by Household Size, 2014 ............... 56
Figure IV-2. Calculation of Affordable Rents in Santa Clara County by Unit Type, 2014 ........................ 57
Figure IV-3. Calculation of Affordable Sales Prices in Santa Clara County by Household Size, 2014 ..... 58
Figure IV-4. Calculation of Affordable Sales Prices in Santa Clara County by Unit Type, 2014 .............. 59
Figure IV-5. Affordable Housing Project Pro Forma Data ......................................................................... 61
Figure IV-6. Sales of Vacant Lands in San Mateo County and Northern Santa Clara County, 2014 ........ 62
Figure IV-7. Estimate of Development Costs of Hypothetical Condominium Project ............................... 63
Figure IV-8. Rental Housing Unit Sizes and Development Costs .............................................................. 64
Figure IV-9. For-Sale Housing Unit Sizes and Development Costs ........................................................... 64
Figure IV-10. Housing Affordability Gap Calculation for Rental Housing ............................................... 66
Figure IV-11. Housing Affordability Gap Calculation for For-Sale Condominium Housing .................... 67
Figure IV-12. Average Housing Affordability Gap by Income Group ....................................................... 67
Figure V-1. Maximum Commercial Linkage Fees ..................................................................................... 68
Figure VI-1. Description of Commercial Prototypes .................................................................................. 69
Figure VI-2. Linkage Fee Scenarios by Prototype (per SF) ........................................................................ 70
Figure VI-3. Pro Forma Revenue Inputs by Prototype ............................................................................... 72
Figure VI-4. Direct and Indirect Cost Inputs .............................................................................................. 73
Figure VI-5. Recent Commercial Vacant Land Transactions in Santa Clara County (2011-2014) ............ 74
Figure VI-6. Feasibility Thresholds for Return on Cost ............................................................................. 75
Figure VI-7. Pro Forma Analysis Results ................................................................................................... 77
Figure VI-8. Existing City Permits and Fees on Commercial Development by Prototype ......................... 79
Figure VI-9. Comparison to Linkage Fees in Neighboring Cities .............................................................. 80
Figure VI-10. Existing Linkage Fees in Bay Area Cities ........................................................................... 81
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INTRODUCTION
In April 2014, the City of Palo Alto hired Strategic Economics and Vernazza Wolfe Associates, Inc. to
develop nexus studies for commercial linkage fees and housing impact fees to mitigate the impacts of new
development on the demand for affordable housing. This draft report presents the findings of the
commercial linkage fee study. In addition, the report describes the methodology, data sources, and
analytical steps required for the nexus analysis.
BACKGROUND
Palo Alto is considering updating its existing commercial linkage fee for office/R&D/medical office and
hotel uses. The City intends to maintain its current linkage fee for retail development. Palo Alto’s
commercial linkage fee is currently set at $19.85 per square foot for all types of new non-residential
development (except for retail spaces of less than 1,500 square feet and nonprofit uses). The purpose of
the linkage fee is to mitigate the impacts of an increase in affordable housing demand from the new
worker households related to the new commercial space. When a city or county adopts impact fees on
new development, it must establish a reasonable relationship or connection between the development
project and the fee that is charged. Studies undertaken to demonstrate this connection are called nexus
studies. This nexus study quantifies the connection between the development of commercial space and the
demand for affordable housing units. The funds raised by the linkage fees are deposited into a housing
fund specifically reserved for use by a local jurisdiction to increase the supply of affordable housing for
the workforce. Commercial linkage fees are one of several funding sources that jurisdictions can use to
help meet the affordable housing needs of new workers.
REPORT ORGANIZATION
This executive summary provides an overview of the commercial linkage fee nexus analysis
methodology, results, and policy considerations. The subsequent chapters of the report contain more
detailed information regarding the methodology, data sources and analysis. The report is organized into
six sections. Following this executive summary, Section II provides an introduction to the purpose of the
study, and an overview of the methodology. Section III presents each of the steps of the commercial
linkage fee analysis in detail. Section IV covers the housing affordability gap analysis. Section V presents
the maximum fee calculation based on the nexus analysis and affordability gap results. The final section,
Section VI, discusses financial feasibility and other policy considerations that jurisdictions typically
weigh before selecting and implementing an impact fee policy.
I. EXECUTIVE SUMMARY
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IMPLEMENTATION OPTIONS
The per-square-foot maximum linkage fees are $177 for the hotel prototype and $264 for the
office/medical office/R&D prototype. If Palo Alto elects to update its linkage fees on these uses, the
recommended fee levels are as follows: $30 per square foot for hotels and $35 per square foot for
office/R&D/medical office. These recommendations are based on the findings of the financial feasibility
analysis, a comparison of fees in neighboring jurisdictions, and other factors as explained in the Policy
Considerations section, below. The maximum, existing, and recommended fees for each prototype are
shown in Figure I-1.
Figure I-1. Maximum and Recommended Fee Levels by Prototype
Prototype
Maximum
Justified Fee
Existing
Linkage Fee
Recommended
Linkage Fee
Hotel $177 $19.85 $30
Office/ Medical Office/ R&D $264 $19.85 $35
Sources: Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
NEXUS ANALYSIS RESULTS
The principal findings of the nexus analysis are presented below. More detail on each step can be found in
subsequent sections of this report.
Prototypes
The first step in this nexus analysis is to define the types of new commercial developments in Palo Alto.
These typical developments are called prototypes. This study identified two commercial development
prototypes:
1. Hotel - includes full-service hotels, limited-service hotels, motels, and other lodging.
2. Office/ R&D/ Medical Office - covers a range of office and research and development (R&D)
uses, including traditional office buildings, medical offices, and specialized spaces for highly
advanced manufacturing and research.
The definition of these commercial prototypes, summarized in Figure I-2, was informed by a review of
recently completed and proposed development projects in Palo Alto, as well as discussions with City
staff. A retail/ restaurant development prototype was considered, but as there are few examples of
recently built or proposed standalone retail projects of this type, the nexus analysis for this prototype has
not been updated. The City intends to maintain its current commercial linkage fee of $19.85 on retail and
restaurant development.
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Figure I-2. Commercial Prototypes
Hotel
Office/R&D/
Medical Office
Prototype Description
Gross Building Area (GBA). excl. Parking (SF) 100,000 100,000
Efficiency Ratio (a) N/A 0.90
Net Leasable Sq. Ft. (NSF) N/A 90,000
Hotel Rooms 133
Parking Spaces 133 300
Podium Parking 33 240
Surface Parking 100 60
GBA Including Structured Parking 109,975 163,000
Floor Area Ratio (b) 1.1 2.0
Land Area (Acres) 2.3 1.9
Land Area (SF) 99,977 81,500
Notes:
(a) Refers to ratio of gross building area to net leasable area. An efficiency ratio of 0.9 means that 90% of the gross building area is leasable.
(b) The floor-area-ratio (FAR) is often used as a measure of density. In this analysis, it is calculated as the gross building area (including structured podium parking) divided by the total land area.
Sources: Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
Employment Density
The next step is to determine how many employees will work in the two prototypes. While these numbers
will vary from building to building, there are sources of information that help researchers define
employment “densities.” The employment density measures the number of employees who work in a
given amount of space. For each building prototype, an average employment density was defined based
on a review of national survey data for existing commercial buildings and a review of recently completed
linkage fee nexus studies in the Bay Area. The densities selected were at the lower end of each range. By
using slightly lower employment estimates, the study assumes a slightly lower number of future
employees in calculating affordable housing needs. Therefore, the conclusions from this study are more
conservative in estimating affordable housing impacts.
Worker Household Incomes
Using these prototypes, the nexus analysis estimates the wages of future workers based on industry and
occupation data. After the average wage of workers is calculated, the next step is to compute the average
household income of worker households. Assuming that there are multiple wage-earners per household,
the household income of worker-households is estimated. Each worker-household is then classified into
area median income (AMI) categories to determine the number of households that would require
affordable housing. Figure I-3 summarizes the estimated worker-household incomes for each prototype.
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Figure I-3. Calculation of Worker Household Income by Prototype
Prototype
Number of
Employee
Households
Hotel
Very Low Income (<=50% AMI) 30.05
Low Income (51-80% AMI) 24.13
Moderate Income (81-120% AMI) 9.58
Above Moderate (>=120%) 3.36
Total 67.12
Office, R&D and Medical Office Land Use
Very Low Income (<=50% AMI) 14.40
Low Income (51-80% AMI) 51.43
Moderate Income (81-120% AMI) 36.32
Above Moderate (>=120%) 99.39
Total 201.54
Sources: Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
Affordability Gap
Many of the new worker households will be unable to afford market-rate housing. In order to measure this
shortfall, this study has calculated the housing affordability gap, shown in Figure I-4. The housing
affordability gap measures the difference between what very low, low, and moderate income households
can afford to pay for housing and the cost of building new, modest rental and for-sale housing units.
Figure I-4. Affordable Housing Gap
Income Level
Average
Affordability
Gap
Very Low-Income (<50% AMI) $306,164
Low-Income (50-80% AMI) $252,258
Moderate-Income (80-120% AMI) $249,596
Notes:
(a) Low income households are defined at 70 percent of AMI for renters and 80 percent of AMI for owners. (b) Moderate income households are defined at 90 percent of AMI for renters and 110 percent AMI for owners. Acronyms: AMI: Area median income. Sources: Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
Maximum Nexus-Based Fee
To calculate the maximum commercial impact fee, the Consultant Team began by calculating the total
affordability gap by prototype, which is obtained by multiplying the average affordability gap at each
income level by the number of very low, low and moderate income households for each prototype. The
total affordability gap by prototype is then divided by the size of the prototype to obtain the maximum
nexus-based fee per square foot (Figure I-5).
The maximum per-square-foot linkage fees are $177 for hotel and $264 for office/R&D/medical
office. The maximum fees are not the recommended fees for adoption. They are the nexus-justified
fees that represent the maximum that Palo Alto could charge to mitigate affordable housing
demand related to commercial development.
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Figure I-5. Maximum Commercial Linkage Fee by Prototype
Prototype Hotel
Office/ R&D/ Medical
Office
Square Footage 100,000 100,000
Total Affordability Gap $17,678,344 $26,447,718
Maximum Fee per SF $177 $264
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
POLICY CONSIDERATIONS
There are a number of policy considerations that can be taken into account when Palo Alto considers
whether to update its commercial linkage fees on new hotel and office/ R&D/ medical office
development. These may include factors such as: the likely financial impact of the proposed linkage fees
on development; the additional cost of the new fees on the existing City fee structure; a comparison of the
fee scenarios to existing linkage fees in nearby cities; the role of the fee in the City’s overall strategy for
affordable housing implementation; and the potential overlap with a residential linkage fee. This section
provides a discussion of each of these policy questions for Palo Alto.
Comparison to Neighboring Jurisdictions – A comparison of the nexus fee scenarios to current
commercial linkage fees charged in nearby cities is an important element of the policy analysis (Figure I-
6). At present, Palo Alto has fees of $19.85 per square foot for all commercial prototypes. Palo Alto’s
existing fees are similar to the linkage fees adopted in San Francisco and Cupertino, which range from
$10 to $24 per square foot, depending on the land use. In most cases, cities have adopted higher fee levels
for office/ R&D/ medical office uses than for hotel uses. For example, in Cupertino, the commercial
linkage fee for hotel is $10 per square foot, compared to $20 per square foot for office/ R&D/ medical
office uses. Palo Alto’s recommended linkage fees for the commercial prototypes would be higher than
the existing linkage fees in San Mateo County and Santa Clara County. The recommended per-square foot
hotel fee ($30) and office/R&D/medical office fee ($35) would be the highest in the region, exceeding the
fees in all of the comparison cities, including San Francisco.
Figure I-6. Comparison of Commercial Linkage Fees in Palo Alto and Neighboring Jurisdictions
Jurisdiction Hotel
Office/R&D/ Medical
Office
Date Fee Was
Adopted
Palo Alto $19.85 $19.85 2002
Cupertino $10 $20 2015
Menlo Park (a) $8 $15 2014
Mountain View (b) $2.50 $25 2015
San Francisco (c) $18 $16-$24 2015
Sunnyvale (d) $7.50 $15 2015
Notes: (a) Buildings 10,000 SF and under are exempt from fees. A new nexus study is currently underway that may result in an updated
fee. (b) New gross floor area under 25,000 SF pays 50 percent of full fee.
(c) The fee for R&D is $16.01 and the fee for office is $24.03. The fee for a small enterprise is $18.89.
(d) The fee on the first 25,000 SF, for all three commercial uses, is discounted by 50 percent. Sources: City staff and websites; Nonprofit Housing Association of Northern California, 2015; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
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Financial Feasibility – Financial feasibility is just one of several factors to consider in making a decision
regarding updating an existing fee. In order to provide Palo Alto with guidance on how different fee
levels could influence development, the Consultant Team conducted a pro forma feasibility analysis that
tested the impact of the maximum fee and three reduced fee scenarios on developer profit for the
commercial prototypes. The analysis showed that establishing a fee at the maximum fee levels was not
financially feasible at this time for the prototypes. However, reduced fee scenarios (including the existing
linkage fee level of $19.85 per square foot) are financially feasible for the hotel and office/ R&D/ medical
office prototypes (Figure I-7). The hotel prototype can support a commercial linkage fee of up to $30 per
square foot. Fee levels of up to $60 per square foot were found to be financially feasible for the office/
R&D/ medical office prototype.
Figure I-7. Comparison of Existing, Maximum, and Feasible Fee Levels by Prototype
Prototype
Existing Linkage
Fee per SF
Maximum Justified
Fee per SF
Maximum Feasible
Fee
Level per SF
Hotel $19.85 $177 $30
Office/Medical Office/R&D $19.85 $264 $60
Sources: City of Palo Alto; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
Total Development Costs – Currently, the total development costs (including land, building and onsite
improvements, parking, indirect costs, financing costs, and developer profit) are $443 per net square foot
for the hotel prototype and $530 per net square foot for the office/ R&D/ medical office prototype. The
maximum nexus-based linkage fee represents close to 30 percent of total development cost for the hotel
and 50 percent of total development costs for the office/ R&D/ medical office prototype (Figure I-8). The
existing linkage fee of $19.85 per square foot makes up three to four percent of development costs for the
prototypes. A fee of $30 per square foot for the hotel prototype, which is the highest financially feasible
fee level, represents six percent of total development costs. A fee of $60 per square foot for the
office/R&D/medical office prototype, which is the highest feasible fee level, would represent 11 percent
of total development costs.
Comparison to Existing City Fees – In addition to the existing commercial linkage fee, the City of Palo
Alto has other permits and fees on new development. The City may wish to consider the amount that total
fees would increase with an updated commercial linkage fee. Existing permits and fees in Palo Alto for
the commercial prototypes (including the existing linkage fees of $19.85 per square foot) are estimated to
be $34 per square foot for the hotel prototype and $57 per square foot for the office/ R&D/ medical office
prototype.1 If the maximum linkage fees were adopted, the total development fees and permits would be
$192 per square foot for hotel and $302 for office, as shown in Figure I-9. The recommended fee of $30
per square foot for hotels and would increase total fees to $45. The recommended fee of $35 per square
foot for office/R&D/medical office would result in total city fees of $73 per square foot for this prototype.
Role of Fee in Palo Alto’s Overall Housing Strategy – Palo Alto currently charges a commercial
linkage fee of $19.85 per square foot on all new non-residential development. These fees are payable at
the time that the building permit is issued. Fee revenues are used to provide financial assistance for
affordable housing developments and preservation. The City also has an inclusionary housing program
that requires that 15 percent of the units in market-rate developments consisting of five or more housing
units must be sold at affordable sales prices. This percentage increases to 20 percent on parcels larger than
1 The hotel calculations were estimated based on the permits and fees paid by new hotel projects in the city; the office/R&D/medical office fees are estimates by City staff. These fee estimates are the best approximations available, and do not represent the actual cost of a proposed new development project.
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five acres. In some cases, developers have the option of paying an in-lieu fee of 7.5 to 10 percent of the
sales price or fair market value, whichever is greater. The developer must also pay a fee for fractional
units. Revenues from the commercial linkage fee (and from residential impact fees, if they are adopted)
would continue to support the City’s existing affordable housing programs. It should be noted that
revenues from a commercial linkage fee need to be spent on housing that benefits the workforce since the
funds stem from affordable housing impacts related to new employment.
Overlap with Residential Impact Fees - In addition to the commercial linkage fee update described in
this report, the City of Palo Alto is also considering implementing new residential impact fees on housing
development. There may be a small share of jobs counted in the residential nexus analysis that are also
included in this commercial linkage fee analysis. Thus, the two programs may have some overlap in
mitigating the affordable housing demand from the same worker households. In order to reduce the
potential for overlap between the two programs, it is advisable to set both the commercial linkage fees
and housing impact fees at below 100 percent of the nexus-based maximum. In this way, when combined,
the programs would mitigate less than 100 percent of the impact even if there were overlap in the jobs
counted in the two nexus analyses.
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Figure I-8. Commercial Linkage Fee Scenarios as Percent of Total Development Costs
Hotel Office/R&D/Medical Office
Fee Scenario Fee Amount Fee as % of TDC Fee Amount Fee as % of TDC
Existing Linkage Fee $19.85 4.29% $19.85 3.74%
Scenario 1: Max Fee $177 28.55% $264 49.77%
Scenario 2 $35 7.32% $60 11.31%
Scenario 3 $30 6.34% $50 9.43%
Scenario 4 $20 4.32% $35 6.60%
Figure I-9. Total Fees and Permits per Square Foot
Hotel Office/R&D/Medical Office
Fee Scenario
Linkage Fee
per SF
Total Permits
and Fees
Linkage Fee
per SF
Total Permits
and Fees
Existing Permits and Fees $19.85 $35 $19.85 $57
Scenario 1 (Maximum Fee) $177 $192 $264 $301
Scenario 2 $35 $50 $60 $97
Scenario 3 $30 $45 $50 $87
Scenario 4 $20 $35 $35 $72
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
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According to the City of Palo Alto’s Housing Element, home values in the City have been increasing
steadily since 2010. The median home price in 2013 was $1.7 million, more than twice the median price
in Santa Clara County. Rental rates have also escalated rapidly, with median rents ranging from $1,900
for studios to more than $8,500 for four-bedroom homes. Given the high prices and rents in the City, most
of the new market-rate housing units built in Palo Alto are only affordable to high income households.
Consequently, very low, low, and moderate income worker households have limited affordable housing
options in the City. As one of its strategies to address the demand for affordable housing in the City, Palo
Alto is considering updating its existing commercial linkage fees for hotel and office/R&D/medical office
uses.
A commercial linkage fee is an impact fee that is charged on new, non-residential development to address
the affordable housing demand from new workers. Palo Alto currently has a commercial linkage fee of
$19.85 per square foot on new, non-residential development. The purpose of this study is to provide a
new nexus analysis in the event the Palo Alto decides to adopt an updated commercial linkage fee for
hotel and office/R&D/medical office uses. The funds raised by the linkage fees are deposited into a
housing fund specifically reserved for use by a local jurisdiction to increase the supply of affordable
housing for the workforce. Linkage fees are one of several funding sources that jurisdictions can use to
help meet the affordable housing needs of new workers. For more than thirty years, California cities and
counties have imposed commercial linkage fees on new, non-residential developments.
THE NEXUS CONCEPT
In order to adopt a commercial linkage fee, a nexus study is required to determine the reasonable
relationship between the fee's use and the impact of the development project on which the fee is imposed.
This commercial linkage fee nexus study establishes and quantifies the linkages or “nexus” between new
commercial development and the need for additional housing affordable to new workers. Some of the new
workers will have household incomes that qualify them for income-restricted affordable housing. This
study quantifies the demand for very low income, low income, and moderate income housing that is
created by new development of commercial buildings.
METHODOLOGY
When a city or county adopts a development impact fee, it must establish a reasonable relationship
between the development project and the fee being charged. Studies undertaken to demonstrate this
connection are called nexus studies. Nexus studies for school impact fees, traffic mitigation fees, and
parks are common. For commercial linkage fees, a methodology exists that establishes a connection
between the development of commercial space and the need to expand the supply of affordable housing.
This study is based on this established methodology.
The purpose of a commercial linkage fee nexus analysis is to quantify the increase in demand for
affordable housing that accompanies new non-residential development. There will be a net gain in
employment when new commercial space is built. The ability of new workers to pay for housing costs is
linked to their occupations (and hence salaries). Given anticipated incomes, there may be an affordability
"gap" between what worker households can afford to pay (to rent or to buy) and the actual costs of new
housing.
II. INTRODUCTION AND METHODOLOGY
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A nexus analysis calculates the relationship between new commercial development and household
incomes of employees and then determines the employees' need for affordable housing. These steps
provide the rationale for calculating the maximum justified commercial linkage fee that could be levied
on non-residential development. These steps are presented in more detail below, and the subsequent
sections of this report present the results of each of these steps.
Step 1. Define the commercial prototypes that represent new commercial development in Santa
Clara County.
The prototypes are defined based on recently completed and proposed development projects in Santa
Clara County. The purpose of defining prototypes is to estimate future employment linked to the new
commercial space. Two prototypes were selected and include Hotels (133 rooms or 100,000 SF) and
Office/ R&D/ Medical Office (100,000 SF). The prototype definitions include information on gross and
leasable area, number of rooms (for hotel only), parking, and floor-area-ratio.
Step 2. Estimate the number of workers that will work in the new commercial space.
Based on a national survey data on employment density for commercial land uses, as well as recently
completed linkage fee nexus studies in the Bay Area, the estimated employment density in hotels is
approximately 0.75 workers per room (average room size of 750 SF) and one worker per 333 SF for
office/ R&D/ medical office. By dividing the prototype developments by employment density figures, the
number of workers for each prototype is estimated.
Step 3. Estimate the number of new households represented by these new workers.
Since there are multiple wage earners in a household, the number of new workers will be higher than the
number of new households moving into Palo Alto. Therefore, it is necessary to go from projected growth
in the number of workers to household growth. This adjustment is based on the average number of wage-
earners per worker household for the Palo Alto (1.49) according to the U.S. Census Bureau American
Community Survey 3-Year Estimates, 2010-2012.
Step 4. Estimate wages of new workers.
The first step in calculating employee wages is to establish a list of the industries that can be associated
with each prototype. Using industry data from QCEW, industries (defined by NAICS Codes) were
identified that are associated with each prototype, or land use. The next step is to identify all the
occupations that are associated with each industry based on data provided by the U.S. Bureau of Labor
Statistics (BLS). The national BLS occupational matrix is then calibrated to match the county’s
employment mix by weighting the national employment distribution to reflect the distribution of
employment by industry within Santa Clara County. Finally, the average wage by worker is calculated
using data on average annual wages by occupation in the San Jose – Sunnyvale – Santa Clara
Metropolitan Statistical Area from the California Employment Development Department.
Step 5. Estimate household income of worker households.
Worker wage estimates from the previous step are then converted to household incomes. This step
assumes that the income of the second wage-earner is similar to the wage of the first wage-earner.
According to the U.S. Census Bureau American Community Survey 3-Year Estimates, 2010-2012, there
are 1.49 wage-earners per worker household in Palo Alto. Individual worker wages are multiplied by 1.49
to represent household incomes.
Step 6. Calculate the number of households that would be eligible for affordable housing divided
into three categories: very low, low, and moderate income.
The average household size in Palo Alto is estimated to be three, based on the US Census, American
Community Survey 5-Year Estimates, 2008-2012. Thus, the income groups are defined for a household
size of three persons based on the income categories established by California Department of Housing
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and Community Development (HCD) for Santa Clara County. Households with above-moderate income
are removed to determine the number that would require below market rate affordable housing.
Step 7. Estimate the affordability gap of new households requiring affordable housing.
The affordability gap represents the difference between what households can afford to pay for housing
and the development cost of a modest housing unit. For very low and low income households, a rental
housing gap is used. For moderate income households, the housing affordability gap is calculated
separately for renter and owner households, and then the two gaps are combined to derive an average
affordability gap for moderate income households.
Step 8. Estimate the total housing affordability gap of new households requiring affordable
housing.
The total number of very low, low, and moderate income new worker households for the each land use
prototype is multiplied by the corresponding affordable housing gap figure.
Step 9. Calculate maximum commercial linkage fees for each prototype.
The total affordability gap is then divided by 100,000 SF, the size of each commercial prototype to
generate a maximum fee per square foot.
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This section discusses each step of the commercial linkage analysis calculations and the maximum nexus-
based fees. The analysis presented in this section should be interpreted within the context of the previous
sections establishing the overall methodology for this study.
NEXUS ANALYSIS STEPS
Using the methodology described in Section II, the following describes each of the steps to calculate the
linkage fees in more detail.
Commercial Prototypes
This study examined the jobs-housing linkage for two commercial development prototypes, which are
described below.
1. Hotel – This building prototype includes full-service hotels, limited-service hotels, motels, and
other lodging.
2. Office/ R&D/ Medical Office – This category includes a wide range of office and R&D users,
including traditional office buildings, open floor-plan offices, medical offices, and specialized
spaces for highly advanced manufacturing and research commonly found in Santa Clara County.
The prototypes defined above represent the types of new commercial buildings recently constructed or
proposed in Santa Clara County. Each prototype was assumed to be 100,000 square feet in size. The
building size is not prescriptive; it is only averaged to illustrate the overall numbers of workers and
households associated with new development projects. Many linkage fee nexus studies use the 100,000
square foot number because it can easily be converted into per-square-foot calculations. The per-square-
foot linkage fee can be applied to a project of any size.
Figure III-1 below describes the building characteristics of each prototype, including factors like floor-
area-ratios (FARs) and parking ratios, which were established based on a review of recent commercial
development projects in the county.
III. COMMERCIAL LINKAGE FEE NEXUS ANALYSIS
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Figure III-1. Description of Commercial Prototypes
Hotel
Office/R&D/
Medical Office
Prototype Description
Gross Building Area (GBA). excl. Parking (SF) 100,000 100,000
Efficiency Ratio (a) N/A 0.90
Net Leasable Sq. Ft. (NSF) N/A 90,000
Hotel Rooms 133
Parking Spaces 133 300
Podium Parking 33 240
Surface Parking 100 60
GBA Including Structured Parking 109,975 163,000
Floor Area Ratio (b) 1.1 2.0
Land Area (Acres) 2.3 1.9
Land Area (sq. ft.) 99,977 81,500
Notes:
(a) Refers to ratio of gross building area to net leasable area. An efficiency ratio of 0.9 means that 90% of the gross building
area is leasable.
(b) The floor-area-ratio (FAR) is often used as a measure of density. In this analysis, it is calculated as the gross building area (including structured podium parking) divided by the total land area.
Sources: Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
Average Employment Density and Number of Workers
For each building prototype, an average employment density was applied based on a combination of
national survey data for existing commercial buildings and a review of recently completed linkage fee
nexus studies in the Bay Area. Figure III-2 summarizes the building density data that formed the basis for
establishing average employment density for each prototype. In order to create conservative assumptions
about the number of jobs associated with new commercial development, the lower range of the density
figures were selected for this analysis.
Figure III-3 describes the density for each prototype, measured by the average number of square feet per
worker for each prototype. This factor is multiplied by the size of the building (100,000 square feet) to
calculate the total number of workers in each commercial prototype. The density factors represent the
average density for the prototypes; individual projects and buildings may actually be more or less dense.
The hotel prototype is assumed to be of lower density than office/ R&D/ medical office. The density
assumption generates the total number of direct workers occupying the commercial space in each
prototype.
Hotel – The hotel employment density assumption is 1,000 square feet per worker (or 0.75
workers per room). This density is at the mid-range of the densities shown in Figure III-2, and
consistent with the Vallen and Vallen estimate for limited service mid-scale hotels, which are in
between full-service “luxury” properties and economy properties. Given that many of the recently
constructed and proposed hotel projects in Santa Clara County are limited service mid-scale
hotels, this density is aligned with market trends. For a 100,000-square-foot hotel (roughly
equivalent to 133 rooms), this density assumption results in a total number of 100 workers.
Office/ R&D/ Medical Office – The average density assumption for office/R&D/medical office is
estimated at 333 square feet per worker. This density estimate is slightly lower than some recent
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linkage fee nexus studies, but higher than the national Energy Information Administration survey.
The resulting number of total workers in this prototype is estimated at 300.
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Figure III-2. Employment Density Data and Sources
Employee Density Figure Source
Hotel
1.5 workers per full-service (luxury) hotel room Vallen and Vallen, "Chapter 1: The Traditional Hotel Industry," Check-In, Check-Out, 2012
0.5 to 1.0 workers per room for "in-between" hotels Vallen and Vallen, "Chapter 1: The Traditional Hotel Industry," Check-In, Check-Out, 2012
As few as 0.25 workers per room for "budget" hotels Vallen and Vallen, "Chapter 1: The Traditional Hotel Industry," Check-In, Check-Out, 2012
2,074 square feet per worker Energy Information Administration, 2003 Commercial Buildings Energy Consumption Survey, Rev. 2006
720 square feet per worker A.C. Nelson, "Reshaping Metropolitan America" (based on calculations from EIA survey)
450 square feet per worker Jobs Housing Impact Fee Draft Nexus Study: City of Napa, CA, Vernazza Wolfe Associates Inc., 2011
2,000 square feet per worker Housing Impact Fee Nexus Study: Mountain View, CA, KMA, 2012
Office/ R&D/ Medical Office
185-340 square feet per employee Norm Miller, "Estimating Office Space per Worker: Implications for Future Office Space Demand," 2012
306 square feet per worker Building Owners and Managers Association Survey, 2012
434 square feet per worker
Energy Information Administration, 2003 Commercial Buildings Energy Consumption Survey, Rev.
2006
300 square feet per worker A.C. Nelson, "Reshaping Metropolitan America," 2013
250-350 square feet per worker San Mateo County Housing Needs Study, Economic & Planning Systems, 2006
300 square feet per worker Jobs Housing Impact Fee Draft Nexus Study: City of Napa, CA, Vernazza Wolfe Associates Inc., 2011
312.5 square feet per worker Housing Impact Fee Nexus Study: Mountain View, CA, KMA, 2012
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Figure III-3. Employment Density by Prototype
Commercial Prototype Prototype Size (SF) Average Density
Number of Workers in
Prototype
Hotel 100,000 SF 133 rooms
1,000 SF per worker 0.75 workers per room
100 workers
Office/ R&D/ Medical Office 100,000 SF 333 square feet per worker 300 workers
Sources: Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
Number of Worker Households
Based on the total number of workers directly employed in the prototypes, the total number of worker
households is estimated. The number of worker households is calculated by dividing the number of
workers by the average number of wage-earners per household in the Palo Alto. Based on data from the
U.S. Census American Community Survey 3-Year Estimates, 2010-2012, there is an average of 1.49
workers per household in Palo Alto. The calculation of total new worker households is demonstrated in
Figure III-4 below. The number of worker households associated with the prototypes is 67 for hotels and
202 for office/R&D/medical office.
Figure III-4. Number of Worker Households by Prototype
Commercial Prototype
Number of New
Workers
Workers per
Household
Number of New
Worker Households
Hotel 100 1.49 67.11
Office/R&D/Medical Office 300 1.49 201.54
Sources: US Census, American Community Survey 3-Year Estimates, 2010-2012; Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
Calculate Worker Wages and Household Income
The first step in calculating employee wages is to establish a list of the industries that can be associated
with each prototype. Using industry data from Quarterly Census of Employment and Wages (QCEW),
industries (defined by NAICS Codes) were identified that are associated with each prototype, or land use.
Figure III-5 and III-6 below describe the industries that are associated with the hotel and office/ R&D/
medical office prototypes. The hotel category shown in Figure III-5 has only one industry attached to it,
while the office/ R&D/ medical office uses are associated with a larger number of industries, as shown in
Figure III-6.
Figure III-5. Definition of Industries for Hotel Prototype
Hotels
721 Accommodation 100%
Total 100%
Note; Unlike other prototypes, the hotel prototype only includes one NAICS industry category. Source: United States Bureau of Labor Statistics, Quarterly Census of Employment and Wages (QCEW), 2013.
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Figure III-6. Definition of Industries for Office/ R&D/ Medical Office Prototype
NAICS Code Description
Percent Total Workers
in Prototype
5415 Computer systems design and related services 13.5%
3344 Semiconductor and electronic component mfg. 10.2%
3341 Computer and peripheral equipment mfg. 9.3%
5191 Other information services 6.6%
5417 Scientific research and development services 5.2%
5613 Employment services 4.9%
5617 Services to buildings and dwellings 3.7%
5112 Software publishers 3.6%
5413 Architectural and engineering services 3.0%
5511 Management of companies and enterprises 2.8%
3345 Electronic instrument manufacturing 2.7%
6211 Offices of physicians 2.6%
5416 Management and technical consulting services 2.6%
6212 Offices of dentists 2.0%
3342 Communications equipment manufacturing 2.0%
6214 Outpatient care centers 1.9%
5412 Accounting and bookkeeping services 1.9%
5616 Investigation and security services 1.7%
5411 Legal services 1.7%
5221 Depository credit intermediation 1.6%
5182 Data processing, hosting and related services 1.6%
7223 Special food services 1.3%
517 Telecommunications 1.3%
5611 Office administrative services 1.1%
3391 Medical equipment and supplies manufacturing 1.1%
5313 Activities related to real estate 1.0%
523 Securities, commodity contracts, investments 0.9%
5311 Lessors of real estate 0.9%
5223 Activities related to credit intermediation 0.8%
6213 Offices of other health practitioners 0.8%
5419 Other professional and technical services 0.8%
5242 Insurance agencies and brokerages 0.6%
5312 Offices of real estate agents and brokers 0.5%
5222 Nondepository credit intermediation 0.5%
5121 Motion picture and video industries 0.4%
5418 Advertising, pr, and related services 0.4%
5614 Business support services 0.4%
6215 Medical and diagnostic laboratories 0.3%
5241 Insurance carriers 0.3%
5111 Newspaper, book, and directory publishers 0.3%
5414 Specialized design services 0.3%
515 Broadcasting, except internet 0.3%
5619 Other support services 0.3%
5612 Facilities support services 0.1%
3353 Electrical equipment manufacturing 0.1%
5331 Lessors of nonfinancial intangible assets 0.1%
5122 Sound recording industries 0.0%
5259 Other investment pools and funds 0.0%
Total 100.0%
Sources: United States Bureau of Labor Statistics, Quarterly Census of Employment and Wages (QCEW), 2013; Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015
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The next step is to identify all the occupations that are associated with each industry based on data
provided by the U.S. Bureau of Labor Statistics (BLS). National level data on occupations are the best
available; state level industry-occupation data exist but do not include all relevant industries. The national
BLS occupational matrix is then calibrated to match the county’s employment mix by weighting the
national employment distribution to reflect the distribution of employment by industry within Santa Clara
County. Finally, the average wage by worker is calculated using data on average annual wages by
occupation in the San Jose – Sunnyvale – Santa Clara Metropolitan Statistical Area (the smallest
geographic level at which wage data are available) from the California Employment Development
Department.
Figure III-7 below summarizes the results of these calculations, computing the average weighted wages2
for each prototype. As shown, office/R&D/medical office employees have highest higher average wage of
the three prototypes, due to a larger percentage of occupations in higher wage categories.
Figure III-7. Average Annual Wage by Prototype
Commercial Prototype
Weighted Average
Annual Wage (a)
Hotel $35,157
Office, R&D and Medical Office $78,598
Notes: (a) Average wages are weighted to take into account the proportion of jobs in each occupational wage category.
Sources: Bureau of Labor Statistics, Occupational Employment Statistics, 2013 and Quarterly Census of Employment and Wages (QCEW), 2013; California Economic Development Department, OES Employment and Wages by Occupation, 2013; Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
The complete occupational mix, and wage data tables for each prototype are presented in Figure III-8 and
Figure III-9.
