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Tuesday, June 15, 2021
Special Meeting
6:00 PM
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PUBLIC COMMENT
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Call to Order
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Action Items
1.Staff Recommends the Finance Committee Review the Lease
Agreement With BioScience Properties for the Regional Water QualityControl Plant Workspace at 1900 Embarcadero Road in an Estimated
Total Amount of $1.73 Million for a Period of Five Years and
Recommend City Council Approval
2.Recommend the City Council Approve the Workplan for Pursuit of a
Revenue-generating Local Ballot Measure for the November 2022
General Election; and Review and Provide Potential Guidance to Staff
on Affordable Housing Funding as Referred by the Council
Future Meetings and Agendas
Adjournment
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Presentation
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2 June 15, 2021
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Meeting ID: 992-2730-7235 Phone No: 1 (669) 900-6833
City of Palo Alto (ID # 12304)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 6/15/2021
City of Palo Alto Page 1
Summary Title: 1900 Embarcadero Lease Agreement
Title: Staff Recommends the Finance Committee Review the Lease
Agreement With BioScience Properties for the Regional Water Quality
Control Plant Workspace at 1900 Embarcadero Road in an Estimated Total
Amount of $1.73 Million for a Period of Five Years and Recommend City
Council Approval
From: City Manager
Lead Department: Public Works
Recommendation
Staff recommends that the Finance Committee review the Lease Agreement (Attachment A)
with BioScience Properties for Regional Water Quality Control Plant work, storage, and parking
space at 1900 Embarcadero Road in the approximate amount of $1.73 million for a five-year
lease term, and recommend to City Council that the City Manager be authorized to execute the
Agreement.
Executive Summary
The City’s Regional Water Quality Control Plant (Plant) is entering a period of concentrated
Capital Improvement Projects over the next five years with a likely total cost of over $250
million. Six major projects are in the design and construction phases. To facilitate those projects
and provide room for construction, staging, consultants, and contractors, some City staff and
equipment must be moved from their current location, while maintaining quick and ready
access to the Plant. Lease space is currently available immediately adjacent to the Plant at 1900
Embarcadero Road. Staff proposes that the Wastewater Treatment Enterprise Fund lease
approximately 5,500 square feet of space in that building for a term of five years at an
estimated total cost of $1.73 million. During that time, it is envisioned that different personnel
and equipment would be moved in and out of that space to facilitate different needs during
Capital Improvement Program (CIP) construction.
Background
The Plant treats wastewater from six communities including the City of Palo Alto. Palo Alto
contributes approximately one-third of the wastewater to the Plant and pays for approximately
one-third of the expenses. Much of the Plant is now 50 years old and must be refurbished or
City of Palo Alto Page 2
rebuilt as discussed at the April 20, 2021 Finance Committee meeting (SR #12170). In addition,
new processes must be added to meet emerging environmental requirements for discharge to
the San Francisco Bay and to supply recycled water for irrigation and highly purified water for
other uses. These needs resulted in a 2012 Long Range Facilities Plan, which was accepted by
City Council. Subsequently, individual CIP projects were developed and six are now in the
design and construction process.
Discussion
In order to move the six CIP projects into the construction phase, space must be created at the
Plant for staging, materials storage, contractor and consultant workspace, parking, and the
construction itself. One immediate need is to move City employees and materials out of the
existing temporary trailers and use these for consultants and contractors. A second need is to
move City employees, equipment, and materials out of the Administration Building, which will
enable the repurposing of the building for pumping and electronic control of recycled and
purified water in the future, consistent with several CIP projects. This move also relocates
employees to more appropriate distances from motors, pumps, and electronics, which are in
the current facility. In addition, the move frees up a large open space for larger gatherings with
necessary distancing for meetings and job walks with contractors. The Plant currently does not
have a space that serves this function. While it had been hoped to accomplish these moves
much sooner, good alternatives did not exist.
Just recently, space for personnel, materials, equipment, and parking has become available at
1900 Embarcadero Road, immediately adjacent to the Plant. This location will act as a modest
extension of the Plant, in a way that no other available property would. Employees will be able
to walk and move materials, equipment, and samples around at the Plant much as they would
have from their current locations. The new location will allow staff to perform inspection,
investigation, repair, design, construction oversight, and outreach material preparation
functions. These functions cannot be efficiently performed at remote locations. The effort to
work at home in response to the pandemic confirmed that most Plant workers cannot
efficiently perform most of their tasks remotely. Some Plant workers can perform some tasks at
home but space will still be needed at the Plant to store, lay out work, and work with materials.
Understanding that the Plant space requirements would likely exceed the current footprint,
staff has had an ongoing dialogue for the past decade with the two owners of appropriate
buildings adjacent to the Plant. Until just recently, opportunities for leasing space of the right
size in one of those buildings was not available. Now, for the first time in more than 20 years,
the City has an opportunity to lease space adjacent to the Plant. Approximately 5,500 square
feet of space is available in 1900 Embarcadero Road, at the corner of Embarcadero Road and
Embarcadero Way. This is sufficient for approximately 25 employees (and their materials) most
in need of relocation to allow the CIP projects to move forward. Since it is not known when this
opportunity will present itself again, staff is recommending that Finance Committee review the
attached Lease Agreement (Attachment A) with BioScience Properties and recommend its
approval to City Council.
City of Palo Alto Page 3
One of the CIP projects in the group of six near-term CIP projects referred to above is the New
Laboratory and Environmental Services Building (WQ-14002) or “Laboratory Building”. This new
building would replace a number of functional areas around the Plant and the 50-year-old
facilities they are in. A preliminary design of this building resulted in a new cost estimate of
almost $60 million. This estimate is much higher than an earlier estimate included in the 2012
Long Range Facilities Plan. Therefore, creative alternatives are now being explored to reduce
the size of this building and reduce its cost. One potential alternative is to purchase the building
and thereby reduce the amount of space needed for a Laboratory Building. This possibility will
be analyzed in greater detail in the coming months. In the interim, leasing the 5,500 square feet
moves the Plant in this direction, with continuing to lease or to purchase the building becoming
options.
Key Terms of the Lease Agreement
COMMENCEMENT DATE: July 1, 2021
EXPIRATION DATE: June 30, 2026 (i.e., sixty (60) months after the Commencement
Date)
PREMISES TO BE LEASED: Suites 110, 201, 205 and 207
RENTABLE AREA OF PREMISES: 5,469 square feet
RENTABLE AREA OF BUILDING: 25,303 square feet
BASE RENT:
Months of Term
Base Rent per
Rentable Square
Foot
Monthly Base
Rent
1-12 $5.30 $28,985.70
13-24 $5.46 $29,855.27
25-36 $5.62 $30,750.93
37-48 $5.79 $31,673.46
49-60 $5.97 $32,623.66
Rent for the second (2nd), thirteenth (13th), twenty-fifth (25th)
and thirty-seventh (37th) months of the Term shall not be
charged.