2 The weighted average wage takes into account the proportion of jobs in each occupational category.
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Figure III-8. Occupational Mix and Average Wages for Hotel Industry
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total
Hotel
Workers (c)
11-0000 Management Occupations
11-9081 Lodging Managers $55,616 1.624%
11-1021 General and Operations Managers $150,054 0.988%
11-9051 Food Service Managers $55,929 0.499%
11-2022 Sales Managers $173,358 0.385%
11-3031 Financial Managers $162,295 0.205%
11-3011 Administrative Services Managers $116,009 0.169%
11-9199 Managers, All Other $164,693 0.128%
11-3121 Human Resources Managers $163,111 0.094%
11-1011 Chief Executives $218,577 0.066%
11-9141 Property, Real Estate, and Community Association Managers $75,727 0.057%
11-2021 Marketing Managers $185,177 0.056%
11-2011 Advertising and Promotions Managers $113,379 0.040%
11-3061 Purchasing Managers $149,288 0.026%
11-3021 Computer and Information Systems Managers $185,257 0.026%
11-2031 Public Relations and Fundraising Managers $129,248 0.008%
11-3111 Compensation and Benefits Managers $164,189 0.007%
11-9151 Social and Community Service Managers $80,170 0.006%
11-3131 Training and Development Managers $161,761 0.003%
11-9041 Architectural and Engineering Managers $186,557 0.003%
11-3071 Transportation, Storage, and Distribution Managers $110,880 0.003%
11-9021 Construction Managers $115,374 0.002%
Weighted Mean Annual Wage $106,756 4.396%
13-0000 Business and Financial Operations Occupations
13-1121 Meeting, Convention, and Event Planners $58,851 0.487%
13-2011 Accountants and Auditors $87,797 0.468%
13-1071 Human Resources Specialists $84,352 0.201%
13-1199 Business Operations Specialists, All Other $95,424 0.096%
13-1023 Purchasing Agents, Except Wholesale, Retail, and Farm Products $79,868 0.083%
13-1161 Market Research Analysts and Marketing Specialists $103,979 0.069%
Draft Palo Alto Linkage Fee Nexus Study
-23-
Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total
Hotel
Workers (c)
13-1151 Training and Development Specialists $83,797 0.027%
13-1141 Compensation, Benefits, and Job Analysis Specialists $90,004 0.019%
13-2051 Financial Analysts $112,220 0.018%
13-2099 Financial Specialists, All Other $63,667 0.013%
13-1041 Compliance Officers $84,523 0.012%
13-1131 Fundraisers $70,296 0.011%
13-1075 Labor Relations Specialists $61,652 0.009%
13-1111 Management Analysts $104,573 0.006%
13-1022 Wholesale and Retail Buyers, Except Farm Products $58,770 0.005%
13-2031 Budget Analysts $85,923 0.002%
13-2041 Credit Analysts $74,760 0.002%
Weighted Mean Annual Wage $78,604 1.528%
15-0000 Computer and Mathematical Occupations
15-1151 Computer User Support Specialists $71,022 0.037%
15-1199 Computer Occupations, All Other $95,708 0.026%
15-1142 Network and Computer Systems Administrators $94,342 0.024%
15-1152 Computer Network Support Specialists $91,823 0.015%
15-1121 Computer Systems Analysts $105,259 0.009%
15-1134 Web Developers $101,961 0.005%
15-1141 Database Administrators $102,689 0.005%
15-1131 Computer Programmers $95,000 0.003%
15-1132 Software Developers, Applications $132,808 0.002%
Weighted Mean Annual Wage $89,651 0.127%
17-0000 Architecture and Engineering Occupations
17-3023 Electrical and Electronics Engineering Technicians $66,014 0.004%
17-2051 Civil Engineers $101,748 0.003%
17-2141 Mechanical Engineers $110,763 0.003%
Weighted Mean Annual Wage $91,430 0.011%
Draft Palo Alto Linkage Fee Nexus Study
-24-
Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total
Hotel Workers
(c)
19-0000 Life, Physical, and Social Science Occupations $93,341 0.006%
Weighted Mean Annual Wage $93,341 0.006%
21-0000 Community and Social Service Occupations
21-1099 Community and Social Service Specialists, All Other $45,821 0.003%
Weighted Mean Annual Wage $45,821 0.003%
23-0000 Legal Occupations
23-1011 Lawyers $197,821 0.002%
23-2011 Paralegals and Legal Assistants $66,207 0.002%
Weighted Mean Annual Wage $141,415 0.004%
25-0000 Education, Training, and Library Occupations
25-3021 Self-Enrichment Education Teachers $45,214 0.035%
25-3099 Teachers and Instructors, All Other, Except Substitute Teachers $61,887 0.005%
25-2011 Preschool Teachers, Except Special Education $39,943 0.003%
25-9031 Instructional Coordinators $72,975 0.002%
Weighted Mean Annual Wage $48,010 0.044%
27-0000 Arts, Design, Entertainment, Sports, and Media Occupations
27-4011 Audio and Video Equipment Technicians $44,404 0.153%
27-2022 Coaches and Scouts $44,647 0.076%
27-3031 Public Relations Specialists $73,572 0.055%
27-3099 Media and Communication Workers, All Other $52,447 0.021%
27-4099 Media and Communication Equipment Workers, All Other $69,576 0.014%
27-1024 Graphic Designers $64,588 0.009%
27-1023 Floral Designers $33,640 0.008%
27-1025 Interior Designers $65,478 0.002%
Weighted Mean Annual Wage $51,110 0.337%
Draft Palo Alto Linkage Fee Nexus Study
-25-
Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a) Average Annual
Wage (b)
% of Total
Hotel Workers
(c)
29-0000 Healthcare Practitioners and Technical Occupations
29-1141 Registered Nurses $124,633 0.006%
29-9011 Occupational Health and Safety Specialists $91,672 0.005%
Weighted Mean Annual Wage $110,755 0.011%
31-0000 Healthcare Support Occupations
31-9011 Massage Therapists $33,182 0.435%
Weighted Mean Annual Wage $33,182 0.435%
33-0000 Protective Service Occupations
33-9032 Security Guards $31,791 1.595%
33-9092 Lifeguards, Ski Patrol, and Other Recreational Protective Service Workers $23,660 0.402%
33-1099 First-Line Supervisors of Protective Service Workers, All Other $55,471 0.140%
33-9099 Protective Service Workers, All Other $44,649 0.064%
33-9021 Private Detectives and Investigators $81,056 0.003%
Weighted Mean Annual Wage $32,248 2.204%
35-0000 Food Preparation and Serving Related Occupations
35-3031 Waiters and Waitresses $22,964 7.606%
35-2014 Cooks, Restaurant $25,887 3.415%
35-9011 Dining Room and Cafeteria Attendants and Bartender Helpers $19,871 2.696%
35-3011 Bartenders $25,181 2.156%
35-3041 Food Servers, Nonrestaurant $29,514 1.857%
35-9021 Dishwashers $20,516 1.776%
35-1012 First-Line Supervisors of Food Preparation and Serving Workers $35,399 1.298%
35-2021 Food Preparation Workers $23,005 1.039%
35-9031 Hosts and Hostesses, Restaurant, Lounge, and Coffee Shop $20,153 0.922%
35-3021 Combined Food Preparation and Serving Workers, Including Fast Food $22,199 0.839%
35-1011 Chefs and Head Cooks $45,637 0.750%
35-3022 Counter Attendants, Cafeteria, Food Concession, and Coffee Shop $21,020 0.554%
Draft Palo Alto Linkage Fee Nexus Study
-26-
Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total
Hotel
Workers (c)
35-2012 Cooks, Institution and Cafeteria $31,489 0.330%
35-2015 Cooks, Short Order $24,546 0.322%
35-9099 Food Preparation and Serving Related Workers, All Other $22,148 0.283%
35-2019 Cooks, All Other $25,413 0.097%
35-2011 Cooks, Fast Food $20,496 0.088%
Weighted Mean Annual Wage $24,740 26.028%
37-0000 Building and Grounds Cleaning and Maintenance Occupations
37-2012 Maids and Housekeeping Cleaners $28,799 24.645%
37-2011 Janitors and Cleaners, Except Maids and Housekeeping Cleaners $27,549 2.606%
37-1011 First-Line Supervisors of Housekeeping and Janitorial Workers $50,352 1.778%
37-3011 Landscaping and Groundskeeping Workers $31,560 1.061%
37-1012 First-Line Supervisors of Landscaping, Lawn Service, and Groundskeeping Workers $52,297 0.120%
37-3019 Grounds Maintenance Workers, All Other $45,818 0.048%
Weighted Mean Annual Wage $30,175 30.258%
39-0000 Personal Care and Service Occupations
39-5092 Manicurists and Pedicurists $19,327 0.059%
39-3031 Ushers, Lobby Attendants, and Ticket Takers $20,113 0.089%
39-7011 Tour Guides and Escorts $21,110 0.048%
39-9099 Personal Care and Service Workers, All Other $21,120 0.215%
39-6011 Baggage Porters and Bellhops $22,894 1.366%
39-5012 Hairdressers, Hairstylists, and Cosmetologists $23,942 0.060%
39-3091 Amusement and Recreation Attendants $24,637 0.681%
39-3093 Locker Room, Coatroom, and Dressing Room Attendants $25,685 0.137%
39-9021 Personal Care Aides $26,572 0.018%
39-9032 Recreation Workers $28,093 0.614%
39-2021 Nonfarm Animal Caretakers $28,990 0.023%
39-9011 Childcare Workers $29,565 0.040%
39-6012 Concierges $32,043 0.700%
Draft Palo Alto Linkage Fee Nexus Study
-27-
Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a) Average Annual
Wage (b)
% of Total
Hotel Workers
(c)
39-9041 Residential Advisors $35,308 0.061%
39-2011 Animal Trainers $43,682 0.003%
39-1021 First-Line Supervisors of Personal Service Workers $45,485 0.238%
Weighted Mean Annual Wage $26,795 4.350%
41-0000 Sales and Related Occupations
41-3099 Sales Representatives, Services, All Other $90,918 0.911%
41-2011 Cashiers $25,771 0.809%
41-2031 Retail Salespersons $27,121 0.316%
41-2012 Gaming Change Persons and Booth Cashiers $21,931 0.197%
41-1011 First-Line Supervisors of Retail Sales Workers $48,448 0.133%
41-2021 Counter and Rental Clerks $34,428 0.077%
41-1012 First-Line Supervisors of Non-Retail Sales Workers $111,025 0.072%
41-3041 Travel Agents $41,745 0.034%
41-9099 Sales and Related Workers, All Other $42,552 0.034%
41-9041 Telemarketers $29,631 0.030%
41-4012 Sales Representatives, Wholesale and Manufacturing, Except Technical and Scientific Products $68,867 0.020%
41-9022 Real Estate Sales Agents $70,439 0.007%
41-3011 Advertising Sales Agents $63,001 0.005%
Weighted Mean Annual Wage $52,775 2.645%
43-0000 Office and Administrative Support Occupations
43-4081 Hotel, Motel, and Resort Desk Clerks $24,788 12.825%
43-1011 First-Line Supervisors of Office and Administrative Support Workers $67,296 1.502%
43-3031 Bookkeeping, Accounting, and Auditing Clerks $49,252 1.111%
43-9061 Office Clerks, General $39,450 0.564%
43-6014 Secretaries and Administrative Assistants, Except Legal, Medical, and Executive $43,308 0.497%
43-4051 Customer Service Representatives $46,518 0.454%
43-4181 Reservation and Transportation Ticket Agents and Travel Clerks $37,617 0.453%
43-2011 Switchboard Operators, Including Answering Service $35,683 0.369%
43-4171 Receptionists and Information Clerks $34,590 0.250%
Draft Palo Alto Linkage Fee Nexus Study
-28-
Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total
Hotel Workers
(c)
43-3041 Gaming Cage Workers $31,137 0.247%
43-5081 Stock Clerks and Order Fillers $28,312 0.220%
43-6011 Executive Secretaries and Executive Administrative Assistants $65,402 0.195%
43-5071 Shipping, Receiving, and Traffic Clerks $35,207 0.126%
43-3051 Payroll and Timekeeping Clerks $51,773 0.094%
43-9199 Office and Administrative Support Workers, All Other $38,731 0.093%
43-4161 Human Resources Assistants, Except Payroll and Timekeeping $51,044 0.082%
43-5032 Dispatchers, Except Police, Fire, and Ambulance $53,920 0.076%
43-3021 Billing and Posting Clerks $45,890 0.065%
43-3061 Procurement Clerks $47,955 0.031%
43-5061 Production, Planning, and Expediting Clerks $58,689 0.020%
43-5021 Couriers and Messengers $36,189 0.016%
43-4041 Credit Authorizers, Checkers, and Clerks $41,981 0.011%
43-4151 Order Clerks $42,315 0.011%
43-3011 Bill and Account Collectors $49,434 0.010%
43-9051 Mail Clerks and Mail Machine Operators, Except Postal Service $34,691 0.008%
43-4199 Information and Record Clerks, All Other $46,467 0.007%
43-4071 File Clerks $34,012 0.005%
43-5111 Weighers, Measurers, Checkers, and Samplers, Recordkeeping $30,539 0.005%
43-9011 Computer Operators $46,204 0.005%
43-9071 Office Machine Operators, Except Computer $33,131 0.005%
43-3099 Financial Clerks, All Other $45,444 0.003%
Weighted Mean Annual Wage $32,767 19.359%
45-0000 Farming, Fishing, and Forestry Occupations
45-2093 Farmworkers, Farm, Ranch, and Aquacultural Animals $28,101 0.032%
45-2092 Farmworkers and Laborers, Crop, Nursery, and Greenhouse $21,473 0.003%
45-1011 First-Line Supervisors of Farming, Fishing, and Forestry Workers $61,161 0.002%
Weighted Mean Annual Wage $29,481 0.038%
Draft Palo Alto Linkage Fee Nexus Study
-29-
Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total
Hotel
Workers (c)
47-0000 Construction and Extraction Occupations
47-2141 Painters, Construction and Maintenance $52,934 0.079%
47-2031 Carpenters $62,042 0.059%
47-2111 Electricians $64,835 0.031%
47-1011 First-Line Supervisors of Construction Trades and Extraction Workers $83,728 0.011%
47-2152 Plumbers, Pipefitters, and Steamfitters $80,317 0.010%
47-2061 Construction Laborers $44,910 0.010%
47-2073 Operating Engineers and Other Construction Equipment Operators $69,510 0.008%
47-2041 Carpet Installers $56,709 0.003%
47-4051 Highway Maintenance Workers $60,564 0.002%
Weighted Mean Annual Wage $60,513 0.213%
49-0000 Installation, Maintenance, and Repair Occupations
49-9071 Maintenance and Repair Workers, General $48,997 4.553%
49-1011 First-Line Supervisors of Mechanics, Installers, and Repairers $77,658 0.400%
49-9091 Coin, Vending, and Amusement Machine Servicers and Repairers $36,977 0.094%
49-9099 Installation, Maintenance, and Repair Workers, All Other $49,058 0.044%
49-9021 Heating, Air Conditioning, and Refrigeration Mechanics and Installers $65,190 0.028%
49-9098 Helpers--Installation, Maintenance, and Repair Workers $34,330 0.023%
49-3053 Outdoor Power Equipment and Other Small Engine Mechanics $46,768 0.011%
49-9041 Industrial Machinery Mechanics $55,938 0.010%
49-3023 Automotive Service Technicians and Mechanics $51,582 0.009%
49-9094 Locksmiths and Safe Repairers $59,969 0.008%
49-3042 Mobile Heavy Equipment Mechanics, Except Engines $55,470 0.007%
49-9043 Maintenance Workers, Machinery $43,226 0.007%
49-2022 Telecommunications Equipment Installers and Repairers, Except Line Installers $65,495 0.002%
49-2094 Electrical and Electronics Repairers, Commercial and Industrial Equipment $51,745 0.002%
Weighted Mean Annual Wage $51,047 5.199%
51-0000 Production Occupations
51-6011 Laundry and Dry-Cleaning Workers $25,879 1.611%
Draft Palo Alto Linkage Fee Nexus Study
-30-
Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b) % of Total Hotel
Workers (c)
51-3011 Bakers $27,048 0.179%
51-8021 Stationary Engineers and Boiler Operators $78,511 0.054%
51-1011 First-Line Supervisors of Production and Operating Workers $63,406 0.051%
51-6052 Tailors, Dressmakers, and Custom Sewers $41,613 0.018%
51-9061 Inspectors, Testers, Sorters, Samplers, and Weighers $46,350 0.011%
51-3021 Butchers and Meat Cutters $34,021 0.008%
51-6031 Sewing Machine Operators $24,629 0.006%
51-6021 Pressers, Textile, Garment, and Related Materials $24,425 0.006%
51-9012 Separating, Filtering, Clarifying, Precipitating, and Still Machine Setters, Operators, and Tenders $40,373 0.003%
51-3092 Food Batchmakers $25,310 0.002%
51-9198 Helpers--Production Workers $27,546 0.002%
Weighted Mean Annual Wage $28,730 1.950%
53-0000 Transportation and Material Moving Occupations
53-6021 Parking Lot Attendants $21,595 0.464%
53-7062 Laborers and Freight, Stock, and Material Movers, Hand $31,188 0.297%
53-1031 First-Line Supervisors of Transportation and Material-Moving Machine and Vehicle Operators $61,604 0.034%
53-1021 First-Line Supervisors of Helpers, Laborers, and Material Movers, Hand $52,489 0.018%
53-3033 Light Truck or Delivery Services Drivers $36,503 0.018%
53-7061 Cleaners of Vehicles and Equipment $25,762 0.008%
53-7199 Material Moving Workers, All Other $39,857 0.005%
53-6031 Automotive and Watercraft Service Attendants $27,042 0.004%
53-7051 Industrial Truck and Tractor Operators $37,469 0.003%
53-3031 Driver/Sales Workers $35,192 0.002%
53-3032 Heavy and Tractor-Trailer Truck Drivers $46,564 0.002%
Weighted Mean Annual Wage $27,778 0.854%
Total, Land Use $35,157 100.000%
Notes: (a) Occupational mix by industry was obtained from US Bureau of Labor Statistics, Occupational Employment Statistics, 2013. (b) Wage data for the San Jose – Sunnyvale – Santa Clara MSA obtained from California Economic Development Department, OES Employment and Wages by Occupation, 2013. (c) Distribution of workers is calculated based on the existing distribution of employment by industry in Santa Clara County, provided by Quarterly Census of Employment and Wages (QCEW), 2013.
Sources: Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
Draft Palo Alto Linkage Fee Nexus Study
-31-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
11-0000 Management Occupations
11-1021 General and Operations Managers $150,054 2.009%
11-3021 Computer and Information Systems Managers $185,257 1.370%
11-3031 Financial Managers $162,295 0.706%
11-9041 Architectural and Engineering Managers $186,557 0.475%
11-2022 Sales Managers $173,358 0.421%
11-2021 Marketing Managers $185,177 0.409%
11-9199 Managers, All Other $164,693 0.398%
11-1011 Chief Executives $218,577 0.290%
11-3011 Administrative Services Managers $116,009 0.273%
11-9111 Medical and Health Services Managers $139,807 0.184%
11-3121 Human Resources Managers $163,111 0.181%
11-9141 Property, Real Estate, and Community Association Managers $75,727 0.151%
11-3051 Industrial Production Managers $129,691 0.118%
11-9121 Natural Sciences Managers $189,368 0.107%
11-3061 Purchasing Managers $149,288 0.091%
11-9021 Construction Managers $115,374 0.059%
11-3131 Training and Development Managers $161,761 0.045%
11-2031 Public Relations and Fundraising Managers $129,248 0.044%
11-9051 Food Service Managers $55,929 0.042%
11-3071 Transportation, Storage, and Distribution Managers $110,880 0.039%
11-3111 Compensation and Benefits Managers $164,189 0.029%
11-2011 Advertising and Promotions Managers $113,379 0.022%
11-9151 Social and Community Service Managers $80,170 0.021%
11-9161 Emergency Management Directors $115,203 0.003%
11-9039 Education Administrators, All Other $85,561 0.003%
11-9081 Lodging Managers $55,616 0.002%
11-9013 Farmers, Ranchers, and Other Agricultural Managers $104,976 0.002%
11-9031 Education Administrators, Preschool and Childcare Center/Program $64,614 0.002%
11-9033 Education Administrators, Postsecondary $110,266 0.001%
11-9032 Education Administrators, Elementary and Secondary School $110,588 0.000%
Weighted Mean Annual Wage $162,745 7.500%
Draft Palo Alto Linkage Fee Nexus Study
-32-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
13-0000 Business and Financial Operations Occupations
13-2011 Accountants and Auditors $87,797 1.738%
13-1111 Management Analysts $104,573 1.252%
13-1199 Business Operations Specialists, All Other $95,424 1.164%
13-1161 Market Research Analysts and Marketing Specialists $103,979 0.902%
13-1071 Human Resources Specialists $84,352 0.876%
13-2051 Financial Analysts $112,220 0.466%
13-1151 Training and Development Specialists $83,797 0.384%
13-2072 Loan Officers $82,709 0.359%
13-1023 Purchasing Agents, Except Wholesale, Retail, and Farm Products $79,868 0.335%
13-2052 Personal Financial Advisors $90,346 0.208%
13-1081 Logisticians $97,520 0.194%
13-1041 Compliance Officers $84,523 0.183%
13-2099 Financial Specialists, All Other $63,667 0.163%
13-1031 Claims Adjusters, Examiners, and Investigators $71,737 0.140%
13-2082 Tax Preparers $51,506 0.135%
13-1141 Compensation, Benefits, and Job Analysis Specialists $90,004 0.116%
13-2041 Credit Analysts $74,760 0.101%
13-1022 Wholesale and Retail Buyers, Except Farm Products $58,770 0.085%
13-1051 Cost Estimators $78,709 0.061%
13-2031 Budget Analysts $85,923 0.061%
13-1121 Meeting, Convention, and Event Planners $58,851 0.043%
13-2021 Appraisers and Assessors of Real Estate $75,586 0.036%
13-2061 Financial Examiners $92,603 0.024%
13-2071 Credit Counselors $53,299 0.017%
13-1075 Labor Relations Specialists $61,652 0.014%
13-1131 Fundraisers $70,296 0.012%
13-1021 Buyers and Purchasing Agents, Farm Products $66,679 0.004%
13-1011 Agents and Business Managers of Artists, Performers, and Athletes $111,797 0.000%
Weighted Mean Annual Wage $91,169 9.073%
Draft Palo Alto Linkage Fee Nexus Study
-33-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
15-0000 Computer and Mathematical Occupations
15-1132 Software Developers, Applications $132,808 4.184%
15-1121 Computer Systems Analysts $105,259 2.702%
15-1133 Software Developers, Systems Software $133,577 2.548%
15-1151 Computer User Support Specialists $71,022 2.162%
15-1131 Computer Programmers $95,000 2.144%
15-1142 Network and Computer Systems Administrators $94,342 1.282%
15-1143 Computer Network Architects $137,806 0.708%
15-1152 Computer Network Support Specialists $91,823 0.667%
15-1134 Web Developers $101,961 0.519%
15-1199 Computer Occupations, All Other $95,708 0.475%
15-1141 Database Administrators $102,689 0.409%
15-1122 Information Security Analysts $106,331 0.392%
15-2031 Operations Research Analysts $118,553 0.188%
15-1111 Computer and Information Research Scientists $134,649 0.099%
15-2041 Statisticians $151,990 0.049%
Weighted Mean Annual Wage $110,240 18.527%
17-0000 Architecture and Engineering Occupations
17-2061 Computer Hardware Engineers $135,975 0.598%
17-2071 Electrical Engineers $122,822 0.484%
17-2051 Civil Engineers $101,748 0.481%
17-3023 Electrical and Electronics Engineering Technicians $66,014 0.468%
17-2141 Mechanical Engineers $110,763 0.460%
17-2072 Electronics Engineers, Except Computer $127,436 0.434%
17-2112 Industrial Engineers $110,914 0.432%
17-2199 Engineers, All Other $114,931 0.242%
17-1011 Architects, Except Landscape and Naval $87,584 0.239%
17-3011 Architectural and Civil Drafters $60,227 0.227%
17-3026 Industrial Engineering Technicians $59,570 0.178%
17-2011 Aerospace Engineers $109,569 0.126%
Draft Palo Alto Linkage Fee Nexus Study
-34-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
17-3029 Engineering Technicians, Except Drafters, All Other $60,430 0.113%
17-3027 Mechanical Engineering Technicians $53,712 0.105%
17-3022 Civil Engineering Technicians $59,600 0.103%
17-3031 Surveying and Mapping Technicians $61,684 0.099%
17-1022 Surveyors $82,141 0.096%
17-2081 Environmental Engineers $81,595 0.094%
17-3013 Mechanical Drafters $66,197 0.084%
17-3012 Electrical and Electronics Drafters $72,773 0.075%
17-2041 Chemical Engineers $100,575 0.051%
17-2131 Materials Engineers $106,068 0.047%
17-1012 Landscape Architects $79,349 0.045%
17-2031 Biomedical Engineers $116,701 0.042%
17-3024 Electro-Mechanical Technicians $52,852 0.041%
17-3025 Environmental Engineering Technicians $70,456 0.031%
17-3019 Drafters, All Other $46,498 0.025%
17-2111 Health and Safety Engineers, Except Mining Safety Engineers and Inspectors $99,077 0.023%
17-1021 Cartographers and Photogrammetrists $73,380 0.022%
Weighted Mean Annual Wage $98,983 5.459%
19-0000 Life, Physical, and Social Science Occupations
19-1042 Medical Scientists, Except Epidemiologists $124,745 0.239%
19-2031 Chemists $78,337 0.159%
19-4021 Biological Technicians $51,638 0.126%
19-2041 Environmental Scientists and Specialists, Including Health $92,946 0.120%
19-4031 Chemical Technicians $46,266 0.111%
19-4099 Life, Physical, and Social Science Technicians, All Other $55,968 0.101%
19-1021 Biochemists and Biophysicists $110,044 0.091%
19-4061 Social Science Research Assistants $50,191 0.060%
19-4091 Environmental Science and Protection Technicians, Including Health $51,365 0.050%
19-2042 Geoscientists, Except Hydrologists and Geographers $79,339 0.049%
19-2012 Physicists $127,871 0.039%
19-3031 Clinical, Counseling, and School Psychologists $87,979 0.038%
19-1029 Biological Scientists, All Other $86,836 0.037%
19-1022 Microbiologists $88,980 0.035%
Draft Palo Alto Linkage Fee Nexus Study
-35-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
19-3099 Social Scientists and Related Workers, All Other $90,447 0.032%
19-3011 Economists $52,377 0.030%
19-1013 Soil and Plant Scientists $58,255 0.025%
19-3051 Urban and Regional Planners $92,997 0.020%
19-4011 Agricultural and Food Science Technicians $31,444 0.020%
19-1012 Food Scientists and Technologists $70,689 0.019%
19-2032 Materials Scientists $111,916 0.019%
19-1023 Zoologists and Wildlife Biologists $66,925 0.016%
19-1099 Life Scientists, All Other $95,840 0.012%
19-3094 Political Scientists $82,718 0.005%
19-1031 Conservation Scientists $95,759 0.004%
19-3039 Psychologists, All Other $85,834 0.003%
19-4092 Forensic Science Technicians $76,587 0.002%
Weighted Mean Annual Wage $82,195 1.461%
21-0000 Community and Social Service Occupations
21-1014 Mental Health Counselors $55,918 0.074%
21-1093 Social and Human Service Assistants $41,501 0.068%
21-1023 Mental Health and Substance Abuse Social Workers $61,148 0.067%
21-1011 Substance Abuse and Behavioral Disorder Counselors $44,070 0.048%
21-1022 Healthcare Social Workers $69,930 0.042%
21-1021 Child, Family, and School Social Workers $50,990 0.032%
21-1091 Health Educators $61,381 0.026%
21-1094 Community Health Workers $46,822 0.022%
21-1099 Community and Social Service Specialists, All Other $45,821 0.020%
21-1015 Rehabilitation Counselors $44,475 0.016%
21-1013 Marriage and Family Therapists $62,140 0.014%
21-1012 Educational, Guidance, School, and Vocational Counselors $63,546 0.014%
21-1019 Counselors, All Other $74,199 0.008%
21-1029 Social Workers, All Other $81,221 0.007%
21-2011 Clergy $55,058 0.002%
21-2021 Directors, Religious Activities and Education $61,067 0.000%
Weighted Mean Annual Wage $54,459 0.462%
Draft Palo Alto Linkage Fee Nexus Study
-36-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
23-0000 Legal Occupations
23-1011 Lawyers $197,821 0.881%
23-2011 Paralegals and Legal Assistants $66,207 0.433%
23-2093 Title Examiners, Abstractors, and Searchers $83,375 0.066%
23-2099 Legal Support Workers, All Other $74,493 0.032%
23-1022 Arbitrators, Mediators, and Conciliators $81,726 0.004%
23-2091 Court Reporters $73,188 0.002%
Weighted Mean Annual Wage $148,985 1.419%
25-0000 Education, Training, and Library Occupations
25-3098 Substitute Teachers $40,206 0.175%
25-4021 Librarians $73,531 0.058%
25-4031 Library Technicians $52,447 0.045%
25-9041 Teacher Assistants $30,220 0.041%
25-2021 Elementary School Teachers, Except Special Education $70,132 0.025%
25-9031 Instructional Coordinators $72,975 0.022%
25-3099 Teachers and Instructors, All Other, Except Substitute Teachers $61,887 0.019%
25-9099 Education, Training, and Library Workers, All Other $38,617 0.018%
25-2022 Middle School Teachers, Except Special and Career/Technical Education $67,977 0.017%
25-2031 Secondary School Teachers, Except Special and Career/Technical Education $73,451 0.016%
25-3021 Self-Enrichment Education Teachers $45,214 0.008%
25-2011 Preschool Teachers, Except Special Education $39,943 0.008%
25-2059 Special Education Teachers, All Other $62,898 0.002%
25-2052 Special Education Teachers, Kindergarten and Elementary School $66,591 0.002%
25-1194 Vocational Education Teachers, Postsecondary $63,101 0.002%
25-4012 Curators $65,033 0.001%
25-3011 Adult Basic and Secondary Education and Literacy Teachers and Instructors $76,587 0.001%
25-1071 Health Specialties Teachers, Postsecondary $76,202 0.001%
25-4013 Museum Technicians and Conservators $44,819 0.001%
25-2054 Special Education Teachers, Secondary School $74,837 0.001%
25-2051 Special Education Teachers, Preschool $65,751 0.001%
Weighted Mean Annual Wage $51,545 0.463%
Draft Palo Alto Linkage Fee Nexus Study
-37-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
27-0000 Arts, Design, Entertainment, Sports, and Media Occupations
27-1024 Graphic Designers $64,588 0.236%
27-3042 Technical Writers $102,446 0.203%
27-3031 Public Relations Specialists $73,572 0.157%
27-3041 Editors $77,538 0.116%
27-1014 Multimedia Artists and Animators $79,399 0.090%
27-3043 Writers and Authors $72,833 0.043%
27-4021 Photographers $41,066 0.041%
27-3022 Reporters and Correspondents $50,727 0.041%
27-1025 Interior Designers $65,478 0.038%
27-1011 Art Directors $125,109 0.034%
27-1021 Commercial and Industrial Designers $89,992 0.025%
27-4011 Audio and Video Equipment Technicians $44,404 0.023%
27-3091 Interpreters and Translators $55,604 0.022%
27-3099 Media and Communication Workers, All Other $52,447 0.017%
27-1026 Merchandise Displayers and Window Trimmers $34,247 0.015%
27-4032 Film and Video Editors $43,564 0.013%
27-2022 Coaches and Scouts $44,647 0.012%
27-1022 Fashion Designers $53,236 0.011%
27-4012 Broadcast Technicians $40,560 0.010%
27-3011 Radio and Television Announcers $31,191 0.009%
27-4099 Media and Communication Equipment Workers, All Other $69,576 0.005%
27-1027 Set and Exhibit Designers $66,804 0.003%
27-1023 Floral Designers $33,640 0.002%
27-3012 Public Address System and Other Announcers $40,914 0.000%
27-1012 Craft Artists $43,696 0.000%
27-2041 Music Directors and Composers $69,576 0.000%
Weighted Mean Annual Wage $74,013 1.163%
29-0000 Healthcare Practitioners and Technical Occupations
29-1141 Registered Nurses $124,633 1.072%
29-2061 Licensed Practical and Licensed Vocational Nurses $58,801 0.469%
29-1069 Physicians and Surgeons, All Other $147,650 0.426%
Draft Palo Alto Linkage Fee Nexus Study
-38-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
29-2021 Dental Hygienists $96,750 0.401%
29-1062 Family and General Practitioners $193,329 0.240%
29-1021 Dentists, General $148,348 0.195%
29-2071 Medical Records and Health Information Technicians $51,233 0.178%
29-1171 Nurse Practitioners $135,499 0.174%
29-1071 Physician Assistants $106,938 0.164%
29-2034 Radiologic Technologists $86,552 0.148%
29-2012 Medical and Clinical Laboratory Technicians $55,209 0.121%
29-1123 Physical Therapists $95,587 0.115%
29-1063 Internists, General $185,589 0.089%
29-1067 Surgeons $241,668 0.086%
29-2099 Health Technologists and Technicians, All Other $59,115 0.076%
29-2057 Ophthalmic Medical Technicians $42,118 0.072%
29-2056 Veterinary Technologists and Technicians $44,161 0.071%
29-1061 Anesthesiologists $248,872 0.070%
29-2055 Surgical Technologists $64,790 0.066%
29-2011 Medical and Clinical Laboratory Technologists $87,938 0.066%
29-1065 Pediatricians, General $188,493 0.066%
29-2052 Pharmacy Technicians $46,256 0.048%
29-1064 Obstetricians and Gynecologists $237,622 0.048%
29-2032 Diagnostic Medical Sonographers $111,440 0.047%
29-1131 Veterinarians $115,073 0.047%
29-1122 Occupational Therapists $90,407 0.046%
29-2081 Opticians, Dispensing $45,527 0.044%
29-1051 Pharmacists $135,408 0.044%
29-9011 Occupational Health and Safety Specialists $91,672 0.039%
29-1041 Optometrists $119,251 0.035%
29-1127 Speech-Language Pathologists $94,686 0.033%
29-1031 Dietitians and Nutritionists $71,083 0.029%
29-1066 Psychiatrists $195,909 0.027%
29-1126 Respiratory Therapists $87,635 0.026%
29-2031 Cardiovascular Technologists and Technicians $60,774 0.026%
29-9099 Healthcare Practitioners and Technical Workers, All Other $69,879 0.021%
29-1199 Health Diagnosing and Treating Practitioners, All Other $78,459 0.020%
Draft Palo Alto Linkage Fee Nexus Study
-39-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
29-2035 Magnetic Resonance Imaging Technologists $98,227 0.020%
29-1124 Radiation Therapists $115,649 0.014%
29-2033 Nuclear Medicine Technologists $117,025 0.013%
29-9012 Occupational Health and Safety Technicians $43,109 0.009%
29-9091 Athletic Trainers $63,263 0.009%
29-1081 Podiatrists $132,656 0.009%
29-2053 Psychiatric Technicians $49,787 0.006%
29-1129 Therapists, All Other $82,232 0.006%
29-2051 Dietetic Technicians $40,327 0.003%
29-2092 Hearing Aid Specialists $55,240 0.002%
29-1128 Exercise Physiologists $84,934 0.002%
29-1125 Recreational Therapists $52,963 0.002%
Weighted Mean Annual Wage $114,459 5.039%
31-0000 Healthcare Support Occupations
31-9092 Medical Assistants $39,127 1.106%
31-9091 Dental Assistants $41,525 0.633%
31-1014 Nursing Assistants $34,421 0.263%
31-1011 Home Health Aides $25,141 0.119%
31-9094 Medical Transcriptionists $46,654 0.074%
31-9096 Veterinary Assistants and Laboratory Animal Caretakers $35,127 0.063%
31-9097 Phlebotomists $41,314 0.059%
31-2021 Physical Therapist Assistants $62,888 0.044%
31-2022 Physical Therapist Aides $35,651 0.035%
31-9099 Healthcare Support Workers, All Other $45,042 0.035%
31-9093 Medical Equipment Preparers $45,506 0.025%
31-9011 Massage Therapists $33,182 0.021%
31-2011 Occupational Therapy Assistants $45,798 0.014%
31-1015 Orderlies $45,576 0.007%
31-9095 Pharmacy Aides $31,136 0.005%
31-2012 Occupational Therapy Aides $42,563 0.003%
Weighted Mean Annual Wage $39,262 2.506%
Draft Palo Alto Linkage Fee Nexus Study
-40-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
33-0000 Protective Service Occupations
33-9032 Security Guards $31,791 1.389%
33-1099 First-Line Supervisors of Protective Service Workers, All Other $55,471 0.060%
33-9021 Private Detectives and Investigators $81,056 0.030%
33-9099 Protective Service Workers, All Other $44,649 0.020%
33-9092 Lifeguards, Ski Patrol, and Other Recreational Protective Service Workers $23,660 0.010%
33-9091 Crossing Guards $35,711 0.010%
33-2011 Firefighters $88,371 0.005%
33-3012 Correctional Officers and Jailers $74,193 0.003%
33-3041 Parking Enforcement Workers $45,455 0.001%
33-2021 Fire Inspectors and Investigators $91,626 0.001%
33-1021 First-Line Supervisors of Fire Fighting and Prevention Workers $133,564 0.000%
Weighted Mean Annual Wage $34,146 1.529%
35-0000 Food Preparation and Serving Related Occupations
35-3021 Combined Food Preparation and Serving Workers, Including Fast Food $22,199 0.205%
35-3031 Waiters and Waitresses $22,964 0.182%
35-2021 Food Preparation Workers $23,005 0.104%
35-2012 Cooks, Institution and Cafeteria $31,489 0.085%
35-3022 Counter Attendants, Cafeteria, Food Concession, and Coffee Shop $21,020 0.082%
35-1012 First-Line Supervisors of Food Preparation and Serving Workers $35,399 0.079%
35-3041 Food Servers, Nonrestaurant $29,514 0.071%
35-9021 Dishwashers $20,516 0.062%
35-9011 Dining Room and Cafeteria Attendants and Bartender Helpers $19,871 0.061%
35-2014 Cooks, Restaurant $25,887 0.040%
35-3011 Bartenders $25,181 0.035%
35-1011 Chefs and Head Cooks $45,637 0.023%
35-9031 Hosts and Hostesses, Restaurant, Lounge, and Coffee Shop $20,153 0.019%
35-2019 Cooks, All Other $25,413 0.017%
35-9099 Food Preparation and Serving Related Workers, All Other $22,148 0.013%
35-2015 Cooks, Short Order $24,546 0.009%
35-2011 Cooks, Fast Food $20,496 0.006%
Weighted Mean Annual Wage $24,987 1.092%
Draft Palo Alto Linkage Fee Nexus Study
-41-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
37-0000 Building and Grounds Cleaning and Maintenance Occupations
37-2011 Janitors and Cleaners, Except Maids and Housekeeping Cleaners $27,549 3.532%
37-3011 Landscaping and Groundskeeping Workers $31,560 1.945%
37-2012 Maids and Housekeeping Cleaners $28,799 0.584%
37-2021 Pest Control Workers $37,354 0.238%
37-1011 First-Line Supervisors of Housekeeping and Janitorial Workers $50,352 0.232%
37-1012
First-Line Supervisors of Landscaping, Lawn Service, and Groundskeeping
Workers $52,297 0.230%
37-3013 Tree Trimmers and Pruners $28,547 0.136%
37-3012 Pesticide Handlers, Sprayers, and Applicators, Vegetation $33,807 0.049%
37-3019 Grounds Maintenance Workers, All Other $45,818 0.031%
Weighted Mean Annual Wage $30,824 6.978%
39-0000 Personal Care and Service Occupations
39-9021 Personal Care Aides $26,572 0.194%
39-3031 Ushers, Lobby Attendants, and Ticket Takers $20,113 0.058%
39-9011 Childcare Workers $29,565 0.026%
39-2021 Nonfarm Animal Caretakers $28,990 0.024%
39-9032 Recreation Workers $28,093 0.016%
39-1021 First-Line Supervisors of Personal Service Workers $45,485 0.015%
39-3091 Amusement and Recreation Attendants $24,637 0.012%
39-6012 Concierges $32,043 0.012%
39-9099 Personal Care and Service Workers, All Other $21,120 0.009%
39-9041 Residential Advisors $35,308 0.007%
39-9031 Fitness Trainers and Aerobics Instructors $53,265 0.007%
39-7011 Tour Guides and Escorts $21,110 0.006%
39-5012 Hairdressers, Hairstylists, and Cosmetologists $23,942 0.005%
39-6011 Baggage Porters and Bellhops $22,894 0.003%
39-3093 Locker Room, Coatroom, and Dressing Room Attendants $25,685 0.001%
39-2011 Animal Trainers $43,682 0.000%
39-5092 Manicurists and Pedicurists $19,327 0.000%
Weighted Mean Annual Wage $27,171 0.395%
Draft Palo Alto Linkage Fee Nexus Study
-42-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
41-0000 Sales and Related Occupations
41-3099 Sales Representatives, Services, All Other $90,918 1.480%
41-4011
Sales Representatives, Wholesale and Manufacturing, Technical and Scientific
Products $122,303 0.645%
41-3031 Securities, Commodities, and Financial Services Sales Agents $94,597 0.412%
41-4012 Sales Representatives, Wholesale and Manufacturing, Except Technical and Scientific Products $68,867 0.334%
41-9031 Sales Engineers $121,759 0.235%
41-1012 First-Line Supervisors of Non-Retail Sales Workers $111,025 0.222%
41-3021 Insurance Sales Agents $73,372 0.213%
41-2031 Retail Salespersons $27,121 0.206%
41-9041 Telemarketers $29,631 0.184%
41-2011 Cashiers $25,771 0.150%
41-9022 Real Estate Sales Agents $70,439 0.121%
41-3011 Advertising Sales Agents $63,001 0.110%
41-2021 Counter and Rental Clerks $34,428 0.105%
41-9099 Sales and Related Workers, All Other $42,552 0.060%
41-9011 Demonstrators and Product Promoters $26,396 0.058%
41-1011 First-Line Supervisors of Retail Sales Workers $48,448 0.049%
41-9021 Real Estate Brokers $104,837 0.028%
41-2022 Parts Salespersons $36,575 0.005%
41-3041 Travel Agents $41,745 0.004%
Weighted Mean Annual Wage $83,961 4.621%
43-0000 Office and Administrative Support Occupations
43-9061 Office Clerks, General $39,450 2.848%
43-4051 Customer Service Representatives $46,518 2.571%
43-6014 Secretaries and Administrative Assistants, Except Legal, Medical, and Executive $43,308 2.003%
43-3031 Bookkeeping, Accounting, and Auditing Clerks $49,252 1.528%
43-4171 Receptionists and Information Clerks $34,590 1.285%
43-1011 First-Line Supervisors of Office and Administrative Support Workers $67,296 1.261%
43-6011 Executive Secretaries and Executive Administrative Assistants $65,402 0.904%
43-3071 Tellers $31,886 0.879%
43-6013 Medical Secretaries $44,938 0.773%
43-3021 Billing and Posting Clerks $45,890 0.657%
Draft Palo Alto Linkage Fee Nexus Study
-43-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
43-9021 Data Entry Keyers $33,820 0.411%
43-5081 Stock Clerks and Order Fillers $28,312 0.391%
43-3011 Bill and Account Collectors $49,434 0.379%
43-6012 Legal Secretaries $62,648 0.365%
43-5071 Shipping, Receiving, and Traffic Clerks $35,207 0.346%
43-5061 Production, Planning, and Expediting Clerks $58,689 0.307%
43-4131 Loan Interviewers and Clerks $47,712 0.275%
43-4071 File Clerks $34,012 0.229%
43-9199 Office and Administrative Support Workers, All Other $38,731 0.186%
43-3051 Payroll and Timekeeping Clerks $51,773 0.172%
43-9011 Computer Operators $46,204 0.144%
43-4161 Human Resources Assistants, Except Payroll and Timekeeping $51,044 0.144%
43-9041 Insurance Claims and Policy Processing Clerks $41,779 0.135%
43-4111 Interviewers, Except Eligibility and Loan $48,452 0.134%
43-4141 New Accounts Clerks $41,475 0.095%
43-9051 Mail Clerks and Mail Machine Operators, Except Postal Service $34,691 0.093%
43-2011 Switchboard Operators, Including Answering Service $35,683 0.086%
43-4199 Information and Record Clerks, All Other $46,467 0.082%
43-9071 Office Machine Operators, Except Computer $33,131 0.081%
43-4151 Order Clerks $42,315 0.072%
43-4011 Brokerage Clerks $57,261 0.066%
43-5032 Dispatchers, Except Police, Fire, and Ambulance $53,920 0.062%
43-4041 Credit Authorizers, Checkers, and Clerks $41,981 0.060%
43-5021 Couriers and Messengers $36,189 0.058%
43-4121 Library Assistants, Clerical $34,488 0.055%
43-9022 Word Processors and Typists $51,013 0.046%
43-3061 Procurement Clerks $47,955 0.040%
43-3099 Financial Clerks, All Other $45,444 0.040%
43-5111 Weighers, Measurers, Checkers, and Samplers, Recordkeeping $30,539 0.023%
43-9031 Desktop Publishers $58,750 0.018%
43-5011 Cargo and Freight Agents $38,650 0.013%
43-9081 Proofreaders and Copy Markers $48,371 0.013%
43-9111 Statistical Assistants $54,203 0.010%
Draft Palo Alto Linkage Fee Nexus Study
-44-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
43-4181 Reservation and Transportation Ticket Agents and Travel Clerks $37,617 0.009%
43-4081 Hotel, Motel, and Resort Desk Clerks $24,788 0.008%
43-5041 Meter Readers, Utilities $52,330 0.006%
43-5031 Police, Fire, and Ambulance Dispatchers $71,660 0.004%
43-4061 Eligibility Interviewers, Government Programs $58,831 0.003%
43-4031 Court, Municipal, and License Clerks $42,184 0.001%
Weighted Mean Annual Wage $45,403 19.372%
45-0000 Farming, Fishing, and Forestry Occupations
45-2092 Farmworkers and Laborers, Crop, Nursery, and Greenhouse $21,473 0.013%
45-2093 Farmworkers, Farm, Ranch, and Aquacultural Animals $28,101 0.006%
45-1011 First-Line Supervisors of Farming, Fishing, and Forestry Workers $61,161 0.002%
45-2091 Agricultural Equipment Operators $54,786 0.002%
45-2011 Agricultural Inspectors $55,849 0.002%
45-4011 Forest and Conservation Workers $19,510 0.001%
45-2041 Graders and Sorters, Agricultural Products $20,370 0.000%
Weighted Mean Annual Wage $31,456 0.026%
47-0000 Construction and Extraction Occupations
47-2061 Construction Laborers $44,910 0.350%
47-4011 Construction and Building Inspectors $82,189 0.097%
47-2111 Electricians $64,835 0.089%
47-2031 Carpenters $62,042 0.088%
47-1011 First-Line Supervisors of Construction Trades and Extraction Workers $83,728 0.036%
47-2073 Operating Engineers and Other Construction Equipment Operators $69,510 0.033%
47-2152 Plumbers, Pipefitters, and Steamfitters $80,317 0.032%
47-2141 Painters, Construction and Maintenance $52,934 0.031%
47-2051 Cement Masons and Concrete Finishers $50,759 0.009%
47-4099 Construction and Related Workers, All Other $60,645 0.007%
47-2081 Drywall and Ceiling Tile Installers $62,062 0.006%
47-2221 Structural Iron and Steel Workers $83,677 0.004%
47-4071 Septic Tank Servicers and Sewer Pipe Cleaners $42,704 0.004%
47-3012 Helpers--Carpenters $49,079 0.004%
Draft Palo Alto Linkage Fee Nexus Study
-45-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
47-2022 Stonemasons $46,306 0.004%
47-4041 Hazardous Materials Removal Workers $42,127 0.003%
47-2181 Roofers $51,558 0.003%
47-2151 Pipelayers $62,285 0.002%
47-2041 Carpet Installers $56,709 0.002%
47-4051 Highway Maintenance Workers $60,564 0.002%
47-2161 Plasterers and Stucco Masons $54,270 0.001%
47-2021 Brickmasons and Blockmasons $59,947 0.001%
47-2044 Tile and Marble Setters $44,141 0.001%
47-3019 Helpers, Construction Trades, All Other $28,061 0.001%
47-3014 Helpers--Painters, Paperhangers, Plasterers, and Stucco Masons $29,650 0.001%
47-2082 Tapers $63,074 0.001%
47-4021 Elevator Installers and Repairers $87,219 0.001%
47-2211 Sheet Metal Workers $69,014 0.001%
47-2071 Paving, Surfacing, and Tamping Equipment Operators $49,221 0.001%
47-2121 Glaziers $71,402 0.000%
47-3011 Helpers--Brickmasons, Blockmasons, Stonemasons, and Tile and Marble Setters $38,929 0.000%
47-2042 Floor Layers, Except Carpet, Wood, and Hard Tiles $64,045 0.000%
Weighted Mean Annual Wage $58,523 0.813%
49-0000 Installation, Maintenance, and Repair Occupations
49-9071 Maintenance and Repair Workers, General $48,997 0.675%
49-2022 Telecommunications Equipment Installers and Repairers, Except Line Installers $65,495 0.243%
49-2011 Computer, Automated Teller, and Office Machine Repairers $46,697 0.184%
49-1011 First-Line Supervisors of Mechanics, Installers, and Repairers $77,658 0.127%
49-9052 Telecommunications Line Installers and Repairers $63,724 0.122%
49-9099 Installation, Maintenance, and Repair Workers, All Other $49,058 0.114%
49-2098 Security and Fire Alarm Systems Installers $64,885 0.068%
49-9041 Industrial Machinery Mechanics $55,938 0.066%
49-2094 Electrical and Electronics Repairers, Commercial and Industrial Equipment $51,745 0.046%
49-9098 Helpers--Installation, Maintenance, and Repair Workers $34,330 0.030%
49-3011 Aircraft Mechanics and Service Technicians $63,317 0.024%
49-3023 Automotive Service Technicians and Mechanics $51,582 0.023%
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Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
49-9094 Locksmiths and Safe Repairers $59,969 0.023%
49-9021 Heating, Air Conditioning, and Refrigeration Mechanics and Installers $65,190 0.017%
49-3031 Bus and Truck Mechanics and Diesel Engine Specialists $55,745 0.015%
49-9043 Maintenance Workers, Machinery $43,226 0.015%
49-9062 Medical Equipment Repairers $56,416 0.011%
49-3053 Outdoor Power Equipment and Other Small Engine Mechanics $46,768 0.011%
49-3042 Mobile Heavy Equipment Mechanics, Except Engines $55,470 0.009%
49-9051 Electrical Power-Line Installers and Repairers $91,072 0.008%
49-9012 Control and Valve Installers and Repairers, Except Mechanical Door $62,330 0.006%
49-3093 Tire Repairers and Changers $30,300 0.004%
49-9069 Precision Instrument and Equipment Repairers, All Other $54,798 0.004%
49-3021 Automotive Body and Related Repairers $47,826 0.004%
49-2097 Electronic Home Entertainment Equipment Installers and Repairers $41,719 0.004%
49-2091 Avionics Technicians $65,780 0.003%
49-3041 Farm Equipment Mechanics and Service Technicians $43,847 0.001%
49-9031 Home Appliance Repairers $42,004 0.001%
49-9091 Coin, Vending, and Amusement Machine Servicers and Repairers $36,977 0.001%
49-2093 Electrical and Electronics Installers and Repairers, Transportation Equipment $65,251 0.000%
49-3091 Bicycle Repairers $26,890 0.000%
49-2096 Electronic Equipment Installers and Repairers, Motor Vehicles $37,638 0.000%
Weighted Mean Annual Wage $55,278 1.862%
51-0000 Production Occupations
51-2092 Team Assemblers $34,315 1.193%
51-2022 Electrical and Electronic Equipment Assemblers $37,365 0.820%
51-9198 Helpers--Production Workers $27,546 0.702%
51-9061 Inspectors, Testers, Sorters, Samplers, and Weighers $46,350 0.532%
51-2099 Assemblers and Fabricators, All Other $38,137 0.473%
51-9199 Production Workers, All Other $36,491 0.387%
51-9111 Packaging and Filling Machine Operators and Tenders $29,762 0.339%
51-4041 Machinists $49,918 0.238%
51-1011 First-Line Supervisors of Production and Operating Workers $63,406 0.228%
51-9141 Semiconductor Processors $37,050 0.226%
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Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
51-4031 Cutting, Punching, and Press Machine Setters, Operators, and Tenders, Metal and Plastic $35,860 0.140%
51-4121 Welders, Cutters, Solderers, and Brazers $43,484 0.126%
51-2023 Electromechanical Equipment Assemblers $36,531 0.100%
51-4011 Computer-Controlled Machine Tool Operators, Metal and Plastic $42,335 0.059%
51-9081 Dental Laboratory Technicians $41,827 0.045%
51-4072
Molding, Coremaking, and Casting Machine Setters, Operators, and Tenders, Metal and
Plastic $31,632 0.045%
51-4193 Plating and Coating Machine Setters, Operators, and Tenders, Metal and Plastic $36,145 0.036%
51-5112 Printing Press Operators $37,416 0.034%
51-4199 Metal Workers and Plastic Workers, All Other $43,097 0.034%
51-2021 Coil Winders, Tapers, and Finishers $55,529 0.032%
51-6011 Laundry and Dry-Cleaning Workers $25,879 0.028%
51-9151 Photographic Process Workers and Processing Machine Operators $35,047 0.019%
51-4081 Multiple Machine Tool Setters, Operators, and Tenders, Metal and Plastic $42,477 0.017%
51-6021 Pressers, Textile, Garment, and Related Materials $24,425 0.017%
51-6031 Sewing Machine Operators $24,629 0.013%
51-9121 Coating, Painting, and Spraying Machine Setters, Operators, and Tenders $33,817 0.013%
51-3011 Bakers $27,048 0.012%
51-4111 Tool and Die Makers $51,310 0.011%
51-3099 Food Processing Workers, All Other $28,694 0.011%
51-4122 Welding, Soldering, and Brazing Machine Setters, Operators, and Tenders $44,744 0.011%
51-4012 Computer Numerically Controlled Machine Tool Programmers, Metal and Plastic $64,290 0.010%
51-3092 Food Batchmakers $25,310 0.010%
51-5113 Print Binding and Finishing Workers $31,795 0.010%
51-4033 Grinding, Lapping, Polishing, and Buffing Machine Tool Setters, Operators, and Tenders, Metal and Plastic $31,053 0.010%
51-2041 Structural Metal Fabricators and Fitters $43,504 0.009%
51-5111 Prepress Technicians and Workers $46,035 0.009%
51-9196 Paper Goods Machine Setters, Operators, and Tenders $42,264 0.009%
51-3022 Meat, Poultry, and Fish Cutters and Trimmers $24,923 0.008%
51-9011 Chemical Equipment Operators and Tenders $46,828 0.007%
51-8031 Water and Wastewater Treatment Plant and System Operators $76,488 0.007%
51-8012 Power Distributors and Dispatchers $118,172 0.006%
51-7011 Cabinetmakers and Bench Carpenters $38,086 0.006%
51-9032 Cutting and Slicing Machine Setters, Operators, and Tenders $29,569 0.006%
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Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
51-8021 Stationary Engineers and Boiler Operators $78,511 0.005%
51-4061 Model Makers, Metal and Plastic $50,701 0.005%
51-9023 Mixing and Blending Machine Setters, Operators, and Tenders $42,508 0.005%
51-4034 Lathe and Turning Machine Tool Setters, Operators, and Tenders, Metal and Plastic $42,742 0.005%
51-9194 Etchers and Engravers $26,763 0.005%
51-9021 Crushing, Grinding, and Polishing Machine Setters, Operators, and Tenders $37,751 0.004%
51-9012 Separating, Filtering, Clarifying, Precipitating, and Still Machine Setters, Operators, and Tenders $40,373 0.004%
51-4022 Forging Machine Setters, Operators, and Tenders, Metal and Plastic $41,105 0.003%
51-9041 Extruding, Forming, Pressing, and Compacting Machine Setters, Operators, and Tenders $33,756 0.003%
51-9195 Molders, Shapers, and Casters, Except Metal and Plastic $38,971 0.003%
51-7099 Woodworkers, All Other $36,155 0.003%
51-9122 Painters, Transportation Equipment $51,656 0.003%
51-3091 Food and Tobacco Roasting, Baking, and Drying Machine Operators and Tenders $32,750 0.002%
51-4032 Drilling and Boring Machine Tool Setters, Operators, and Tenders, Metal and Plastic $37,741 0.002%
51-8091 Chemical Plant and System Operators $53,252 0.002%
51-4035 Milling and Planing Machine Setters, Operators, and Tenders, Metal and Plastic $37,324 0.002%
51-8099 Plant and System Operators, All Other $74,231 0.002%
51-9191 Adhesive Bonding Machine Operators and Tenders $31,784 0.002%
51-9123 Painting, Coating, and Decorating Workers $38,269 0.002%
51-9022 Grinding and Polishing Workers, Hand $29,680 0.002%
51-6052 Tailors, Dressmakers, and Custom Sewers $41,613 0.002%
51-9051 Furnace, Kiln, Oven, Drier, and Kettle Operators and Tenders $52,256 0.001%
51-9192 Cleaning, Washing, and Metal Pickling Equipment Operators and Tenders $23,551 0.001%
51-8013 Power Plant Operators $84,833 0.001%
51-4191 Heat Treating Equipment Setters, Operators, and Tenders, Metal and Plastic $50,609 0.001%
51-3093 Food Cooking Machine Operators and Tenders $28,593 0.001%
51-4194 Tool Grinders, Filers, and Sharpeners $50,131 0.001%
51-8093 Petroleum Pump System Operators, Refinery Operators, and Gaugers $77,972 0.001%
51-9031 Cutters and Trimmers, Hand $24,446 0.001%
51-6062 Textile Cutting Machine Setters, Operators, and Tenders $27,109 0.000%
51-3021 Butchers and Meat Cutters $34,021 0.000%
51-7021 Furniture Finishers $29,630 0.000%
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Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
51-7041 Sawing Machine Setters, Operators, and Tenders, Wood $33,543 0.000%
Weighted Mean Annual Wage $37,809 6.124%
53-0000 Transportation and Material Moving Occupations
53-7062 Laborers and Freight, Stock, and Material Movers, Hand $31,188 2.554%
53-7064 Packers and Packagers, Hand $23,607 0.672%
53-7051 Industrial Truck and Tractor Operators $37,469 0.285%
53-3032 Heavy and Tractor-Trailer Truck Drivers $46,564 0.199%
53-3033 Light Truck or Delivery Services Drivers $36,503 0.137%
53-7063 Machine Feeders and Offbearers $33,475 0.052%
53-1021 First-Line Supervisors of Helpers, Laborers, and Material Movers, Hand $52,489 0.037%
53-3099 Motor Vehicle Operators, All Other $48,302 0.030%
53-3041 Taxi Drivers and Chauffeurs $31,493 0.026%
53-7061 Cleaners of Vehicles and Equipment $25,762 0.023%
53-1031
First-Line Supervisors of Transportation and Material-Moving Machine and
Vehicle Operators $61,604 0.021%
53-7081 Refuse and Recyclable Material Collectors $46,188 0.017%
53-3031 Driver/Sales Workers $35,192 0.016%
53-6021 Parking Lot Attendants $21,595 0.014%
53-2012 Commercial Pilots $69,308 0.010%
53-3021 Bus Drivers, Transit and Intercity $56,828 0.004%
53-6031 Automotive and Watercraft Service Attendants $27,042 0.004%
53-3022 Bus Drivers, School or Special Client $36,117 0.004%
53-6051 Transportation Inspectors $87,640 0.003%
53-7032 Excavating and Loading Machine and Dragline Operators $62,966 0.003%
53-6099 Transportation Workers, All Other $33,607 0.001%
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Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
53-7199 Material Moving Workers, All Other $39,857 0.001%
53-1011 Aircraft Cargo Handling Supervisors $54,846 0.000%
53-2022 Airfield Operations Specialists $67,925 0.000%
Weighted Mean Annual Wage $32,020 4.116%
Total, Land Use $78,597.78 100.000%
Notes: (a) Occupational mix by industry was obtained from US Bureau of Labor Statistics, Occupational Employment Statistics, 2013. (b) Wage data for the San Jose – Sunnyvale – Santa Clara Metropolitan Statistical Area obtained from California Economic Development Department, OES Employment and Wages by Occupation, 2013. (c) Distribution of workers is calculated based on the existing distribution of employment by industry in Santa Clara County, provided by Quarterly Census of Employment and Wages (QCEW), 2013. Sources: Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
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Household Incomes
Based on the employee wage calculations discussed above, household incomes are estimated for each
prototype. This step assumes that the income of the second wage-earner is similar to the wage of the first
wage-earner. In order to calculate the annual household income, the average worker wage is multiplied by
the number of wage-earners per household. According to the U.S. Census Bureau American Community
Survey 3-Year Estimates, 2010-2012, there is an average of 1.49 wage-earners per household in Palo
Alto. The average annual wage per employee within each occupation was multiplied by 1.49 in order to
determine annual average household income.
Employee households are then categorized as very low, low, moderate, and above moderate income based
on the income definitions and cut-offs established by the California Housing and Community
Development Department (HCD). According to the U.S. Census Bureau American Community Survey 5-
Year Estimates, 2008-2012, the average household size in the City of Palo Alto is 2.41. This has been
rounded to 2, the nearest whole number. The income categories for very low, low, moderate, and above
moderate income households are therefore based on the household size of two persons, using the
California Department of Housing and Community Development’s definitions of income thresholds for
area median income, as shown in Figure III-10.
Figure III-10. Household Income Categories
Income Category 2-Person Household
Very Low Income (<=50% AMI) $42,450
Low Income (51-80% AMI) $67,900
Moderate Income (81-120% AMI) $101,300
Above Moderate Income (>=120%) >$101,300
Source: California Department of Housing and Community Development, "State Income Limits for 2014", February 28, 2014.
Using the income categories described above, the new worker households were sorted into income
groups. As shown in Figure III-11 below, most hotel worker households are in very low and low income
categories, and about half of office/ R&D/ medical office workers are in very low, low, and moderate
income categories. Above moderate income households were removed from the subsequent steps of the
nexus analysis, as it is determined that these income groups would be able to afford market-rate housing.
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Figure III-11. Number of Worker Households by Income Category
Prototype
Number of Worker
Households
Hotel
Very Low Income (<=50% AMI) 30.05
Low Income (51-80% AMI) 24.13
Moderate Income (81-120% AMI) 9.58
Above Moderate (>=120%) 3.36
Total 67.12
Office, R&D and Medical Office Land Use
Very Low Income (<=50% AMI) 14.40
Low Income (51-80% AMI) 51.43
Moderate Income (81-120% AMI) 36.32
Above Moderate (>=120%) 99.39
Total 201.54 Sources: Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
Draft Palo Alto Linkage Fee Nexus Study
Estimating the housing affordability gap is necessary to calculate the maximum housing impact fee. This
section summarizes the approach to calculating the housing affordability gap and the results of the
analysis.
METHODOLOGY
The housing affordability gap is defined as the difference between what very low, low, and moderate
income households can afford to pay for housing and the development cost of new, modest housing units.
Calculating the housing affordability gap involves the following three steps:
1. Estimating affordable rents and housing prices for households in target income groups.
2. Estimating development costs of building new, modest housing units, based on current cost and
market data.
3. Calculating the different between what renters and owners can afford to pay for housing and the
cost of development of rental and ownership units.
The housing affordability gap is estimated at a countywide level because the California Department of
Housing and Community Development Department (HCD) and U.S. Housing and Urban Development
Department (HUD) define the ability to pay for housing at the county (rather than the city) level. This
analysis uses 2014 income limits published by California Department of Housing and Community
Development (HCD).
ESTIMATING AFFORDABLE RENTS AND SALES PRICES
The first step in calculating the housing affordability gap is to determine the maximum amount that
households at the targeted income levels can afford to pay for housing. For eligibility purposes, most
affordable housing programs define very low income households as those earning approximately 50
percent or less of area median income (AMI), low income households as those earning between 51 and 80
percent of AMI, and moderate income households as those earning between 81 and 120 percent of AMI.
In order to ensure that the affordability of housing does not use the top incomes in each category, the
analysis uses a point within the income ranges for the low and moderate income groups.3
Figure IV-1 and Figure IV-2 show the calculations for rental housing. The maximum affordable monthly
rent is calculated as 30 percent of gross monthly household income, minus a deduction for utilities. For
example, a very low income, three-person household could afford to spend $1,194 on total monthly
housing costs. After deducting for utilities, $1,145 a month is available to pay for rent (Figure IV-1).
Figure IV-3 and Figure IV-4 demonstrate housing affordability for homeowners. Homeowners are
assumed to pay a maximum of 35 percent of gross monthly income on total housing costs, depending on
income level. The maximum affordable price for for-sale housing is then calculated based on the total
monthly mortgage payment that a homeowner could afford, using standard loan terms used by CalHFA
3 For rental housing, 70 percent of AMI is used to represent low income households and 90 percent of AMI is used to
represent moderate income households. For ownership housing, it is assumed that moderate income homebuyers may earn slightly less than the maximum for that income category (110 percent of AMI). Higher income limits are used for ownership than for rental housing because ownership housing is more expensive to purchase and maintain.
IV. HOUSING AFFORDABILITY GAP
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programs and many private lenders for first-time homebuyers, including a five percent down payment
(Figure IV-3). For example, a moderate income, three-person household could afford to spend $3,046 a
month on total housing costs, allowing for the purchase of a $359,897 home.
Key assumptions used to calculate the maximum affordable rents and housing prices are discussed below.
Unit types: For rental housing, the analysis included studios, one-, two-, and three-bedroom
units. For for-sale housing, one-, two-, and three-bedroom units were included. These unit types
represent the affordable and modest market-rate apartment and condominium units available in
Palo Alto. Condominiums were used to represent modest for-sale housing because single-family
homes in Palo Alto tend to be significantly more expensive than condominiums.
Occupancy and household size assumptions. Because income levels for affordable housing
programs vary by household size, calculating affordable unit prices requires defining household
sizes for each unit type. Consistent with California Health and Safety Code Section 50052.5(h),
unit occupancy was generally estimated as the number of bedrooms plus one. For example, a
studio unit is assumed to be occupied by one person, a one bedroom unit is assumed to be
occupied by two people, and so on. Several adjustments to this general assumption were made in
order to capture the full range of household sizes. In particular, it is assumed that one-bedroom
condominiums could be occupied by one- or two-person households, and three-bedroom
apartments and condominiums could be occupied by four- or five-person households.4
Targeted income levels for rental housing: For rental housing, affordable rents were calculated
for very low income, low income, and moderate income households (see Figure IV-1 and Figure
IV-2). For eligibility purposes, most affordable housing programs define very low income
households as those earning 50 percent or less of area median income (AMI), low income
households as those earning between 51 and 80 percent of AMI, and moderate income
households as those earning between 81 and 120 percent of AMI. However, defining affordable
housing expenses based at the top of each income range would result in prices that are not
affordable to most of the households in each category. Thus, this analysis does not use the
maximum income level for all of the income categories. Instead, for rental housing, 70 percent of
AMI is used to represent low income households and 90 percent of AMI is used to represent
moderate income households.
Targeted income levels for ownership housing For ownership housing, affordable home prices
were calculated only for moderate income households, because very low and low income
households are unlikely to be homebuyers. Higher income limits are used for ownership than for
rental housing because ownership housing is more expensive to purchase and maintain. It is
assumed that moderate income homebuyers may earn slightly less than the maximum for that
income category (110 percent of AMI).
Maximum monthly housing costs.5 For all renters, maximum monthly housing costs are
assumed to be 30 percent of gross household income. For homebuyers, 35 percent of gross
income is assumed to be available for monthly housing costs, reflecting the higher incomes of this
4 For these unit types, the maximum affordable home price (or rent) is calculated as the average price (or rent) that the relevant household sizes can afford to pay. For example, the maximum affordable home price for a one-bedroom condominium is calculated as the average of the maximum affordable home price for one- and two-person
households.
5 The calculation of homeowner affordability is conservative in that the model accounts for additional costs for buyers (such as utility costs) that might not be considered by all lenders.
Draft Palo Alto Linkage Fee Nexus Study
group.6 These standards are based on California’s Health & Safety Code Sections 50052.5 and
50053.
Utilities. The monthly utility cost assumptions are based on Santa Clara County’s “2013 Utility
Allowance Schedule.”7 Both renters and owners are assumed to pay for heating, cooking, other
electric, and water heating. In addition, owners are assumed to pay for water and trash collection.8
Mortgage terms & costs included for ownership housing. For ownership housing, the
mortgage calculations are based on the terms typically offered to first-time homebuyers (such as
the terms offered by the California Housing Finance Authority), which is a 30-year mortgage
with a five percent down payment. A five percent down payment standard is also used by many
private lenders for first-time homebuyers. Based on recent interest rates to first-time buyers, the
analysis assumes a 5.375 percent annual interest rate.9 In addition to mortgage payments and
utilities, monthly ownership housing costs include homeowner association (HOA) dues,10
property taxes,11 private mortgage insurance,12 and hazard and casualty insurance.13
6 The assumption that homebuyers spend 35 percent of gross household income on housing results in a reduced affordability gap than if 30 percent of gross household income were used instead.
7 Santa Clara County, “Utility Allowance Schedule”, 2013.
8 Based on the most common types of fuel for owner and rental units in Palo Alto, all units are assumed to have natural gas heating and water heating systems; for-sale units are also assumed to have natural gas stoves, while rental units are assumed to use electric stoves. Sources: U.S. Census Bureau, 2008-2012 American Community
Survey, “Table B25117: Tenure by House Heating Fuel,” City of Palo Alto; U.S. Census Bureau, 2011 American Housing Survey, “Table C-03-AH-M, San Jose-Sunnyvale-Santa Clara: Heating, Air Conditioning, and Appliances – All Housing Units.”
9 Sources: CalHFA Mortgage Calculator, accessed March 2014; Zillow.com, “Current Mortgage Rates and Home Loans,” accessed March 2014; interviews with California Housing Finance Agency (CalHFA) Preferred Loan Officers, March 2014.
10 HOA fees are estimated at $300 per unit per month, based on common HOA fees in Santa Clara County as reported in: Polaris Pacific, “Silicon Valley Condominium Market,” February 2014.
11 The annual property tax rate is estimated at 1.16, based on the total direct and overlapping property tax rate for
Palo Alto reported in the City’s 2012-13 Comprehensive Annual Financial Report (page 144).
12 The annual private mortgage insurance premium rate is estimated at 0.89 percent of the total mortgage amount, consistent with standard requirements for conventional loans with a five percent down payment. Sources: Genworth,
February 2014; MGIC, December 2013; Radian, April 2014.
13 The annual hazard and casualty insurance rate is assumed to be 0.35 percent of the sales price, consistent with standard industry practice.
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Figure IV-1. Calculation of Affordable Rents in Santa Clara County by Household Size, 2014
Persons per Household (HH) 1 2 3 4 5
Very Low Income (50% AMI)
Maximum Household Income at 50% AMI $37,150 $42,450 $47,750 $53,050 $57,300
Maximum Monthly Housing Cost (a) $929 $1,061 $1,194 $1,326 $1,433
Utility Deduction $29 $40 $49 $60 $60
Maximum Available for Rent (HH Size) (b) $900 $1,021 $1,145 $1,266 $1,373
Low Income (70% AMI)
Maximum Household Income at 70% AMI $51,695 $59,080 $66,465 $73,850 $79,765
Maximum Monthly Housing Cost (a) $1,292 $1,477 $1,662 $1,846 $1,994
Utility Deduction $29 $40 $49 $60 $60
Maximum Available for Rent (HH Size) (b) $1,263 $1,437 $1,613 $1,786 $1,934
Moderate Income (90% AMI)
Maximum Household Income at 90% AMI $66,465 $75,960 $85,455 $94,950 $102,555
Maximum Monthly Housing Cost (a) $1,662 $1,899 $2,136 $2,374 $2,564
Utility Deduction $29 $40 $49 $60 $60
Maximum Available for Rent (HH Size) (b) $1,633 $1,859 $2,087 $2,314 $2,504
Notes:
(a) 30 percent of maximum monthly household income.
(b) Maximum monthly housing cost minus utility deduction.
Acronyms:
AMI: Area median income
HH: Household
Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014 and “Overpayment and Overcrowding,” 2010; Housing Authority of Santa Clara County, "2013 Utility Allowances Schedule," Santa Clara County, October 2013; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure IV-2. Calculation of Affordable Rents in Santa Clara County by Unit Type, 2014
Affordable Rents by Unit Type (a) Studio 1 Bedroom 2 Bedroom 3 Bedroom
Very Low Income (50% AMI) $900 $1,021 $1,145 $1,319
Low Income (70% AMI) $1,263 $1,437 $1,613 $1,860
Moderate Income (90% AMI) $1,633 $1,859 $2,087 $2,409
(a) Affordable rents are calculated as follows: Studios are calculated as one-person households; One-bedroom units are calculated as two-person households; Two-bedroom units are calculated as three-person households; Three-bedroom units are calculated as an average of four and five person households. Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014 and “Overpayment and Overcrowding,” 2010; Housing Authority of Santa Clara County, "2013 Utility Allowances Schedule," Santa Clara County, October 2013; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure IV-3. Calculation of Affordable Sales Prices in Santa Clara County by Household Size, 2014
Household Size (Persons per HH) 1 2 3 4 5
Moderate Income (110% AMI) (g)
Maximum Household Income at 110% AMI $81,235 $92,840 $104,445 $116,050 $125,345
Maximum Monthly Housing Cost (a) $2,369 $2,708 $3,046 $3,385 $3,656
Monthly Deductions
Utilities $113 $113 $125 $174 $174
HOA Dues $300 $300 $300 $300 $300
Property Taxes and Insurance (b) $527 $619 $706 $785 $858
Monthly Income Available for Mortgage Payment (c) $1,429 $1,676 $1,915 $2,126 $2,324
Maximum Mortgage Amount (d) $255,155 $299,376 $341,902 $379,732 $415,083
Maximum Affordable Sales Price - HH Size (e) $268,584 $315,133 $359,897 $399,717 $436,929
Notes: (a) 30 percent of monthly household income for very low and low income households; 35 percent of monthly household income for moderate-income households
(b) Assumes annual property tax rate of 1.16 percent of sales price; annual private mortgage insurance premium rate of 0.89 percent of mortgage amount; annual hazard and casualty insurance rate of 0.35 percent of sales price (c) Maximum monthly housing cost minus deductions (d) Assumes 5.375 percent interest rate and 30 year loan term. Assumes CalHFA first-time homebuyer program. (e) Assumes 5 percent down payment (95 percent loan-to-value ratio). Assumes CalHFA first-time homebuyer program. (f) Calculated as an average of household sizes occupying unit type. 1-bedroom units are assumed to accommodate 1- and 2-person households; 3-bedroom units are assumed to accommodate 4- and 5-person households. (g) Calculated as 110 percent of the median household income reported by HCD for each household size. Acronyms: AMI: Area median income HH: Household HOA: Homeowners association Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014 and “Overpayment and Overcrowding,” 2010; Housing
Authority of Santa Clara County, "2013 Utility Allowances Schedule," Santa Clara County, October 2013; Mortgage insurance provider websites; Interviews with California Housing Finance Agency (CalHFA) Preferred Loan Officers, March 2014; CalHFA Mortgage Calculator, March 2014; Zillow.com, March 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure IV-4. Calculation of Affordable Sales Prices in Santa Clara County by Unit Type, 2014
Affordable Sales Price by Unit Type (a) 1 Bedroom 2 Bedroom 3 Bedroom
Moderate Income (110% AMI) $291,858 $359,897 $418,323
(a) One-bedroom units are calculated as an average of one- and two-person households; Two-bedroom units are calculated as three-person households; and three-bedroom units are calculated as an average of four and five person households. Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014 and “Overpayment and Overcrowding,” 2010; Housing Authority of Santa Clara County, "2013 Utility Allowances Schedule,"
Santa Clara County, October 2013; Mortgage insurance provider websites; Interviews with California Housing Finance Agency (CalHFA) Preferred Loan Officers, March 2014; CalHFA Mortgage Calculator, March 2014; Zillow.com, March 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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ESTIMATING HOUSING DEVELOPMENT COSTS
The second step in calculating the housing affordability gap is to estimate the cost of developing new,
modest housing units. Modest housing is defined slightly differently for rental and ownership housing.
For rental housing, the costs and characteristics of modest housing are similar to recent projects
developed in Palo Alto by the affordable rental housing sector. However, there are no examples of new
modest ownership housing units built in Palo Alto by the private or nonprofit sectors. The new for-sale
homes in Palo Alto are typically luxury custom-built single family homes and large upscale condominium
units, which are too costly to meet the standard for modest housing. For the purposes of this affordability
gap analysis, modest for-sale housing units are defined as compact, non-luxury multifamily condominium
units.
The calculation of housing development costs used in the housing affordability gap requires several steps.
Because the gap covers both rental housing and for-sale housing, it is necessary to estimate costs for each.
The following describes the data sources used to calculate rental and for-sale housing development costs.
Rental Housing
Rental housing development costs were based on pro forma data obtained from recent affordable housing
projects in Palo Alto. Figure IV-5 shows the description of these projects and summarizes the information
that was used to generate a per-square-foot cost of $446 used in the cost analysis. These costs include site
acquisition costs, hard costs (on- and off-site improvements), soft costs (such as design, city permits and
fees, construction interest, and contingencies), and developer fees. The costs from the rental housing pro
formas were also cross-referenced against proprietary pro formas available to the consultant team from
other private development projects in order to ensure accuracy.
Since these projects assumed state and federal funding, the labor costs included in the original pro formas
reflect the prevailing wage requirement imposed by state and local governments. The costs shown in
Figure IV-5 have been adjusted to subtract out the prevailing wage requirement because the development
cost model used in the housing affordability gap analysis does not assume receipt of government
subsidies. A rule of thumb used by local economists who assist affordable housing developers in
obtaining public financing, is to estimate that, under the prevailing wage requirement, labor costs are 25
percent higher than would otherwise be the case. Therefore, on-site and off-site improvement costs
obtained from the original pro formas are reduced by 25 percent to reflect actual labor costs that would
apply to construction projects that do not have these requirements.14 Finally, on average, land acquisition
costs accounted for 20 percent or less of these total adjusted costs.
14 These prevailing wage requirements refer only to labor cost requirements on construction projects that receive funding from the state or federal government. These are not the same as minimum wage requirements that individual cities may adopt.
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Figure IV-5. Affordable Housing Project Pro Forma Data
Project Description Maybelle Alma Garden Apts
Location Palo Alto Palo Alto
Date of Pro Forma 2013 2013
Land Area (acres) 1.03 0.6
Gross Building Area (SF) 56,192 63,885
Number of Units 60 50
Parking Type Uncovered Underground
Parking Spaces/ Unit 0.8 1.0
Land Acquisition Costs
$7,498,524 ($167 per SF of land)
$7,480,000 ($286 per SF of land)
Project Costs per SF of Gross Building Area
Land Cost (a) $133 $117
Hard Costs (b) $160 $153
Soft Costs (c) $91 $192
Developer Fees $25 $22
Total Project Costs (d) $409 $484
Notes:
(a) Calculated per square foot of gross building area. (b) Excludes prevailing wage requirements for on-site and off-site hard
costs.
(c) Includes design, engineering, city permits and fees, construction interest, contingencies, legal, etc.
(d) Total costs include developer fees.
Acronyms:
SF: Square feet
Source: Pro Forma Data provided by City of Palo Alto; Vernazza Wolfe Associates, Inc; Strategic Economics, 2014.
To ensure that the land value assumptions used in the rental development cost estimates (ranging from
$167 to $286 per square foot of land) were reasonable, the consultant team analyzed recent sales of vacant
properties in Santa Clara County using DataQuick, a commercial vendor that tracks real estate
transactions. As shown below in Figure IV-6, land values in Southern San Mateo County and Northern
Santa Clara County are highly variable from city to city, ranging from $96 to $228 per square foot. The
analysis demonstrates that the land costs for the affordable rental housing projects shown in Figure IV-5
are generally consistent with the land values in the market area.
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Figure IV-6. Sales of Vacant Lands in San Mateo County and Northern Santa Clara County, 2014
Property Location
Sales
Date Sales Price
Site
Size
(SF)
Average
Sales
Price/ SF
Page Mill Palo Alto 2012 $3,959,000 26,926 $147
389 El Camino Real Menlo Park 2012 $12,200,000 53,579 $228
1300 El Camino Real Menlo Park 2012 $24,500,000 148,165 $165
E. side of Tilton Avenue, N. of El Camino Real San Mateo 2012 $4,505,000 33,572 $134
1275 El Camino Real Menlo Park 2014 $3,600,000 17,960 $200
3877 El Camino Real Palo Alto 2013 $4,450,000 32,825 $136
536 N Wishman Rd Mountain View 2014 $1,050,000 7,000 $150
1958 Latham St Mountain View 2014 $1,600,000 16,600 $96
Value Range per SF of Land $96 - $228
Source: City of Palo Alto; Independent appraisals; Loopnet, 2015; Strategic Economics, 2015.
For-Sale Housing
Market-rate for-sale housing units in Palo Alto are priced at over $1 million; these units are too upscale to
be considered “modest” units. Because of the lack of examples of built modest units in the City, the cost
of developing new, modest for-sale housing was estimated using published industry data sources, recent
financial feasibility studies, and data from other projects in Santa Clara County. The Consultant Team
estimated the development costs of a hypothetical condominium project, as described in Figure IV-7.15
Land costs were estimated based on recent DataQuick sales of multi-family zoned properties in Southern
San Mateo County and Northern Santa Clara County. As shown in Figure IV-6, land values vary
depending on location and lot size, ranging from $96 to $228 per square foot. Because most transactions
occurred in 2012 and 2013 in other lower cost jurisdictions, the current land value for multi-family land
for condominium development in Palo Alto was estimated at $200 per square foot.
RS Means cost data, adjusted for the Bay Area’s construction costs, was used to calculate hard costs.
Based on a review of recent financial feasibility analyses in the Bay Area, soft costs were estimated at 30
percent of hard costs, and developer fees and profits were estimated at 12 percent of hard and soft costs.
Using this method, the development costs are estimated at approximately $500 per net square foot of
building area.
15 The hypothetical condominium building type is a Type V building with underground parking and floor-area ratio of 1.7.
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Figure IV-7. Estimate of Development Costs of Hypothetical Condominium Project
Building Characteristics
Land Area (SF) 110,727
Gross Building Area (SF) 188,235
Net Building Area (SF) 160,000
Number of Units 100
Parking Type Underground
Parking Spaces/ Unit 2
Floor-area ratio (FAR) 1.7
Density (units per acre) 39
Average Unit Size 1,600
Land Acquisition Costs per Square Foot (a) $200
Development Cost Cost per Net SF
Land Cost (b) $138
Hard Costs $250
Soft Costs (c) $75
Developer Fees (d) $39
Total Development Costs $502
Notes:
(a) Land value is estimated at $200 per square foot based on recent transactions in market area. (b) Calculated based on RS Means cost estimates per square foot of net building area. (c) Estimated at 30 percent of hard costs. Includes design, engineering, city permits and fees, construction interest, contingencies, legal, etc.
(d) Estimated at 12 percent of hard costs and soft costs.
Sources: RS Means, 2014; DataQuick 2014; Recent financial feasibility studies; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Cost Estimates by Unit Size
The data sources described above also provided information on estimated unit sizes. Unit size information
is needed to translate costs/sales prices per square foot to unit costs. Unit sizes are estimated separately
for rental and for-sale units. For the rental units, the recent inventory of projects developed by MidPen
Housing was analyzed. For ownership units, the average sizes of recently built condominium units
(Figure IV-7) were analyzed.
Figure IV-8 provides the unit sizes and development cost estimates for rental units. Per-unit development
costs were calculated by multiplying average unit sizes by the per-square foot development costs of $446.
Rental unit costs range from $223,000 for studio units to $499,520 for three-bedroom units.
Figure IV-9 summarizes the costs of condominium units. The per-unit costs were derived by multiplying
the average unit size by the development cost, estimated at $500 per square foot. On a per unit basis,
condominium development costs are $450,000 for one-bedroom units, $650,000 for two-bedroom units,
and $875,000 for three-bedroom units.
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Figure IV-8. Rental Housing Unit Sizes and Development Costs
Unit Type
Estimated Cost
per Net SF
Unit Size
(net SF)
Development
Costs
Studio $446 500 $223,000
One bedroom $446 700 $312,200
Two bedroom $446 900 $401,400
Three bedroom $446 1,120 $499,520
Acronyms: SF: Square feet Sources: Confidential Pro Forma Data; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Figure IV-9. For-Sale Housing Unit Sizes and Development Costs
Unit Type
Estimated Cost
per Net SF
Unit Size
(net SF)
Development
Costs
One bedroom $500 900 $450,000
Two bedroom $500 1,300 $650,000
Three bedroom $500 1,750 $875,000
Acronyms: SF: Square feet Sources: DataQuick, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
CALCULATING THE HOUSING AFFORDABILITY GAP
The final step in the analysis is to calculate the housing affordability gap, or the difference between what
renters and owners can afford to pay and the total cost of developing new units. The purpose of the
housing affordability gap calculation is to help determine the fee amount that would be necessary to cover
the cost of developing housing for very low, low, and moderate income households. The calculation does
not assume the availability of any other source of housing subsidy because not all "modest" housing is
built with public subsidies, and tax credits and tax-exempt bond financing are highly competitive
programs that will not always be available to developers of modest housing units.
Figure IV-10 shows the housing affordability gap calculation for rental units. For each rental housing unit
type and income level, the gap is defined as the difference between the per-unit cost of development and
the supportable debt per unit. The supportable debt is calculated based on the net operating income
generated by an affordable monthly rent, incorporating assumptions about operating expenses (including
property taxes, insurance, etc.), reserves, vacancy and collection loss, and mortgage terms based on
discussions with local affordable housing developers. Because household sizes are not uniform and the
types of units each household may occupy is variable, the average housing affordability gap is calculated
by averaging the housing affordability gaps for the various unit sizes.
Figure IV-11 shows the housing affordability gap calculation for ownership units. For each unit type, the
gap is calculated as the difference between the per-unit cost of development and the affordable sales price
for each income level. As with rental housing, the average housing affordability gap is calculated by
averaging the housing affordability gaps across unit sizes in order to reflect that households in each
income group vary in size, and may occupy any of these unit types.