CITY’S SHARE: 21.6% of Rentable space in the Building
BASE YEAR: Calendar year 2021
PARKING SPACES: Sixteen (16) unreserved spaces
Rent Amount:
As noted above, the proposed lease includes four months of free rent spaced out over the term
of the lease. When the four free months are factored in, the $5.30 per rentable square foot
base monthly rate is equivalent to an approximately $4.95 starting rate, which is slightly higher
than the appraised value of $4.75 per square foot. This rental rate, as adjusted, is higher than
City of Palo Alto Page 4
the rate the City currently pays for space at Elwell Court ($3.95), but does reflect a negotiated
reduction from the original asking price of $5.70 per square foot. The Elwell Court space,
located approximately one mile away from 1900 Embarcadero, is used by the Utilities
Department. Unike the current situation where the City is dealing with a new owner and
uncertain rental environment, the City has leased the Elwell Court facility since 1998, so enjoys
the benefit of a long-standing business relationship. The rental rate for 1900 Embarcadero is
higher due to its location, condition, parking, amenities, and appearance. The site’s location is
beneficial for the City, because staff’s availability and proximity to the Plant are important for
efficient day to day operational needs in order to have easy access the various Plant facilities.
Rent Increases Over Time:
The type of lease the Owner uses for this building is known as “Full Service”, where a Base Rent
($5.30 per square foot per month, in this case) and a Base Year (2021, in this case) are
established. The Base Rent will increase 3 percent annually. The Landlord pays all building’s
operating expenses in the Base (first) Year. The tenant then pays its proportionate share
(21.61%) of incremental increases in expenses, over the Base Year, in subsequent years.
Projected increases in expenses, if any, are calculated on an annual basis and added to the
monthly rental as “Additional Expenses.” Additional Expenses include on-going operating costs,
such as utilities, insurance, property tax, and repair and maintenance. To the degree the
expenses are controllable – management and administrative costs, cleaning, security – any
increase is capped at 7%. This creates some uncertainty in the rental amount in the four
subsequent years of this lease as the owner is new so there is no historical data to review to
assess operational performance. The lease does contain a “non-appropriation” clause which
provides that if Council does not agree to fund the lease in any year it may be terminated
without a penalty. A remaining concern is that property taxes could increase if the building is
sold again. However, this is unlikely as the building just sold in the year before the City’s Base
Year, and the property taxes are therefore aligned with current market valuation.
Resource Impact
The total cost of the new lease is estimated to be $1.73 million over the five-year lease term,
including an annual increase in the Base Rent of 3 percent. Palo Alto treats the combined
wastewater from Palo Alto, Los Altos, Los Altos Hills, Mountain View, Stanford University, and
the East Palo Alto Sanitary District, and shares the costs of operating the Plant proportionally
with the other partners. Similar to other shared costs for the Plant, Palo Alto’s cost share of the
rent is approximately 35 percent and the other five agencies’ share is approximately 65 percent
(outlined in below table).
The lease is a “Full Service” type lease in which expenses are paid by the Landlord except that
increases in expenses are paid by the City with a cap of 7 percent per year on controllable
expenses. This constitutes a 0 to 7+ percent range for years 2 through 5 (FY 2023 through FY
2026) of the lease term and is not built into the estimated cost projection below. No such
increases will apply to the first year (FY 2022) and any subsequent increase will be assessed in
the subsequent years of the lease term and addressed as needed through the annual budget
City of Palo Alto Page 5
development process. Additionally, monthly fiber costs for the office suites are estimated at
$330 per month or approximately $3,960 annually. These costs are not included in the rental
lease agreement, and will be funded separately through the Utility portion of the operating
Budget for the RWQCP.
Due to the timing of this agreement, these expenses were not included in the FY 2022 Proposed
Operating Budget for the Wastewater Treatment Fund. Pending Finance Committee’s
recommendation to Council to approve this lease agreement, a budget amendment in the
Wastewater Treatment Fund will be brought to City Council as a recommendation for approval
subsequent to the adoption of the FY 2022 Operating Budget on June 21, 2021. Funding for
future fiscal years of the five-year lease term is subject to the annual appropriation of funds
through the annual budget process.
Fiscal Year Total Cost CPA Cost Share
FY 2022 $318,843 $110,224
FY 2023 $328,408 $113,531
FY 2024 $338,260 $116,937
FY 2025 $348,408 $120,445
FY 2026 $391,484 $135,336
TOTAL $1,725,403 $596,472
Note: Estimated amounts include an annual 3 percent increase and one month of free
rent in years 1, 2, 3, and 4 of the five-year lease term.
Stakeholder Engagement
Leasing this space will not impact neighbors or Baylands visitors as no activities producing noise
or emissions will be transferred to the new location. Therefore, a formal outreach program was
not conducted. However, the immediate neighbors were notified, as were the Partners of the
Plant. The lease expense is approximently 1.0 percent of the Plant’s estimated annual operating
expenses and was not a concern to the Partners. On the contrary, should the lease be
extended, or the building purchased, it could result in construction of a considerably smaller
Laboratory Building than currently under consideration. This would likely save a large amount
of money for all of the Partners. This possibility will be analyzed in the coming months.
Environmental Review
Approval of the Lease Agreement is exempt from review under the California Environmental
Quality Act (“CEQA”) pursuant to CEQA Guideline Section 15301, Existing Facilities, involving
negligble expansion of existing or former use.
Attachments:
• Attachment A: Lease Agreement for A Portion of 1900 Embarcadero Road
LEASE AGREEMENT
BETWEEN
1900 EMBARCADERO PROPERTY OWNER, LP,
A DELAWARE LIMITED PARTNERSHIP
LANDLORD
AND
CITY OF PALO ALTO,
A CALIFORNIA CHARTERED MUNICIPAL CORPORATION
TENANT
1900 EMBARCADERO ROAD
PALO ALTO, CALIFORNIA
Attachment A
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TABLE OF CONTENTS
Basic Lease Information ............................................................................................................................. iii
1. Definitions ............................................................................................................................................ 1
2. Premises ............................................................................................................................................... 1
3. Term ..................................................................................................................................................... 1
4. Rent; Additional Charges ..................................................................................................................... 1
5. Expenses and Taxes ............................................................................................................................. 2
6. Condition of Premises .......................................................................................................................... 5
7. Common Areas ..................................................................................................................................... 6
8. Use........................................................................................................................................................ 6
9. Alterations and Tenant’s Property ........................................................................................................ 7
10. Repairs and Other Work .................................................................................................................. 8
11. Liens................................................................................................................................................. 8
12. Subordination ................................................................................................................................... 9
13. Inability to Perform .......................................................................................................................... 9
14. Destruction ....................................................................................................................................... 9
15. Insurance ........................................................................................................................................ 11
16. Eminent Domain ............................................................................................................................ 11
17. Assignment and Subletting ............................................................................................................ 12
18. Utilities and Services ..................................................................................................................... 13
19. Default ........................................................................................................................................... 15
20. Indemnity; Waiver; Interest on Overdue Obligations .................................................................... 16
21. Landlord’s Access to Premises ...................................................................................................... 17
22. Notices ........................................................................................................................................... 17
23. No Waiver ...................................................................................................................................... 18
24. Tenant’s Estoppel Certificates ....................................................................................................... 18
25. Rules and Regulations.................................................................................................................... 18
26. Tenant’s Taxes ............................................................................................................................... 18
27. Corporate Authority ....................................................................................................................... 18
28. Miscellaneous ................................................................................................................................ 18
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Exhibits:
A Diagram/Description of Premises
B Rules and Regulations
Addendum I: Option to Extend Term
Schedule I: Tenant’s Insurance Requirements
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BASIC LEASE INFORMATION
BUILDING: 1900 Embarcadero Road
Palo Alto, California 94303
LANDLORD’S ADDRESS: 1900 Embarcadero Property Owner, LP
c/o BioScience Properties, Inc.