Finally, the tenure-neutral estimates of the housing affordability gap were estimated for very low, low,
and moderate income households (Figure IV-12). Because very low and low income households that are
looking for housing in today’s market are much more likely to be renters, an ownership gap was not
calculated for these income groups. The rental gap represents the overall affordability gap for these two
income groups. On the other hand, moderate income households could be either renters or owners.
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Therefore, the rental and ownership gaps are averaged for this income group to calculate the overall
affordability gap for moderate income households. The calculated average affordability gap per unit is
$306,164 for very low income households; $252,258 for low income households, and $249,596 for
moderate income households. The housing affordability gap is highest for very low income households
because they can afford to pay the least amount for housing.
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Figure IV-10. Housing Affordability Gap Calculation for Rental Housing
Income Level and Unit Type
Unit Size
(SF)
Maximum Monthly
Rent (a)
Annual
Rental
Revenue
Net
Operating
Income (b)
Available
for Debt
Service (c)
Supportable
Debt (d)
Development
Costs (e)
Affordability
Gap (f)
Very-Low Income (50% AMI)
Studio 500 $900 $10,797 $2,757 $2,206 $29,166 $223,000 $193,834
1 Bedroom 700 $1,021 $12,255 $4,142 $3,314 $43,818 $312,200 $268,382
2 Bedroom 900 $1,145 $13,737 $5,550 $4,440 $58,711 $401,400 $342,689
3 Bedroom 1,120 $1,319 $15,833 $7,541 $6,033 $79,769 $499,520 $419,751
Average Affordability Gap $306,164
Low Income (70% AMI)
Studio 500 $1,263 $15,161 $6,902 $5,522 $73,016 $223,000 $149,984
1 Bedroom 700 $1,437 $17,244 $8,882 $7,105 $93,954 $312,200 $218,246
2 Bedroom 900 $1,613 $19,352 $10,884 $8,707 $115,133 $401,400 $286,267
3 Bedroom 1,120 $1,860 $22,322 $13,706 $10,965 $144,987 $499,520 $354,533
Average Affordability Gap $252,258
Moderate Income (90% AMI)
Studio 500 $1,633 $19,592 $11,112 $8,890 $117,544 $223,000 $105,456
1 Bedroom 700 $1,859 $22,308 $13,693 $10,954 $144,843 $312,200 $167,357
2 Bedroom 900 $2,087 $25,049 $16,296 $13,037 $172,383 $401,400 $229,017
3 Bedroom 1,120 $2,409 $28,906 $19,960 $15,968 $211,146 $499,520 $288,374
Average Affordability Gap $197,551
Notes:
(a) Affordable Rents are based on HCD FY 2014 Income Limits for Santa Clara County. See Figure 2, above. (b) Amount available for debt. Assumes 5% vacancy and collection loss and $7,500 per unit for operating expenses and reserves, based on pro formas for affordable housing projects recently proposed in Palo Alto.
(c) Assumes 1.25 Debt Coverage Ratio.
(d) Assumes 6.38%, 30 year loan. Calculations based on annual payments.
(e) Assumes development cost of $446 per net square foot on rental units.
(f) Calculated as the difference between development costs and supportable debt. Rounded to nearest whole number.
Acronyms:
SF: Square feet
AMI: Area median income
Sources: Selected Palo Alto Rental Housing Pro Formas; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure IV-11. Housing Affordability Gap Calculation for For-Sale Condominium Housing
Income Level and Unit Type
Unit Size
(SF)
Affordable
Sales Price
(a)
Development
Costs (b)
Affordability
Gap (c)
Moderate Income (110% of AMI)
1 Bedroom 900 $291,858 $450,000 $158,142
2 Bedroom 1,300 $359,897 $650,000 $290,103
3 Bedroom 1,750 $418,323 $875,000 $456,677
Average Affordability Gap $301,641
(a) See calculation in Figure IV-9, above. (b) Assumes $500/SF for development costs, based on recent condominium sales.
(c) Calculated as the difference between affordable sales price and development cost; rounded to nearest whole number.
Acronyms:
SF: Square feet
AMI: Area median income Sources: DataQuick Sales Data, 2008-2012; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
Figure IV-12. Average Housing Affordability Gap by Income Group
Income Level Rental Gap Ownership Gap
Average
Affordability Gap
Very Low-Income (50% AMI) (a) $306,164 N/A $306,164
Low-Income (70% - 80% AMI) (b) $252,258 N/A $252,258
Moderate-Income (90% - 110% AMI) (c) $197,551 $301,641 $249,596
Notes:
(a) Based on rental housing only; very-low-income gap was not calculated for ownership housing. (b) Low-income households are assumed to earn 70 percent of AMI for rental housing and 80 percent of AMI for ownership housing.
(c) Moderate-income households are assumed to earn 90 percent of AMI for rental housing and 110 percent of AMI for ownership housing.
Acronyms:
AMI: Area median income
Source: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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This section builds on the findings of the previous analytical steps to calculate the maximum justified
linkage fees for each commercial prototype.
MAXIMUM FEE CALCULATION
To derive the maximum nexus-based fee, the housing affordability gap (see Section IV) is applied to the
number of lower-income worker households linked to the prototypes. This is the basis for developing an
estimate of the total affordability gap for each prototype. The total gap for each prototype is then divided
by the size of each development prototype to calculate a single maximum fee per square foot.
Figure V-1 presents the results of the linkage fee calculations for each prototype. The calculations shown
below assume that 100 percent of the very low, low, and moderate income households linked to the new
commercial space would be accommodated in Palo Alto. The maximum fee results (rounded to the
nearest dollar) are $177 per square foot for hotel and $264 per square foot for office/ R&D/ medical
office.
The calculated linkage fees are high for two reasons: 1) the cost of housing development in Palo Alto is
high, creating a large affordability gap for very low, low, and moderate income households; 2) many of
the workers associated with new commercial development, especially those in the hotel industry, earn low
wages and fall into very low and low income household categories. Although average wages for hotel
workers are lower than for office workers, the density of workers in hotels is lower than in office/ R&D/
medical office space; therefore maximum linkage fees for hotels are lower than for offices. .
The maximum fees shown in Figure V-1 are not the recommended fees for adoption. They are the
nexus-justified fees that represent the maximum that Palo Alto could charge to mitigate affordable
housing demand related to commercial development.
Figure V-1. Maximum Commercial Linkage Fees
Very Low, Low, and
Moderate Income Worker
Households
Total
Affordability
Gap
Size of
Prototype (SF)
Maximum
Fee (per SF) Hotel 64 $17,678,344 100,000 $177
Office, R&D and Medical Office 102 $26,447,718 100,000 $264
Note: Maximum fee per square foot has been rounded to the nearest dollar.
Sources: Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
V. MAXIMUM LINKAGE FEES
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There are a number of policy considerations that can be taken into account when a jurisdiction considers
an update to its commercial linkage fee. These policy factors include the financial impact of fee scenarios
on future development, the potential increase to the city’s existing fees on commercial development, a
comparison of proposed linkage fees with those fees already charged in adjacent jurisdictions, and how
potential revenues from new linkage fees can benefit the City’s overall affordable housing goals. This
section provides a discussion of some of the key financial and policy questions for Palo Alto.
PROTOTYPES AND FEE LEVELS
Commercial Prototypes
As described in Section III, the analysis estimates linkage fees for two commercial prototypes: hotel and
office/ R&D/ medical office. The building characteristics, including size, density (floor-area-ratio), and
parking assumptions are based on a review of recently built and proposed projects in Palo Alto (Figure
VI-1). The financial feasibility of potential fee levels is tested for each of these prototypes.
Figure VI-1. Description of Commercial Prototypes
Hotel
Office/R&D/
Medical Office
Prototype Description
Gross Building Area (GBA). excl. Parking (SF) 100,000 100,000
Efficiency Ratio (a) N/A 0.90
Net Leasable Sq. Ft. (NSF) N/A 90,000
Hotel Rooms 133
Parking Spaces 133 300
Podium Parking 33 240
Surface Parking 100 60
GBA Including Structured Parking 109,975 163,000
Floor Area Ratio (b) 1.1 2.0
Land Area (Acres) 2.3 1.9
Land Area (sq. ft.) 99,977 81,500
Notes:
(a) Refers to ratio of gross building area to net leasable area. An efficiency ratio of 0.9 means that 90% of the gross building area is leasable.
(b) The floor-area-ratio (FAR) is often used as a measure of density. In this analysis, it is calculated as the gross building area (including structured podium parking) divided by the total land area.
Sources: Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
VI. FEASIBILITY AND POLICY CONSIDERATIONS
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Fee Levels
In order to provide Palo Alto with some guidance on how proposed fees could impact development
decisions, the Consultant Team conducted a financial feasibility analysis that tested the impact of the
maximum linkage fee, the existing fee, and other potential fee levels, on developer profit. Figure VI-2
illustrates the different per-square-foot fee scenarios, by prototype.
Figure VI-2. Linkage Fee Scenarios by Prototype (per SF)
Fee Scenarios Hotel
Office/ R&D/
Medical Office
Existing Fee (rounded) $19.85 $19.85
Scenario 1: Maximum Fee $177 $264
Scenario 2 $35 $60
Scenario 3 $30 $50
Scenario 4 $20 $35
Sources: Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
METHODOLOGY
Financial feasibility was tested using a pro forma model that measures the return on cost of the
commercial prototypes. Return on cost is a commonly used metric indicating the profitability of a project.
The pro forma model tallies all development costs, including land, direct construction costs, indirect costs
(including financing), and developer fees. Revenues from lease rates or hotel room rates are the basis for
calculating annual income from the new commercial development. The total operating costs are
subtracted from the total revenues to calculate the annual net operating income. The return on cost is then
estimated by dividing the annual net operating income by the total development costs. The fee levels were
then added as an additional development cost to measure the resulting change in the developer’s return on
cost.
KEY INPUTS
The key revenue and cost inputs to the financial pro forma analysis are based on market research and
published resources. The data inputs are explained in more detail below.
Revenues
To estimate income from commercial development, the pro forma analysis used rental data from Costar
for the Palo Alto market for existing office buildings. A 10 percent revenue increase was applied to
account for the value premium of new office/R&D space. To calculate hotel revenues, the Consultant
Team interviewed hotel managers of hotel properties in Palo Alto to determine average daily rates and
occupancy rates. 16 The surveyed managers reported average rates of between $150 and $400 for
weekend, off-peak stays, and between $289 and $800 for peak, weekday stays. Occupancy rates were
reported at between 78 percent and 95 percent. Based on these findings, the analysis estimated average
daily rate at $240 per night, and occupancy rates at 83 percent. The revenue inputs for each land use
prototype are shown in Figure VI-3.
16 Properties surveyed include Hilton Garden Inn, Homewood Suites, The Epiphany, Hotel Keen, Dinah’s Garden Hotel, Sheraton Palo Alto, and Garden Court Hotel.
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Direct and Indirect Costs
Cost estimates for the commercial prototypes include direct construction costs (site work, building costs,
and parking), indirect costs, financing costs, and developer overhead and profit. Direct building
construction cost estimates for office/ R&D/ medical office are based on RS Means. Hotel construction
costs were estimated based on recent data from HVS Consulting and Smith Travel Research, and include
costs for Furniture, Fixtures, and Equipment (FF&E). Direct and indirect cost inputs for the pro forma
analysis are shown in Figure VI-4.
Land Costs
One of the critical cost factors for a commercial development project is land cost. To determine the land
value of sites zoned for commercial uses, the Consultant Team analyzed recent sales transactions in Santa
Clara County and reviewed third-party property appraisals. The high average value of land per square foot
in Palo Alto, illustrated in Figure VI-5, is partly due to the relatively smaller average size of the sold
parcels. As a result, the Consultant Team estimated a commercial land value of $160 per square foot,
closer to the sub-market average.17 This approximate land cost is an estimate for the purposes of this
analysis; the value of any particular site is likely to vary based on its location, amenities, and property
owner expectations, among other factors.
Return on Cost Thresholds
In order to understand how the different fee levels impact financial feasibility, the return on cost results
can be compared to an investor’s expectations for each type of development. The thresholds for this
analysis were pegged to investor expectations regarding overall capitalization rates (cap rate) for each
product type in the Bay Area. The cap rate, which is measured by dividing net income generated by a
property by the total project value, is a commonly used metric to estimate potential returns. Lower cap
rates signify high performing markets. In this analysis, the total project value is equivalent to the total
development cost. PWC Real Estate Investor Survey (Fourth Quarter 2014) was the primary data source
for determining cap rates for office/ R&D/ medical office uses. For hotel, cap rate data was obtained from
HVS, a consulting firm that tracks hotel markets.
To ensure that the financial analysis is conservative and does not reflect peak market conditions, the
thresholds selected for determining project feasibility are slightly higher than the published cap rates. It
was determined that the threshold for the return on cost is between 6.75 percent and 7.0 percent for office/
R&D/ medical office and between 7.0 percent and 7.25 percent for hotel (see Figure VI-6).
17 The commercial land value used in the pro forma analysis is different from the calculated land value for the affordability gap analysis because it is for commercially zoned land rather than multifamily zoned land.
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Figure VI-3. Pro Forma Revenue Inputs by Prototype
Prototypes Metric Input
Hotel
Average Daily Rate (a) Daily per Room $240
Occupancy Rate (a) Annual 83%
RevPAR (b) Daily per Room $198
Gross Annual Room Income Annual per Room $72,270
Gross Annual Other Revenue Annual per Room $10,950
Less: Vacancy (c) $0
Less: Operating Expenses (d) 70% ($58,254)
Annual Net Operating Income $24,966
Office/R&D
Revenues and Expenses (d)
Monthly Rent - Gross per NSF $68
Operating Expenses % of Gross 28%
Vacancy Rate % of Gross 5%
Estimates
Net Square Footage 90,000
Annual Gross Revenues $6,120,000
Operating Expenses ($1,713,600)
Vacancy Rate ($306,000)
Net Operating Income $4,100,400
Notes:
(a) Based on a survey of Palo Alto hotel managers, including Hilton Garden Inn, Homewood Suites, The Epiphany,
Hotel Keen, Dinah’s Garden Hotel, Sheraton Palo Alto, and Garden Court Hotel. Hotel property managers reported average rates of between $150 and $400 for weekend and off-peak days, and between $289 and $800 for peak, weekday stays. Occupancy rates were reported at between 78 percent and 95 percent. RevPAR (revenue per available room) is calculated as occupancy percentage times average daily rate. (b) RevPAR, a measure of revenue per room, is calculated by multiplying the occupancy rate by the average daily rate.
(c) Vacancy is already reflected in RevPAR estimate. (d) Costar Group average rents in the Palo Alto market. A premium of 10% is applied to account for newer product. Sources: Palo Alto hotel property managers; HVS and STR Consulting, 2014; Costar, 2015; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
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Figure VI-4. Direct and Indirect Cost Inputs
Development Assumptions Metric Hotel
Office/R&D/
Medical Office
Direct Costs (a)
Building & On-Site Improvements (b) per sq. ft. of GBA $200 $200
Parking Costs - Podium per space $25,000 $25,000
Parking Costs - Surface per space $2,500 $2,500
Indirect Costs (c)
A&E & Consulting % of Direct Costs 8.0% 8.0%
Tenant Improvements per NSF N/A $40
Permits & Fees (d) total $1,490,679 $3,745,450
Taxes, Insurance, Legal & Accounting % of Direct Costs 3.0% 3.0%
Financing Costs % of Direct Costs 6.0% 6.0%
Developer Overhead &Fee % of Direct Costs 8.5% 8.5%
Contingency % of Indirect Costs 5.0% 5.0%
Notes:
(a) Review of pro formas for similar projects in Silicon Valley region; RS Means, 2014.
(b) Hotel costs include Furniture, Fixtures & Equipment (FF&E).
(c) Review of pro formas for similar projects in Bay Area.
(d) For the hotel prototype, permit and fee calculations are based on recently developed hotel projects in the City. For the office/R&D/medical office
prototype, permits & fee calculations were provided by the City of Palo Alto. These are estimates for the prototypes created in this analysis and do not represent actual costs for specific development projects.
Sources: Project pro formas; RS Means, 2014; HVS and STR Consulting; City of Palo Alto; Strategic Economics, 2015.
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Figure VI-5. Recent Commercial Vacant Land Transactions in Santa Clara County (2011-2014)
Property City Site Area Sale Price
Sale Price/ SF of
Land
1236 College Avenue Palo Alto 5,750 $2,795,000 $486.09
3502 Emma Court Palo Alto 7,369 $2,150,000 $291.76
382 Curtner Avenue Palo Alto 8,525 $1,384,000 $162.35
4220 El Camino Real Palo Alto 55,609 $3,775,000 $67.88
370 Lowell Avenue Palo Alto 12,474 $4,450,000 $356.74
3500 South Court Palo Alto 6,250 $2,700,000 $432.00
3333 Bryant Street Palo Alto 6,125 $2,700,000 $440.82
405 Curtner Avenue Palo Alto 12,375 $1,800,000 $145.45
363 Garden Street Palo Alto 5,000 $195,000 $39.00
897 Marshall Drive Palo Alto 2,801 $49,000 $17.49
3265 El Camino Real Palo Alto 7,490 $975,000 $130.17
1130 Middlefield Road Palo Alto 5,600 $2,800,000 $500.00
El Camino Real Palo Alto 55,609 $3,775,000 $67.88
N San Antonio Rd Los Altos 11,960 $1,200,000 $100.33
N San Antonio Rd Los Altos 11,600 $1,030,000 $88.79
Los Gatos Blvd Los Gatos 20,038 $5,800,000 $47.38
Los Gatos Blvd Los Gatos 102,366 $5,800,000 $47.38
Placer Oaks Rd Los Gatos 2,351 $266,000 $113.14
Placer Oaks Rd Los Gatos 2,262 $266,000 $117.60
S Main St Milpitas 9,148 $775,000 $84.72
Dempsey Rd Milpitas 52,392 $1,250,000 $23.86
Milpitas 15,000 $530,000 $35.33
Milpitas 44,431 $14,563,500 $327.78
Dixon Rd Milpitas 14,810 $812,500 $54.86
Old Middlefield Way Mountain View 11,175 $1,600,000 $143.18
Church St Mountain View 11,250 $2,270,000 $201.78
Moffett Blvd Mountain View 79,715 $10,100,000 $126.70
El Camino Real Santa Clara 63,162 $6,100,000 $96.58
Saratoga Ave Santa Clara 16,700 $1,075,000 $64.37
El Camino Real Santa Clara 4,960 $275,000 $55.44
Big Basin Way Saratoga 17,187 $1,398,000 $81.34 Average Palo Alto Sales 14,691 $2,272,923 $241
Average All Sales 21,983 $2,730,935 $160
Sources: CoreLogic, 2015; Loopnet, 2015; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
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Figure VI-6. Feasibility Thresholds for Return on Cost
Prototype Capitalization Rates
Selected Threshold for
Return on Cost
Hotel (a) 6.75% - 7.25% 7.0% - 7.25%
Office/ R&D/ Medical Office(b) 5.88% - 6.71% 6.75% - 7.0%
Notes:
(a) HVS Consulting, January 2015. Cap rate data was only available at the national level. However,
the Bay Area market generally outperforms the rest of the country, so this estimate is likely lower than cap rates Santa Clara County.
(b) PWC Real Estate Investor Survey, San Francisco Office Market, 4th Quarter 2014. Because capitalization rates for office may be peaking in the Bay Area market, and R&D and medical office uses have higher cap rates, the financial analysis set the threshold at a higher rate. Sources: HVS Consulting, January 2015; PWC Real Estate Investor Survey, 4Q2014; Vernazza Wolfe
Associates, Inc. and Strategic Economics, 2015.
RESULTS
Hotel
The pro forma analysis shows that under current economic conditions, without the addition of a
commercial linkage fee, the hotel prototype generates a healthy return on cost of 7.5 percent, which is
financially feasible (Figure VI-7). The annual net operating income is estimated at $3.3 million ($24,966
per room). The total development costs, including land, direct, and indirect costs total $44.3 million. The
following describes the financial implications of adding new commercial linkage fees at various fee
levels:
The existing fee level of $19.85 per square foot increases development costs to $46.3 million.
The current fee is approximately four percent of total development costs for a hotel prototype. A
hotel prototype that is charged the existing fee can generate a strong return on cost of 7.2 percent.
Fee scenario 1, the maximum fee level of $177 per square foot, increases total development costs
to almost $62 million. The maximum fee accounts for 28.6 percent of total development costs.
This fee scenario generates a calculated return on cost of 5.4 percent, which is not financially
feasible.
Fee scenario 2, a lower nexus fee of $35 per square foot is equivalent to 7.3 percent of total
development costs and generates a potential return of 6.95 percent. This return is not financially
feasible.
Scenario 3, a fee of $30 per square foot, would account for 6.3 percent of total development
costs. At this fee level, the return on cost is estimated at 7 percent, which is financially feasible.
Fee scenario 4 is a nexus fee of $20 per square foot, which represents 4.3 percent of the project’s
total development costs. The return on cost is estimated at 7.2 percent, which is also financially
feasible.
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Office/R&D/Medical Office
Under a base scenario with no commercial linkage fees on office/R&D/medical office development, a
prototypical project generates an estimated net operating income of $4.1 million, with total development
costs estimated at $53.0 million. The net operating income divided by the total development costs results
in an estimated return on cost of 7.7 percent, a higher percentage than the minimum threshold for
financial feasibility for office/ R&D/ medical office development, which is 6.75 to 7.0 percent (see Figure
VI-7). The high return on cost indicates that this prototype would offer attractive returns under current
market conditions. The following describes the financial implications of adding new commercial linkage
fees at various fee levels:
The City’s existing linkage fee of $19.85 per square foot is approximately 3.7 percent of total
development costs. An office prototype charged the existing fee level can generate a healthy
return on costs of 7.5 percent.
Scenario 1, a fee set at the maximum level of $264 per square foot, would account for about half
of total development costs for the office/R&D/medical office prototype. The return on cost with
this fee is estimated at 5.2 percent, which would not be financially feasible.
Scenario 2, a fee level of $60 per square foot, would make up 11.3 percent of total development
costs. The calculated return on cost is 6.9 percent, which is financially feasible.
Scenario 3, a fee level of $50 per square foot, is equivalent to 9.4 percent of total project
development costs. Under this scenario, the office/R&D/medical office project generates a return
on cost of 7.1 percent, which is feasible.
The fee scenario 4 of $35 per square foot would be equivalent to 6.6 percent of total project costs.
The estimated return on costs is 7.3 percent, which is financially feasible.
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Figure VI-7. Pro Forma Analysis Results
Hotel Office/R&D/Medical Office
Development Costs (a) per Room Total Per Gross SF TotalLand $120,273 $15,996,364 $130 $13,040,000 Direct Costs
Building & On-Site Improvements $150,376 $20,000,000 $200 $20,000,000 Parking $8,125 $1,080,625 $55 $5,475,000 Total Direct Costs $158,501 $21,080,625 $255 $25,475,000
Indirect Costs A&E & Consulting $12,680 $1,686,450 $20 $2,038,000 Tenant Improvements $36 $3,600,000
FF&E (b) $0 $0 Permits & Fees (c) $11,208 $1,490,679 $37 $3,745,450 Taxes, Insurance, Legal, Acctg $4,755 $632,419 $8 $764,250 Financing Costs $9,510 $1,264,838 $15 $1,528,500 Developer Overhead & fee $13,473 $1,791,853 $22 $2,165,375
Contingency $2,581 $343,312 $7 $692,079 Total Indirect Costs $54,207 $7,209,551 $145 $14,533,654 Total Development Costs (TDC)
without Nexus Fees $44,286,539 $53,048,654
TDC with Nexus Fees by Fee Scenario Linkage Fee
per SF
TDC incl. Nexus
Fee
Linkage Fee
per SF
TDC incl. Nexus
Fee
No Fee $0.00 $44,286,539 $0.00 $53,048,654 Existing Fee $19.85 $46,271,539 $19.85 $55,033,654 Fee Scenario 1: Maximum Fee $177 $61,986,539 $264 $79,448,654
Fee Scenario 2 $35 $47,786,539 $60 $59,048,654 Fee Scenario 3 $30 $47,286,539 $50 $58,048,654 Fee Scenario 4 $20 $46,286,539 $35 $56,548,654
Revenues per SF Total per SF TotalAnnual Net Operating Income (d) $24,966 $3,320,478 $41 $4,100,400
Return on Cost by Fee Scenario:
Nexus Fee
per SF Return on Costs
Nexus Fee
per SF Return on Costs No Fee $0.00 7.50% $0.00 7.73% Existing Fee $19.85 7.18% $19.85 7.45% Scenario 1: Maximum Fee $177 5.36% $264 5.16% Fee Scenario 2 $35 6.95% $60 6.94% Fee Scenario 3 $30 7.02% $50 7.06% Fee Scenario 4 $20 7.17% $35 7.25%
Fees as % of TDC
Nexus Fee
per SF
Nexus Fee as % of
TDC
Nexus Fee
per SF
Nexus Fee as %
of TDC No Fee $0.00 0.00% $0.00 0.00% Existing Fee $19.85 4.29% $19.85 3.74%
Scenario 1: Maximum Fee $177 28.55% $264 49.77% Fee Scenario 2 $35 7.32% $60 11.31% Fee Scenario 3 $30 6.34% $50 9.43%
Fee Scenario 4 $20 4.32% $35 6.60%
Return on Cost - Threshold for Feasibility 7.0-7.25% 6.75-7.0%
Notes: (a) See Figure VI-4. (b) Furniture Fixtures & Equipment for hotel is included in the direct costs.
(c) Permit & fee calculations, excluding linkage fees, as provided by City of Palo Alto. These are estimates for the prototypes created in this analysis; specific development projects may have different results. (d) See Figure VI-3. Sources: Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
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POLICY CONSIDERATIONS
While the nexus study provides the necessary economic analysis for the updated linkage fees, it is up to
policymakers to decide which fee level is appropriate to charge to new development. Financial feasibility
is one important factor to examine. In addition, there are a number of other policy issues to consider, such
as:
How much the City’s development fees would increase with an updated commercial linkage fee;
How an updated linkage fee in Palo Alto would compare with those recently adopted in
neighboring jurisdictions;
What options exist for establishing alternatives to the payment of fees; and
How the updated commercial linkage fee fits into the City’s overall affordable housing strategy.
Existing City Permits and Fees on Commercial Development
In addition to its existing commercial linkage fee of $19.85 per square foot, the City of Palo Alto has
other permits and fees on new development. 18 The City may wish to consider the amount that total fees
would increase with an updated commercial linkage fee. Based on the current schedule of fees in Palo
Alto, existing fees (including the existing linkage fees) for the commercial prototypes are estimated to be
$35 per square foot for the hotel prototype and $57 per square foot for the office/R&D/medical office
prototype.19 If the maximum linkage fees were adopted, the total development fees and permits would be
$192 per square foot for hotel and $301 for office, as shown in Figure VI-8.
18 New non-profit development, including churches, educational facilities, and hospitals, is exempt from the current fee. New retail space smaller than 1,500 square feet is also exempted.
19 The hotel fees were estimated based on the fees paid by new hotel projects in the city; the retail/restaurant/services fees and office/R&D/medical office fees are estimates by City staff. These fee estimates are the best approximations available, and do not represent the actual cost of a proposed new development project.
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Figure VI-8. Existing City Permits and Fees on Commercial Development by Prototype
Hotel
Office/R&D/
Medical Office
Existing Fees/ Permits per SF (excl. linkage fee) $15 $37
Current Linkage Fee $20 $20
Total Existing Fees Per SF $35 $57
Fee Scenario 1 (Maximum Fees)
Nexus Fee Per SF $177 $264
Combined Fees Per SF $192 $301
Fee Scenario 2
Nexus Fee Per SF $35 $60
Combined Fees Per SF $50 $97
Fee Scenario 3
Nexus Fee Per SF $30 $50
Combined Fees Per SF $45 $87
Fee Scenario 4
Nexus Fee Per SF $20 $35
Combined Fees Per SF $35 $72
Sources: Palo Alto, Department of Planning and Building, 2014; Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
Comparison with Fees Charged in Other Jurisdictions
Figure VI-9 compares Palo Alto’s existing commercial linkage fee and proposed fee scenarios with the
linkage fees adopted by nearby cities. At present, Palo Alto has fees of $19.85 per square foot for all
commercial uses. Palo Alto’s existing fees are similar to the linkage fees adopted San Francisco and
Cupertino, which range from $16 to $24 per square foot, depending on the land use. In most cases, cities
have adopted higher fee levels for office/ R&D/ medical office uses than for hotel uses. For example, in
Cupertino, the commercial linkage fee for hotel is $10 per square foot, compared to $20 per square foot
for office/ R&D/ medical office uses. The maximum linkage fees calculated for all the commercial
prototypes, ranging from $177 to $295 per square foot in this study are much higher than existing linkage
fees in Bay Area jurisdictions.
Other cities in the Bay Area also have commercial linkage fees that can be compared to the potential fee
scenarios for Palo Alto. A summary of some of these existing fees is shown in Figure VI-10, based on the
most current information available. The fee amounts vary significantly by jurisdiction.
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Figure VI-9. Comparison to Linkage Fees in Neighboring Cities
Hotel
Office/ R&D/
Medical Office
Date Fee Was
Adopted
Palo Alto Fee Scenarios (per SF)
Existing Linkage Fee $19.85 $19.85 2002
Scenario 1 (Maximum) $177 $264
Scenario 2 $35 $60
Scenario 3 $30 $50
Scenario 4 $20 $35
Fees in Nearby Cities (per SF)
Cupertino $10 $20 2015
Menlo Park (a) $8 $15 2014
Mountain View (b) $2.50 $25 2015
San Francisco (c) $18 $16-$24 2015
Sunnyvale (d) $7.50 $15 (e) 2015
Notes: (a) Buildings 10,000 SF and under are exempt from fees. A new nexus study is currently underway that may result in an
updated fee. (b) New gross floor area under 25,000 SF pays 50 percent of full fee. (c) The fee for R&D is $16.01 and the fee for office is $24.03. The fee for a small enterprise is $18.89. (d) Approval of the proposed fees is pending a community process. (e) The fee on the first 25,000 SF is discounted by 50 percent. Sources: City staff and websites; Nonprofit Housing Association of Northern California, 2015; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
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Figure VI-10. Existing Linkage Fees in Bay Area Cities
City
Commercial Development
Subject to Fees Fee Amount
Walnut Creek All development commercially classified i.e.
R&D, for-profit medical offices/hospitals, etc.
$5.00 per SF
Oakland
Office and Warehouse/Distribution
$5.24 per SF used for office of warehouse /distribution needs beyond 25,000 SF
Dublin Industrial, Office, R&D, Retail, Services & Accommodations
Industrial: $.048 per SF Office: $1.24 per SF R&D: $0.81 per SF
Retail: $1.00 per SF Services & Acc.: $0.42 per SF * Buildings less than 20,000 SF are exempt.
Pleasanton All commercial office or industrial
development projects
$2.87 per SF
Adjusted annually based on CPI
Alameda
Retail, Office, Warehousing, Manufacturing, Hotel//Motel
Retail: $2.24 per SF Office: $4.42 per SF Warehouse & Manufacturing: $0.77 per SF
Hotel/Motel: $1,108 per room/suite May be adjusted annually based on CPI
Napa Office, Hotel, Retail, Industrial (Industrial, Warehouse, Wine Production)
Office: $1.00 per SF Hotel: $3.00 per SF
Retail: $0.80 per SF Industrial: $0.50 per SF
San Rafael Office or R&D, Retail, Restaurant, Personal Service, Manufacturing, Light Industrial,
Warehouse, Hotel/Motel
5,000 SF or more to provide affordable housing units
or pay a fee * $254,599 per unit Office & R&D: 0.03 units Retail, Restaurant or Personal Service:
0.0225 units Manufacturing or Light Industrial: 0.01625 units
Warehouse: 0.00875 units Hotel/Motel: 0.0075 units
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Figure VI-10. Summary of Existing Linkage Fees in Other Bay Area Cities (Continued)
City
Commercial Development
Subject to Fees Fee Amount
Petaluma Commercial, Retail, Industrial Commercial: $2.14 per SF Retail: $3.69 per SF
Industrial: $2.21 per SF
Emeryville Any development of non residential uses for which a discretionary permit or building permit is
required
$4.00 per SF
Berkeley Developments in non-residential and R-4 Zones, except in South Berkeley IX Target Area, over
7,500 SF
Office/Retail/Restaurant/Hotel/Lodging/R&D: $4.50 per SF
Industrial/Manufacturing/Warehouse/Storage: $2.25 per sq. ft
Sources: The Non-Profit Housing Association of Northern California, Strategic Economics, and Vernazza Wolfe Associates, Inc, 2015.
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Benefit to Palo Alto’s Overall Affordable Housing Strategy
The City currently charges a commercial linkage fee of $19.85 per square foot on all new non-residential
development. These fees are payable at the time that the building permit is issued. The city also has an
inclusionary housing program that requires that 15 percent of the units in market-rate developments
consisting of five or more housing units must be sold at below-market rate (BMR) prices. The
inclusionary requirement increases to 20 percent for larger projects on five-acre and larger parcels. Two-
thirds of the BMR units are to be affordable at the 90 percent AMI level households and the remaining
one-third is to be affordable at the 110 percent AMI level. City policy generally requires that the BMR
units be provided in the project. In some cases, developers have the option of paying an in-lieu fee of 7.5
to 10 percent of the sales price or fair market value, whichever is greater. The developer must also pay a
fee for fractional units.
Revenues from the BMR in-lieu fee and commercial linkage fee programs are deposited into the City’s
Affordable Housing Fund. The Affordable Housing Fund is a local housing trust fund established by the
City Council of Palo Alto to provide financial assistance for the development of housing affordable to
very low-, low- and moderate-income households that live or work within the City. It is largely made up
of two sub-funds: the Commercial Housing Fund and the Residential Housing Fund. While both rental
and ownership units are eligible for assistance, in practice all units assisted thus far have been rental units
and almost all have been affordable to very low- or low-income households.
The revenues to be collected from the commercial linkage fee provide an important source of local
funding; however, local fee revenues do not generally cover the entire funding gap encountered by
sponsors of new affordable housing. Additional funding from a variety of sources will remain critical.
These funding sources typically include public subsidies from Santa Clara County, equity from the Low
Income Housing Tax Credits, and financing from conventional lenders.
Potential for Overlap between Residential and Commercial Fees
The City is also undertaking a housing impact nexus study simultaneously, and may soon adopt a housing
impact fee in a parallel process to the commercial linkage fee considered in this report. One issue that
may arise if a City considers the adoption of both fees is whether there is any overlap between the two
impact fees, resulting in potential “double-counting” of impacts.
The commercial linkage fee study examined jobs located in new commercial buildings including office/
R&D/ medical office buildings and hotels. The nexus analysis then calculated the average wages of the
workers associated with each commercial building to derive the annual income of the new worker
households. The analysis determines the area median income (AMI) level of the new worker-households
to identify the number of worker-households that would require affordable housing.
The housing impact fee nexus analysis examined households buying or renting new market rate units in
the jurisdiction. The household expenditures by these new residents have an economic impact in the
county, which can be linked to new jobs. The nexus analysis quantified the jobs linked to new household
spending, and then calculated the wages of new workers and the household income of new worker
households. Each worker household was then categorized by area median income (AMI) to determine the
number of households that require affordable housing.
There may be a share of jobs counted in the commercial linkage fee analysis that are also included in
the residential nexus analysis, particularly those in the service sector. Other types of jobs counted in the
residential nexus analysis are unique to that analysis, and are not included in the commercial linkage
fee analysis (for example, public sector employees). The commercial linkage fee analysis is limited to
new development in private sector office/ R&D/ medical office buildings and hotels space.
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There is potential that some jobs could be counted in both analyses, and that the two programs may
overlap in mitigating the affordable housing demand from the same worker households. Each of the
proposed fees is required to mitigate no more than 100 percent of the demand for affordable units by new
worker households. In order to reduce the potential for overlap between the two programs, it is advisable
to set both the commercial linkage fees and housing impact fees at below 100 percent of the nexus-based
maximum. In this way, when combined, the programs would mitigate less than 100 percent of the impact
even if there were overlap in the jobs counted in the two nexus analyses.
Administrative Issues
Similar to any impact fee, the fee should be adjusted annually for inflation and increases in construction
costs. Adjustments are also needed due to possible changes in the housing affordability gap. However, the
connection between new commercial construction and growth in employment derived from employment
densities is unlikely to change in the short run.
It is advisable that the City adjusts its commercial linkage fee annually by using an annual adjustment
mechanism. An adjustment mechanism updates the fees to compensate for inflation in development costs.
To simplify annual adjustments, it is recommended that the City selects a cost index that is routinely
published. While there is no index that tracks changes in Palo Alto’s development costs, including land,
there are a few other options to consider.
The first option is the Consumer Price Index (Shelter Only). The shelter component of the index
covers costs for rent of primary residence, lodging away from home, owner’s equivalent rent of
primary residence, and household insurance. Of the total shelter index, costs associated with the
owner’s equivalent rent of primary residence constitute 70% of total costs entered into the index.
A second option to adjust the fee for annual inflation is the construction cost index published in
the Engineering News Record (ENR). This index is routinely used to update other types of impact
fees. Cost index information for the San Francisco area, the closest geographical area to Palo
Alto, is available on an annual basis. While this index measures inflation in construction costs, it
does not incorporate changes in land costs and public fees charged on new development.
While both indices measure changes in housing costs, both understate the magnitude of inflation for the
reasons presented above. However, since these indices are readily available and relatively simple to use, it
is recommended, that City uses these indices for annual adjustments. It is further recommended that the
City base its annual adjustment mechanism on the higher of the two indices (CPI or ENR), using a five-
year moving average as the inflation factor.
In addition to revising the fee annually for inflation, the City is encouraged to update the commercial
linkage fee study every five years, or at the very least, update the housing affordability gap used in the
basic model. The purpose of these updates is to insure that the fee is still based on a cost/revenue structure
that remains applicable in the Palo Alto housing market. In this way, the fee will more accurately reflect
any structural changes between affordable prices/rents and market rate sales prices/development costs.
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GLOSSARY OF TERMS
Affordable Housing: Under state and federal statutes, housing is defined as affordable if housing costs
do not exceed 30 to 35 percent of gross household income.
Annual Adjustment Mechanism: Due to inflation in housing construction costs, it is frequently
necessary to adjust impact fees. An index, such as the Consumer Price Index (CPI) or a published
construction cost index (for example, from the Engineering News Record) is used to revise housing fees
to reflect inflation in housing construction costs.
Assisted Housing: Housing that has received public subsidies (such as low interest loans, density
bonuses, direct financial assistance, etc.) from federal, state, or local housing programs in exchange for
restrictions requiring a certain number of housing units to be affordable to very low, low, and moderate-
income households.
Boomerang Funds: Monies returned to the City by the State of California, after dissolution of
redevelopment agencies in the State.
Consumer price index (CPI): Index that measures changes in the price level of a market basket of
consumer goods and services purchased by households.
Employment Densities: The amount of square feet per employee is calculated for each property use that
is subject to a commercial development housing linkage fee. Employment densities are used to estimate
the number of employees that will work in a new commercial development.
Household: The US Census Bureau defines a household as all persons living in a housing unit whether or
not they are related. A single person living in an apartment as well as a family living in a house is
considered a household. Households do not include individuals living in dormitories, prisons,
convalescent homes, or other group quarters.
Household Income: The total income of all the persons living in a household. Household income is
commonly grouped into income categories based upon household size and income, relative to the regional
median family income.
VII. GLOSSARY OF TERMS AND ACRONYMS
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Housing Affordability Gap: The affordability gap is defined as the difference between what a household
can afford to spend on housing and the market rate cost of housing. Affordable rents and sales prices are
defined as a percentage of gross household income, generally between 30 percent and 35 percent of
income.
For renters, rental costs are assumed to include the contract rent as well as the cost of utilities,
excluding cable and telephone service. The difference between these gross rents and affordable
rents is the housing affordability gap for renters. This calculation assumes that 30% of income is
paid for gross rent.
For owners, costs include mortgage payments, mortgage insurance, property taxes, property
insurance, and homeowner association dues.20 The difference between these housing expenses
and affordable ownership costs is the housing affordability gap for owners. This calculation
assumes that 35% of income is paid for housing costs.
Housing Subsidy: Housing subsidies refer to government assistance aimed at reducing housing sales
prices or rents to more affordable levels.
Housing Unit: A housing unit can be a room or group of rooms used by one or more individuals living
separately from others in the structure, with direct access to the outside or to a public hall and containing
separate toilet and kitchen facilities.
Inclusionary Zoning: Inclusionary zoning, also known as inclusionary housing, refers to a planning
ordinance that requires that a given percentage of new construction be affordable to households with very
low, low, moderate, or workforce incomes.
In-Lieu Fee: A literal definition for an in-lieu fee for inclusionary units would be a fee adopted “in place
of” providing affordable units. For the purposes of operating an inclusionary housing program, a public
jurisdiction may adopt a fee option for developers that prefer paying fees over providing housing units on-
or off-site. A fee study is frequently undertaken to establish the maximum fee that can be charged as an
in-lieu fee. This fee study must show that there is a reasonable relationship between the fee and the cost of
providing affordable housing.
Market-Rate Housing: Housing which is available on the open market without any public subsidy. The
price for housing is determined by the market forces of supply and demand and varies by location.
Nexus Study: In order to adopt a residential housing impact fee or a commercial linkage fee, a nexus
study is required. A nexus requires local agencies proposing a fee on a development project to identify the
purpose of the fee, the use of the fee, and to determine that there is “a reasonable relationship between the
fee’s use and the type of development project on which the fee is imposed.” A Nexus Study establishes
20 Mortgage terms for first-time homebuyers typically allow down payment of five percent; these terms require private mortgage
insurance.
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and quantifies a causal link or “nexus” between new residential and commercial development and the
need for additional housing affordable to new employees.
Non-Residential Development Housing Impact Fee (or Linkage Fee): A fee or charge imposed on
commercial developers to pay for a development’s impact on the need for affordable housing. The fee is
based on projected household incomes of new employees that will work in newly created space. The fee
varies according to the type of property use.
Palmer Case: This civil suit affects rental housing only. It affirmed that the Costa Hawkins Rental Act,
passed in 1995 by the California State Legislature, applies to inclusionary rental units. The implication of
this finding is that cities or counties cannot require rental property owners to rent inclusionary units that
become vacant at below market rents, unless the developer accepted financial assistance (including fee
waivers) or received other incentives that lowered development costs.
Property Prototypes: Property prototypes are used for residential and commercial developments in order
to define housing impact fees. The prototypes generally represent new development projects built in a
community and are used to estimate affordable housing impacts associated with new market rate
commercial and residential developments. While the prototypes should be “typical” of what is built, for
ease of mathematical computation, they are often expressed as larger developments in order to avoid
awkward fractions.
Residential Housing Impact Fee: A fee imposed on residential development to pay for a development’s
impact on the need for affordable housing. The fee is based on projected incomes of new employees
associated with the expansion of market rate developments. Two steps are needed to define the fees. The
first step is the completion of a nexus study, and the second step entails selection of the actual fee amount,
which can be below the amount justified by the fee study, but not above that amount.
RS Means: Data source of information for construction cost data.
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DEFINITION OF ACRONYMS
AMI: Area Median Income
CBIA: California Building Industry Association
EDD: State of California Employment Development Department
FAR: Floor-area-ratio
FF&E: Furniture, Fixtures, and Equipment
GBA: Gross Building Area
HCD: Department of Housing and Community Development (State of California)
NAICS: North American Industry Classification System
NSF: Net Square Feet
QCEW: Quarterly Census of Employment and Wages
R&D: Research and development
SF: Square Feet
DRAFT REPORT
Residential Impact Fee
Nexus Study
October 2015
prepared for:
City of Palo Alto
Vernazza Wolfe Associates, Inc.
VWA
Attachment B
Table of Contents
I. EXECUTIVE SUMMARY .................................................................................................. 5
Introduction ...................................................................................................................................... 5
Background ...................................................................................................................................... 5
Report Organization ......................................................................................................................... 5
Fee Implementation Options ............................................................................................................ 5
Nexus Analysis Methodology and Results ....................................................................................... 6
Policy Considerations ..................................................................................................................... 12
II. INTRODUCTION AND METHODOLOGY ...................................................................... 14
Background .................................................................................................................................... 14
The Nexus Concept ....................................................................................................................... 15
Methodology ................................................................................................................................... 15
III. RESIDENTIAL PROTOTYPES ....................................................................................... 17
Recent Housing Development Trends ........................................................................................... 17
Residential Prototypes ................................................................................................................... 18
Household Incomes of Buyers and Renters .................................................................................. 23
IV. ECONOMIC IMPACT ANALYSIS (IMPLAN3) ............................................................... 29
The IMPLAN3 Model ...................................................................................................................... 29
Household Income Impacts ........................................................................................................... 30
Employment and Wage Impacts .................................................................................................... 30
Estimating Worker-Households ..................................................................................................... 30
Estimating Demand for Affordable Housing ................................................................................... 31
V. AFFORDABILITY GAP ANALYSIS ............................................................................... 36
Methodology ................................................................................................................................... 36
Estimating Affordable Rents and Sales Prices .............................................................................. 36
Estimating Housing Development Costs ........................................................................................ 43
Calculating the Housing Affordability Gap ..................................................................................... 47
VI. MAXIMUM FEE AND REQUIREMENTS ........................................................................ 51
Maximum Fee Calculation ............................................................................................................. 51
Inclusionary Housing Requirements .............................................................................................. 55
VII. FEASIBILITY AND POLICY CONSIDERATIONS .......................................................... 56
Financial Feasibility Analysis ......................................................................................................... 56
Additional Policy Considerations .................................................................................................... 68
VIII. GLOSSARY OF TERMS AND ACRONYMS .................................................................. 76
Glossary of terms ........................................................................................................................... 76
Definition of Acronyms ................................................................................................................... 79
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List of Figures
Figure I-2. Sales Prices and Rental Rates of Residential Prototypes ............................................................ 7
Figure I-3. Estimated Annual Household Incomes of Buyers of Single-Family Detached Units ................. 7
Figure I-4. Estimated Annual Household Incomes of Buyers of Single-Family Attached Units ................. 8
Figure I-5. Estimated Annual Household Incomes of Buyers of Condominium Units ................................ 8
Figure I-6. Estimated Annual Household Incomes of Renters of Apartment Units ..................................... 8
Figure I-7. New Worker Households by Income Group for Prototypes ....................................................... 9
Figure I-8. Number of Worker Households Associated with 100-Unit Prototypes, by Income Level ......... 9
Figure I-9. Total Affordability Gap for Single-Family Detached Units (30 Units) .................................... 10
Figure I-10. Total Affordability Gap for Single-Family Attached Units (10 Units) ................................... 10
Figure I-11. Total Affordability Gap for Condominiums (35 Units) .......................................................... 10
Figure I-12. Total Affordability Gap for Apartments (70 Units) ................................................................ 10
Figure I-13. Maximum Housing Impact Fee by Prototype ......................................................................... 11
Figure III-1. Single-Family Detached Home Sales in Palo Alto, Units Built 2012-2013 ........................... 19
Figure III-2. New Market-Rate Single-Family Attached Development in Palo Alto ................................. 19
Figure III-3. New Market-Rate Apartment Projects in Mountain View and Redwood City ...................... 20
Figure III-4. New Condominium Unit Sales in Palo Alto, Sold 2009 - 2011 ............................................. 21
Figure III-5. Recent Condominium Sales in Palo Alto and Surrounding Communities: Sold July 2014-
July 2015 ..................................................................................................................................................... 22
Figure III-6. Average Net Residential SF per Unit ..................................................................................... 23
Figure III-7. Estimated Annual Household Incomes of Buyers of Single-Family Detached Units ............ 25
Figure III-8. Estimated Annual Household Incomes of Buyers of Single-Family Attached Units ............. 26
Figure III-9. Estimated Annual Household Incomes of Buyers of Condominium Units ............................ 27
Figure III-10. Estimated Annual Household Incomes of Renters of Apartment Units ............................... 28
Figure IV-1. Estimated Incomes by Income Categories for Buyers and Renters of New Units ................. 32
Figure IV-2. Estimated Job and Wage Impacts of Prototypes by Industry ................................................. 33
Figure IV-3. Estimated Job and Wage Impacts of Prototypes by Occupation ............................................ 34
Figure IV-4. Induced Employment Impacts, Palo Alto .............................................................................. 35
Figure IV-5. New Worker Households by Income Group for Prototypes .................................................. 35
Figure V-1. Calculation of Affordable Rents in Santa Clara County by Household Size, 2014 ................ 39
Figure V-2. Calculation of Affordable Rents in Santa Clara County by Unit Type, 2014 ......................... 40
Figure V-3. Calculation of Affordable Sales Prices in Santa Clara County by Household Size, 2014 ...... 41
Figure V-4. Calculation of Affordable Sales Prices in Santa Clara County by Unit Type, 2014 ............... 42
Figure V-5. Affordable Housing Project Pro Forma Data .......................................................................... 44
Figure V-6. Sales of Vacant Lands in San Mateo County and Northern Santa Clara County, 2014 .......... 45
Figure V-7. Estimate of Development Costs of Hypothetical Condominium Project ................................ 46
Figure V-8. Rental Housing Unit Sizes and Development Costs ............................................................... 47
Figure V-9. For-Sale Housing Unit Sizes and Development Costs ............................................................ 47
Figure V-10. Housing Affordability Gap Calculation for Rental Housing ................................................. 49
Figure V-11. Housing Affordability Gap Calculation for For-Sale Condominium Housing ..................... 50
Figure V-12. Average Housing Affordability Gap by Income Group ........................................................ 50
Figure VI-1. Maximum Per-Unit Fee for Single-Family Detached Prototype ........................................... 52
Figure VI-2. Maximum Per-Unit Fee for Single-Family Attached Prototype ............................................ 52
Figure VI-3. Maximum Per-Unit Fee for Condominium Prototype ........................................................... 52
Figure VI-4. Maximum Per-Unit Fee for Apartment Prototype ................................................................. 53
Figure VI-5. Maximum Fee per SF for Single-Family Detached Prototype ............................................... 53
Figure VI-6. Maximum Fee per SF for Single-Family Attached Prototype ............................................... 53
Figure VI-7. Maximum Fee per SF for Condominium Prototype .............................................................. 54
Figure VI-8. Maximum Fee per SF for Apartment Prototype .................................................................... 54
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Figure VII-1. Residential Prototypes .......................................................................................................... 56
Figure VII-2. Fee Levels per Unit for Prototypes ....................................................................................... 57
Figure VII-3. Fee Levels per Square Foot for Prototypes ........................................................................... 58
Figure VII-4. Sales Prices and Rents for Prototypes ................................................................................... 59
Figure VII-5. Apartment Revenue Calculations ......................................................................................... 59
Figure VII-6. Development Cost Factors .................................................................................................... 60
Figure VII-7. Recent Single-Family Land Sales Transactions in Palo Alto and Neighboring Cities ......... 62
Figure VII-8. Recent Multi-Family Land Sales Transactions in Palo Alto and Neighboring Cities .......... 63
Figure VII-9. Pro Forma Model Results for Single-Family Detached and Attached Prototypes .............. 66
Figure VII-10. Pro Forma Model Results for Condominium and Apartment Prototypes ........................... 66
Figure VII-11. Palo Alto Total Residential Fees under Selected Fee Scenarios ......................................... 69
Figure VII-12. Comparison with Impact Fees and In-Lieu Fees in Neighboring Jurisdictions .................. 70
Figure VII-13. Existing Housing Impact Fees in Bay Area Cities ............................................................. 72
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INTRODUCTION
In April 2014, the City of Palo Alto hired Strategic Economics and Vernazza Wolfe Associates, Inc.
to develop nexus studies for commercial linkage fees and residential impact fees to mitigate the
impacts of new development on the demand for affordable housing. This draft report presents the
findings of the residential impact fee study. In addition, the report describes the methodology, data
sources, and analytical steps required for the nexus analysis.
BACKGROUND
Palo Alto is interested in adopting an affordable housing impact fee on new residential development.
The purpose of this fee would be to mitigate the impact of an increase in affordable housing demand
from new worker households associated with new market-rate residential units. When a city or county
adopts a development impact fee, it must establish a reasonable relationship or connection between
the development project and the fee that is charged. Studies undertaken to demonstrate this
connection are called nexus studies. This nexus study quantifies the connection between the
development of market rate housing and the need for affordable housing units.
This residential impact fee nexus study measures the income and spending generated by the
households renting or buying new market rate units in Palo Alto. The increase in consumption is then
translated into new “induced” job growth. These induced jobs will be at various wage rates; many
will be at lower wages, for example in the retail and personal services sectors. Since low-wage
households cannot reasonably afford to pay for market rate rental and for-sale housing in Palo Alto, a
housing impact fee can be justified to bridge the difference between what these new households can
afford to pay and the cost of developing modest housing units to accommodate them.
REPORT ORGANIZATION
This executive summary provides an overview of the housing nexus analysis methodology and
results. The subsequent chapters of the report contain more detailed information regarding the
methodology, data sources, and the steps of the analysis. The report is organized into seven sections
and provides a glossary of terms at its conclusion. Following this executive summary, Section II
provides an introduction to the purpose of the study, and an overview of the methodology. Section III
presents the residential prototypes used in the analysis. Section IV describes the methodology and
results of the IMPLAN economic impact analysis. Section V covers the housing affordability gap
analysis. Section VI presents the maximum fee calculation based on the nexus analysis and
affordability gap results. The final section, Section VII, discusses financial feasibility and other policy
considerations that jurisdictions typically assess before implementing a nexus fee.
FEE IMPLEMENTATION OPTIONS
The maximum single-family detached impact fee per unit is $333,501, the maximum townhouse fee
per unit is $189,037, the maximum condominium impact fee per unit is $158,519, and the maximum
apartment fee per unit is $101,906. The fees are also calculated on a per-square-foot basis by dividing
the unit fee by the average size of the unit. On a per-square-foot basis, the maximum impact fee is
$111 for single-family detached, $90 for townhouses, $75 for condominiums and $105 for
apartments.
I. EXECUTIVE SUMMARY
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If the City of Palo Alto decides to adopt a housing impact fee, the recommended fee levels are: $95
per square foot for single-family detached housing ($285,000 per unit), $50 per square foot for single-
family attached housing ($105,000 per unit), $50 per square foot for condominiums ($105,000 per
unit), and $50 per square foot for apartments ($48,571 per unit). These recommendations are based on
the results of the financial feasibility analysis, a comparison with fees adopted in other Bay Area
communities, and other policy issues. The maximum and recommended fee levels are shown in
Figure I-1.
Figure I-1. Recommended Housing Impact Fees by Residential Prototype
Prototype
Maximum
Justified
Fee per
Unit
Maximum
Justified Fee
per SF
Recommended
Fee per Unit
Recommended
Fee per SF
Recommended
Fee as % of
Sales Price
Single-Family Detached $333,501 $111 $285,000 $95 9%
Single-Family Attached $189,037 $90 $105,000 $50 6%
Condominium $158,519 $75 $105,000 $50 8%
Apartments $101,906 $105 $48,571 $50 n/a
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015
NEXUS ANALYSIS METHODOLOGY AND RESULTS
Prototypes
The first step in the nexus analysis is developing residential housing prototypes. The prototypes
establish the types of market rate housing development that are occurring or are expected to occur in
the city that could potentially be subject to the affordable housing impact fee. The fees calculated in
this nexus study are only applicable to the housing prototypes defined in this analysis.
Based on historical development trends, market data, broker interviews, and input from city staff, the
Consultant Team constructed four housing prototypes that represent the type of development that is
likely to occur in Palo Alto: single-family detached housing (for-sale), single-family attached units
(for-sale), condominiums (for-sale) and rental apartments. These development prototypes are not
intended to represent specific development projects; rather, they are designed to illustrate the type of
projects that are likely to be built in Palo Alto in the near future. Figure I-2 provides information on
the unit type and size, as well as estimated sales prices and average monthly rents for each prototype.
DRAFT Palo Alto Housing Impact Fee Nexus Study -7-
Figure I-2. Sales Prices and Rental Rates of Residential Prototypes
Prototype Unit Type
Number
of Units
Net Area
(SF)
Unit Sales
Price/
Monthly
Rent
Price or
Rent per
SF
Single-Family Detached (For-Sale)
Type V wood frame 5 BD/4 BA 30 3,000 $3,043,000 $1,015
6 units per acre
Attached garage
Net Residential Area (Net SF) 90,000
Single-Family Attached (For-Sale)
Type V wood frame 3 BD/ 4 BA 10 2,100 $1,666,000 $793
11 units per acre
Tuck-under garage
Net Residential Area 21,000
Condominiums (For-Sale)
Type V wood frame 4 BD/3 BA 35 2,100 $1,390,000 $662
30 units per acre
Underground parking
Net Residential Area (Net SF) 73,500
Apartments (Rental)
Type V wood frame 1 BD/ 1 BA 20 795 $3,247 $4.09
41 units per acre 2 BD/2 BA 50 1,114 $4,191 $3.76
Podium parking
Net Residential Area 68,000
Average Net SF per Unit 1,063
Sources: Sources: DataQuick, 2014; Carmel the Village, 2014; CoStar, 2014; Individual Project Websites, 2014; City of Palo Alto, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
Household Income
The next step is to calculate the annual household incomes of the buyers of new for-sale units and the
renters occupying new apartment units by using the sales prices and rents shown in Figure I-1.
Threshold incomes needed to purchase or rent units are based on standards used in the housing
industry1. Figures I-3 through I-6 summarize the estimated household incomes of for-sale home
buyers, by housing type, and Figure I-5 presents the calculated household incomes of apartment
renters. Household incomes are a key input to the IMPLAN3 economic impact analysis described in
Section IV of this report.
Figure I-3. Estimated Annual Household Incomes of Buyers of Single-Family Detached Units
Single-Family Detached Unit Type
5 BR/ 4 BA
Number of Households 30
Sales Price $3,043,000
Household Income $546,783 Sources: California Health & Safety Code; Freddie Mac, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2015.
1 These standards are presented in greater detail in Section III of this report.
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Figure I-4. Estimated Annual Household Incomes of Buyers of Single-Family Attached Units
Single-Family Attached Unit Type
3 BR/ 4 BA
Number of Households 10
Sales Price $1,666,000
Household Income $309,642
Sources: California Health & Safety Code; Freddie Mac, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2015
Figure I-5. Estimated Annual Household Incomes of Buyers of Condominium Units
Condominium Unit Type
4 BR/ 3 BA
Number of Households 35
Sales Price $1,390,000
Household Income $260,049
Sources: California Health & Safety Code; Freddie Mac, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2015
Figure I-6. Estimated Annual Household Incomes of Renters of Apartment Units
Apartment Unit Type
1 BR/ 1 BA 2 BR/ 2 BA
Number of Households 20 50
Monthly Rent $3,247 $4,191
Household Income $129,894 $167,654
Sources: California Health & Safety Code; Freddie Mac, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2015
Economic Impact Analysis (IMPLAN)
The next step is to determine employment and wage impacts of each prototype based on the incomes
of the occupants of new housing units. The buyers and renters of the new market-rate units create
new spending in the local economy. These new expenditures can be linked to new jobs, many of
which pay low wages. The job and wage impacts related to new market-rate housing units are
measured using IMPLAN3, an economic impact analysis tool. An economics consulting firm,
Applied Development Economics (ADE) undertook the IMPLAN3 analysis for this study.
The results of the IMPLAN analysis indicate that many of the induced jobs generated within Santa
Clara County are in low-wage sectors like retail and food services (restaurants). However, a
significant proportion of induced jobs are also in higher-paying resident-serving categories such as
health care and government.
Demand for Affordable Housing
Since the focus of this study is on households, the next step is to calculate the number of new worker
households by dividing the total number of new workers by the average number of wage-earners per
household in Palo Alto. However, not all of the worker households require affordable housing. To
estimate the affordable housing demand, the average annual household income of worker households
is sorted into income categories that are consistent with area median income (AMI) levels defined for
Santa Clara County. Figure I-7 indicates that of the 48.54 new worker households associated with
single-family detached development, there are 38.32 households that need affordable housing. The
comparable figures for single-family attached, condominium and apartment development are 7.23,
21.26, and 27.31 households, respectively. In order to directly compare the impact of market rate
residential development by prototype, Figure I-8 displays the number of worker households, at
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various income levels, associated with a 100-unit development project. As shown, a 100-unit single-
family detached subdivision, which has the highest sales values of all the prototypes, is linked to
161.8 worker households. Townhouse, condominium, and apartment developments of the same size
are linked to 91.63 worker households, 76.95 worker households, and 49.39 worker households,
respectively.
Figure I-7. New Worker Households by Income Group for Prototypes
Worker Households by Income Category
Single-
Family
Detached
(30 Units)
Single-
Family
Attached
(10 Units)
Condominium
(35 Units)
Apartment
(70 Units)
Households Requiring Affordable Housing
Very Low Income (<=50% AMI) 6.98 1.32 3.87 5.07
Low Income (51-80% AMI) 17.15 3.24 9.51 12.26
Moderate Income (81-120% AMI) 14.19 2.68 7.87 9.98
Subtotal Very Low, Low, Moderate Income 38.32 7.23 21.26 27.31
Above Moderate Income Households 10.22 1.93 5.67 7.26
Total All Worker Households 48.54 9.16 26.93 34.57
Note: For each prototype and income category, the number of households requiring affordable housing has been rounded to nearest one-hundredth. Sources: IMPLAN 3 via Applied Development Economics, 2015; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015
Figure I-8. Number of Worker Households Associated with 100-Unit Prototypes, by Income Level
Worker Households by Income Category
Single-
Family
Detached
Single-
Family
Attached
Condominium Apartment
Households Requiring Affordable Housing
Very Low Income (<=50% AMI) 23.25 13.17 11.06 7.25
Low Income (51-80% AMI) 57.16 32.37 27.19 17.51
Moderate Income (81-120% AMI) 47.31 26.79 22.50 14.25
Subtotal Very Low, Low, Moderate Income 127.73 72.30 60.74 39.01
Above Moderate Income Households 34.07 19.33 16.21 10.37
Total All Worker Households 161.80 91.63 76.95 49.39
Note: For each prototype and income category, the number of households requiring affordable housing has been rounded to nearest one-hundredth.
Source: Applied Development Economics, Inc., 2015; Strategic Economics & Vernazza Wolfe Associates, Inc 2015.
Affordability Gap
The next step is to quantify the total gap between what very low, low, and moderate income
households can afford to pay for housing expenses and the cost of building new, modest rental and
for-sale housing units. This housing “affordability gap” number per household is then multiplied by
the number of income-qualified households in each income category for each housing type separately
in order to estimate the total housing affordability gap for each prototype. Figure I-9 through I-12
present these totals by housing type.
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Figure I-9. Total Affordability Gap for Single-Family Detached Units (30 Units)
Income Level
Households
Requiring Affordable
Housing
Average Affordability
Gap per Household
Affordability Gap for
All Households
Very Low-Income (<50% AMI) 6.98 $306,164 $2,137,025
Low-Income (50-80% AMI) 17.15 $252,258 $4,326,225
Moderate-Income (80-120% AMI) 14.19 $249,596 $3,541,767
Total 38.32 $10,005,017
Sources: California Housing and Community Development; Individual lenders; Affordable and market-rate project pro formas; DataQuick, 2014; RS Means, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Figure I-10. Total Affordability Gap for Single-Family Attached Units (10 Units)
Income Level
Households
Requiring Affordable
Housing
Average Affordability
Gap per Household
Affordability Gap for
All Households
Very Low-Income (<50% AMI) 1.32 $306,164 $404,136
Low-Income (50-80% AMI) 3.24 $252,258 $817,316
Moderate-Income (80-120% AMI) 2.68 $249,596 $668,917
Total 7.23 $1,890,370
Sources: California Housing and Community Development; Individual lenders; Affordable and market-rate project pro formas; DataQuick, 2014; RS Means, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Figure I-11. Total Affordability Gap for Condominiums (35 Units)
Income Level
Households
Requiring Affordable
Housing
Average Affordability
Gap per Household
Affordability Gap for
All Households
Very Low-Income (<50% AMI) 3.87 $306,164 $1,184,855
Low-Income (50-80% AMI) 9.51 $252,258 $2,398,974
Moderate-Income (80-120% AMI) 7.87 $249,596 $1,964,321
Total 21.26 $5,548,149 Sources: California Housing and Community Development; Individual lenders; Affordable and market-rate project pro formas;
DataQuick, 2014; RS Means, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Figure I-12. Total Affordability Gap for Apartments (70 Units)
Income Level
Households
Requiring Subsidy
Average Affordability
Gap per Household
Affordability Gap for
All Households
Very Low-Income (<50% AMI) 5.07 $306,164 $1,552,251
Low-Income (50-80% AMI) 12.26 $252,258 $3,092,683
Moderate-Income (80-120% AMI) 9.97 $249,596 $2,488,472
Total 27.30 $7,133,407 Sources: California Housing and Community Development; Individual lenders; Affordable and market-rate project pro formas;
DataQuick, 2014; RS Means, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Maximum Nexus-Based Fee
The final step in calculating the maximum housing impact fee by prototype is to divide the total gap
at each income level by the number of units in each prototype (Figure I-13). This maximum fee
amount represents the ceiling on the fee that could be charged to mitigate affordable housing impacts
from new residential development.
The maximum single-family detached impact fee per unit is $333,501, the maximum townhouse
fee per unit is $189,037, the maximum condominium impact fee per unit is $158,519, and the
maximum apartment fee per unit is $101,906. The fees are also calculated on a per-square-foot
DRAFT Palo Alto Housing Impact Fee Nexus Study -11-
basis by dividing the unit fee by the average size of the unit. On a per-square-foot basis, the
maximum impact fee is $111 for single-family detached, $90 for townhouses, $75 for
condominiums and $105 for apartments.
Figure I-13. Maximum Housing Impact Fee by Prototype
Prototype Single-Family
Detached
Single-Family
Attached Condominiums Apartments
Total Number of Units 30 10 35 70
Average Unit Size 3,000 2,100 2,100 971
Total Affordability Gap $10,005,017 $1,890,370 $5,548,149 $7,133,407
Maximum Fee per Unit $333,501 $189,037 $158,519 $101,906
Maximum Fee per SF $111.17 $90.02 $75.49 $104.90 Note: The affordability gap by prototype and maximum fee per unit numbers have been rounded to the nearest whole number.
The maximum fee per SF has been rounded to the nearest one hundredth. Sources: California Housing and Community Development; Individual lenders; Affordable and market-rate project pro formas; DataQuick, 2014; RS Means, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
DRAFT Palo Alto Housing Impact Fee Nexus Study -12-
POLICY CONSIDERATIONS
There are a number of policy considerations that can be taken into account when jurisdictions
consider adopting an affordable housing impact fee on new market-rate development. These may
include factors such as: the likely financial impact of the proposed housing impact fees on
development; the additional cost of the new fees on the existing city fee structure; a comparison of the
fee scenarios to existing housing impact fees in nearby cities; the role of the fee in the City’s overall
strategy for affordable housing implementation; and the potential overlap with a commercial linkage
fee. This section provides a discussion of each of these policy questions for Palo Alto.
Financial Feasibility – Financial feasibility is just one of several factors to consider in making a
decision regarding a potential nexus fee. In order to provide Palo Alto with guidance on how
proposed fees could impact development decisions, the Consultant Team conducted a pro forma
analysis that tested the impact of potential fee scenarios on developer profit for each prototype. The
impact fees were tested at various levels, including the maximum fee level and lower fee levels.
Single-Family Detached - According to the results of the pro forma analysis, the maximum
and reduced fee levels for single-family detached prototype are financially feasible.
Single-Family Attached – The maximum fee and reduced fee levels for the single-family
attached prototype are financially feasible to implement.
Condominiums – All of the fee levels tested, including the maximum nexus fee, are
financially feasible for condominium development.
Apartment - While the maximum nexus fee is not supportable for the apartment prototype,
reduced fee levels of $50 per square foot and lower are financially feasible.
Comparison to Existing City Fees – Palo Alto has existing city permits and fees on new
development that would increase with the adoption of a new housing impact fee. The City may wish
to consider the amount that total city fees would increase with the additional housing impact fee.
Based on the current schedule of fees in Palo Alto, existing permits and fees (excluding the nexus fee)
for the residential prototypes are estimated at $53 per square foot ($158,808 per unit) for single-
family detached units, $66 per square foot ($138,777 per unit) for single-family attached units, $30
per square foot ($63,247 per unit) for condominiums, and $32 per square foot ($30,617 per unit) for
apartments.2 Once the nexus-based residential impact fees at various levels are added to existing fees,
the total fees increase significantly. The maximum fee scenario increases total per-square-foot fees to
$164 for detached single-family homes, $156 for attached single-family homes, $106 for
condominiums, and $136 for apartments.
Comparison to Nearby Jurisdictions – Palo Alto’s maximum fee level, if adopted, would be
considerably higher than what has been adopted in other San Mateo County and Santa Clara County
cities to date. However, San Francisco has adopted fees ranging from $199,000 to $522,000 per unit,
amounts that are similar to the maximum fee levels calculated for Palo Alto’s single-family detached
and single-family attached prototypes. The recommended fee levels for single-family detached and
single-family attached prototypes are lower than the adopted fees in San Francisco. The
recommended fee level for condominiums of $40 per square foot is higher than the adopted fees in
many other Peninsula cities, but similar to the fees established in East Palo Alto and San Carlos. The
2 The fee estimates presented above represent the best approximations available from the City of Palo Alto for these prototypes. Actual fees will vary depending on the specifics of the project.
DRAFT Palo Alto Housing Impact Fee Nexus Study -13-
recommended apartment fee level of $50 per square foot is higher than fees adopted in Cupertino,
Daly City, San Jose, Mountain View, and Sunnyvale, but significantly lower than the fees adopted in
San Francisco.
Role of Fee in Palo Alto’s Overall Housing Strategy – Palo Alto currently charges a commercial
linkage fee of $19.31 per square foot on all new non-residential development, but does not have a
housing impact fee. The City also has an inclusionary housing program that requires that 15 percent
of the units in market-rate developments consisting of five or more housing units must be sold at
affordable sales prices. This percentage increases to 20 percent on parcels larger than five acres. In
some cases, developers have the option of paying an in-lieu fee of between 7.5 and 10 percent of the
sales price or fair market value, whichever is greater. The developer must also pay a fee for fractional
units. Revenues from the residential impact fees, if they are adopted, would continue to support the
City’s existing affordable housing programs. It should be noted that revenues from a housing nexus
fee need to be spent on housing that benefits the workforce since the funds stem from affordable
housing impacts related to new employment.
Overlap with Commercial Linkage Fee – In addition to the residential impact fee described in this
report, Palo Alto has existing commercial linkage fees on non-residential development. There may be
a small share of jobs counted in the commercial nexus analysis that supports its commercial linkage
fee program that are also included in this residential impact fee analysis. Thus, the two programs may
have some overlap in mitigating the affordable housing demand from the same worker households. In
order to reduce the potential for overlap between the two programs, it is advisable to set both the
commercial linkage fees and housing impact fees at below 100 percent of the nexus-based maximum.
In this way, when combined, the programs would mitigate less than 100 percent of the impact even if
there were overlap in the jobs counted in the two nexus analyses.
DRAFT Palo Alto Housing Impact Fee Nexus Study -14-
According to the City of Palo Alto’s Housing Element, home values in the City have been increasing
steadily since 2010. The median home price in 2013 was $1.7 million, more than twice the median
price in Santa Clara County. Rental rates have also escalated rapidly, with median rents ranging from
$1,900 for studios to more than $8,500 for four-bedroom homes. Given the high prices and rents in
the City, most of the new market-rate housing units built in Palo Alto are only affordable to high-
income households. Consequently, very low, low, and moderate income households have limited
affordable housing options in the City.
As one of its strategies to address the demand for affordable housing in the City, Palo Alto is
considering a housing impact fee on new residential development. The purpose of this fee would be to
mitigate the impact of an increase in demand for affordable housing due to employment growth
associated with potential new residential development. When a city or county adopts a development
impact fee, it must establish a reasonable relationship or connection between the development project
and the impacts for which the fee is charged. Studies undertaken to demonstrate this connection are
called nexus studies. Nexus studies for school impact fees, traffic mitigation fees, and park fees are
common. For housing impact fees, a methodology exists that establishes a connection between the
development of market rate housing and the need to expand the supply of affordable housing. This
study is based on this methodology.
The approach for this nexus study is to estimate the number of new workers that will be required to
provide goods and services to the market rate households that are occupying new units in Palo Alto.
Although growth in employment will provide jobs at various wage rates, many of the new jobs will
be at low-wage rates in retail trade and services, consistent with job patterns in the County. Since
low-wage households cannot reasonably afford to pay for market rate rental and for-sale housing in
Palo Alto, a housing impact fee can bridge the difference between what these new households can
afford to pay and the costs of developing new housing units for them.
New market rate housing units in Palo Alto create a need for low-wage employees to provide goods
and services to residents of the new units. If new market rate housing were not built, there would not
be an increase in employment nor the accompanying demand for affordable housing from these new
workers. Because housing impact fees are directed related to employment growth, the revenues
collected from these fees needs to be spent on workforce housing and not on housing for households
that do not participate in the labor force, such as retired seniors, unemployed homeless, and full-time
student populations.
BACKGROUND
Cities and counties in California have operated inclusionary zoning programs to increase the supply
of affordable housing since the 1970s. An inclusionary program requires that builders of new
residential projects provide a specified percentage of units, either on-site or off-site, at affordable
prices. Some programs have also allowed developers the option of paying fees “in lieu” of providing
inclusionary units.
Inclusionary zoning policies were usually established based on the police power of cities and counties
to enact legislation benefitting public health, safety, and welfare. However, in 2009, the Court of
Appeal held in Palmer/Sixth Street Properties, L.P. v. City of Los Angeles that inclusionary rental
requirements based on the police power violates the Costa Hawkins Rental Housing Act, which
allows landlords to determine the rents of all new units. Affordable rental housing may still be
required if a developer agrees by contract to do so, in exchange for financial assistance or regulatory
II. INTRODUCTION AND METHODOLOGY
DRAFT Palo Alto Housing Impact Fee Nexus Study -15-
incentives. However, in the absence of these incentives, restricted rents cannot be required of a
developer. Consequently, communities have completed nexus studies and imposed rental housing
impact fees to mitigate the impact of market-rate rental housing on the need for affordable housing.
Recently, the California Supreme Court’s decision on the California Building Industry Association
(CBIA) Versus the City of San Jose upheld the use of local inclusionary housing programs for
ownership units.
The nexus analyses presented in this study are designed to define an upper limit for a housing impact
fee to be charged on new rental and for-sale housing to mitigate impacts on affordable housing needs.
The maximum fee is not necessarily the recommended fee. Subsequent sections of this report address
additional policy considerations to consider when adopting housing impact fees.
THE NEXUS CONCEPT
In a balanced housing market, the development of new market rate housing results in population
growth. Residents purchasing and renting these new units now spend money in the city. For example,
they go out to eat in local restaurants, shop for food and clothing in local stores, and patronize other
local businesses, such as hair salons, dry cleaners, and dental offices. This local spending results in
the need to hire new workers to respond to the increased demand for goods and services. A nexus
study establishes the connection between the households that purchase new housing units (or rent
newly constructed rental units) and the number of new workers that will be hired by local businesses
to serve the needs of new residents.
Growth in employment will provide jobs at various wage rates. While some jobs will pay salaries that
will allow new workers to rent or purchase market rate housing, many new jobs will also be at lower
wages. Since low-wage households cannot reasonably afford to pay for market rate rental and for-sale
housing in Palo Alto, a housing impact fee addresses the demand for affordable housing.
METHODOLOGY
The first step of the nexus analysis is to estimate the market prices or rents of new housing units.
Based on these prices or rents, gross household incomes of buyers and renters are calculated. The
gross household incomes of buyers and renters are then translated into direct economic impacts (new
spending on retail goods and personal services), and induced impacts (new jobs and wage income)
using the IMPLAN3 model. The IMPLAN3 analysis provides information on likely incomes of new
workers. These incomes can then be used to estimate the demand for affordable housing from new
worker households, and the costs of providing these affordable units.
Each step of the nexus analysis is described in greater detail below.
Step 1. Define the residential prototypes that represent new market rate housing development.
Based on a review of recent development trends, pipeline projects, and market data for the city and
county, the residential prototypes are defined. The prototypes represent typical new market-rate
development projects likely to occur in the city. The prototype definitions include information on the
building characteristics, net residential area, unit mix and sizes, and sales prices or rents.
Step 2. Estimate household income of buyers and renters of new market rate units.
The average gross household income required to purchase or rent new market rate units is estimated
based on the market value or rents of new units. For ownership units, the calculation assumes typical
mortgage terms and assumes that buyers spend 35 percent of their gross incomes on housing costs.
DRAFT Palo Alto Housing Impact Fee Nexus Study -16-
For rental units, is assumed that renter households spend 30 percent of their gross incomes on
housing.
Step 3. Estimate economic impacts of new buyers and renters using IMPLAN3.
The IMPLAN3 model uses Bureau of Labor Statistics Consumer Expenditure Survey data to model
the spending patterns of different income groups. The model estimates the increase in expenditures
from new households, the number of new (induced) workers related to new households, and the
occupations and wages of these new workers.
Step 4. Estimate the number of new worker households and annual household incomes.
The number of new induced workers from the IMPLAN3 analysis is divided by the average number
of workers per household in the city (defined by the U.S. Census Bureau) to calculate the total
number of worker households associated with each housing prototype. The average worker’s wage
calculated in the IMPLAN3 analysis is multiplied by the number of workers per household in the city
to derive gross household income. This step assumes that the all wage-earners in a household have the
same income.
Step 5. Estimate the demand for affordable housing from new worker households.
Based on the calculation of new worker household income, the worker households are categorized by
target income group (very low income, low income, moderate income, and above moderate income).
Worker households with above-moderate incomes are removed from the nexus analysis, because they
would not require affordable housing.
Step 6. Estimate the affordability gap of new households requiring affordable housing.
The affordability gap represents the difference between what households can afford to pay for
housing and the development cost of a modest housing unit. For very low and low income
households, a rental housing gap is used. For moderate income households, the housing affordability
gap is calculated separately for renter and owner households, and then the two gaps are combined to
derive an average affordability gap for moderate income households.
Step 7. Estimate nexus-based fees for each prototype.
The number of new households requiring affordable housing is multiplied by the average affordability
gap per household to estimate the total affordability gap for each prototype. The maximum per-unit
and per-square foot fees are then calculated by dividing the aggregate affordability gap by the number
of units or net residential area in each prototype.
DRAFT Palo Alto Housing Impact Fee Nexus Study -17-
The first step in the nexus analysis is developing residential housing prototypes. The residential
prototypes establish the types of residential development that are occurring or are expected to occur in
the city and could potentially be subject to the affordable housing impact fee. The housing prototypes
are not intended to represent specific development projects; rather, they are designed to illustrate the
type of projects that are likely to be built in Palo Alto in the near future. The fees calculated in this
nexus study are only applicable to the housing prototypes defined in this analysis.
Based on estimated sales prices and rents of new market-rate units, the household incomes of buyers
and renters of new units are estimated. This section of the report describes the methodology for
establishing the prototypes and calculating the household incomes of buyers and renters of new
market-rate units in Palo Alto. The estimated household incomes are then used as inputs to the
IMPLAN3 analysis to estimate the employment impacts of the market-rate households, which is
described in more detail in Section IV of this report.
RECENT HOUSING DEVELOPMENT TRENDS
In order to ensure that the prototypes accurately reflect current market conditions, the Consultant
Team analyzed recently built market rate housing development projects, as well as planned and
proposed projects in Palo Alto. In the last years, Palo Alto has seen the development of new for-sale
market rate housing including single-family detached, single-family attached and condominium units.
As the City is anticipating new apartment development in the near future, this report examined
proposed projects in Palo Alto and recently built apartments in nearby cities to establish an apartment
prototype.
Figure III-1 summarized recent sales of single-family detached units in Palo Alto built between 2012
and 2013. The weighted average sale price (accounting for the size of the unit) is $1,015 per square
foot. Similarly, Figure III-2 presents a recent single-family attached development built in Palo Alto in
2013. According to recent sales data, the single-family attached units sold at an average price of $803
per square foot.
Because Palo Alto has not experienced new apartment development, market data from recently built
apartment projects in nearby cities was analyzed for this prototype. Figure III-3 contains the market
data for recently built market-rate apartment projects in Mountain View and Redwood City. As
shown, the average asking monthly rents are approximately $3,200 for one bedroom units, $4,200 for
two bedroom units, and $4,000 for three bedroom units.
Palo Alto has seen the development of several condominium projects between 2008 and 2011 , with
no new completions since then. According to the data shown in Figure III-4, the average price for
newer units sold between 2009 and 2013 is $1.3 million per unit ($660 per square foot), and the
average size is 2,121 square feet. An updated list showing 2014 and 2015 condominium sales in Palo
Alto and in other nearby communities in Santa Clara County is shown in Figure III-5. As shown, Palo
Alto commands a price premium over other cities, with average condominium units selling for $1.3
million square feet per unit ($874 per square foot), compared to $1.1 million per unit in other nearby
communities ($739 per square foot). Based on this information, the condominium prototype is a
$1.39 million unit with an average size of 2,100 square feet.