514 Via De La Valle, Suite 300A
Solana Beach, CA 92075
Attn: Steve Bollert
Email: steve@bioscienceprop.com
Telephone: (858) 263-0770
With a copy to:
1900 Embarcadero Property Owner, LP
c/o BioScience Properties, Inc.
1900 Embarcadero Road, Suite 201
Palo Alto, CA 94303
Attn: Tina Long
Email: tina@bioscienceprop.com
Telephone: (650) 867-5981
TENANT’S ADDRESS: City of Palo Alto
P.O. Box 10250
Palo Alto, CA 94303
Attn: Real Property Manager
Email: real.property@cityofpaloalto.org
Telephone: (650) 329-2264
With a copy to:
City of Palo Alto
P.O. Box 10250
Palo Alto, CA 94303
Attn: Public Works – Watershed Protection
Email: cleanbay@cityofpaloalto.org
Telephone: (650) 329-2598
COMMENCEMENT DATE: July 1, 2021.
EXPIRATION DATE: June 30, 2026 (i.e., sixty (60) months after the Commencement Date).
PREMISES: Suites 110, 201, 205 and 207 in the Building
RENTABLE AREA OF PREMISES: Suite 110: 1,011 rentable square feet
Suite 201: 1,600 rentable square feet
Suites 205 & 207: 2,858 rentable square feet
Total: 5,469 rentable square feet
iv
RENTABLE AREA OF BUILDING: 25,303 rentable square feet
DIAGRAM OF PREMISES: See Exhibit A
BASE RENT:
Months of Term
Base Rent per
Rentable Square
Foot
Monthly Base Rent
1-12 $5.30 $28,985.70
13-24 $5.46 $29,855.27
25-36 $5.62 $30,750.93
37-48 $5.79 $31,673.46
49-60 $5.97 $32,623.66
*Notwithstanding the foregoing, provided that Tenant is not in default
under this Lease beyond any applicable notice and cure period, the Base
Rent for the second (2nd), and thirteenth (13th), twenty-fifth (25th) and
thirty-seventh (37th) months of the Term shall be abated.
SECURITY DEPOSIT: $32,623.66
TENANT’S SHARE: 21.61%
BASE YEAR: Calendar year 2021
PERMITTED USE: General office, administration, incidental storage, and other ancillary
uses as approved by the City of Palo Alto and otherwise in compliance
with all applicable laws, ordinances, rules and regulation.
PARKING SPACES: Sixteen (16) unreserved spaces (i.e., 3 per 1,000 rentable square feet of
the Premises)
PARKING FEE: $0 per unreserved space
INSURANCE AMOUNT: $1,000,000 per occurrence, $2,000,000 aggregate
BROKERS: None
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LEASE AGREEMENT
THIS LEASE, dated as of ______________, 2021, is between 1900 EMBARCADERO PROPERTY
OWNER, LP, a Delaware limited partnership (“Landlord”), and CITY OF PALO ALTO, a California
chartered municipal corporation (“Tenant”). Landlord and Tenant hereby covenant and agree as follows:
1. DEFINITIONS
1.1. Basic Lease Information
The Basic Lease Information is hereby incorporated into and made a part of this Lease.
2. PREMISES
2.1. Premises Defined
Landlord leases to Tenant and Tenant hires from Landlord on the terms and conditions contained in
this Lease the Premises specified in the Basic Lease Information. Tenant accepts the Rentable Area as
specified in the Basic Lease Information as the Rentable Area of the Premises and such area shall not be
subject to recalculation. Landlord warrants to Tenant that the Premises and Building have been measured
substantially in accordance with industry standards. The terms “common area” and “common areas” shall
mean spaces, facilities, and installations such as toilets, janitor, telephone, electrical, and mechanical rooms
and closets, trash facilities, stairs, public lobbies, corridors and other circulation areas, wherever located in
the Building. The Building, the real property upon which the Building stands, common areas, drives,
walkways and other amenities appurtenant to or servicing the Building, are herein sometimes collectively
called the “Real Property” or the “Project.”
3. TERM
3.1. Term Commencement
The “Term” shall commence on the Commencement Date and shall terminate on the Expiration Date,
each as described in the Basic Lease Information. Any occupancy or possession of the Premises by Tenant
with Landlord’s permission prior to the date specified for the commencement of the Term shall be upon
and subject to all terms, covenants and conditions of this Lease, including the payment of rent. Landlord
will make all commercially reasonable efforts to deliver the Premises to Tenant in the condition required
by this Lease on the Commencement Date. If, for any reason whatsoever, Landlord cannot deliver
possession of the Premises to Tenant on or prior to the Commencement Date as set forth in the Basic Lease
Information, then (A) the validity of this Lease shall not be affected except that the Term shall begin at such
time that the Premises are delivered to Tenant; and (B) Tenant shall have no claim against Landlord on
account of such late delivery, provided, however, that Tenant shall owe no rent until at such time that the
Premises is delivered to Tenant and provided further, however, that if Landlord fails to deliver the Premises
to Tenant within six (6) months following the Commencement Date as set forth in the Basic Lease
Information, then Tenant shall have the right, in its sole discretion, to terminate this Lease. Following the
Commencement Date, Landlord will deliver to Tenant a notice identifying the Commencement Date, a
copy of which notice shall be executed by Tenant and returned to Landlord.
4. RENT; ADDITIONAL CHARGES
4.1. Annual Rental
Tenant shall pay to Landlord during the Term at the address set forth in the Basic Lease Information,
without demand, offset or deduction, Base Rent as set forth in the Basic Lease Information. Base Rent shall
be payable on or before the first day of each month, in advance, provided that the first month’s rent shall
be payable no later than ten (10) days following the execution of this Lease by Tenant. If the
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Commencement Date or the Expiration Date should occur on a day other than the first or last day of a
calendar month, respectively, then the Base Rent for such period shall be prorated.
4.2. Additional Charges
Tenant shall pay to Landlord as and when due all charges, expense and tax reimbursements (including,
without limitation, Tenant’s Share of Excess Expenses and Excess Taxes), fees, expenses, and all other
amounts as provided in this Lease (“Additional Charges”). Unless otherwise specifically provided for
herein, all Additional Charges shall be due 30 days following Tenant’s receipt of Landlord’s invoice for
the Additional Charges. Base Rent and Additional Charges shall constitute the “Rent” payable by Tenant
for the Premises.
4.3. Late Charges
If Tenant fails to pay any Rent within five (5) business days after the date Landlord gives Tenant
notice, such unpaid amounts will be subject to a late payment charge equal to five percent (5%) of the
unpaid amounts in each instance. This late payment charge has been agreed upon by Landlord and Tenant,
after negotiation, as liquidated damages and a reasonable estimate of the additional administrative costs and
detriment that will be incurred by Landlord as a result of any such failure by Tenant, the actual damages
and costs thereof being extremely difficult if not impossible to determine.
4.4. Security Deposit
Concurrently with Tenant’s execution of this Lease, Tenant has deposited with Landlord the Security
Deposit described in the Basic Lease Information. The Security Deposit shall be held by Landlord as
security for Tenant’s performance of the terms of this Lease. Landlord may (but shall not be required to)
use all or any part of the Security Deposit to remedy any default of Tenant under the Lease or to compensate
Landlord for any loss or damage which Landlord may incur as a result of Tenant’s default. If any portion
of the Security Deposit is so used, Tenant shall redeposit said amount with Landlord within ten (10) days
of Landlord’s demand therefor. Tenant shall not be entitled to interest on the Security Deposit and Landlord
shall not be required to keep the Security Deposit separate from its general funds.
5. EXPENSES AND TAXES
5.1. Definitions
For purposes of this Article 5, the following terms shall have the following meanings:
(a) “Real Estate Taxes” shall mean any and all real property taxes and any and all general,
supplemental and special assessments and reassessments, transit charges, fees or assessments, housing fund
assessments, security charges, maintenance fees, payments in lieu of taxes, fees or charges, and any other
tax, fee, assessment, charge or excise levied or assessed (whether at the date of this Lease or thereafter)
(i) on the Real Property, any portion thereof or Landlord’s interest therein, or Landlord’s personal property
used in the operation of the Real Property, (ii) on the use or occupancy of the Real Property or any portion
thereof, including, without limitation, any tax or levy made against Rent or gross receipts from the Real
Property, (iii) on the sale or other transfer of the Real Property or any portion thereof, or any improvements
thereto or recapitalization thereof, (iv) in connection with the business of renting space in the Real Property,
or in connection with entering into this Lease or any other lease with respect to the Real Property, or (v) for
housing, police, fire, or other governmental services provided by any governmental or public entity and
collected by a lien upon the Real Property. Real Estate Taxes shall also include any other tax, fee, or charge
that may be levied or assessed as a substitute for any other Real Estate Taxes. Real Estate Taxes shall not
include those amounts payable by Tenant pursuant to Section 26, or similar amounts payable directly by
other tenants of the Building. Real Estate Taxes shall also include reasonable legal fees, costs and
disbursements incurred in connection with proceedings to contest, determine or reduce Real Estate Taxes,
to the extent the reduction in Real Estate Taxes exceeds such costs. Tenant may in its sole discretion
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challenge the assessed value of the Project with the applicable authority, and Landlord will take such
commercially reasonable action, at no cost to Landlord, to cooperate with Tenant in any such challenge.
(b) “Expenses” shall mean all reasonable actual costs and expenses paid and/or incurred by
Landlord in connection with the management, operation, maintenance and repair of the Real Property,
including, without limitation, (i) the cost of heating, ventilation, air conditioning, steam, electricity, gas,
water, sewer service, mechanical, elevator and other systems and all other utilities, and the cost of supplies
and equipment and maintenance and service contracts in connection therewith, (ii) the cost of repairs,
replacements, general maintenance and cleaning, including, without limitation, the cost of janitorial and
other service agreements and trash removal, (iii) the cost of insurance Landlord reasonably deems
appropriate to carry, or is required to carry by any mortgagee under any mortgage against the Real Property
or any portion thereof or interest therein with respect to the Real Property (including, without limitation,
earthquake and flood insurance) or any of Landlord’s or a property manager’s personal property used in the
operation of the Real Property, (iv) wages, salaries, payroll taxes and other labor costs and employee
benefits of all on-site employees, and the allocable share of all off-site employees to the extent engaged in
the operation, management, maintenance and repair of the Real Property, (v) reasonable fees, charges and
other costs, including, without limitation, property management fees, consulting fees, attorneys’ fees and
accounting fees of all independent contractors engaged by Landlord, or that are charged by Landlord if
Landlord performs equivalent services in connection with the Real Property, (vi) the cost of supplying,
replacing and cleaning employee uniforms, (vii) fifty percent (50%) of the fair market rental value of the
property manager’s offices in the Building, (viii) the cost of any capital improvements or alterations made
to the Real Property after the date of this Lease that are intended as a labor-saving measure or to effect other
economies in the operation or maintenance of the Real Property or that are required under any governmental
law or regulation that was not applicable to the Real Property at the date of this Lease (in either case
amortized over such reasonable period as Landlord shall determine), together with interest on the
unamortized balance(s) at the a rate equal to Landlord’s borrowing costs as reasonably determined by
Landlord, (ix) all costs and fees for licenses, inspections or permits that Landlord may be required to obtain,
(x) exterior and interior landscaping, (xi) depreciation on personal property used by Landlord exclusively
on the Real Property, (xii) legal fees, costs and disbursements incurred in connection with proceedings to
contest, determine, or reduce Expenses, to the extent the reduction exceeds the costs (xiii) reasonable
reserves for any periodic items or improvements that would constitute an Expense when paid (provided that
payment of an Expense out of such reserves shall be excluded in calculating Expenses for the applicable
period), and (xiv) any other reasonable expenses and costs, whether foreseeable or unforeseeable, incurred
in managing, operating, maintaining and repairing the Real Property.
(c) “Base Year” shall be as provided on the Basic Lease Information.
(d) “Comparison Year” shall mean each calendar year after the Base Year.
(e) “Tenant’s Share” of Taxes and Expenses shall be as provided on the Basic Lease Information.
If the rentable area of the Premises or the Building is changed for any reason, Tenant’s Share shall be
recalculated to equal an amount determined by dividing the rentable area of the Premises after such
occurrence by the rentable area of the entire Building after such occurrence.
(f) “Excess Taxes” with respect to a given Comparison Year shall mean the excess of Real Estate
Taxes for that Comparison Year over Real Estate Taxes for the Base Year.
(g) “Excess Expenses” with respect to a given Comparison Year shall mean the excess of Expenses
for that Comparison Year over Expenses for the Base Year.
5.2. Special Allocations
Real Estate Taxes and Expenses which are, in Landlord’s reasonable discretion, properly chargeable
solely to a single tenant or to a group of tenants shall be so allocated. Any amount so allocated to Tenant
shall, notwithstanding any other provision of this Lease, be paid by Tenant as Additional Charges.
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5.3. Real Estate Taxes and Expense Gross-Up
Real Estate Taxes and Expenses for any period (including, without limitation, the Base Year) in which
the Building is not at least ninety-five percent (95%) occupied shall be adjusted according to Landlord’s
reasonable estimate to reflect the Real Estate Taxes and Expenses which would be payable if the Building
were ninety-five percent (95%) occupied.
5.4. Payment of Tenant’s Share of Excess Taxes and Expenses
Commencing on the first anniversary of the Commencement Date, Tenant shall pay to Landlord, in
advance, as Additional Charges one twelfth (1/12th) of Tenant’s Share of Excess Taxes and Excess
Expenses for each Comparison Year in an amount estimated by Landlord and billed by Landlord to Tenant.