III. RESIDENTIAL PROTOTYPES
DRAFT Palo Alto Housing Impact Fee Nexus Study -18-
RESIDENTIAL PROTOTYPES
Based on historical development trends, market data, broker interviews, and input from city staff, the
Consultant Team constructed four housing prototypes that represent the type of development that is
likely to occur in Palo Alto. These development prototypes are not intended to represent specific
development projects; rather, they are designed to illustrate the type of projects that are likely to be
built in Palo Alto in the near future. The prototypes, as shown in Figure III-5, provide information on
the building type, number of units, average size by unit type, and average monthly rents or sales
prices by unit type.
Single-Family Detached
The single-family prototype is a 30-unit subdivision of detached homes with an average net density of
six units per acre. This development type is representative of recently built and proposed single-
family projects in Palo Alto and the immediate area. The single-family homes are five-bedroom units
with a total net area of 3,000 square feet. The average estimated price of newly built single-family
detached units is $3,043,000.
Single-Family Attached
The single-family attached prototype is a 10-unit single-family attached development with tuck-under
garage. The estimated average net density is 11 units per acre. The units are three-bedroom units
with an average size of 2,100 square feet. The estimated price of a new single-family attached unit s
$1,666,000.The single-family attached prototype represents typical new market-rate single-family
attached homes proposed or recently built in Palo Alto and nearby cities.
For-Sale Condominiums
The for-sale condominium prototype is a 35-unit Type V wood-frame building with an underground
parking garage. The estimated average density is 30 units per acre. This building type is
representative of recently built condominium projects in Palo Alto. The condominium prototype is a
four-bedroom unit with a size of 2,100 square feet. The average estimated price of newly built
condominiums is $1,390,000.
Rental Apartments
The rental apartment prototype is a Type V wood-frame building with podium parking and net
residential area of 214,900 square feet. The estimated density is 41 units per acre. Because new
market-rate apartment development has not occurred in Palo Alto, the prototype is based on trends in
rental apartment development in nearby cities including Mountain View and Redwood City.
Consistent with market trends, the apartment unit mix consists of one- and two-bedroom units.
Estimated monthly rents range from $3,200 to $4,200 per unit, depending on unit size and number of
bedrooms.
DRAFT Palo Alto Housing Impact Fee Nexus Study
-19-
Figure III-1. Single-Family Detached Home Sales in Palo Alto, Units Built 2012-2013
Address Year Built Number of Bedrooms Number of Bathrooms Unit Size (SF) Sale Price Price/SF
3466 RAMBOW DR 2012 4 3.5 2,318 $2,690,000 $1,160
928 ADDISON AVE 2012 6 5.5 4,084 $4,650,000 $1,139
4008 EL CERRITO RD 2012 5 4.5 3,746 $3,780,000 $1,009
130 IRIS WAY 2013 4 3 2,502 $3,060,000 $1,223
3500 EMMA CT 2012 4 3.5 2,523 $2,250,000 $892
740 SEALE AVE 2012 7 6 5,598 $6,000,000 $1,072
849 NORTHAMPTON DR 2012 5 4.5 3,533 $4,700,000 $1,330
3872 CORINA WAY 2012 5 3.5 2,675 $2,150,000 $804
387 ELY PL 2012 3 3.5 2,588 $2,452,000 $947
747 ROSEWOOD DR 2012 5 4.5 2,954 $3,300,000 $1,117
3501 EMMA CT 2012 4 3 2,431 $2,350,000 $967
3503 EMMA CT 2012 5 3 2,653 $2,650,000 $999
886 CHIMALUS DR 2012 4 3.5 2,504 $2,751,000 $1,099
3342 SOUTH CT 2012 4 3.5 2,384 $2,300,000 $965
1091 EMERSON ST 2013 5 5 5,043 $3,800,000 $754
1112 HIGH ST 2012 4 3 2,208 $2,250,000 $1,019
434 FULTON ST 2012 3 2 1,558 $2,157,000 $1,384
525 GUINDA ST 2012 4 3 2,251 $2,445,000 $1,086
1135 WEBSTER ST 2013 4 3.5 3,300 $3,450,000 $1,046
Weighted Average $1,015
Sources: DataQuick, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
Figure III-2. New Market-Rate Single-Family Attached Development in Palo Alto
Project Year Built Building Type Unit Types
Number
Units
Unit Size
(SF)
Average Sale
Price
Average
Price/SF
Classics at Monroe Place 2013 3-story single-family attached 3 BR/ 3.5 BA 10 2,075 $1,665,888 $803
Attached garage
Sources: Classic Communities, 2014; City of Palo Alto, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
DRAFT Palo Alto Housing Impact Fee Nexus Study -20-
Figure III-3. New Market-Rate Apartment Projects in Mountain View and Redwood City
Project Building Type Year Built Unit Type
Number
Units Unit Size
Avg.
Monthly
Rent
Avg. Rent/
SF
Carmel the Village 5 stories 2013 Studio 41 537 $2,795 $5.20
555 San Antonio Rd Underground parking 1 BR/ 1 BA 192 693 $3,350 $4.83
Mountain View 2 BR/ 2 BA 97 1054 $4,820 $4.57
201 Marshall Apartments 7 stories 2014 Studio 10 634 $2,495 $3.94
201 Marshall Underground parking 1 BR/ 1 BA 64 1,030 $3,378 $3.28
Redwood City 2 BR/ 2 BA 39 1,129 $4,260 $3.77
Radius 5-6 stories 2014 1 BR/ 1 BA 150 840 $3,100 $3.69
640 Veteran's Dr Underground parking 2 BR/ 2 BA 100 1,132 $3,845 $3.40
Redwood City 3 BR/ 2 BA 14 1,289 $4,093 $3.18
Township Apartments 4 stories 2013 1 BR/ 1 BA 41 725 $3,063 $4.22
333 Main St Podium garage 2 BR/ 2 BA 88 1,080 $3,600 $3.33
Redwood City 3 BR/ 2 BA 3 1,224 $3,300 $2.70
Woodside 4-5 stories 2011 1 BR/ 1 BA 14 840 $3,365 $4.01
885 Woodside Rd Podium and underground 2 BR/ 2 BA 21 1,424 $5,290 $3.72
Redwood City
Average All Projects Studio 6% 556 $2,736
1 BR/ 1 BA 53% 795 $3,247 $4.09
2 BR/ 2 BA 39% 1,114 $4,191 $3.76
3 BR/ 2 BA 2% 1,277 $3,953 $3.10
Sources: Carmel the Village, 2014; CoStar, 2014; 201marshall.com, 2014; Apartments.com, 2014.
Calculations by Vernazza Wolfe Associates, Inc. and Strategic Economics, 2014.
DRAFT Palo Alto Housing Impact Fee Nexus Study -21-
Figure III-4. New Condominium Unit Sales in Palo Alto, Sold 2009 - 2011
Year Built Unit Size (SF) Number of Bedrooms Number of Bathrooms Sale Price Price/SF
2009 2,122 4 3.5 $1,240,000 $584
2009 2,423 4 3.5 $1,440,000 $594
2009 2,122 4 3.5 $1,259,500 $594
2009 2,407 4 3.5 $1,412,500 $587
2009 1,769 3 2.5 $1,060,000 $599
2009 2,330 4 3.5 $1,415,000 $607
2009 2,368 4 3.5 $1,419,500 $599
2009 2,363 4 3.5 $1,396,000 $591
2009 2,368 4 3.5 $1,889,000 $798
2009 2,330 4 3.5 $1,430,000 $614
2009 1,811 3 2.5 $1,450,000 $801
2010 1,846 4 2.5 $1,330,000 $720
2010 1,769 3 2.5 $1,139,500 $644
2010 2,423 4 3.5 $1,400,000 $578
2010 2,122 4 3.5 $1,336,500 $630
2010 2,122 4 3.5 $1,341,500 $632
2010 2,407 4 3.5 $1,399,000 $581
2010 2,407 4 3.5 $1,520,000 $631
2010 2,330 4 3.5 $1,425,000 $612
2010 2,122 4 3.5 $1,387,500 $654
2010 2,368 4 3.5 $1,446,500 $611
2010 1,838 4 2.5 $1,259,000 $685
2010 1,948 4 2.5 $1,434,000 $736
2010 1,948 4 2.5 $1,480,000 $760
2011 1,846 4 2.5 $1,400,000 $758
2011 1,838 4 2.5 $1,330,000 $724
2011 1,838 4 2.5 $1,380,000 $751
2011 1,948 4 2.5 $1,710,000 $878
2011 1,935 4 2.5 $1,350,000 $698
2011 1,838 4 2.5 $1,330,000 $724
2011 1,935 4 2.5 $1,300,000 $672
2011 2,330 4 3.5 $1,382,500 $593
2011 2,122 4 3.5 $1,345,000 $634
2011 2,423 4 3.5 $1,408,500 $581
Average 2,121 $1,389,588 $660
Source: DataQuick, 2014, Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -22-
Figure III-5. Recent Condominium Sales in Palo Alto and Surrounding Communities: Sold July 2014-July 2015
City Project Address
Building
Type
Year
Built
Number
Units
Unit
Type
Unit
Size Sold Price
Sold
PSF
Palo Alto Arbor Real El Camino Real and W. Charleston Rd 3 stories 2007 129 2 BR 1,636 $1,237,000 $756
3 BR 1,913 $1,580,000 $826
Palo Alto Sterling Park Loma Verde Ave & Fallen Leaf St 3 stories 2011 120 3 BR 1,715 $1,460,000 $851
Palo Alto Echolon 1101 E. Meadow Dr 3 stories 2009 70 3 BR 1,300 $1,320,000 $1,015
Palo Alto Vantage E. Meadow Dr & Quail Dr 2 stories 2008 76 2 BR 1,197 $1,102,000 $921
Average Palo Alto $1,339,800 $874
Mountain View Mondrian E. Evelyn Ave & Moorpark Wy 3 stories 2007 151 2 BR 1,410 $1,310,000 $929
3 BR 1,602 $1,192,333 $744
Mountain View Gables End Plymouth St & Amherst Wy 2-3 stories 2008 108 2 BR 1,490 $1,100,000 $738
Mountain View Bedford Square Bedford Dr & Ferguson Dr 3 stories 2007 106 2 BR 1,374 $977,500 $711
3 BR 1,843 $1,480,000 $803
Los Altos 100 First 100 First St 3 stories 2015 46 1 BR 1,156 $910,000 $787
2 BR 1,621 $1,450,000 $895
3 BR 2,281 $2,383,500 $1,045
Los Altos 396 First 396 First St 3 stories 2013 20 1 BR 891 $861,000 $966
2 BR 1,557 $1,172,688 $753
Sunnyvale Evelyn Glen E. Evelyn Ave & Peppermint Tree Ter 3 stories 2008 130 2 BR 1,251 $816,888 $653
3 BR 1,426 $865,643 $607
4 BR 1,586 $1,100,000 $694
Sunnyvale
Verona at
Sunnyvale Tasman Dr & Morse Ave 3 stories 2009 72 2 BR 1,392 $821,000 $590
3 BR 1,555 $895,000 $576
Sunnyvale Fusion Deguine Dr & Glen Valley Ter 3 stories 2012 228 4 BR 1,882 $1,060,000 $563
Average Other Cities $1,149,722 $739
Source: Polaris Pacific, 2015; Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -23-
Figure III-6. Average Net Residential SF per Unit
Prototype Unit Type
Number
of Units
Net Area
(SF)
Unit Sales Price/
Monthly Rent
Price or
Rent per
SF
Single-Family Detached (For-Sale)
Type V wood frame 5 BD/4 BA 30 3,000 $3,043,000 $1,015
6 units per acre
Attached garage
Net Residential Area (Net SF) 90,000
Single-Family Attached (For-Sale)
Type V wood frame 3 BD/ 4 BA 10 2,100 $1,666,000 $793
11 units per acre
Tuck-under parking
Net Residential Area 21,000
Condominiums (For-Sale)
Type V wood frame 4 BD/3 BA 35 2,100 $1,390,000 $662
30 units per acre
Underground parking
Net Residential Area (Net SF) 73,500
Apartments (Rental)
Type V wood frame 1 BD/ 1 BA 20 795 $3,247 $4.09
41 units per acre 2 BD/2 BA 50 1,114 $4,191 $3.76
Podium parking
Net Residential Area 68,000
Average Net SF per Unit 1,063
Sources: DataQuick, 2014; Carmel the Village, 2014; CoStar, 2014; 201marshall.com, 2014; Apartments.com, 2014; Classic Communities, 2014; City of Palo Alto, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
HOUSEHOLD INCOMES OF BUYERS AND RENTERS
Using the sales prices and rents shown in Figure III-5, the next step is to calculate the annual
household incomes of the buyers of new for-sale condominium units and the renters occupying new
apartment units. The household income is a key input to the IMPLAN3 economic impact analysis
described in Section IV of this report. The calculations demonstrate that the estimated annual
household income of buyers of new market-rate units in Palo Alto is between $260,000 and $550,000,
depending on the unit prototype. For renters of new market-rate apartment units, the annual
household income is estimated between approximately $130,000 and $170,000. This shows that new
housing units developed in the City are priced for high-income households, and cannot be accessed
by very low, low, and moderate income households.
Income of Single-Family Detached Buyers
To calculate the household income of single-family detached buyers, the analysis applied typical
mortgage terms for Santa Clara County: 20 percent down payment, 30 year fixed rate mortgage, and
4.35 percent interest rate. Palo Alto property tax rates were estimated from recent budget documents.
Total housing costs, including monthly payments for mortgage payments, property taxes and
insurance, are assumed to be 35 percent of available monthly income. The result of the income
estimates for households buying new single-family detached units is shown in Figure III-6. As shown
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in the calculations, for single-family detached units, household incomes are estimated to be almost
$550,000.
Income of Single-Family Attached Buyers
For buyers of single-family attached units, the analysis applied the same typical mortgage terms as
those used for single-family detached units, and Palo Alto’s property tax rates. Homeowner
association (HOA) fees were based on a review of HOA fees at similar new single-family attached
developments in Santa Clara County. As in the previous case, households are expected to spend 35
percent of available monthly income on total housing costs, including monthly payments for
mortgage payments, property taxes, insurance and HOA fees. Figure III-7 shows the result of the
income estimates for households buying new single-family detached units. As shown in the
calculations, for single-family attached units, household incomes are estimated to be approximately
$310,000.
Incomes of Condominium Buyers
To calculate the household income of buyers of new condominium units, the analysis applied
mortgage terms typical for Santa Clara County: 20 percent down payment, 30 year fixed rate
mortgage, and 4.35 percent interest rate. Property tax rates were estimated from recent budget
documents, and homeowner association (HOA) fees were based on a review of HOA fees at similar
new condominium developments in Santa Clara County. Total housing costs, including monthly
payments for mortgage payments, property taxes, insurance, and HOA fees, are assumed to be 35
percent of available monthly income. The result of the income estimates for households buying new
condominium units is shown in Figure III-8. As shown in the calculations, for condominium units,
household incomes are estimated at over $260,000.
Incomes of Apartment Renters
For renter households, maximum annual housing costs are assumed to be 30 percent of gross
household income, a standard established in California’s Health and Safety Code Sections 50052.5
and 50053. The estimated household income of renters varies by unit type, as indicated in Figure III-
9. One-bedroom renter households have an estimated annual income of nearly $130,000, while
renters of two-bedroom units have estimated household incomes of about $170,000.
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Figure III-7. Estimated Annual Household Incomes of Buyers of Single-Family Detached Units
Single-Family Detached Unit Type
5 BR/ 4 BA
Number of Households 30
Sales Price $3,043,000
Down Payment (a) $608,600
Loan Amount $2,434,400
Monthly Debt Service (b) $12,119
Annual Debt Service $145,425
Annual Property Taxes (c) $35,299
Fire and Hazard Insurance (d) $10,651
Annual Housing Costs (e) $191,374
Household Income $546,783
Notes: (a) Down payment is estimated at 20% of sales price, based on Freddie Mac data for Santa Clara County.
(b) Interest rate is estimated at 4.35% for a 30-year term, based on Freddie Mac data. http://www.freddiemac.com/pmms/pmms30.htm. (c) Property tax rate is 1.16% based Palo Alto CAFR, 2013. (d) Industry standard (e) Homeownership housing burden is estimated at 35%, based on California Health & Safety Code
Sections 50052.5 and 50053. Sources: Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
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Figure III-8. Estimated Annual Household Incomes of Buyers of Single-Family Attached Units
Single-Family Attached Unit Type
3 BR/ 4 BA
Number of Households 10
Sales Price $1,666,000
Down Payment (a) $333,200
Loan Amount $1,332,800
Monthly Debt Service (b) $6,635
Annual Debt Service $79,618
Annual Property Taxes (c) $19,326
Annual HOA Fees (d) $3,600
Fire and Hazard Insurance (e) $5,831
Annual Housing Costs (f) $108,375
Household Income $309,642
Notes: (a) Down payment is estimated at 20% of sales price, based on Freddie Mac data for Santa Clara County.
(b) Interest rate is estimated at 4.35% for a 30-year term, based on Freddie Mac data. http://www.freddiemac.com/pmms/pmms30.htm. (c) Property tax rate is 1.16% based Palo Alto CAFR, 2013. (d) Homeownership association (HOA) fees are estimated at $300 per month, based on review of recently built projects.
(e) Industry standard (f) Homeownership housing burden is estimated at 35%, based on California Health & Safety Code Sections 50052.5 and 50053. Sources: Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
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Figure III-9. Estimated Annual Household Incomes of Buyers of Condominium Units
Condominium Unit Type
4 BR/ 3 BA
Number of Households 35
Sales Price $1,390,000
Down Payment (a) $278,000
Loan Amount $1,112,000
Monthly Debt Service (b) $5,536
Annual Debt Service $66,428
Annual Property Taxes (c) $16,124
Annual HOA Fees (d) $3,600
Fire and Hazard Insurance (e) $4,865
Annual Housing Costs (f) $91,017
Household Income $260,049
Notes: (a) Down payment is estimated at 20% of sales price, based on Freddie Mac data for Santa Clara County.
(b) Interest rate is estimated at 4.35% for a 30-year term, based on Freddie Mac data. http://www.freddiemac.com/pmms/pmms30.htm. (c) Property tax rate is 1.16% based Palo Alto CAFR, 2013. (d) Homeownership association (HOA) fees are estimated at $300 per month, based on review of recently built projects.
(e) Industry standard (f) Homeownership housing burden is estimated at 35%, based on California Health & Safety Code Sections 50052.5 and 50053. Sources: Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
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Figure III-10. Estimated Annual Household Incomes of Renters of Apartment Units
Apartment Unit Type
1 BR/ 1 BA 2 BR/ 2 BA
Number of Households 20 50
Monthly Rent $3,247 $4,191
Annual Housing Costs $38,968.31 $50,296.35
Housing Costs as % of Income (a) 30% 30%
Household Income $129,894 $167,655
Notes: (a) Renter housing burden is estimated at 30%, based on California Health & Safety Code Sections 50052.5 and 50053.
Sources: Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
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The buyers and renters of the new market-rate condominiums and apartments create new spending in
the local economy. These new expenditures can be linked to new jobs, many of which pay low wages.
The job and wage impacts related to new market-rate housing units are measured using IMPLAN3, an
economic impact analysis tool. An economics consulting firm, Applied Development Economics
(ADE) undertook the IMPLAN3 analysis with the information on residential prototypes and
associated buyers’ and renters incomes provided by Strategic Economics and Vernazza Wolfe
Associates Inc. In this section of the report, the methodology and results of the IMPLAN3 analysis
are described in detail.
THE IMPLAN3 MODEL
The IMPLAN model is an economic dataset that has been used for over 35 years to measure the
economic impacts of new investments and spending using the industrial relationships defined through
an Input-Output Model. The IMPLAN model can estimate economic impacts resulting from changes
in industry output, employment, income, and other measures. The latest version of this model is
referred to as IMPLAN3.
For this analysis, the input-output model used data specific to Santa Clara County in order to estimate
the multiplier effects resulting from the households that could potentially rent or buy new housing
units in Palo Alto. In this case, all of the multiplier effects derive from new demand for goods and
local services (including government) that new households would generate within Santa Clara
County. It does not account for economic impacts generated during the construction period, or
any economic impacts that would occur outside of the county.
The economic impacts estimated by the model generally fall into one of three categories - direct,
indirect, or induced. For this analysis, the direct impacts represent the household income brought
into the community by new residents. Indirect impacts would normally result from demand for
commodities and services provided by suppliers for business operations. (Because the direct impacts
come only from household spending, and not from business activity, the indirect effects were not
calculated.) Induced impacts represent the potential effects resulting from household spending at local
establishments by the new workers hired as a result of increased household expenditures. These
impacts affect all sectors of the economy, but primarily affect retail businesses, health services,
personal services providers, and government services. The employment estimates provided by the
IMPLAN3 model cover all types of jobs, including full and part time jobs.
The first analysis undertaken by the IMPLAN3 model estimated the household demand for retail
goods and personal services. It is assumed that buyers and renters of new housing units in Palo
Alto increase demand for goods and services within Santa Clara County. This demand is based on
the projected incomes of renters and owners for each prototype. The IMPLAN3 model’s calculations
are based on changes in household income, which adjusts the gross income to account for the
payment of income taxes and savings.3
The second analysis estimated the induced impacts, or multiplier effects of new household spending
in terms of jobs and wage income. The jobs and income calculations are focused on the induced jobs
that would be created through local spending by the new households. The input-output model
estimates the job impacts by detailed industry sector. The analysis took the detailed industry impact
3 According to IMPLAN Group LLC, when the economic impact is modeled based on household income change, IMPLAN3 will adjust the input for income taxes and savings.
IV. ECONOMIC IMPACT ANALYSIS (IMPLAN3)
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estimates and distributed them by occupational category. The occupational employment data used in
the analysis came from the California Employment Development Department (EDD) Labor Market
Information Division, and aggregates together data for all of California. After converting the
industry level data into occupational employment, the income distribution was calculated using the
occupational wage data for the San Jose-Santa Clara-Sunnyvale Metropolitan Statistical Area
(MSA).. The average wage by occupation was used to make this calculation. The 2014 (first quarter)
occupational wage data used in the analysis comes from California’s EDD.
It should be noted that the figures used in the IMPLAN3 analysis reflect the demand for retail goods
and services by net, new Santa Clara County households. The multiplier impacts assume that all of
this spending will remain in Santa Clara County.4
HOUSEHOLD INCOME IMPACTS
Since the IMPLAN3 Model bases its household income impacts on Consumer Expenditure Survey
data, income categories are used in the model instead of continuous income information. Because of
this feature, the analysis sorted the renters and buyers of new market rate units into income groups,
and then calculated the economic impacts based on the total income calculated for each income
group.
Figure IV-1 below summarizes the household income data for single-family detached, single-family
attached, condominium and apartment households. As shown, all 30 single-family detached
households are in the income category of $150,000 or higher, with a total combined household
income of $16.40 million. The ten single-family attached households are also all in the over
$150,000 income category, reaching a combined household income of $3.1 million. Likewise, all 35
condominium households belong to the income category of $150,000 or higher, with an aggregate
income of $9.1 million. Figure IV-1 also demonstrates the same calculation for renter households.
The rental prototype has 20 households in the $100,000-$150,000 income category, and 50
households in the over $150,000 income category. The combined total household income for renter
households is $10.98 million. These total income figures, adjusted to account for taxes and savings,
were used as inputs for the IMPLAN3 analysis.
EMPLOYMENT AND WAGE IMPACTS
Based on the incomes of the new buyers and renters, the next step is to determine employment and
wage impacts from each prototype. Estimated employment and wages are shown in Figure IV-2 for
each IMPLAN3 industry sector, indicating the number of induced jobs, the industry’s share of total
employment growth by prototype, and the average wage by industry. Figure IV-3 provides the same
IMPLAN3 output data, organized by occupation rather than industry, for each prototype. As shown in
both figures, many of the induced jobs generated within Santa Clara County are in low-wage sectors
and occupations related to retail and food services (restaurants). For example, workers in the food
preparation and services earn annual wages of approximately $24,000. In addition to the very low
paying occupations, a smaller share of induced jobs are in higher-paying resident-serving categories
such as health care and government.
ESTIMATING WORKER-HOUSEHOLDS
Recognizing that many households have more than one wage-earner, the next step is to calculate the
number of worker–households by dividing the total number of new workers by the average number of
4 Estimating the retail leakage would require a detailed analysis of retail sales totals for existing businesses in Santa Clara County and is beyond the scope of this study.
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wage-earners per household in Palo Alto. According to the U. S. Census Bureau 2008-2012 American
Community Survey 3-Year Estimate, Palo Alto has an average of 1.51 workers per household. The
number of induced jobs is divided by 1.51 to calculate the total number of worker households. Figure
IV-4 illustrates this calculation.
ESTIMATING DEMAND FOR AFFORDABLE HOUSING
To estimate the demand for affordable housing, it is first necessary to determine the incomes of the
new households. Once the average annual household income of worker households is calculated, the
next step is to categorize households into area median income (AMI) levels based on the thresholds
set by California Department of Housing and Community Development for Santa Clara County. The
average household size in Palo Alto is 2.41 (rounded to 2.0), according to the US Census American
Community Survey 5-Year Estimates 2008-2012. The income threshold for a two-person household
in Santa Clara County was therefore used to determine the AMI categories of each new worker
household. Figure IV-5 indicates that of the 48.5 new worker households associated with single-
family detached development, there will be 38.3 households that need affordable housing. The
comparable figures for single-family attached, condominium and apartment development are,
respectively, 7.2, 21.3 and 27.3 households.
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Figure IV-1. Estimated Incomes by Income Categories for Buyers and Renters of New Units
Single-Family Detached Prototype Single-Family Attached Prototype Condominium Prototype Apartment Prototype
Income Category
New
Households
Aggregate
Household
Incomes
Average
Household
Income
New
Households
Aggregate
Household
Incomes
Average
Household
Income
New
Households
Aggregate
Household
Incomes
Average
Household
Income
New
Households
Aggregate
Household
Incomes
Average
Household
Income
Less than $10,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$10,000-$15,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$15,000-$25,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$25,000-$35,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$35,000-$50,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$50,000-$75,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$75,000-$100,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$100,000-$150,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 20 $2,597,887 $129,894
Over $150,000 30 $16,403,491 $546,783 10 $3,096,418 $309,642 35 $9,101,701 $260,049 50 $8,382,725 $167,655
Total 30 $16,403,491 $546,783 10 $3,096,418 $309,642 35 $9,101,701 $260,049 70 $10,980,612 $156,866
Sources: Applied Development Economics, Inc., 2015; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
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Figure IV-2. Estimated Job and Wage Impacts of Prototypes by Industry
Single-Family
Detached Prototype
Single-Family
Attached Prototype
Condominium
Prototype
Apartment
Prototype
Industry (NAICS code)
Average
Wage Jobs % Of Jobs Jobs % Of Jobs Jobs % Of Jobs Jobs % Of Jobs
11 Forestry, fishing, hunting, and agriculture $30,270 0.02 0% 0.005 0% 0.01 0% 0.02 0%
21 Mining $68,709 0.005 0% 0.001 0% 0.003 0% 0.004 0%
22 Utilities $73,885 0.09 0% 0.02 0% 0.05 0% 0.06 0%
23 Construction $65,942 1.52 2% 0.29 2% 0.84 2% 1.04 2%
31 Manufacturing $68,114 0.18 0% 0.03 0% 0.10 0% 0.13 0%
42 Wholesale trade $61,865 1.27 2% 0.24 2% 0.71 2% 0.91 2%
44 Retail trade $53,534 10.24 14% 1.93 14% 5.68 14% 7.36 14%
48 Transportation & warehousing $44,980 0.94 1% 0.18 1% 0.52 1% 0.66 1%
51 Information $77,807 0.99 1% 0.19 1% 0.55 1% 0.72 1%
52 Finance & insurance $71,401 3.97 5% 0.75 5% 2.20 5% 2.84 5%
53 Real estate & rental & leasing $65,766 3.30 5% 0.62 5% 1.83 5% 2.40 5%
54 Professional, scientific & technical services $93,985 2.50 3% 0.47 3% 1.39 3% 1.75 3%
55 Management of companies & enterprises $90,580 0.22 0% 0.04 0% 0.12 0% 0.16 0%
56 Admin, support, waste mgt, remediation services $51,482 2.73 4% 0.52 4% 1.51 4% 1.95 4%
61 Educational services $61,806 4.97 7% 0.94 7% 2.76 7% 3.30 6%
62 Health care and social assistance $66,334 13.91 19% 2.63 19% 7.72 19% 10.25 20%
71 Arts, entertainment & recreation $46,623 2.27 3% 0.43 3% 1.26 3% 1.60 3%
72 Accommodation & food services $28,709 9.90 14% 1.87 14% 5.49 14% 7.23 14%
81 Other services (except public administration) $50,865 6.34 9% 1.20 9% 3.52 9% 4.59 9%
91 Government $69,032 7.92 11% 1.49 11% 4.39 11% 5.23 10%
Total 73.30 100% 13.84 100% 40.67 100% 52.20 100%
Note: Average wage is calculated based on the mean occupational wages, and the average statewide distribution of occupations for each industry. Sources: Applied Development Economics, Inc, 2015; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
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Figure IV-3. Estimated Job and Wage Impacts of Prototypes by Occupation
SOC
Code Occupational Title
Average
Annual Wage
Single-Family
Detached Jobs
Single-Family
Attached Jobs
Condominium
Jobs
Apartment
Jobs
11-0000 Management Occupations $157,147 3.48 0.66 1.93 2.48
13-0000 Business and Financial Operations Occupations $91,243 3.74 0.71 2.07 2.62
15-0000 Computer and Mathematical Occupations $117,227 1.36 0.26 0.75 0.95
17-0000 Architecture and Engineering Occupations $109,326 0.71 0.13 0.39 0.48
19-0000 Life, Physical, and Social Science Occupations $93,341 0.69 0.13 0.38 0.47
21-0000 Community and Social Services Occupations $58,932 1.71 0.32 0.95 1.22
23-0000 Legal Occupations $138,848 0.50 0.09 0.28 0.34
25-0000 Education, Training, and Library Occupations $58,305 3.79 0.72 2.10 2.56
27-0000 Arts, Design, Entertainment, Sports, Media Occupations $67,471 1.11 0.21 0.62 0.79
29-0000 Healthcare Practitioners and Technical Occupations $108,395 4.97 0.94 2.76 3.62
31-0000 Healthcare Support Occupations $37,001 2.34 0.44 1.30 1.71
33-0000 Protective Service Occupations $53,668 1.96 0.37 1.09 1.32
35-0000 Food Preparation and Serving-Related Occupations $23,861 10.53 1.99 5.84 7.66
37-0000 Building and Grounds Cleaning and Maintenance $29,998 2.22 0.42 1.23 1.58
39-0000 Personal Care and Service Occupations $28,970 5.19 0.98 2.88 3.75
41-0000 Sales and Related Occupations $54,182 9.06 1.71 5.03 6.51
43-0000 Office and Administrative Support Occupations $45,414 11.49 2.17 6.38 8.15
45-0000 Farming, Fishing, and Forestry Occupations $25,561 0.06 0.01 0.03 0.04
47-0000 Construction and Extraction Occupations $59,340 1.35 0.25 0.75 0.92
49-0000 Installation, Maintenance, and Repair Occupations $54,737 2.45 0.46 1.36 1.75
51-0000 Production Occupations $40,099 1.29 0.24 0.71 0.92
53-0000 Transportation and Material Moving Occupations $35,640 3.31 0.63 1.84 2.35
Total all occupations 73.30 13.84 40.67 52.20
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Figure IV-4. Induced Employment Impacts, Palo Alto
Project Prototype
Single-Family
Detached
Single-Family
Attached Condominium Apartment
Number of Units 30 10 35 70
Induced Employment (Workers) 73.30 13.84 40.67 52.20
Average Number of Workers per Household 1.51 1.51 1.51 1.51
New Worker Households 48.54 9.16 26.93 34.57
Source: ADE, 2015; Strategic Economics & Vernazza Wolfe Associates, Inc. 2015.
Figure IV-5. New Worker Households by Income Group for Prototypes
Worker Households by Income Category
Income Thresholds
(2-Person Household)
Single-Family
Detached
Single Family
Attached Condominium Apartment
Households Requiring Affordable Housing
Very Low Income (<=50% AMI) $42,450 6.98 1.32 3.87 5.074
Low Income (51-80% AMI) $67,900 17.15 3.24 9.51 12.259
Moderate Income (81-120% AMI) $101,300 14.19 2.68 7.87 9.975
Subtotal 38.32 7.23 21.26 27.310
Above Moderate Income Households >$101,300 10.22 1.93 5.67 7.26
Total All Worker Households 48.54 9.16 26.93 34.57
Note: For each prototype and income category, the number of households requiring affordable housing has been rounded to nearest one-hundredth. Sources: Applied Development Economics, 2015; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015
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Estimating the housing affordability gap is necessary to calculate the maximum housing impact fee. This
section summarizes the approach to calculating the housing affordability gap and the results of the
analysis.
METHODOLOGY
The housing affordability gap is defined as the difference between what very low, low, and moderate
income households can afford to pay for housing and the development cost of new, modest housing units.
Calculating the housing affordability gap involves the following three steps:
1. Estimating affordable rents and housing prices for households in target income groups.
2. Estimating development costs of building new, modest housing units, based on current cost and
market data.
3. Calculating the different between what renters and owners can afford to pay for housing and the
cost of development of rental and ownership units.
The housing affordability gap is estimated at a countywide level because the California Department of
Housing and Community Development Department (HCD) and U.S. Housing and Urban Development
Department (HUD) define the ability to pay for housing at the county (rather than the city) level. This
analysis uses 2014 income limits published by California Department of Housing and Community
Development (HCD).
ESTIMATING AFFORDABLE RENTS AND SALES PRICES
The first step in calculating the housing affordability gap is to determine the maximum amount that
households at the targeted income levels can afford to pay for housing. For eligibility purposes, most
affordable housing programs define very low income households as those earning approximately 50
percent or less of area median income (AMI), low income households as those earning between 51 and 80
percent of AMI, and moderate income households as those earning between 81 and 120 percent of AMI.
In order to ensure that the affordability of housing does not use the top incomes in each category, the
analysis uses a point within the income ranges for the low and moderate income groups.5
Figure V-1 and Figure V-2 show the calculations for rental housing. The maximum affordable monthly
rent is calculated as 30 percent of gross monthly household income, minus a deduction for utilities. For
example, a very low income, three-person household could afford to spend $1,194 on total monthly
housing costs. After deducting for utilities, $1,145 a month is available to pay for rent (Figure V-1).
Figure V-3 and Figure V-4 demonstrate housing affordability for homeowners. Homeowners are assumed
to pay a maximum of 35 percent of gross monthly income on total housing costs, depending on income
level. The maximum affordable price for for-sale housing is then calculated based on the total monthly
mortgage payment that a homeowner could afford, using standard loan terms used by CalHFA programs
and many private lenders for first-time homebuyers, including a five percent down payment (Figure V-3).
5 For rental housing, 70 percent of AMI is used to represent low income households and 90 percent of AMI is used to
represent moderate income households. For ownership housing, it is assumed that moderate income homebuyers may earn slightly less than the maximum for that income category (110 percent of AMI). Higher income limits are used for ownership than for rental housing because ownership housing is more expensive to purchase and maintain.
V. AFFORDABILITY GAP ANALYSIS
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For example, a moderate income, three-person household could afford to spend $3,046 a month on total
housing costs, allowing for the purchase of a $359,897 home.
Key assumptions used to calculate the maximum affordable rents and housing prices are discussed below.
Unit types: For rental housing, the analysis included studios, one-, two-, and three-bedroom
units. For for-sale housing, one-, two-, and three-bedroom units were included. These unit types
represent the affordable and modest market-rate apartment and condominium units available in
Palo Alto. Condominiums were used to represent modest for-sale housing because single-family
homes in Palo Alto tend to be significantly more expensive than condominiums.
Occupancy and household size assumptions. Because income levels for affordable housing
programs vary by household size, calculating affordable unit prices requires defining household
sizes for each unit type. Consistent with California Health and Safety Code Section 50052.5(h),
unit occupancy was generally estimated as the number of bedrooms plus one. For example, a
studio unit is assumed to be occupied by one person, a one bedroom unit is assumed to be
occupied by two people, and so on. Several adjustments to this general assumption were made in
order to capture the full range of household sizes. In particular, it is assumed that one-bedroom
condominiums could be occupied by one- or two-person households, and three-bedroom
apartments and condominiums could be occupied by four- or five-person households.6
Targeted income levels for rental housing: For rental housing, affordable rents were calculated
for very low income, low income, and moderate income households (see Figure V-1 and Figure
V-2). For eligibility purposes, most affordable housing programs define very low income
households as those earning 50 percent or less of area median income (AMI), low income
households as those earning between 51 and 80 percent of AMI, and moderate income
households as those earning between 81 and 120 percent of AMI. However, defining affordable
housing expenses based at the top of each income range would result in prices that are not
affordable to most of the households in each category. Thus, this analysis does not use the
maximum income level for all of the income categories. Instead, for rental housing, 70 percent of
AMI is used to represent moderate income households and 90 percent of AMI is used to represent
moderate income households.
Targeted income levels for ownership housing For ownership housing, affordable home prices
were calculated only for moderate income households, because very low and low income
households are unlikely to be homebuyers. Higher income limits are used for ownership than for
rental housing because ownership housing is more expensive to purchase and maintain. It is
assumed that moderate income homebuyers may earn slightly less than the maximum for that
income category (110 percent of AMI).
Maximum monthly housing costs.7 For all renters, maximum monthly housing costs are
assumed to be 30 percent of gross household income. For homebuyers, 35 percent of gross
income is assumed to be available for monthly housing costs, reflecting the higher incomes of this
group.8 These standards are based on California’s Health & Safety Code Sections 50052.5 and
50053.
6 For these unit types, the maximum affordable home price (or rent) is calculated as the average price (or rent) that
the relevant household sizes can afford to pay. For example, the maximum affordable home price for a one-bedroom condominium is calculated as the average of the maximum affordable home price for one- and two-person households.
7 The calculation of homeowner affordability is conservative in that the model accounts for additional costs for buyers (such as utility costs) that might not be considered by all lenders.
8 The assumption that homebuyers spend 35 percent of gross household income on housing results in a reduced
affordability gap than if 30 percent of gross household income were used instead.
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Utilities. The monthly utility cost assumptions are based on Santa Clara County’s “2013 Utility
Allowance Schedule.”9 Both renters and owners are assumed to pay for heating, cooking, other
electric, and water heating. In addition, owners are assumed to pay for water and trash
collection.10
Mortgage terms & costs included for ownership housing. For ownership housing, the
mortgage calculations are based on the terms typically offered to first-time homebuyers (such as
the terms offered by the California Housing Finance Authority), which is a 30-year mortgage
with a five percent down payment. A five percent down payment standard is also used by many
private lenders for first-time homebuyers. Based on recent interest rates to first-time buyers, the
analysis assumes a 5.375 percent annual interest rate.11 In addition to mortgage payments and
utilities, monthly ownership housing costs include homeowner association (HOA) dues,12
property taxes,13 private mortgage insurance,14 and hazard and casualty insurance.15
9 Santa Clara County, “Utility Allowance Schedule”, 2013.
10 Based on the most common types of fuel for owner and rental units in Palo Alto, all units are assumed to have natural gas heating and water heating systems; for-sale units are also assumed to have natural gas stoves, while rental units are assumed to use electric stoves. Sources: U.S. Census Bureau, 2008-2012 American Community
Survey, “Table B25117: Tenure by House Heating Fuel,” City of Palo Alto; U.S. Census Bureau, 2011 American Housing Survey, “Table C-03-AH-M, San Jose-Sunnyvale-Santa Clara: Heating, Air Conditioning, and Appliances – All Housing Units.”
11 Sources: CalHFA Mortgage Calculator, accessed March 2014; Zillow.com, “Current Mortgage Rates and Home Loans,” accessed March 2014; interviews with California Housing Finance Agency (CalHFA) Preferred Loan Officers, March 2014.
12 HOA fees are estimated at $300 per unit per month, based on common HOA fees in Santa Clara County as reported in: Polaris Pacific, “Silicon Valley Condominium Market,” February 2014.
13 The annual property tax rate is estimated at 1.16, based on the total direct and overlapping property tax rate for
Palo Alto reported in the City’s 2012-13 Comprehensive Annual Financial Report (page 144).
14 The annual private mortgage insurance premium rate is estimated at 0.89 percent of the total mortgage amount, consistent with standard requirements for conventional loans with a five percent down payment. Sources: Genworth,
February 2014; MGIC, December 2013; Radian, April 2014.
15 The annual hazard and casualty insurance rate is assumed to be 0.35 percent of the sales price, consistent with standard industry practice.
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Figure V-1. Calculation of Affordable Rents in Santa Clara County by Household Size, 2014
Persons per Household (HH) 1 2 3 4 5
Very Low Income (50% AMI)
Maximum Household Income at 50% AMI $37,150 $42,450 $47,750 $53,050 $57,300
Maximum Monthly Housing Cost (a) $929 $1,061 $1,194 $1,326 $1,433
Utility Deduction $29 $40 $49 $60 $60
Maximum Available for Rent (HH Size) (b) $900 $1,021 $1,145 $1,266 $1,373
Low Income (70% AMI)
Maximum Household Income at 70% AMI $51,695 $59,080 $66,465 $73,850 $79,765
Maximum Monthly Housing Cost (a) $1,292 $1,477 $1,662 $1,846 $1,994
Utility Deduction $29 $40 $49 $60 $60
Maximum Available for Rent (HH Size) (b) $1,263 $1,437 $1,613 $1,786 $1,934
Moderate Income (90% AMI)
Maximum Household Income at 90% AMI $66,465 $75,960 $85,455 $94,950 $102,555
Maximum Monthly Housing Cost (a) $1,662 $1,899 $2,136 $2,374 $2,564
Utility Deduction $29 $40 $49 $60 $60
Maximum Available for Rent (HH Size) (b) $1,633 $1,859 $2,087 $2,314 $2,504
Notes:
(a) 30 percent of maximum monthly household income.
(b) Maximum monthly housing cost minus utility deduction.
Acronyms:
AMI: Area median income
HH: Household
Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014 and “Overpayment and Overcrowding,” 2010; Housing Authority of Santa Clara County, "2013 Utility Allowances Schedule," Santa Clara County, October 2013; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure V-2. Calculation of Affordable Rents in Santa Clara County by Unit Type, 2014
Affordable Rents by Unit Type (a) Studio 1 Bedroom 2 Bedroom 3 Bedroom
Very Low Income (50% AMI) $900 $1,021 $1,145 $1,319
Low Income (70% AMI) $1,263 $1,437 $1,613 $1,860
Moderate Income (90% AMI) $1,633 $1,859 $2,087 $2,409
(a) Affordable rents are calculated as follows: Studios are calculated as one-person households; One-bedroom units are calculated as two-person households; Two-bedroom units are calculated as three-person households; Three-bedroom units are calculated as an average of four and five person households. Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014 and “Overpayment and Overcrowding,” 2010; Housing Authority of Santa Clara County, "2013 Utility Allowances Schedule," Santa Clara County, October 2013; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure V-3. Calculation of Affordable Sales Prices in Santa Clara County by Household Size, 2014
Household Size (Persons per HH) 1 2 3 4 5
Moderate Income (110% AMI) (g)
Maximum Household Income at 110% AMI $81,235 $92,840 $104,445 $116,050 $125,345
Maximum Monthly Housing Cost (a) $2,369 $2,708 $3,046 $3,385 $3,656
Monthly Deductions
Utilities $113 $113 $125 $174 $174
HOA Dues $300 $300 $300 $300 $300
Property Taxes and Insurance (b) $527 $619 $706 $785 $858
Monthly Income Available for Mortgage Payment (c) $1,429 $1,676 $1,915 $2,126 $2,324
Maximum Mortgage Amount (d) $255,155 $299,376 $341,902 $379,732 $415,083
Maximum Affordable Sales Price - HH Size (e) $268,584 $315,133 $359,897 $399,717 $436,929
Notes: (a) 30 percent of monthly household income for very low and low income households; 35 percent of monthly household income for moderate-income households
(b) Assumes annual property tax rate of 1.16 percent of sales price; annual private mortgage insurance premium rate of 0.89 percent of mortgage amount; annual hazard and casualty insurance rate of 0.35 percent of sales price (c) Maximum monthly housing cost minus deductions (d) Assumes 5.375 percent interest rate and 30 year loan term. Assumes CalHFA first-time homebuyer program. (e) Assumes 5 percent down payment (95 percent loan-to-value ratio). Assumes CalHFA first-time homebuyer program. (f) Calculated as an average of household sizes occupying unit type. 1-bedroom units are assumed to accommodate 1- and 2-person households; 3-bedroom units are assumed to accommodate 4- and 5-person households. (g) Calculated as 110 percent of the median household income reported by HCD for each household size. Acronyms: AMI: Area median income HH: Household HOA: Homeowners association Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014 and “Overpayment and Overcrowding,” 2010; Housing
Authority of Santa Clara County, "2013 Utility Allowances Schedule," Santa Clara County, October 2013; Mortgage insurance provider websites; Interviews with California Housing Finance Agency (CalHFA) Preferred Loan Officers, March 2014; CalHFA Mortgage Calculator, March 2014; Zillow.com, March 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure V-4. Calculation of Affordable Sales Prices in Santa Clara County by Unit Type, 2014
Affordable Sales Price by Unit Type (a) 1 Bedroom 2 Bedroom 3 Bedroom
Moderate Income (110% AMI) $291,858 $359,897 $418,323
(a) One-bedroom units are calculated as an average of one- and two-person households; Two-bedroom units are calculated as three-person households; and three-bedroom units are calculated as an average of four and five person households. Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014 and “Overpayment and Overcrowding,” 2010; Housing Authority of Santa Clara County, "2013 Utility Allowances Schedule,"
Santa Clara County, October 2013; Mortgage insurance provider websites; Interviews with California Housing Finance Agency (CalHFA) Preferred Loan Officers, March 2014; CalHFA Mortgage Calculator, March 2014; Zillow.com, March 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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ESTIMATING HOUSING DEVELOPMENT COSTS
The second step in calculating the housing affordability gap is to estimate the cost of developing new,
modest housing units. Modest housing is defined slightly differently for rental and ownership housing.
For rental housing, the costs and characteristics of modest housing are similar to recent projects
developed in Palo Alto by the affordable rental housing sector. However, there are no examples of new
modest ownership housing units built in Palo Alto by the private or nonprofit sectors. The new for-sale
homes in Palo Alto are typically luxury custom-built single family homes and large upscale condominium
units, which are too costly to meet the standard for modest housing. For the purposes of this affordability
gap analysis, modest for-sale housing units are defined as a compact, non-luxury multifamily
condominium units.
The calculation of housing development costs used in the housing affordability gap requires several steps.
Because the gap covers both rental housing and for-sale housing, it is necessary to estimate costs for each.
The following describes the data sources used to calculate rental and for-sale housing development costs.
Rental Housing
Rental housing development costs were based on pro forma data obtained from recent affordable housing
projects in Palo Alto. Figure V-5 shows the description of these projects and summarizes the information
that was used to generate a per-square-foot cost of $446 used in the cost analysis. These costs include site
acquisition costs, hard costs (on- and off-site improvements), soft costs (such as design, city permits and
fees, construction interest, and contingencies), and developer fees. The costs from the rental housing pro
formas were also cross-referenced against proprietary pro formas available to the consultant team from
other private development projects in order to ensure accuracy.
Since these projects assumed state and federal funding, the labor costs included in the original pro formas
reflect the prevailing wage requirement imposed by state and local governments. The costs shown in
Figure V-5 have been adjusted to subtract out the prevailing wage requirement because the development
cost model used in the housing affordability gap analysis does not assume receipt of government
subsidies. A rule of thumb used by local economists who assist affordable housing developers in
obtaining public financing, is to estimate that, under the prevailing wage requirement, labor costs are 25
percent higher than would otherwise be the case. Therefore, on-site and off-site improvement costs
obtained from the original pro formas are reduced by 25 percent to reflect actual labor costs that would
apply to construction projects that do not have these requirements.16 Finally, on average, land acquisition
costs accounted for 20 percent or less of these total adjusted costs.
16 These prevailing wage requirements refer only to labor cost requirements on construction projects that receive funding from the state or federal government. These are not the same as minimum wage requirements that individual cities may adopt.
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Figure V-5. Affordable Housing Project Pro Forma Data
Project Description Maybelle Alma Garden Apts
Location Palo Alto Palo Alto
Date of Pro Forma 2013 2013
Land Area (acres) 1.03 0.6
Gross Building Area (SF) 56,192 63,885
Number of Units 60 50
Parking Type Uncovered Underground
Parking Spaces/ Unit 0.8 1.0
Land Acquisition Costs
$7,498,524 ($167 per SF of land)
$7,480,000 ($286 per SF of land)
Project Costs per SF of Gross Building Area
Land Cost (a) $133 $117
Hard Costs (b) $160 $153
Soft Costs (c) $91 $192
Developer Fees $25 $22
Total Project Costs (d) $409 $484
Notes:
(a) Calculated per square foot of gross building area. (b) Excludes prevailing wage requirements for on-site and off-site hard
costs.
(c) Includes design, engineering, city permits and fees, construction interest, contingencies, legal, etc.
(d) Total costs include developer fees.
Acronyms:
SF: Square feet
Source: Pro Forma Data provided by City of Palo Alto; Vernazza Wolfe Associates, Inc; Strategic Economics, 2014.
To ensure that the land value assumptions used in the rental development cost estimates (ranging from
$167 to $286 per square foot of land) were reasonable, the consultant team analyzed recent sales of vacant
properties in Santa Clara County using DataQuick, a commercial vendor that tracks real estate
transactions. As shown below in Figure IV-6, land values in Southern San Mateo County and Northern
Santa Clara County are highly variable from city to city, ranging from $96 to $228 per square foot. The
analysis demonstrates that the land costs for the affordable rental housing projects shown in Figure V-5
are generally consistent with the land values in the market area.
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Figure V-6. Sales of Vacant Lands in San Mateo County and Northern Santa Clara County, 2014
Property Location
Sales
Date Sales Price
Site
Size
(SF)
Average
Sales
Price/ SF
Page Mill Palo Alto 2012 $3,959,000 26,926 $147
389 El Camino Real Menlo Park 2012 $12,200,000 53,579 $228
1300 El Camino Real Menlo Park 2012 $24,500,000 148,165 $165
E. side of Tilton Avenue, N. of El Camino Real San Mateo 2012 $4,505,000 33,572 $134
1275 El Camino Real Menlo Park 2014 $3,600,000 17,960 $200
3877 El Camino Real Palo Alto 2013 $4,450,000 32,825 $136
536 N Wishman Rd Mountain View 2014 $1,050,000 7,000 $150
1958 Latham St Mountain View 2014 $1,600,000 16,600 $96
Value Range per SF of Land $96 - $228
Source: City of Palo Alto; Independent appraisals; Loopnet, 2015; Strategic Economics, 2015.
For-Sale Housing
Market-rate for-sale housing units in Palo Alto are priced at over $1 million; these units are too upscale to
be considered “modest” units. Because of the lack of examples of built modest units in the City,the cost of
developing new, modest for-sale housing was estimated using using published industry data sources,
recent financial feasibility studies, and data from other projects in Santa Clara County. The Consultant
Team estimated the development costs of a hypothetical condominium project, as described in Figure V-
7.17 Land costs were estimated based on recent DataQuick sales of multi-family zoned properties in
Southern San Mateo County and Northern Santa Clara County. As shown in Figure V-6, land values vary
depending on location and lot size, ranging from $96 to $228 per square foot. Because most transactions
occurred in 2012 and 2013 in other lower cost jurisdictions, the current land value for multi-family land
for condominium development in Palo Alto was estimated at $200 per square foot.
RS Means cost data, adjusted for the Bay Area’s construction costs, was used to calculate hard costs.
Based on a review of recent financial feasibility analyses in the Bay Area, soft costs were estimated at 30
percent of hard costs, and developer fees and profits were estimated at 12 percent of hard and soft costs.
Using this method, the development costs are estimated at approximately $500 per net square foot of
building area.
17 The hypothetical condominium building type is a Type V building with underground parking and floor-area ratio of 1.7.
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Figure V-7. Estimate of Development Costs of Hypothetical Condominium Project
Building Characteristics
Land Area (SF) 110,727
Gross Building Area (SF) 188,235
Net Building Area (SF) 160,000
Number of Units 100
Parking Type Underground
Parking Spaces/ Unit 2
Floor-area ratio (FAR) 1.7
Density (units per acre) 39
Average Unit Size 1,600
Land Acquisition Costs per Square Foot (a) $200
Development Cost Cost per Net SF
Land Cost (b) $138
Hard Costs $250
Soft Costs (c) $75
Developer Fees (d) $39
Total Development Costs $502
Notes:
(a) Land value is estimated at $200 per square foot based on recent transactions in market area. (b) Calculated based on RS Means cost estimates per square foot of net building area. (c) Estimated at 30 percent of hard costs. Includes design, engineering, city permits and fees, construction interest, contingencies, legal, etc.
(d) Estimated at 12 percent of hard costs and soft costs.
Sources: RS Means, 2014; DataQuick 2014; Recent financial feasibility studies; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Cost Estimates by Unit Size
The data sources described above also provided information on estimated unit sizes. Unit size information
is needed to translate costs/sales prices per square foot to unit costs. Unit sizes are estimated separately
for rental and for-sale units. For the rental units, the recent inventory of projects developed by MidPen
Housing was analyzed. For ownership units, the average sizes of recently built condominium units
(Figure V-7) were analyzed.
Figure V-8 provides the unit sizes and development cost estimates for rental units. Per-unit development
costs were calculated by multiplying average unit sizes by the per-square foot development costs of $446.
Rental unit costs range from $223,000 for studio units to $499,520 for three-bedroom units.
Figure V-9 summarizes the costs of condominium units. The per-unit costs were derived by multiplying
the average unit size by the development cost, estimated at $500 per square foot. On a per unit basis,
condominium development costs are $450,000 for one-bedroom units, $650,000 for two-bedroom units,
and $875,000 for three-bedroom units.
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Figure V-8. Rental Housing Unit Sizes and Development Costs
Unit Type
Estimated Cost
per Net SF
Unit Size
(net SF)
Development
Costs
Studio $446 500 $223,000
One bedroom $446 700 $312,200
Two bedroom $446 900 $401,400
Three bedroom $446 1,120 $499,520
Acronyms: SF: Square feet Sources: Confidential Pro Forma Data; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Figure V-9. For-Sale Housing Unit Sizes and Development Costs
Unit Type
Estimated Cost
per Net SF
Unit Size
(net SF)
Development
Costs
One bedroom $500 900 $450,000
Two bedroom $500 1,300 $650,000
Three bedroom $500 1,750 $875,000
Acronyms: SF: Square feet Sources: DataQuick, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
CALCULATING THE HOUSING AFFORDABILITY GAP
The final step in the analysis is to calculate the housing affordability gap, or the difference between what
renters and owners can afford to pay and the total cost of developing new units. The purpose of the
housing affordability gap calculation is to help determine the fee amount that would be necessary to cover
the cost of developing housing for very low, low, and moderate income households. The calculation does
not assume the availability of any other source of housing subsidy because not all "modest" housing is
built with public subsidies, and tax credits and tax-exempt bond financing are highly competitive
programs that will not always be available to developers of modest housing units.
Figure V-10 shows the housing affordability gap calculation for rental units. For each rental housing unit
type and income level, the gap is defined as the difference between the per-unit cost of development and
the supportable debt per unit. The supportable debt is calculated based on the net operating income
generated by an affordable monthly rent, incorporating assumptions about operating expenses (including
property taxes, insurance, etc.), reserves, vacancy and collection loss, and mortgage terms based on
discussions with local affordable housing developers. Because household sizes are not uniform and the
types of units each household may occupy is variable, the average housing affordability gap is calculated
by averaging the housing affordability gaps for the various unit sizes.
Figure V-11 shows the housing affordability gap calculation for ownership units. For each unit type, the
gap is calculated as the difference between the per-unit cost of development and the affordable sales price
for each income level. As with rental housing, the average housing affordability gap is calculated by
averaging the housing affordability gaps across unit sizes in order to reflect that households in each
income group vary in size, and may occupy any of these unit types.
Finally, the tenure-neutral estimates of the housing affordability gap were estimated for very low, low,
and moderate income households (Figure V-12). Because very low and low income households that are
looking for housing in today’s market are much more likely to be renters, an ownership gap was not
calculated for these income groups. The rental gap represents the overall affordability gap for these two
income groups. On the other hand, moderate income households could be either renters or owners.
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Therefore, the rental and ownership gaps are averaged for this income group to calculate the overall
affordability gap for moderate income households. The calculated average affordability gap per unit is
$306,164 for very low income households; $252,258 for low income households, and $249,596 for
moderate income households. The housing affordability gap is highest for very low income households
because they can afford to pay the least amount for housing.
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Figure V-10. Housing Affordability Gap Calculation for Rental Housing
Income Level and Unit Type
Unit Size
(SF)
Maximum Monthly
Rent (a)
Annual
Rental
Revenu
e
Net
Operating
Income (b)
Available
for Debt
Service (c)
Supportable
Debt (d)
Development
Costs (e)
Affordability
Gap (f)
Very-Low Income (50% AMI)
Studio 500 $900 $10,797 $2,757 $2,206 $29,166 $223,000 $193,834
1 Bedroom 700 $1,021 $12,255 $4,142 $3,314 $43,818 $312,200 $268,382
2 Bedroom 900 $1,145 $13,737 $5,550 $4,440 $58,711 $401,400 $342,689
3 Bedroom 1,120 $1,319 $15,833 $7,541 $6,033 $79,769 $499,520 $419,751
Average Affordability Gap $306,164
Low Income (70% AMI)
Studio 500 $1,263 $15,161 $6,902 $5,522 $73,016 $223,000 $149,984
1 Bedroom 700 $1,437 $17,244 $8,882 $7,105 $93,954 $312,200 $218,246
2 Bedroom 900 $1,613 $19,352 $10,884 $8,707 $115,133 $401,400 $286,267
3 Bedroom 1,120 $1,860 $22,322 $13,706 $10,965 $144,987 $499,520 $354,533
Average Affordability Gap $252,258
Moderate Income (90% AMI)
Studio 500 $1,633 $19,592 $11,112 $8,890 $117,544 $223,000 $105,456
1 Bedroom 700 $1,859 $22,308 $13,693 $10,954 $144,843 $312,200 $167,357
2 Bedroom 900 $2,087 $25,049 $16,296 $13,037 $172,383 $401,400 $229,017
3 Bedroom 1,120 $2,409 $28,906 $19,960 $15,968 $211,146 $499,520 $288,374
Average Affordability Gap $197,551
Notes:
(a) Affordable Rents are based on HCD FY 2014 Income Limits for Santa Clara County. See Figure 2, above.
(b) Amount available for debt. Assumes 5% vacancy and collection loss and $7,500 per unit for operating expenses and reserves, based on pro formas for affordable housing projects recently proposed in Palo Alto.
(c) Assumes 1.25 Debt Coverage Ratio.
(d) Assumes 6.38%, 30 year loan. Calculations based on annual payments.
(e) Assumes development cost of $446 per net square foot on rental units.
(f) Calculated as the difference between development costs and supportable debt. Rounded to nearest whole number.
Acronyms:
SF: Square feet AMI: Area median income
Sources: Selected Palo Alto Rental Housing Pro Formas; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure V-11. Housing Affordability Gap Calculation for For-Sale Condominium Housing
Income Level and Unit Type
Unit Size
(SF)
Affordable
Sales Price
(a)
Development
Costs (b)
Affordability
Gap (c)
Moderate Income (110% of AMI)
1 Bedroom 900 $291,858 $450,000 $158,142
2 Bedroom 1,300 $359,897 $650,000 $290,103
3 Bedroom 1,750 $418,323 $875,000 $456,677
Average Affordability Gap $301,641
(a) See calculation in Figure V-9, above. (b) Assumes $500/SF for development costs, based on recent condominium sales. (c) Calculated as the difference between affordable sales price and development cost; rounded to nearest whole number.
Acronyms:
SF: Square feet
AMI: Area median income
Sources: DataQuick Sales Data, 2008-2012; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
Figure V-12. Average Housing Affordability Gap by Income Group
Income Level Rental Gap Ownership Gap
Average
Affordability Gap
Very Low-Income (50% AMI) (a) $306,164 N/A $306,164
Low-Income (70% - 80% AMI) (b) $252,258 N/A $252,258
Moderate-Income (90% - 110% AMI) (c) $197,551 $301,641 $249,596
Notes:
(a) Based on rental housing only; very-low-income gap was not calculated for ownership housing.
(b) Low-income households are assumed to earn 70 percent of AMI for rental housing and 80 percent of AMI for ownership housing.
(c) Moderate-income households are assumed to earn 90 percent of AMI for rental housing and 110 percent of AMI for ownership housing.
Acronyms:
AMI: Area median income
Source: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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This section builds on the findings of the previous analytical steps to calculate maximum justified
housing impact fees for each prototype.
MAXIMUM FEE CALCULATION
To derive the maximum nexus-based fee, the housing affordability gap is applied to the number of
lower-income worker households linked to the prototypes. This is the basis for developing an estimate
of the total affordability gap for each prototype. The total gap for each prototype is then divided by
the number of units in the development prototype to calculate a single maximum fee per unit.
Figure VI-1 presents the results of the nexus fee calculation for the single-family detached prototype.
The per unit housing affordability gap number is multiplied by the number of income-qualified
worker households linked to the prototype to estimate the total gap. The total affordability gap is then
divided by the number of units in the prototype to derive the maximum fee per unit, estimated at
$333,501 per unit. The same steps are taken for the single-family attached, condominium and rental
apartment prototypes to estimate the maximum fee per unit, as shown in Figures VI-2, VI-3 and VI-4.
The calculated maximum fees are $189,037 per single-family attached unit, $158,519 per
condominium unit and $101,906 per apartment unit.
The fees can also be calculated on per-square-foot basis by dividing the total gap by the net
residential area for each prototype. The maximum fee per square foot is $111 for the 90,000-square-
feet single-family detached prototype (Figure V-5), $90 for the 21,000-square-foot single-family
attached prototype (Figure V-6), $75 for the 73,500-square-foot condominium prototype (Figure VI-
7) and $105 for the 67,970-square-foot apartment prototype (Figure VI-8).
The per-unit and per-square-foot fees shown in the tables below express the total nexus-based fees for
the four housing prototypes in Palo Alto. They represent the maximum justified fees based on the
nexus analysis that could be imposed on new development. The City may adopt fees or require
mitigations at a lower level than these justified fees, depending on financial feasibility and other
policy considerations.
VI. MAXIMUM FEE AND REQUIREMENTS
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Figure VI-1. Maximum Per-Unit Fee for Single-Family Detached Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Number Units
in Prototype
Total Fee Per
Unit
Very Low Income (<=50% AMI) $306,164 6.98 $2,137,025
Low Income (51-80% AMI) $252,258 17.15 $4,326,225
Moderate Income (81-120% AMI) $249,596 14.19 $3,541,767
Total $10,005,017 30 $333,501
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
Figure VI-2. Maximum Per-Unit Fee for Single-Family Attached Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Number Units
in Prototype
Total Fee Per
Unit
Very Low Income (<=50% AMI) $306,164 1.32 $404,136
Low Income (51-80% AMI) $252,258 3.24 $817,316
Moderate Income (81-120% AMI) $249,596 2.68 $668,917
Total $1,890,370 10 $189,037 Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
Figure VI-3. Maximum Per-Unit Fee for Condominium Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Number Units
in Prototype
Total Fee Per
Unit
Very Low Income (<=50% AMI) $306,164 3.87 $1,184,855
Low Income (51-80% AMI) $252,258 9.51 $2,398,974
Moderate Income (81-120% AMI) $249,596 7.87 $1,964,321
Total $5,548,149 35 $158,519
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
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Figure VI-4. Maximum Per-Unit Fee for Apartment Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Number Units
in Prototype
Total Fee Per
Unit
Very Low Income (<=50% AMI) $306,164 3.87 $1,552,251
Low Income (51-80% AMI) $252,258 9.51 $3,092,683
Moderate Income (81-120% AMI) $249,596 7.87 $2,488,472
Total $7,133,407 70 $101,906
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
Figure VI-5. Maximum Fee per SF for Single-Family Detached Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Net
Residential
Area (SF)
Total Fee Per
SF
Very Low Income (<=50% AMI) $306,164 6.98 $2,137,025
Low Income (51-80% AMI) $252,258 17.15 $4,326,225
Moderate Income (81-120% AMI) $249,596 14.19 $3,541,767
Total $10,005,017 90,000 $111.17
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
Figure VI-6. Maximum Fee per SF for Single-Family Attached Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Net
Residential
Area (SF)
Total Fee Per
SF
Very Low Income (<=50% AMI) $306,164 1.32 $404,136
Low Income (51-80% AMI) $252,258 3.24 $817,316
Moderate Income (81-120% AMI) $249,596 2.68 $668,917
Total $1,890,370 21,000 $90.02
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -54-
Figure VI-7. Maximum Fee per SF for Condominium Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Net
Residential
Area (SF)
Total Fee Per
SF
Very Low Income (<=50% AMI) $306,164 3.87 $1,184,855
Low Income (51-80% AMI) $252,258 9.51 $2,398,974
Moderate Income (81-120% AMI) $249,596 7.87 $1,964,321
Total $5,548,149 73,500 $75.49
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
Figure VI-8. Maximum Fee per SF for Apartment Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Net
Residential
Area (SF)
Total Fee Per
SF
Very Low Income (<=50% AMI) $306,164 5.07 $1,552,251
Low Income (51-80% AMI) $252,258 12.26 $3,092,683
Moderate Income (81-120% AMI) $249,596 9.97 $2,488,472
Total $7,133,407 67,970 $104.95
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -55-
INCLUSIONARY HOUSING REQUIREMENTS
In addition to establishing the maximum potential justified fee for new development projects, the
nexus results described above can also be used to establish the percentage of inclusionary units under
the City’s current program. At present, inclusionary housing is one of the primary tools for providing
affordable housing units in Palo Alto. Palo Alto currently has an inclusionary policy in the General
Plan that requires that 15 to 20 percent of units in new developments be affordable housing units. The
affordability levels for the inclusionary units are typically determined on a case by case basis, and
developers have historically built the units within their projects. If the City adopts a housing impact
fee, it could replace its inclusionary zoning program with an impact fee program that still allows
developers the option of providing affordable units; or it could continue to require on-site units in for-
sale projects.
The principal way in which the equivalent inclusionary percentage can be estimated from the nexus
analysis is by taking the total number of households requiring affordable housing (for each prototype)
and dividing this number by the number of total units in each prototype. The analysis indicates that
the nexus-based inclusionary percentage rate is much higher than the City’s existing inclusionary
policy. Therefore the results of the nexus analysis support the current inclusionary requirements. In
fact, the results of the nexus analysis indicate that inclusionary rates of 39 percent and higher
(depending on the prototype) are supported by the nexus analysis.
DRAFT Palo Alto Housing Impact Fee Nexus Study -56-
There are a number of policy considerations that can be taken into account when jurisdictions
consider adopting an affordable housing impact fee on new market-rate development. These may
include factors such as the likely impact of the proposed fee levels on local housing development, the
competitiveness of the city in attracting development relative to neighboring jurisdictions, the impact
of the proposed fee on existing city fee level, and the role of the proposed fee in meeting the city’s
overall affordable housing objectives. This section provides a discussion of some of the key financial
and policy questions for Palo Alto.
FINANCIAL FEASIBILITY ANALYSIS
Summary of Residential Prototypes
As discussed in more detail in Section III of this report, this nexus analysis is based on four
residential prototypes: for-sale single-family detached, single-family attached and condominiums, and
rental apartments. Figure VII-1 summarizes the characteristics of the four development prototypes
that were tested for financial feasibility. These prototypes are representative of the types of market
rate housing development projects that can reasonably be expected in Palo Alto. All residential
prototypes are Type V wood frame construction. The single-family detached units have an attached
garage and a density of 6 units per acre. On average, the net residential area is 3,000 square feet per
unit. The single-family attached prototype building has podium parking and a density of 11 units per
acre, with an average net area per unit of 2,100 square feet. The condominium prototypes have
underground parking, a density of 30 units per acre, and an average net size of 2,100 square feet. The
apartment prototype building has podium parking and a density of 41 units per acre. The average net
area per unit is 971 square feet. Most of the apartment units are two bedrooms, with a small number
of one bedroom units.
Figure VII-1. Residential Prototypes
Building Characteristics
Single-Family
Detached
Single-Family
Attached Condominiums Apartments
Building Type Type V Type V Type V Type V
Total Residential Units (a) 30 10 35 70
Avg. Size Unit in Square Feet (SF) 3,000 2,100 2,100 971
Net Square Footage (NSF) 90,000 21,000 73,500 68,000
Parking Type Attached garage Podium Underground Podium
Efficiency Factor (b) 85% 85% 85% 65%
Gross Square Footage (GSF) 105,882 24,706 86,471 104,698
Floor Area Ratio (FAR) (c) 0.5 0.6 1.7 1.4
Land Area (SF) 211,765 41,176 50,865 74,785
Land Area (Acres) 4.86 0.95 1.17 1.72
Units per Acre 6 11 30 41
Notes:
(a) Unit characteristics are described in more detail in Section III.
(b) Ratio of leasable square footage to gross square footage.
(c) Floor area ratio (FAR) measures density by dividing gross building area by total site area.
Source: Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
VII. FEASIBILITY AND POLICY CONSIDERATIONS
DRAFT Palo Alto Housing Impact Fee Nexus Study -57-
Fee Levels
In order to provide Palo Alto with some guidance on how proposed fees could impact development
decisions, the Consultant Team conducted a financial feasibility analysis that tested the impact of
different fee scenarios on developer profit. Given that it is unusual for local jurisdictions to enact an
impact fee at its maximum nexus-based level, three additional fee scenarios were evaluated for each
prototype. These calculations provide Palo Alto with an understanding of the impact of different fee
scenarios on the financial feasibility of residential development projects.
Figure VII-2 demonstrates the calculated fees per unit at different levels for each prototype. The fee
scenarios can also be calculated on per square foot basis, which are shown in Figure VII-3.
Figure VII-2. Fee Levels per Unit for Prototypes
Prototype
Net
Residential
SF per Unit Per Unit Fee Levels Tested
Single-Family Detached 3,000 $150,000 $225,000 $285,000 $333,501
Single-Family Attached 2,100 $63,000 $105,000 $147,000 $189,037
Condominium 2,100 $52,500 $84,000 $105,000 $158,519
Apartments 971 $29,143 $48,571 $82,571 $101,906
Sources: Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -58-
Figure VII-3. Fee Levels per Square Foot for Prototypes
Prototype
Net
Residential
SF per Unit Per SF Fee Levels Tested
Single-Family Detached 3,000 $50 $75 $95 $111
Single-Family Attached 2,100 $30 $50 $70 $90
Condominium 2,100 $25 $40 $55 $75
Apartments 971 $30 $50 $85 $105
Sources: Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
Methodology
Financial feasibility of the fee options was tested using a pro forma model that measures the residual
land value of a given development project. Many pro forma models are structured to solve for the
financial return for the developer or investors (internal rate of return). In contrast, the residual land
value method of analysis solves for the value of the land. This method recognizes that the value of
land is inextricably linked to what can be built on it, and that development potential is heavily
influenced by zoning, lot size/configuration, neighborhood context, and other factors. The pro forma
model tallies all development costs (minus land) including direct construction costs, indirect costs
(including financing), and developer fees. Revenues from unit sales or rental leases are then summed.
The total project costs are then subtracted from the total project revenues. The balance is the residual
value, representing the price a developer would pay for the land if pursuing that project. The fee
levels were then added as an additional development cost to measure the effect on the residual land
value.
Revenues
To estimate income from residential development, the analysis uses the sales prices and monthly rents
presented in Section III of this report and summarized in Figure VII-4. These revenue assumptions
were based on a review of local and regional market data, including information on the type of
development that has been recently constructed or is planned or proposed in Palo Alto; and current
sales prices and rental rates of recently built residential development in Palo Alto and neighboring
cities. For ownership projects (single-family detached, single-family attached, and condominiums),
the revenues are calculated by multiplying the unit count by the sales price. For rental projects, the
revenues were estimated using an income capitalization approach. This valuation approach first
estimates the annual net operating income (NOI) of the apartment prototype, which is the difference
between total project income (annual rents) and project expenses, including operating costs18 and
vacancies. The NOI is then divided by the capitalization rate (cap rate) to derive total project value.
Figure VII-5 summarizes the calculations and data source used for estimating the value of the
apartment prototype.
18 Operating costs were calculated based on the Institute of Real Estate Management Survey of Apartment Buildings in the San Francisco Metropolitan Statistical Area (MSA).
DRAFT Palo Alto Housing Impact Fee Nexus Study -59-
Figure VII-4. Sales Prices and Rents for Prototypes
Prototype Unit Type
Number
of Units
Net Area
(SF)
Unit Sales
Price/ Monthly
Rent
Price or
Rent per
SF
Single-Family Detached (For-Sale)
Type V wood frame 5 BD/4 BA 30 3,000 $3,043,000 $1,015
6 units per acre
Attached garage
Net Residential Area (Net SF) 90,000
Single-Family Attached
(For-Sale)
Type V wood frame 3 BD/ 4 BA 10 2,100 $1,666,000 $793
11 units per acre
Podium parking
Net Residential Area 21,000
Condominiums (For-Sale)
Type V wood frame 4 BD/3 BA 35 2,100 $1,390,000 $662
30 units per acre
Underground parking
Net Residential Area (Net SF) 73,500
Apartments (Rental)
Type V wood frame 1 BD/ 1 BA 20 795 $3,247 $4.09
41 units per acre 2 BD/2 BA 50 1,114 $4,191 $3.76
Podium parking
Net Residential Area 68,000
Average Net SF per Unit 1,063
Sources: Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
Figure VII-5. Apartment Revenue Calculations
Apartment Revenues Calculation Total
Gross Annual Rental Income (a) Gross annual rents $3,294,184
Operating Expenses (b) 30 percent of income ($988,255)
Vacancy (c) 5 percent of income ($164,709)
Annual Net Operating Income (c)
Income less expenses
and vacancy $2,141,219
Capitalization Rate (d) 5 percent 5.00%
Capitalized Value Project value $42,824,386
Notes:
(a) Average monthly rents multiplied by 12 months multiplied by unit count for each unit type.
(b) Institute of Real Estate Management, San Francisco MSA Apartment Properties, 2011.
(c) Assumes a vacancy rate of 5 percent in a stabilized rental market.
(d) According to DTZ's San Francisco Real Estate Forecast 2015, the cap rate for apartments is approximately 5 percent.
Sources: IREM, DTZ, Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -60-
Development Costs
Cost estimates for the residential prototypes include direct construction costs (site work, building
costs, and parking), indirect costs, financing costs, and developer overhead and profit. Development
cost estimates for the pro forma analysis are based on RS Means and project pro formas for recent
projects in the region. Soft costs and developer overhead/profit were calculated based on a review of
similar project pro formas in the Bay Area. City fee calculations were provided by City staff. Each of
the cost factors used in the analysis is summarized in Figure VII-6.
Figure VII-6. Development Cost Factors
Development Costs Metric
Direct Costs (a) Single-Family Detached $155 Per NSF Single-Family Attached $150 Per NSF Condominiums $225 Per NSF
Apartments $210 Per NSF
Indirect Costs (b) A&E & Consulting 6.00% of direct costs
Permits & Fees (Excl. Housing) (c) estimated by City Taxes, Insurance, Legal & Accounting 3.00% of direct costs Other (d) 3.00% of direct costs
Contingency 5.00% of indirect costs Total Indirect Costs
Financing Costs (b)
Loan to Cost Ratio (LTC) 80% of total costs Loan Interest Rate 6% annual rate Compounding Period 12 months
Construction/Absorption Period (e) 12 to 24 months Utilization Rate 55% of loan Loan Fees 2% of loan
Developer Overhead & Profit 12% of total costs (excl. land)
Notes: (a) Direct costs include site work, building construction, and parking costs of $30,000 per space for underground parking and $25,000 per space for podium parking. Costs estimates are based on review of Bay Area pro formas for similar projects and data from RS Means. (b) Based on review of similar project pro formas in the Bay Area and interviews with developers.
(c) Permits & fees are a generalized estimate of costs based on prototypes, calculated by City staff. Permits and fees for actual projects vary depending on many factors. (d) Other soft costs include marketing, personal property, environmental studies, etc. (e) Absorption periods are estimated at 12 months for condominiums and single-family attached units; 18 months for single-family detached subdivisions; and 24 months for apartments. Sources: RS Means, 2014; Similar pro formas; City of Palo Alto, 2015; Strategic Economics, 2015.
Land Value
In order to understand what the different fee levels indicate regarding financial feasibility, the residual
land values for each fee scenario can be compared with the market value of residential land in Palo
Alto. If the residual value is higher than the market value, the project is feasible. If the residual value
is lower than the market price, then the project is infeasible.
To determine the land value of sites zoned for lower density uses (single-family detached and single-
family attached) and higher density multi-family residential uses (condominiums and rental
apartments), the Consultant Team analyzed recent sales transactions in Southern San Mateo County
and Northern San Mateo County, and reviewed third-party property appraisals. Figure VII-7
illustrates the results of the land value analysis for lower density single-family detached and single-
family attached residential uses, while Figure VII-8 shows the value of properties zoned for higher
density multi-family residential uses. For lower density residential uses, values range considerably
DRAFT Palo Alto Housing Impact Fee Nexus Study -61-
depending on location and size, from $50 per square foot for the lower quartile, to $172 per square
foot for the upper quartile. For higher-density multi-family housing, the range is between $96 and
$228 per square foot, with a weighted average (accounting for lot size) of $167. The majority of the
sales shown in Figures VII-7 and VII-8 were transactions that occurred earlier than 2014; today’s land
values are likely to be higher. Therefore, for this analysis, the estimated land value is estimated at
between $150 and $250 per square foot for higher density multi-family development, including
condominiums and apartments. For all prototypes, the market value of land is presented as a range
because the land value of properties is likely to vary depending on location, size, and other
conditions.