As soon as reasonably possible after the expiration of the Base Year and each Comparison Year, Landlord
shall furnish Tenant with a statement (“Landlord’s Statement”) setting forth the actual amount of Real
Estate Taxes and Expenses for such Base Year or Comparison Year, as applicable, and Tenant’s Share of
Excess Taxes and Expenses for such Comparison Year, which Landlord’s Statement shall include
reasonably detailed calculations of such amounts. Tenant may request, within thirty (30) days of receipt of
Landlord’s Statement, such additional documentation as is reasonably necessary to review Landlord’s
Statement; provided however, that any such request will not affect the timing of any payments required
under this Lease and provided further that Landlord shall be obligated to provide only such documentation
which is within Landlord’s possession. Upon Tenant’s request, Landlord shall provide such additional
documentation within twenty (20) days following the request. If the actual amount of Tenant’s Share of
Excess Taxes and Expenses due for such Comparison Year is greater than the estimated amount of Tenant’s
Share of Excess Taxes and Expenses paid by Tenant for such Comparison Year, the difference shall be paid
by Tenant (whether or not this Lease has terminated) within thirty (30) days after delivery of Landlord’s
Statement or paid with the next installment of Base Rent. If the actual amount of Tenant’s Share of Excess
Taxes and Expenses due for such Comparison Year is less than the estimated amount of Tenant’s Share of
Excess Taxes and Expenses paid by Tenant for such Comparison Year, the difference shall be paid by
Landlord (whether or not this Lease has terminated) along with delivery of Landlord’s Statement, or
credited against the next installments of Excess Taxes or Excess Expenses due from Tenant hereunder;
provided, however, that in no event shall Excess Taxes or Excess Expenses for a given Comparison Year
be less than zero. Tenant’s Share of Excess Taxes and Excess Expenses for any Comparison Year that is
less than a full year shall be prorated equitably by Landlord.
5.5. Controllable Expenses
Notwithstanding any provision of this Lease to the contrary, for the sole purpose of calculating
Tenant’s Share of Excess Expenses, the Controllable Expenses (as defined below) for each calendar year
after the Base Year shall not increase by more than seven percent (7%) over the maximum permitted
Controllable Expenses for the immediately preceding calendar year (i.e., on a cumulative, compounding
basis and regardless of the actual Controllable Expenses incurred for such preceding year); provided,
however, that if the actual Controllable Expenses for any calendar year are greater than the maximum
amount permitted to be charged to Tenant hereunder, then the difference shall be added to the actual
Controllable Expenses for succeeding years of the Term until exhausted. The term “Controllable
Expenses” mean those actual Expenses for which increases are reasonably within the control of Landlord,
and shall specifically exclude, without limitation, Utility Expenses (as defined below), Insurance Expenses
(as defined below), Real Estate Taxes, assessments, the cost of any Project amenities, collectively bargained
union wages, costs to comply with governmental laws enacted or first applicable after the Commencement
Date, trash removal and any services provided by monopolies or where there is otherwise only one (1)
provider available to Landlord. For purposes of this Lease, the following definitions shall apply: (i) “Utility
Expenses” shall mean the actual cost of supplying all utilities to the Project and the Building (other than
utilities for which tenants of the Building are separately metered), including utilities for the heating,
ventilation and air conditioning system for the Building and the Common Areas; and (ii) “Insurance
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Expenses” shall mean the actual cost of insurance required or allowed to be carried by Landlord under this
Lease. There shall be no limitation on the amount of increase from year to year on Expenses which are not
Controllable Expenses.
5.6. Objections to Statements
Provided that Tenant is not then in default under this Lease beyond any applicable notice and cure
period, Tenant shall have sixty (60) days following receipt of Landlord’s Statement, or receipt of additional
information requested pursuant to Section 5.4, whichever is later, to raise any objection to the calculations
contained therein, and to request adjustments to the data and/or calculations. If Landlord grants Tenant’s
request, the Expenses shall be adjusted accordingly. If Landlord disputes Tenant’s request, the Parties agree
to seek to resolve the dispute through good faith negotiations. If good faith negotiations fail to resolve the
dispute, the Parties agree to mutually select a certified public account (CPA) with not less than 10 years’
experience auditing financial statements related to commercial properties in the San Francisco Bay Area,
to review the records and determine whether Tenant’s request for adjustment is justified. The CPA shall
not be paid on a contingency fee basis. The Parties agree to accept the CPA’s determination as final. If the
CPA confirms Tenant’s request, Tenant’s share of the expenses shall be adjusted retroactively to the start
date for such expenses. All costs incurred in connection therewith, including, without limitation, all fees
charged by the CPA, shall be the sole responsibility of Tenant, unless the CPA determines that Landlord
overstated the Expenses and Taxes by more than five percent (5%), in which event Landlord shall be
responsible for the costs of the CPA.
Failure of Tenant to object within the sixty (60) day period shall be deemed a waiver of any such
objection, absent manifest error. Tenant shall continue to make all payments required hereunder pending
resolution of any objection or request for adjustment. No delay by Landlord in providing any Landlord’s
Statement shall be deemed a default by Landlord or a waiver of Landlord’s right to require payment of
Tenant’s obligations for actual or estimated Excess Taxes or Excess Expenses.
6. CONDITION OF PREMISES
The Premises shall be delivered to Tenant as-is, in good, clean and tenantable condition, with all
Building Systems working, and in compliance with all applicable laws in effect as of the Commencement
Date. Except as expressly set forth herein, Landlord shall have no obligation to perform any work,
improvements or alterations to the Premises. Tenant shall be responsible, at its sole cost and expense, for
the performance of all work necessary or desirable for Tenant’s occupancy of the Premises (“Tenant’s
Work”). All such work shall be subject to the requirements of Section 10.2 below. Landlord makes no
representation or warranty as to the nature, quality or suitability for Tenant’s business of the Building or
the Premises, and Tenant shall have no rights against Landlord by reason of any claimed deficiencies
therein. For the period of ninety (90) consecutive days after the Commencement Date, Landlord shall, at its
sole cost and expense, be responsible for any repairs that are required to be made to the Premises, unless
Tenant was responsible for the cause of such repair, in which case Tenant shall pay the cost. Landlord and
Tenant acknowledge and agree that as of the Commencement Date, the floor of the Premises on the second
floor of the Building has a moderate slope (which has a corresponding impact on the ceiling of the Premises
on the first floor of the Building), but such slope does not currently impair the tenantability of the Premises
for the uses permitted under this Lease. If, at any time during the Term of this Lease, Tenant reasonably
determines that such slope materially impairs the tenantability of the Premises for the uses permitted under
this Lease, Tenant may deliver a written request to Landlord to remedy such slope (including the ceiling of
the first floor Premises) in a manner that will make the Premises tenantable for the uses permitted under
this Lease (“Slope Repair Request”). Within forty-five (45) days after receipt of the Slope Repair Request,
Landlord shall deliver a written notice to Tenant (“Slope Repair Response”) indicating whether or not
Landlord elects, in its sole discretion, to repair the slope (including the ceiling of the first floor Premises)
as set forth in the Slope Repair Request. If Landlord elects not to repair the slope (including the ceiling of
the first floor Premises) as set forth in the Slope Repair Request, Tenant shall have the right to terminate
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this Lease by providing written notice to Landlord no later than ten (10) business days following delivery
of Landlord’s Slope Repair Response, which termination shall be effective no earlier than ninety (90) days
after the date of Landlord’s Slope Repair Response. If, during such ninety (90) day period, Landlord elects
to repair the slope as set forth in the Slope Repair Request, Landlord shall deliver prior written notice
thereof to Tenant, after which Tenant may elect to either proceed with termination as aforesaid or retract
such termination by delivering written notice of such retraction to Landlord no later than ten (10) business
days following delivery of Landlord’s notice. In any event, if at any time Landlord elects to repair the slope,
Landlord shall, at its sole cost and expense, be responsible for the repair work, and the cost and expense for
such shall not be considered an Expense, for purposes of Section 5(b), above, and shall not be passed
through in any form to Tenant.
7. COMMON AREAS
7.1. Right to Use Common Areas
Tenant and Tenant’s agents, representatives, employees and visitors, shall have the right to use during
the Term the common areas of the Real Property in common with other persons approved by Landlord,
subject to Landlord’s rules and regulations and the provisions of this Lease, including all security
requirements imposed from time to time by Landlord at or for the Real Property.
7.2. Alteration by Landlord
Landlord shall at all times maintain and operate the common areas in good repair and condition and
in a manner consistent with comparable buildings in the vicinity of the Project. Landlord hereby reserves
the right, at any time and from time to time, without the consent of or liability of any kind whatsoever to
Tenant, Tenant’s agents, representatives, employees or visitors, to make reasonable alterations or additions
to the Real Property, to reasonably change, add to, eliminate or reduce the extent, size, location, shape,
number or configuration of any aspect of the Real Property, including any entrances or passageways, doors
and doorways, corridors, stairs, building equipment, or any Building Systems or facilities; to close to the
general public all or any portion of the Real Property, to the extent and for the period necessary to avoid
any dedication to the public, to effect any repairs or further construction, or in case of any other
circumstances rendering such action advisable in Landlord’s reasonable opinion; to change any common
areas to rental space and any rental space to common areas; to utilize portions of the common areas for
entertainment, displays, product shows, the leasing of temporary or permanent kiosks or other such uses as,
in Landlord’s reasonable judgment, may attract the public; and to change the name, address, number or
other designation by which the Real Property is commonly known. In undertaking any activity provided
for in this Section 7.2, Landlord shall not unreasonably restrict Tenant’s access to and use and enjoyment
of the Premises and any other portion of the Real Property; Landlord shall use commercially reasonable
efforts to limit any interference with the use of the Premises by Tenant in connection therewith, but shall
incur no liability for any such interference that may occur, and Tenant shall have no right to abate rent in
connection therewith.
8. USE
8.1. Permitted Use
The Premises shall be used for the Permitted Use specified in the Basic Lease Information only, and
for no other purpose, without the prior written consent of Landlord, which shall not be unreasonably
withheld, conditioned, or delayed, subject to the terms and conditions of this Lease.
8.2. No Nuisance
Tenant shall not allow, suffer or permit the Premises or any use thereof to constitute a nuisance, to
violate any insurance policy restrictions, or to unreasonably interfere with the safety, comfort or enjoyment
of the Building by Landlord or any other occupants of the Building or their customers, invitees or any others
lawfully in, upon or about the Real Property.
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8.3. Compliance with Laws
Tenant, at Tenant’s expense, shall comply with, and cause all of Tenant’s agents, employees,
contractors, representatives, and visitors to comply with, all applicable laws, ordinances, rules and
regulations of governmental authorities applicable to the Premises or the use or occupancy thereof,
including, without limitation, the federal Americans With Disabilities Act, as amended; provided that
Tenant shall not be obligated pursuant to this Section 8.3 to make or pay for any alterations to the electrical,
mechanical, heating, ventilation or air conditioning, life safety or plumbing systems of the Building
(collectively the “Building Systems”), any structural elements of the Building, or any common area, unless
such alterations are required as a result of Tenant’s actions or Tenant’s default under this Lease or result
from particular alterations or improvements to the Premises made by or for Tenant.
8.4. Hazardous Materials
Tenant shall not cause or suffer or permit any Hazardous Material, as defined below, to be brought
upon, kept, used, discharged, deposited or released in, on, or about the Premises or the Real Property by
Tenant, or any of Tenant’s agents, employees, representatives, contractors or visitors, provided that Tenant
may keep on the Premises such Hazardous Materials as are customarily used by typical office tenants and
are maintained in full compliance with all applicable laws. Landlord represents and warrants that to
Landlord’s actual knowledge there are no Hazardous Materials at the Project in violation of any local, state,
or federal environmental laws or regulations. Each party shall indemnify, defend and hold the other party
harmless from and against any and all claims, damages, costs, liabilities and expenses (including, without
limitation, diminution in value or use of the Real Property, attorneys’ fees, consultant fees and expert fees)
which arise during or after the Term as a result of any breach by the indemnifying party of this Section 8.4
or any contamination on or affecting the Real Property which is caused by such breach or for which Tenant
or Landlord is otherwise legally responsible under this Lease or applicable law. This indemnification
obligation shall survive any termination of this Lease and shall include, without limitation, costs incurred
in connection with any investigation of site conditions and any clean-up, remedial, removal or restoration
work on or affecting the Real Property. “Hazardous Material” means any hazardous, toxic or dangerous
substance, material or waste which is or becomes regulated by or under any local, state or federal
governmental authority or environmental law, including without limitation (i) all chlorinated solvents,
(ii) petroleum products or by-products, (iii) asbestos, and (iv) polychlorinated biphenyls.
9. ALTERATIONS AND TENANT’S PROPERTY
9.1. Alterations
Tenant shall not before or during the Term make or suffer to be made any alterations, additions or
improvements in or to the Premises (herein collectively called “Alterations”) without first obtaining
Landlord’s written consent therefor based on reasonable plans and specifications submitted by Tenant.
Landlord’s consent may be withheld in Landlord’s sole and absolute discretion if any Alterations could in
Landlord’s reasonable judgment negatively affect the structure of the Building or the Building Systems, or
require additional code compliance or similar work not included in the Alterations; otherwise, Landlord’s
consent shall not be unreasonably withheld, conditioned, or delayed. Notwithstanding anything herein to
the contrary, Tenant shall be permitted to make nonstructural alterations to the Premises following ten (10)
days’ written notice to Landlord, but without Landlord’s prior consent, to the extent that such alterations
do not adversely affect the systems and equipment of the Building, exterior appearance of the Building, or
structural aspects of the Building, and provided that such alterations cost less than $20,000 in each instance
and are made in compliance with all of Landlord’s rules and regulations for the Project applicable to
alterations.
9.2. Removal of Property
All Alterations shall become the property of Landlord, and shall be surrendered to Landlord, upon the
expiration or earlier termination of this Lease; except for movable equipment, trade fixtures, personal
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property and furniture owned by Tenant (“Tenant Owned Property”). At Landlord’s sole election made
at the time that Landlord approves any Alterations, such Alterations shall be removed from the Premises at
Tenant’s sole cost and expense at the expiration or sooner termination of this Lease, and the Premises shall
be restored, at Tenant’s sole cost and expense, to their condition before the making of such Alterations,
ordinary wear and tear excepted, and such obligations shall survive the expiration or any earlier termination
of this Lease.