DRAFT Palo Alto Housing Impact Fee Nexus Study
Figure VII-7. Recent Single-Family Land Sales Transactions in Palo Alto and Neighboring Cities
Site Address Location Sale Price Lot Area
Price/ SF
of Land
10655 CORDOVA RD CUPERTINO CA 95014-3911 $880,000 14,000 $62.86
CUPERTINO CA $1,605,000 8,373 $191.69
21730 RAINBOW DR CUPERTINO CA 95014-4827 $1,312,500 79,432 $16.52
STEVENS CANYON RD CUPERTINO CA 95014 $1,700,000 36,155 $47.02
10231 HILLCREST RD CUPERTINO CA 95014-1081 $1,121,500 11,985 $93.58
CUPERTINO CA $1,960,000 46,043 $42.57
CUPERTINO CA $1,200,000 22,390 $53.60
22711 SAN JUAN RD CUPERTINO CA 95014-3932 $1,668,000 16,000 $104.25
12810 DEER CREEK LN LOS ALTOS HILLS CA 94022 $1,650,000 59,242 $27.85
12060 ELSIE WAY LOS ALTOS HILLS CA 94022-3388 $2,800,000 49,223 $56.88
WESTWIND WAY LOS ALTOS HILLS CA 94022 $6,000,000 37,462 $160.16
MILLER AVE LOS ALTOS CA 94024 $1,975,000 7,623 $259.08
W SUNSET DR LOS ALTOS HILLS CA 94022 $8,645,000 52,349 $146.82
W SUNSET DR LOS ALTOS HILLS CA 94022 $8,645,000 6,534 $146.82
WILDCREST DR LOS ALTOS HILLS CA 94022 $2,765,000 89,300 $30.96
24560 RUTH LEE CT LOS ALTOS CA 94024 $2,700,000 20,168 $133.88
26310 ESPERANZA DR LOS ALTOS HILLS CA 94022-2653 $2,530,000 43,560 $58.08
12501 ZAPPETTINI CT LOS ALTOS HILLS CA 94022-6316 $2,140,000 51,401 $41.63
181 ALVARADO AVE LOS ALTOS CA 94022-1220 $500,000 21,746 $22.99
969 SHERWOOD AVE LOS ALTOS CA 94022-1327 $480,000 4,960 $96.77
NIBLICK AVE LOS ALTOS CA 94022 $2,050,000 13,504 $151.81
25755 CARADO CT LOS ALTOS HILLS CA 94022 $1,730,000 44,350 $39.01
10 PASA ROBLES AVE LOS ALTOS CA 94022-1235 $1,850,000 6,200 $298.39
26400 ESHNER CT LOS ALTOS HILLS CA 94022 $3,400,000 55,321 $61.46
ALTA VIS LOS ALTOS CA 94022 $4,000,000 18,900 $211.64
ALTA VIS LOS ALTOS CA 94022 $4,000,000 31,147 $128.42
FREMONT RD LOS ALTOS HILLS CA 94022 $2,040,000 54,886 $37.17
12030 ELSIE WAY LOS ALTOS HILLS CA 94022-3388 $2,150,000 49,223 $43.68
LANTIS LN LOS ALTOS CA 94024 $1,950,000 11,326 $172.17
24600 RUTH LEE CT LOS ALTOS CA 94024-4750 $3,053,000 55,050 $55.46
HAPPY ACRES RD LOS GATOS CA 95032 $1,343,000 7,405 $181.36
OAK RIDGE WAY LOS GATOS CA 95032 $2,150,000 8,800 $244.32
BELLA VISTA AVE LOS GATOS CA 95032 $60,500 1,300 $46.54
101 COSTANCES CT LOS GATOS CA 95032-4845 $785,000 7,883 $99.58
17059 PINE AVE LOS GATOS CA 95032 $1,275,000 32,234 $39.55
403 MONTCLAIR RD LOS GATOS CA 95032 $785,000 15,304 $51.29
COLORADO CT LOS GATOS CA 95030 $900,000 40,075 $22.46
SUN RAY DR LOS GATOS CA 95030 $1,049,000 7,650 $137.12
16227 MAYA WAY LOS GATOS CA 95030 $2,638,500 43,680 $60.41
217 ALEXANDER AVE LOS GATOS CA 95030-5202 $1,450,000 7,500 $193.33
26 ALPINE AVE LOS GATOS CA 95030-7131 $675,000 20,038 $33.69
BUSKIRK ST MILPITAS CA 95035 $390,000 910 $428.57
826 CALAVERAS RIDGE DR MILPITAS CA 95035-3445 $600,000 46,426 $12.92
2212 LELAND AVE MOUNTAIN VIEW CA 94040 $577,000 5,152 $68.25
2206 LELAND AVE MOUNTAIN VIEW CA 94040 $577,000 3,302 $68.25
1755 PEACOCK AVE MOUNTAIN VIEW CA 94043-4436 $475,000 6,460 $73.53
2240 COLUMBIA ST PALO ALTO CA 94306-1234 $2,115,000 6,175 $170.22
2250 COLUMBIA ST PALO ALTO CA 94306-1234 $2,115,000 6,250 $170.22
PALO ALTO CA $1,658,000 6,000 $276.33
370 LOWELL AVE PALO ALTO CA 94301-3811 $4,450,000 12,474 $356.74
DRAFT Palo Alto Housing Impact Fee Nexus Study -63-
Figure VII-7. Recent Single-Family Land Sales Transactions in Palo Alto and Neighboring Cities
(continued)
Site Address Location Sale Price Lot Area
Price/ SF
of Land
4075 ORME ST PALO ALTO CA 94306-3137 $2,175,000 16,830 $129.23
ASH ST PALO ALTO CA 94306 $1,275,000 3,049 $418.17
1620 WEBSTER ST PALO ALTO CA 94301-3851 $6,000,000 20,000 $300.00
569 SAN ANTONIO RD PALO ALTO CA 94306 $6,250,000 30,943 $201.98
297 BEL AYRE DR SANTA CLARA CA 95050-2004 $855,000 17,424 $49.07
1476 MONROE ST SANTA CLARA CA 95050 $1,299,000 2,704 $480.40
VILLA OAKS LN SARATOGA CA 95070 $4,280,000 14,846 $288.29
SARATOGA-SUNNYVALE RD SARATOGA CA 95070 $1,300,000 18,800 $69.15
15651 ROBLES DEL ORO SARATOGA CA 95070-6430 $1,550,000 43,320 $35.78
HOWEN DR SARATOGA CA 95070 $1,670,000 10,169 $164.22
BROOKWOOD LN SARATOGA CA 95070 $1,650,000 18,050 $91.41
LAND ONLY SARATOGA CA 95070 $1,553,500 14,810 $104.90
14100 ALTA VISTA AVE SARATOGA CA 95070 $1,030,000 10,149 $101.49
SARATOGA VISTA AVE SARATOGA CA 95070 $1,300,000 12,760 $101.88
MERRIBROOK DR SARATOGA CA 95070 $1,822,000 4,136 $440.52
Summary Statistics
Lower Quartile (25%) $49.07
Median Value $99.58
Upper Quartile (75%) $172.17
Source: CoreLogic, 2015; Strategic Economics, 2015.
Figure VII-8. Recent Multi-Family Land Sales Transactions in Palo Alto and Neighboring Cities
Property Location
Sales
Date Sales Price
Site
Size
(SF)
Average
Sales
Price/ SF
Page Mill Palo Alto 2012 3,959,000 26,926 $147
389 El Camino Real Menlo Park 2012 $12,200,000 53,579 $228
1300 El Camino Real Menlo Park 2012 $24,500,000 148,165 $165
E. side of Tilton Avenue, N. of El Camino Real San Mateo 2012 4,505,000 33,572 $134
1275 El Camino Real Menlo Park 2014 $3,600,000 17,960 $200
3877 El Camino Real Palo Alto 2013 4,450,000 32,825 $136
536 N Wishman Rd Mountain View 2014 1,050,000 7,000 $150
1958 Latham St, Mountain View, CA 94040 Mountain View 2014 $1,600,000 16,600 $96
Value Range $96 - $228
Weighted Average Value per SF $167
Source: City of Palo Alto; Independent appraisals; Loopnet, 2015; Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study
-64-
Financial Feasibility Results
Figures VII-9 and VII-10 provide the pro forma for the single-family detached, single-family
attached, condominium and apartment prototypes. Below is a discussion of the findings.
Single-Family Detached
The feasibility analysis indicates that at current market prices, without the addition of new impact
fees, the single-family detached prototype would have revenues of $91.3 million, with a total
development cost of $24.5 million. The difference between the revenues and costs is the residual land
value, which is estimated at $315 per square foot. This prototype, with no additional impact fees,
yields a residual land value that is higher than what is required to be financially feasible.
All of the impact fee scenarios were found to be financially feasible due to the very high value of
single-family detached homes in Palo Alto.
The maximum impact fee of $111 per square foot raises development costs from $24.5
million to $34.5 million. This cost increase results in a residual land value of $268 per square
foot.
An impact fee set at $95 per square foot increases development costs to $33 million. The
residual land value under this scenario is $275 per square foot
An impact fee of $75 per square foot increases development costs to $31.2 million. The
residual land value under this fee scenario is $284 per square foot.
A fee level set at $50 per square foot results in total development costs of $29 million, and a
residual land value of $294 per square foot.
Single-Family Attached
According to the feasibility analysis, with no added nexus fees, the single-family attached prototype
would have total development costs of $5.8 million and a sale value of $16.7 million. The residual
land value, without nexus fees, is then estimated at $263 per square foot, and exceeds the threshold on
financial feasibility, defined as between $50 and $175.
All of the potential impact fee levels are financially feasible due to the high value of single-family
detached units in Palo Alto.
The maximum impact fee of $75 per square foot brings development costs to $7.4 million.
This cost increase results in a residual land value of $224 per square foot.
A $50 per square foot nexus fee increases development costs to $6.9 million. Under this fee
scenario, the residual land value is $237 per square foot.
With an impact fee of $40 per square foot, development costs reach $6.7 million. In this case,
the residual land value is $242 per square foot.
A fee level set at $25 per square foot brings total development costs to $6.4 million, and the
residual land value to $250 per square foot.
Condominiums
The feasibility analysis shows that, following current market prices and without new impact fees, the
condominium prototype would have revenues of $48.7 million, with a total development cost of
$26.5 million. The difference between the revenues and costs is the residual land value, which is
DRAFT Palo Alto Housing Impact Fee Nexus Study -65-
estimated at $435 per square foot. The residual land value associated with this prototype is higher
than what is required to be financially feasible.
Given the high price of condominium units in Palo Alto, all of the housing impact fee levels were
found to be financially feasible, as described below:
The full justified impact fee of $90 per square foot raises development costs from $26.5
million to $33.1 million. This cost increase results in a residual land value of $305 per square
foot.
A reduced impact fee set at $70 per square foot raises development costs to $31.7 million.
The residual land value under this fee scenario is $334 per square foot.
Setting the nexus fee at $50 per square foot results in development costs of $30.2 million, and
a residual land value of $363 per square foot.
A fee level set at $30 per square foot results in a total development cost of $28.7 million, and
a residual land value of $392 per square foot.
Apartments
For apartments, the financial analysis shows that under current market conditions, without a nexus fee
on affordable housing, a prototypical apartment development costs approximately $25.5 million, with
a total project value of $42.7 million. The residual land value on this prototype, excluding a nexus
fee, is estimated at $231 per square feet, which is a higher value than what would be required to be
financially feasible.
The analysis shows that the maximum justified fee for apartments is not financially feasible to
implement. However, reduced fee levels are financially feasible. The following describes the
feasibility of potential housing impact fees at different levels for apartments:
The maximum nexus fee of $105 per square foot brings total development costs up to nearly
$32.6 million. This cost increase results in a residual land value of $136 per square foot,
which is not financially feasible under current market conditions.
A nexus fee of $85 per square foot increases development costs to $31.2 million. The residual
land value under this fee scenario is $154 per square foot, which is financially feasible.
With a housing impact fee level of $50 per square foot, development costs reach $28.9
million. The residual land value in this case is of $186 per square foot, which is financially
feasible.
A fee level of $30 per square foot increases development costs to $27.5 million, creating a
residual land value of $204 per square foot. This fee level would also be financially feasible.
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Figure VII-9. Pro Forma Model Results for Single-Family Detached and Attached Prototypes
Single Family Detached Single-Family Attached
Development Costs (Excl. Land &
Nexus Fee) per Unit Total per Unit Total
Direct Costs (a)
Building & On-Site Improvements $465,000 $13,950,000 $315,000 $3,150,000
Building & Onsite per NSF $155 $150
Parking Incl. above Incl. above Incl. above Incl. above
Total Direct Costs $465,000 $13,950,000 $315,000 $3,150,000
Total Direct Costs per NSF $155 $150
Indirect Costs (a)
A&E & Consulting $27,900 $837,000 $18,900 $189,000
Permits & Fees (Excl. Nexus fee) (b) $158,808 $4,764,246 $138,777 $1,387,773
Taxes, Insurance, Legal & Accounting $13,950 $418,500 $9,450 $94,500
Other Indirect Costs $13,950 $418,500 $9,450 $94,500
Contingency $10,730 $321,912 $8,829 $88,289
Total Indirect Costs $225,339 $6,760,158 $185,406 $1,854,062
Financing Costs (a) $38,383 $1,151,485 $21,217 $212,172
Developer Overhead & Profit (a) $87,447 $2,623,397 $62,595 $625,948
Total Development Costs $816,168 $24,485,040 $584,218 $5,842,182
Total Development Costs (per NSF) $272 $278
Income
Gross Income/Sales Proceeds $3,043,000 $91,290,000 $1,666,000 $16,660,000 Less: Operating/Sales Expenses & Vacancy
Net (Operating or Sales) Income $3,043,000 $91,290,000 $1,666,000 $16,660,000
Capitalized Value/Sales Value (c) $3,043,000 $91,290,000 $1,666,000 $16,660,000
Residual Land Value Analysis
Total Development Costs (TDC) Except
Land With Various Levels of Nexus Fee
Nexus Fee
per NSF
TDC incl. Nexus
Fee
Nexus Fee
per NSF
TDC incl. Nexus
Fee
$0 $24,485,040 $0 $5,842,182
$50 $28,985,040 $25 $6,367,182
$75 $31,235,040 $40 $6,682,182
$95 $33,035,040 $50 $6,892,182
$111 $34,475,040 $75 $7,417,182
Residual Land Value per Sq. Ft. at Various Nexus Fee Levels
Nexus Fee
per NSF
Residual Land
Value per SF
Nexus Fee
per NSF
Residual Land
Value per SF
$0 $315 $0 $263
$50 $294 $25 $250
$75 $284 $40 $242
$95 $275 $50 $237
$111 $268 $75 $224
Current Land Values/ Threshold for
Feasibility $50-$175 $50-$175
Notes: (a) See Figure VII-5. (b) This represents a generalized estimate of the fee and permit costs for each prototype, calculated by city staff. Actual fee and permit costs for development projects will vary depending on many factors. (c) See Figure VII-4. (d) Feasibility threshold varies by density of prototype. For single-family detached and single-family attached, the threshold is $50-$175 per square foot. For multi-family rental apartments and condominiums, the threshold is $150 to $250 per square foot Acronyms: SF: square feet NSF: net square feet TDC: total development costs Source: Strategic Economics, 2015.
Figure VII-10. Pro Forma Model Results for Condominium and Apartment Prototypes
Condominiums Apartments
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Development Costs (Excl. Land & Nexus
Fee) per Unit Total per Unit Total
Direct Costs (a)
Building & On-Site Improvements $472,500 $16,537,500 $203,910 $14,273,700
Building & Onsite per NSF $225 $210
Parking $45,000 $1,575,000 $37,500 $2,625,000
Total Direct Costs $517,500 $18,112,500 $241,410 $16,898,700
Total Direct Costs per NSF $246 $249
Indirect Costs (a)
A&E & Consulting $31,050 $1,086,750 $14,485 $1,013,922
Permits & Fees (Excl. Nexus fee) (b) $63,247 $2,213,657 $30,617 $2,143,169
Taxes, Insurance, Legal & Accounting $15,525 $543,375 $7,242 $506,961
Other Indirect Costs $15,525 $543,375 $7,242 $506,961
Contingency $6,267 $219,358 $2,979 $208,551
Total Indirect Costs $131,615 $4,606,515 $62,565 $4,379,564
Financing Costs (a) $27,522 $963,286 $20,913 $1,463,945
Developer Overhead & Profit (a) $81,196 $2,841,876 $38,987 $2,729,065
Total Development Costs $757,834 $26,524,177 $363,875 $25,471,273
Total Development Costs (per NSF) $361 $375
Income
Gross Income/Sales Proceeds $1,390,000 $48,650,000 $46,971 $3,288,000
Less: Operating/Sales Expenses & Vacancy $16,440 $1,150,800
Net (Operating or Sales) Income $1,390,000 $48,650,000 $30,531 $2,137,200
Capitalized Value/Sales Value (c) $1,390,000 $48,650,000 $610,629 $42,744,000
Residual Land Value Analysis
Total Development Costs (TDC) Except Land With Various Levels of Nexus Fee
Nexus Fee
per NSF
TDC incl.
Nexus Fee
Nexus Fee
per NSF
TDC incl.
Nexus Fee
$0 $26,524,177 $0 $25,471,273
$30 $28,729,177 $30 $27,510,373
$50 $30,199,177 $50 $28,869,773
$70 $31,669,177 $85 $31,248,723
$90 $33,139,177 $105 $32,608,123
Residual Land Value per Sq. Ft. at Various Nexus Fee Levels
Nexus Fee
per NSF
Residual
Land Value
per SF
Nexus Fee
per NSF
Residual
Land Value
per SF
$0 $435 $0 $231
$30 $392 $30 $204
$50 $363 $50 $186
$70 $334 $85 $154
$90 $305 $105 $136
Current Land Values/ Threshold for
Feasibility $150-$250 $150-$250
Notes: (a) See Figure VII-5. (b) This represents a generalized estimate of the fee and permit costs for each prototype, calculated by city staff. Actual fee and permit costs for development projects will vary depending on many factors. (c) See Figure VII-4. (d) Feasibility threshold varies by density of prototype. For single-family detached and single-family attached, the threshold is $50-$175 per square foot. For multi-family rental apartments and condominiums, the threshold is $150 to $250 per square foot Acronyms: SF: square feet NSF: net square feet Source: Strategic Economics, 2015.
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ADDITIONAL POLICY CONSIDERATIONS
While the nexus study provides the necessary economic analysis for the housing impact fees, it is up
to policymakers to decide what percentage of the maximum fee to charge on new development.
Financial feasibility is one important factor to examine. In addition, there are a number of other
policy issues to consider, such as:
How much will residential development fees increase?
What are the residential impact fee levels in neighboring jurisdictions?
How does a housing impact fee fit into Palo Alto’s overall housing strategy?
How can the city decide other administrative issues?
A discussion of each of these topics is presented below.
Comparison to Existing Fees on Residential Development
Figure VII-11 presents information on current city fees charged on the four residential prototypes
included in this nexus analysis. It also demonstrates how total residential fee levels would change
under the maximum fee and three additional residential impact fee scenarios.
Currently, Palo Alto’s existing city permits and fees for the residential prototypes are estimated at
$158,808 for a single-family detached unit, $138,777 for a single-family attached unit, $63,247 for a
condominium unit and $30,617 for an apartment unit.19 Once the nexus-based residential impact fees
at various levels are added to existing fees, the total fees increase as presented in Figure VII-11. The
maximum fee scenario increases total fees between 200 and 400 percent, depending on the prototype,
while the lowest fee scenario (Scenario 4) approximately doubles total city fees.
Figure VII-11 is intended to be a resource for the policy discussion that Palo Alto will have when
considering what fee level to select. A fee that is set too high could have a dampening effect on
private development. On the other hand, a low fee does not fully mitigate all the affordable housing
impacts from new residential development.
19 The fee estimates presented above represent the best approximations available from Palo Alto.
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Figure VII-11. Palo Alto Total Residential Fees under Selected Fee Scenarios
Single-Family
Detached
Single-Family
Attached Condominiums Apartments
Existing Fees and Permits per Unit $158,808 $138,777 $63,247 $30,617
Existing Fees and Permits per SF $53 $66 $30 $32
Scenario 1: Maximum Fee per SF $111 $90 $75 $105
Nexus Fee Per Unit $333,501 $189,037 $158,519 $101,906
Combined Fees Per Unit $492,309 $327,814 $221,766 $132,523
Combined Fees per SF $164 $156 $106 $136
Scenario 2 Fee per SF $95 $70 $50 $85
Nexus Fee Per Unit $285,000 $147,000 $105,000 $82,571
Combined Fees Per Unit $443,808 $285,777 $168,247 $113,188
Combined Fees per SF $148 $136 $80 $117
Scenario 3 Fee per SF $75 $50 $40 $50
Nexus Fee Per Unit $225,000 $105,000 $84,000 $48,571
Combined Fees Per Unit $383,808 $243,777 $147,247 $79,188
Combined Fees per SF $128 $116 $70 $82
Scenario 4 Fee per SF $50 $30 $25 $30
Nexus Fee Per Unit $150,000 $63,000 $52,500 $29,143
Combined Fees Per Unit $308,808 $201,777 $115,747 $59,760
Combined Fees per SF $103 $96 $55 $62
Comparison to Neighboring Jurisdictions
Figure VII-12 compares the fee scenarios for Palo Alto with the current housing impact fees and in-
lieu fees in other nearby cities. If either the maximum housing impact fee levels (Scenario 1) or the
second-highest fee levels (Scenario 2) were adopted in Palo Alto, they would significantly exceed the
residential impact fees charged in the neighboring jurisdictions in San Mateo and Santa Clara
Counties listed in Figure VII-12. However, San Francisco has adopted fees ranging from $199,000 to
$522,000 per unit, depending on the unit size, which are somewhat similar to the maximum fee levels
calculated for Palo Alto. If Palo Alto were to adopt the recommended fee levels its fees would be
higher than most other cities in San Mateo and Santa Clara Counties, but lower than the housing
impact fees in San Francisco.
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Figure VII-12. Comparison with Impact Fees and In-Lieu Fees in Neighboring Jurisdictions
Single Family Detached Single Family Attached Condominiums Apartments
Date Fee Was
Adopted
Palo Alto Fee Scenarios
Scenario 1 (Maximum)
Per SF $111 $90 $75 $105 N/A
Per Unit $333,501 $189,037 $158,519 $101,906
Scenario 2
Per SF $95 $70 $50 $85 N/A
Per Unit $285,000 $147,000 $105,000 $82,571
Scenario 3
Per SF $75 $50 $40 $50 N/A
Per Unit $225,000 $105,000 $84,000 $48,571
Scenario 4
Per SF $50 $30 $25 $30 N/A
Per Unit $150,000 $63,000 $52,500 $29,143
Impact Fees
Cupertino $15/SF $16.50/SF (a) $20/SF $25/SF 2015
Daly City $14/SF $18/SF (b) $22/SF $25/SF 2014
East Palo Alto $22/SF $22/SF $22-$44/SF (c) $22/SF 2014
Mountain View N/A N/A N/A $15/SF 2015
San Carlos (d) $23.54-$43.54/SF $20.59-$42.20/SF $20.59-$42.20/SF $23.54-$43.54/SF 2010
San Francisco (e) $199,698-$522,545/unit $199,698-$522,545/unit $199,698-$522,545/unit $199,698-$522,545/unit 2015
San Jose N/A N/A N/A $17/SF (f) 2014
Sunnyvale N/A N/A N/A $17/SF (g) 2015
Inclusionary Policies and In-Lieu Fees
Palo Alto 15%-20% 15%-20% 15%-20% N/A
Mountain View 3% of Sales Price 3% of Sales Price 3% of Sales Price N/A 2015
San Jose (h) 15% or $17/SF in-lieu fee 15% or $17/SF in-lieu fee 15% or $17/SF in-lieu fee N/A 2014
Sunnyvale 7% of Sales Price 7% of Sales Price 7% of Sales Price N/A 2015
(a) This fee applies to small lot single family and townhomes.
(b) This fee applies to townhomes.
(c) Fee ranges from $22 per square foot for for-sale housing without structured parking to $44 per square foot for housing with structured parking.
(d) Fees shown as ranges. Actual fees charged depends on project size.
(e) Fee charged depends on unit size (number of bedrooms).
(f) Fee goes into effect in 2016. Developments approved by July 2016 are exempt with a longer exemption for downtown development.
(g) Fees for projects that are between 4 and 7 units pay 50 percent of this fee.
(h) Inclusionary policy and in-lieu fee apply to for-sale developments of more than 20 units.
Sources: The Non-Profit Housing Association of Northern California; City of San Carlos Municipal Code; Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
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The potential fee scenarios can also be compared with existing housing impact fees in other Bay Area
cities for regional context. This list is not an exhaustive inventory of all Bay Area cities with housing
impact fees, but it provides information about many cities that have fees on rental, ownership or both
types of housing. As shown in Figure VII-13, housing nexus fees in other Bay Area cities vary
significantly from city to city. None of the fees presented in Figure VII-13 are as high as the
maximum justified fee in Palo Alto. However, some of the cities, such as Berkeley and Fremont, have
impact fees that are similar to the lowest fee scenario evaluated for Palo Alto.
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Figure VII-13. Existing Housing Impact Fees in Bay Area Cities
City Project Type Amount
Fremont For-Sale and Rental Development $19.50 per habitable SF $22.50 per habitable SF for single family homes on
lots 6,000 SF or greater.
Santa Rosa For-Sale and Rental Development 2.5% of sale price of for-sale units. Based on SF for rentals
Livermore For-Sale and Rental Development Based on type of dwelling produced
Pleasanton For-Sale and Rental Development Single Family (over 1,500 SF): $10,880 per unit
Single Family (1,500 SF or less) and Multi-family (Apt. or Condo): $2,696 per unit Adjusted annually based on CPI
Napa For Sale and Rental Development Single Family: $ 2.20 per SF Condo: $2.20 per SF Rental: $3.75 per sq.
Emeryville Rental Residential Projects $20,000 per dwelling unit
Berkeley Rental Development $28,000 per unit
Note: City of Berkeley Resolution No. 66, 015 authorizes $8,000 discount for eligible projects
Sources: The Non-Profit Housing Association of Northern California, Strategic Economics, and Vernazza Wolfe Associates, Inc, 2015.
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Role of Fees in Overall Housing Strategy
The City currently charges a commercial linkage fee of $19.31 per square foot on all new non-
residential development. These fees are payable at the time that the building permit is issued. The city
also has an inclusionary housing program that requires that 15 percent of the units in market-rate
developments consisting of five or more housing units must be sold at below-market rate (BMR)
prices. The inclusionary requirement increases to 20 percent for larger projects on five-acre and larger
parcels. Two-thirds of the BMR units are to be affordable at the 90 percent AMI level households
and the remaining one-third are to be affordable at the 110 percent AMI level. City policy generally
requires that the BMR units be provided in the project. In some cases, developers have the option of
paying an in-lieu fee of between 7.5 and ten percent of the sales price or fair market value, whichever
is greater. The developer must also pay a fee for fractional units.
Revenues from the BMR in-lieu fee and commercial linkage fee programs are deposited into the
City’s Affordable Housing Fund. The Affordable Housing Fund is a local housing trust fund
established by the City Council of Palo Alto to provide financial assistance for the development of
housing affordable to very low-, low- and moderate-income households that live or work within the
City. It is largely made up of two sub-funds: the Commercial Housing Fund and the Residential
Housing Fund. While both rental and ownership units are eligible for assistance, in practice all units
assisted thus far have been rental units and almost all have been affordable to very low- or low-
income households.
The revenues to be collected from the residential impact fee, if adopted, could provide an important
additional source of local funding; however, local fee revenues do not generally cover the entire
funding gap encountered by sponsors of new affordable housing. Additional funding from a variety of
sources will remain critical. These funding sources typically include public subsidies from Santa
Clara County, equity from the Low Income Housing Tax Credits, and financing from conventional
lenders.
Potential for Overlap between Residential and Commercial Fees
The City is also undertaking a housing impact nexus study simultaneously, and may soon adopt a
housing impact fee in a parallel process to the commercial linkage fee considered in this report. One
issue that may arise if a City considers the adoption of both fees is whether there is any overlap
between the two impact fees, resulting in potential “double-counting” of impacts.
The commercial linkage fee study examined jobs located in new commercial buildings including
office/ R&D/ medical office buildings, retail/ restaurants/ services, and hotels. The nexus analysis
then calculated the average wages of the workers associated with each commercial building to derive
the annual income of the new worker households. The analysis determines the area median income
(AMI) level of the new worker-households to identify the number of worker-households that would
require affordable housing.
The housing impact fee nexus analysis examined households buying or renting new market rate units
in the jurisdiction. The household expenditures by these new residents have an economic impact in
the county, which can be linked to new jobs. The nexus analysis quantified the jobs linked to new
household spending, and then calculated the wages of new workers and the household income of new
worker households. Each worker household was then categorized by area median income (AMI) to
determine the number of households that require affordable housing.
There may be a share of jobs counted in the commercial linkage fee analysis that are also included
in the residential nexus analysis, particularly those in the service sector. Other types of jobs counted
in the residential nexus analysis are unique to that analysis, and are not included in the commercial
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linkage fee analysis (for example, public sector employees). The commercial linkage fee analysis
is limited to new development in private sector office/ R&D/ medical office buildings, hotels, and
retail/ restaurants/ services space.
There is potential that some jobs could be counted in both analyses, and that the two programs may
overlap in mitigating the affordable housing demand from the same worker households. Each of the
proposed fees is required to mitigate no more than 100 percent of the demand for affordable units by
new worker households. In order to reduce the potential for overlap between the two programs, it is
advisable to set both the commercial linkage fees and housing impact fees at below 100 percent of the
nexus-based maximum. In this way, when combined, the programs would mitigate less than 100
percent of the impact even if there were overlap in the jobs counted in the two nexus analyses.
Administrative Issues
When adopting a Housing Impact Fee, there are several administrative issues to consider. First, does
the City want to encourage smaller units? By charging lower fees for smaller units, it is possible that
it could encourage development of smaller units.
Secondly, similar to any impact fee, periodically it will be necessary to adjust the housing
impact fees. Adjustments may be needed due to possible changes in the affordability gap. However,
the connection between new residential construction and growth in employment derived from the
IMPLAN3 Model is unlikely to change in the short run.
It is advisable that the City adjusts its housing impact fee annually by using an annual adjustment
mechanism. An adjustment mechanism updates the fees to compensate for inflation in development
costs. To simplify annual adjustments, it is recommended that the City select a cost index that is
routinely published. While there is no index that tracks changes in Palo Alto’s development costs,
including land, specifically, there are a few options to consider.
The first option is the Consumer Price Index (CPI) Shelter component. The shelter
component of the CPI covers costs for rent of primary residence, lodging away from home,
owner’s equivalent rent of primary residence, and household insurance. Of the total shelter
index, costs associated with the owner’s equivalent rent of primary residence constitute 70
percent of total costs entered into the index.
A second option to adjust the fee for annual inflation is the construction cost index published
in the Engineering News Record (ENR). This index is routinely used to update other types of
impact fees. Cost index information for the San Francisco region, the smallest geographical
area available for this purpose, is available on an annual basis. The ENR cost index measures
inflation in construction costs, but it does not incorporate changes in land costs or public fees
charged on new development.
Because these indices are readily available, reliable, and relatively simple to use, it is recommended
that Palo Alto use these indices for annual adjustments. However, because both understate the
magnitude of inflation, it is recommended that the City base its annual adjustment mechanism on the
higher of the two indices (CPI or ENR), using a five-year moving average as the inflation factor.
In addition to revising the fee annually for inflation, the City is encouraged to update the housing
impact study every five years, or at the very least, update the housing affordability gap used in the
basic model. The purpose of these updates is to ensure that the fee is still based on a cost-revenue
structure that remains applicable in the Palo Alto housing market. In this way, the fee will more
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accurately reflect any potential structural changes in the relationships between affordable prices and
rents, and development costs.
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GLOSSARY OF TERMS
Affordable Housing: Under state and federal statutes, housing is defined as affordable if housing
costs do not exceed 30 to 35 percent of gross household income.
Annual Adjustment Mechanism: Due to inflation in housing construction costs, it is frequently
necessary to adjust impact fees. An index, such as the Consumer Price Index (CPI) or a published
construction cost index (for example, from the Engineering News Record) is used to revise housing
fees to reflect inflation in housing construction costs.
Assisted Housing: Housing that has received public subsidies (such as low interest loans, density
bonuses, direct financial assistance, etc.) from federal, state, or local housing programs in exchange
for restrictions requiring a certain number of housing units to be affordable to very low-, low-, and
moderate-income households.
Boomerang Funds: Monies returned to the City by the State of California, after dissolution of
redevelopment agencies in the State.
Consumer price index (CPI): Index that measures changes in the price level of a market basket of
consumer goods and services purchased by households.
Employment Densities: The amount of square feet per employee is calculated for each property use
that is subject to a commercial development housing linkage fee. Employment densities are used to
estimate the number of employees that will work in a new commercial development.
Household: The US Census Bureau defines a household as all persons living in a housing unit
whether or not they are related. A single person living in an apartment as well as a family living in a
house is considered a household. Households do not include individuals living in dormitories, prisons,
convalescent homes, or other group quarters.
Household Income: The total income of all the persons living in a household. Household income is
commonly grouped into income categories based upon household size and income, relative to the
regional median family income.
Housing Affordability Gap: The affordability gap is defined as the difference between what a
household can afford to spend on housing and the market rate cost of housing. Affordable rents and
sales prices are defined as a percentage of gross household income, generally between 30 percent and
35 percent of income.
VIII. GLOSSARY OF TERMS AND ACRONYMS
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For renters, rental costs are assumed to include the contract rent as well as the cost of utilities,
excluding cable and telephone service. The difference between these gross rents and
affordable rents is the housing affordability gap for renters. This calculation assumes that
30% of income is paid for gross rent.
For owners, costs include mortgage payments, mortgage insurance, property taxes, property
insurance, and homeowner association dues. 20 The difference between these housing
expenses and affordable ownership costs is the housing affordability gap for owners. This
calculation assumes that 35% of income is paid for housing costs.
Housing Subsidy: Housing subsidies refer to government assistance aimed at reducing housing sales
prices or rents to more affordable levels.
Housing Unit: A housing unit can be a room or group of rooms used by one or more individuals
living separately from others in the structure, with direct access to the outside or to a public hall and
containing separate toilet and kitchen facilities.
IMPLAN3: A software model that is used to provide a quantitative assessment of the
interdependencies between different branches of a regional (or national) economy. The latest model,
IMPLAN3, was used in the nexus studies. The major input is household income, and the major output
is direct and induced employment reported by industries
Inclusionary Zoning: Inclusionary zoning, also known as inclusionary housing, refers to a planning
ordinance that requires that a given percentage of new construction be affordable to households with
very low, low, moderate, or workforce incomes.
In-Lieu Fee: A literal definition for an in-lieu fee for inclusionary units would be a fee adopted “in
place of” providing affordable units. For the purposes of operating an inclusionary housing program,
a public jurisdiction may adopt a fee option for developers that prefer paying fees over providing
housing units on- or off-site. A fee study is frequently undertaken to establish the maximum fee that
can be charged as an in-lieu fee. This fee study must show that there is a reasonable relationship
between the fee and the cost of providing affordable housing.
Market-Rate Housing: Housing which is available on the open market without any public subsidy.
The price for housing is determined by the market forces of supply and demand and varies by
location.
Nexus Study: In order to adopt a residential housing impact fee or a commercial linkage fee, a nexus
study is required. A nexus requires local agencies proposing a fee on a development project to
identify the purpose of the fee, the use of the fee, and to determine that there is “a reasonable
20 Mortgage terms for first-time homebuyers typically allow down payment of five percent; these terms require private
mortgage insurance.
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relationship between the fee’s use and the type of development project on which the fee is imposed.”
A nexus study establishes and quantifies a causal link or “nexus” between new residential and
commercial development and the need for additional housing affordable to new employees.
Linkage Fee: A fee or charge imposed on commercial developers to pay for a development’s impact
on the need for affordable housing. The fee is based on projected household incomes of new
employees that will work in newly created space. The fee varies according to the type of property use.
Prototypes: Prototypes are used for residential and commercial developments in order to define
housing impact fees. The prototypes generally represent new development projects built in a
community and are used to estimate affordable housing impacts associated with new market rate
commercial and residential developments. While the prototypes should be “typical” of what is built,
for ease of mathematical computation, they are often expressed as larger developments in order to
avoid awkward fractions.
Residential or Housing Impact Fee: A fee imposed on residential development to pay for a
development’s impact on the need for affordable housing. The fee is based on projected incomes of
new employees associated with the expansion of market rate developments. Two steps are needed to
define the fees. The first step is the completion of a nexus study, and the second step entails selection
of the actual fee amount, which can be below the amount justified by the fee study, but not above that
amount.
RS Means: Data source of information for construction cost data.
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DEFINITION OF ACRONYMS
AMI: Area Median Income
CBIA: California Building Industry Association
EDD: State of California Employment Development Department
FAR: Floor-area-ratio
FF&E: Furniture, Fixtures, and Equipment
GBA: Gross Building Area
HCD: Department of Housing and Community Development (State of California)
NAICS: North American Industry Classification System
NSF: Net Square Feet
QCEW: Quarterly Census of Employment and Wages
R&D: Research and development
SF: Square Feet
TDC: Total Development Costs
Table 4. Comparison to Neighboring Cities (Residential)
Comparison with Impact Fees and In-Lieu Fees in Neighboring Jurisdictions
Palo Alto Fee Scenarios
Scenario 1 (Maximum)
Per SF
$111 $90 $75 $105 N/A
Per Unit $333,501 $189,037 $158,519 $101,906
Scenario 2
Per SF $95 $70 $50 $85 N/A
Per Unit $285,000 $147,000 $105,000 $82,571
Scenario 3
Per SF $75 $50 $40 $50 N/A
Per Unit $225,000 $105,000 $84,000 $48,571
Scenario 4
Per SF $50 $30 $25 $30 N/A
Per Unit $150,000 $63,000 $52,500 $29,143
Impact Fees
Cupertino $15/SF $16.50/SF(a)$20/SF $25/SF 2015
Daly City $14/SF $18/SF (b) $22/SF $25/SF 2014
East Palo Alto $22/SF $22/SF $22-$44/SF (c) $22/SF 2014
Mountain View N/A N/A N/A $15/SF 2015
San Carlos (d) $23.54-$43.54/SF $20.59-$42.20/SF $20.59-$42.20/SF $23.54-$43.54/SF 2010
San Francisco (e) $199,698-$522,545/unit $199,698-$522,545/unit $199,698-$522,545/unit $199,698-$522,545/unit 2015
San Jose N/A N/A N/A $17/SF (f) 2014
Sunnyvale N/A N/A N/A $17/SF (g) 2015
Inclusionary Policies and In-Lieu Fees
Palo Alto 15%-20% 15%-20% 15%-20% N/A
Mountain View 3% of Sales Price 3% of Sales Price 3% of Sales Price N/A 2015
San Jose (h) 15% or $17/SF in-lieu fee 15% or $17/SF in-lieu fee 15% or $17/SF in-lieu fee N/A 2014
Sunnyvale 7% of Sales Price 7% of Sales Price 7% of Sales Price N/A 2015
(a) This fee applies to small lot single family and townhomes. (b) This fee applies to townhomes.
(c) Fee ranges from $22 per square foot for for-sale housing without structured parking to $44 per square foot for housing with structured parking.
(d) Fees shown as ranges. Actual fees charged depends on project size. (e) Fee charged depends on unit size (number of bedrooms). (f) Fee goes into effect in 2016. Developments approved by July 2016 are exempt with a longer exemption for downtown development. (g) Fees for projects that are between 4 and 7 units pay 50 percent of this fee.
(h) Inclusionary policy and in-lieu fee apply to for-sale developments of more than 20 units.
Sources: The Non-Profit Housing Association of Northern California; City of San Carlos Municipal Code; Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
City of Palo Alto (ID # 6635)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 2/16/2016
City of Palo Alto Page 1
Summary Title: Development Center and Business Registry Staffing
Title: Approval of Amendment to Table of Organization by Adding 1.0 FTE
Management Analyst in the Development Services Department
From: City Manager
Lead Department: City Manager
Recommendation
Staff recommends that the City Council amend the Table of Organization by adding 1.0
Management Analyst in the General Fund, Development Services Department.
Background
The City Council passed Ordinance No. 5279 in November 2014 establishing the
Business Registry program and on January 19, 2016 amended the original program to
exempt small businesses and small non-profits. The Development Services Department
is taking a lead in administering the Business Registry Program. As a result of the
additional responsibilities being assigned to the Development Center and the current
high volume work-load for the existing Development Center staff, a staffing and
workload assessment study was contracted by Human Resources. The staffing study
concluded that current staffing resources do not support the level of administration and
reporting required to meet the demands of this new program and the existing workload
exceeds the current level of staffing, therefore staff recommends the addition of one
Full-Time Equivalent (FTE) Management Analyst. There is an immediate need to
request this position in order to hire and train in a timely manner to meet Business
Registry demands and maintain the existing level of service in the Development Center.
Discussion
The Palo Alto Development Center is a “one stop” customer service center which
experiences extremely high customer demand for services every day with approximately
4,000 permits issued per year. Since March 2015, the Development Center (DC)
Manager and Economic Development Manager have been co-leaders of the Business
Registry project. Currently, the day-to-day administration is handled at the
Development Center under the DC Manager. The implementation of the Business
Registry program has been complex and demanding and has impacted the existing
City of Palo Alto Page 2
workload for the DC Manager. The duties in administering the Business Registry involve
the following:
• Oversee day-to-day administration of Business Registry:
• Manage outreach and notifications processes as well as timely response to
inquiries and answering questions;
• Create reports for status updates to monitor compliance;
• Merger of the Business Registry program with Certificate of Occupancy by
assisting in the creation of procedures, interplay with Accela, and training staff;
and
• Administer Business Registry payments, fees and refunds.
In order to determine appropriate allocation of new Business Registry work among
current staffing and evaluate the demands and requirements to support the existing
workload, Human Resources contracted for a staffing and workflow analysis of the
administrative support functions in the Development Center Department, including a
review of current classifications, and options for supporting the additional
responsibilities associated with administering the Business Registry Program and
supporting the existing workload. The findings determined that the DC Manager needs
additional support to provide required assistance on this key program and to maintain
the high level of service currently provided in the Development Center. The analysis
concluded that a Management Analyst is the appropriate classification to handle the
necessary duties to efficiently operate the Business Registry and provide additional
support for Development Center administrative functions. With the existing level of
demand in the Development Center and the ongoing responsibilities associated with the
Business Registry administration a full time employee is required.
In addition, the findings note that the Development Center Services Department should
evaluate the use of contractors in supporting Development Center services since there
is an ongoing high demand for inspection and plan review. The review points out that
while the use of contractors in the staffing model has provided flexibility to manage
fluctuations in demand for services, it has contributed to a high level of turnover of
trained and experienced contract personnel. Staff will evaluate the ongoing work-load
needs and return with possible recommendations on use of contract personnel during
the development of the Fiscal Year 2017 operating budget.
At this time, the only change recommended to the Fiscal Year 2016 budget is to add
one FTE Management Analyst to support the Business Registry program and the
significant Development Center workload. Attached is an updated Fiscal Year 2016
Table of Organization to reflect the addition of this one FTE.
Resource Impact
The addition of one FTE Management Analyst is estimated to cost $53,224 for the
remainder of the current fiscal year and approximately $164,040 annually.
Sufficient funding is available within the Development Services department’s Fiscal Year
City of Palo Alto Page 3
2016 budget, through the use of salary savings and unencumbered contract dollars, to
fund the additional expenses associated with this position through this fiscal
year. Development Services is currently conducting a comprehensive fee study to align
the Department’s Municipal Fees with expenses. Development Services intends to offset
ongoing future expenses associated with this additional position through appropriate
adjustments to the Fiscal Year 2017 Municipal Fee schedule with the goal of reaching
100% full cost recovery. Staff will bring forth recommendations to adjust fees and
achieve cost-neutrality as part of the development of the Fiscal Year 2017 operating
budget, and subsequent Business Registry updates, subject to council approval.