10. REPAIRS AND OTHER WORK
10.1. Tenant’s Obligations
Tenant shall at all times during the Term maintain the Premises in good, clean and sanitary condition,
ordinary wear and tear excepted, and, at Tenant’s cost and expense, make all repairs and replacements as
and when necessary to preserve the Premises in good working order and such condition; provided that
Tenant shall not be obligated to repair or maintain the Building Systems or the structural elements of the
Building unless such repair or maintenance is necessitated by any act of Tenant, its agents, representatives,
employees, contractors or visitors. Notwithstanding the foregoing, Tenant shall not be responsible for the
repair of any latent defect in the original construction of the Building or installation of any Landlord
installed improvements regardless of time of discovery, and Landlord shall repair the same at its sole cost
within a reasonable time, but in no event later than thirty (30) days after discovery of the defect. Landlord
shall not be liable for, and there shall be no abatement of Rent with respect to, any injury to or interference
with Tenant’s business arising from any repairs, maintenance, alteration or improvement in or to any portion
of the Real Property, or in or to any fixtures, appurtenances or equipment therein, except to the extent
arising from Landlord’s gross negligence or willful misconduct. Tenant hereby waives the provisions of
Sections 1941 and 1942 of the California Civil Code and any similar law now or hereafter in effect, as such
laws relate to the condition of the Premises or Tenant’s right to effect repairs in the Premises and deduct
the cost thereof from the Rent.
10.2. Conditions Applicable to Repairs and Other Work
All repairs, replacements, and reconstruction (including without limitation all Alterations) made by or
on behalf of Tenant shall be made and performed (a) at Tenant’s cost and expense and at such time and in
such manner as Landlord may reasonably require, (b) by contractors or mechanics reasonably approved by
Landlord, (c) so as to be at least equal in quality of materials and workmanship to the original work or
installation, (d) in accordance with such reasonable requirements as Landlord may impose with respect to
insurance and bonds to be obtained by Tenant, (e) in accordance with all applicable laws and regulations
of governmental authorities having jurisdiction over the Premises and all Rules and Regulations for the
Real Property adopted by Landlord from time to time, (f) so as not to interfere with the use and enjoyment
of the Building by Landlord, other tenants of the Building or any other persons, and (g) in compliance with
such other requirements as Landlord may reasonably impose (including without limitation a requirement
that Tenant furnish Landlord with as-built drawings upon completion of the work).
11. LIENS
Tenant shall keep the Premises and the Real Property free from any liens arising from any acts or
omissions of Tenant, or Tenant’s agents, employees, representatives, contractors or visitors. Tenant shall,
within thirty (30) days following notice of the imposition of any such lien, cause the same to be released of
record by payment or posting of a bond fully satisfactory to Landlord in form and substance, and if Tenant
fails to do so Landlord shall have, in addition to all other remedies provided herein and by law, the right
(but not the obligation) to cause the lien to be released by such means as Landlord shall deem proper,
including without limitation payment of the claim giving rise to such lien. All such sums paid by Landlord
and all expenses incurred by it in connection therewith shall be Additional Charges payable by Tenant.
Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or
required by law, or that Landlord shall deem proper for the protection of Landlord, the Premises, the Real
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Property and any other party having an interest therein, from mechanics’, materialmen’s and other liens. In
addition to all other requirements contained in this Lease, Tenant shall give to Landlord at least five (5)
business days’ prior written notice of commencement of any construction by or for Tenant on the Premises.
12. SUBORDINATION
This Lease and Tenant’s rights and interests thereunder shall be subject and subordinate at all times
to (a) all existing and future ground leases or underlying leases affecting any portion of the Real Property,
and (b) the lien of any existing or future mortgage, deed of trust, or other security instrument in any amount
for which any portion of the Real Property or any interest therein is specified as security. Notwithstanding
the foregoing, Landlord or the holder of any such ground or underlying lease or such lien shall have the
right to cause the same to be subordinated to this Lease, and in such event Tenant shall, at the option of the
party who succeeds to the interest of Landlord under this Lease upon any termination of any such ground
or underlying lease or upon any foreclosure or assignment in lieu of foreclosure relating to such lien, attorn
to and become the tenant of such successor in interest to Landlord, provided that such successor in interest
shall recognize and agree to be bound by the terms of this Lease so long as Tenant is not in default. The
foregoing provisions shall be self operative and no further instrument shall be required to effect the
provisions of this Section; provided that Tenant’s right to possession of the Premises shall not be disturbed
so long as Tenant is not in default under this Lease beyond any applicable notice and cure period, and
Tenant covenants and agrees to execute and deliver, within ten (10) business days after demand by Landlord
and in the reasonable form requested by Landlord, any additional documents evidencing the foregoing,
provided such documents contain appropriate non-disturbance provisions assuring Tenant’s quiet
enjoyment of the Premises.
13. INABILITY TO PERFORM
If by reason of force majeure, including, without limitation, acts of God, governmental restrictions,
pandemics (including, without limitation, COVID-19), strikes, labor disturbances, shortages of materials
or supplies, or any other cause or event beyond Landlord’s reasonable control, whether similar or dissimilar
to the foregoing (“Force Majeure”), Landlord is unable to perform or is delayed in performing any of
Landlord’s obligations under this Lease, no such inability or delay shall (a) constitute an actual or
constructive eviction, in whole or in part, (b) entitle Tenant to any abatement or reduction of Rent,
(c) relieve Tenant from any of its obligations under this Lease, or (d) impose any liability upon Landlord
or its agents or contractors by reason of inconvenience or annoyance to Tenant or by reason of injury to or
interruption of Tenant’s business, or otherwise. If this Lease specifies a time period for performance of an
obligation of Landlord, that time period shall be extended by the period of any delay in Landlord’s
performance caused by any of the events of Force Majeure described above. The provisions of this Lease
shall supersede California Civil Code Section 1932(1) as it relates to the condition of the Premises or
Tenant’s occupancy thereof, and Tenant hereby waives any right to terminate this Lease under Section
1932(1) or under any similar laws, statutes or ordinances now or hereafter in effect.
14. DESTRUCTION
14.1. Repair
Subject to the provisions of Sections 14.3 and 14.4 below, if any portion of the Real Property is
damaged by any casualty (the “Damaged Property”), then to the extent that the Premises or common areas
is made unusable for the normal operation of Tenant’s business on the Premises and the Damaged Property
can, in Landlord’s reasonable opinion, be repaired within one hundred eighty (180) days after the date of
damage, Landlord shall proceed immediately to make such repairs in accordance with Section 14.4 below.
Landlord’s opinion regarding time to repair shall be delivered to Tenant within thirty (30) days after the
date of the damage. Rent for the portion(s) of the Premises affected by such repair shall be abated during
the period of repair to the extent that Tenant is unable to use such portion(s) of the Premises for the normal
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operation of Tenant’s business, which shall include repairs to the common areas which prevent Tenant from
using the Premises for the normal operating of Tenant’s business.
14.2. Tenant’s Right to Terminate
If such damage causes all or any material portion of the Premises to be unusable by Tenant for the
normal operation of Tenant’s business on the Premises and in Landlord’s reasonable opinion damage to the
Premises cannot be repaired within three hundred sixty (360) days from the date of the damage, Tenant
may terminate this Lease by delivery of written notice to Landlord within thirty (30) days after the date on
which Landlord’s opinion regarding time and repair is delivered to Tenant. Landlord’s opinion regarding
repairability shall be delivered to Tenant within sixty (60) days after the date of the damage. Upon
termination, Rent shall be apportioned as of the date of the damage.
14.3. Landlord’s Right to Terminate
In the event (i) the Building is totally or substantially destroyed, or (ii) the cost of repair of the Real
Property following the damage or destruction equals or exceeds ten percent (10%) of the replacement cost
of the Building and such cost is not fully covered by insurance proceeds actually paid or payable to Landlord
(and not claimed by Landlord’s mortgagee); or (iii) the Term will expire within one (1) year from the date
of any material damage to or destruction of the Premises and Tenant fails to extend the term in accordance
with any right expressly granted in this Lease within thirty (30) days after the date of damage; or (iv) the
Damaged Property cannot, in Landlord’s reasonable opinion, be repaired within one hundred eighty (180)
days after the date of damage or be feasibly restored to substantially the same condition as immediately
prior to the damage, then Landlord may elect to terminate this Lease (A) by delivery of written notice to
Tenant within thirty (30) days after the date of damage or destruction (in the case of a termination pursuant
to clauses (i), (ii) or (iv) above, or (B) by delivery of written notice to Tenant within forty-five (45) days
after the date of the damage or destruction (in the case of a termination pursuant to clause (iii) above).
14.4. Extent of Repair Obligations
If this Lease is not terminated pursuant to Section 14.2 or 14.3 above, Landlord shall repair the
Building and all improvements (except those constructed or installed by Tenant, if any). All such repairs
shall be performed in a good and workmanlike manner and shall restore the items repaired to substantially
the same usefulness, design and construction as existed immediately before the damage. All work by Tenant
shall be performed in accordance with the requirements of Section 10.2. In the event of any termination of
this Lease, the proceeds from any insurance carried by Landlord and paid by reason of damage to or
destruction of the Real Property or any portion thereof shall belong to and be paid to Landlord.
14.5. Waiver of Subrogation
As long as their respective insurance policies so permit, Landlord and Tenant hereby mutually waive
their respective rights of recovery against each other for any loss insured by fire, extended coverage and
other property insurance policies existing for the benefit of the respective parties. Each party shall obtain
any special policy endorsements, if required to evidence compliance with such waiver.
14.6. Non-Application of Certain Statutes
The provisions of this Lease constitute an express agreement between Landlord and Tenant with
respect to any and all damage to, or destruction of, all or any part of the Premises, or any other portion of
the Real Property. Any statute or regulation of the State of California or any other governmental authority
or body, including without limitation California Civil Code Sections 1932(2), 1933(4), 1941 and 1942,
relating to any rights or obligations of a landlord and tenant upon damage or destruction of the leased
premises shall have no application to this Lease or any damage or destruction to all or any part of the
Premises or any other portion of the Building, and Tenant hereby waives the provisions of any such statute
or regulation.
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15. INSURANCE
Tenant shall during the Term, or during any occupancy or use of the Premises by Tenant prior to the
commencement of the Term, provide insurance coverage conforming in all respects to the requirements of
Schedule I (Insurance) attached hereto. Tenant shall not do anything, or suffer or permit anything to be
done, in, on or about the Premises that shall invalidate or be in conflict with the provisions of any fire or
other insurance policies covering the Building or any property located therein. Tenant, at Tenant’s cost and
expense, shall comply with, and shall cause all occupants of the Premises to comply with, all applicable
customary rules, orders, regulations or requirements of any board of fire underwriters or other similar body.
Landlord shall provide property damage insurance during the Term covering the Building. The
amounts and terms and conditions of coverage shall be determined by Landlord and shall be as required or
approved by Landlord’s mortgagee, if any, and otherwise shall be consistent with property damage policies
carried for comparable properties in the immediate vicinity of the Building.
16. EMINENT DOMAIN
16.1. Effect of Taking
If the entirety of the Premises is condemned or taken (or any transfer is made in lieu thereof), other
than a temporary taking, before or during the Term for public or quasi-public use (each of which events
shall be referred to as a “taking”), this Lease shall automatically terminate as of the earlier of the date (the
“effective date of taking”) (i) of the vesting of title in the condemning authority, or (ii) the date the
condemning authority is authorized to take possession of the Premises. If only a part of the Premises is so
taken, this Lease shall automatically terminate as to the portion of the Premises so taken as of the effective
date of taking. If any portion of the Real Property is taken so as to render the Building incapable of
economically feasible operation as reasonably determined by Landlord, this Lease may be terminated by
Landlord, as of the effective date of taking, by written notice to Tenant given at any time prior to the
effective date of taking. If a portion of the Premises is taken so as to render the Premises or the remaining
portion thereof unusable by Tenant for the normal operation of Tenant’s business on the Premises, this
Lease may be terminated by Tenant as of the date of the effective date of such taking, by written notice to
Landlord given at any time prior to the effective date of taking. If this Lease is not terminated as a result of
a taking, Landlord shall restore the Building to an architecturally whole unit; provided, however, that
Landlord shall not be obligated to expend on such restoration more than the amount of the condemnation
award actually received by Landlord (and not claimed by Landlord’s mortgagee), nor do more work than
that described in Section 14.4, unless Tenant pays to Landlord in advance (and without any credit against
Rent or any other obligation of Tenant under this Lease) the difference between the cost of such restoration
and the amount of the condemnation award so actually received by Landlord.
16.2. Award
Landlord shall be entitled to the entire award for any taking, including, without limitation, any award
made for the value of the leasehold estate created by this Lease. No award for any partial or entire taking
shall be apportioned, and Tenant hereby assigns to Landlord any award that may be made in any taking;
provided, however, that nothing contained herein shall be deemed to give Landlord any interest in any
separate award made to Tenant for its relocation expenses, the taking of personal property and fixtures
belonging to Tenant, the unamortized value of improvements made or paid for by Tenant, or the interruption
of or damage to Tenant’s business.
16.3. Abatement of Rent
In the event of a partial taking that does not result in a termination of this Lease as to the entire
Premises, the Rent shall abate in proportion to the portion of the Premises so taken or rendered unusable by
Tenant for the normal operation of Tenant’s business on the Premises. The provisions of this Lease
specifically supercede California Code of Civil Procedure Sections 1265.120 and 1265.130 or any similar
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statute or regulation now or hereafter in effect relating to abatement of rent or termination of a lease in the
event of a taking or condemnation of the Premises, and Tenant hereby waives the provisions of any such
statute or regulation.
16.4. Temporary Taking
If all or any portion of the Building or the Premises is taken for a limited period of time before or
during the Term, this Lease shall remain in full force and effect; provided, however, that the Rent shall
abate during such limited period in proportion to the portion of the Premises that is rendered not usable by
Tenant by reason of such taking. Landlord shall be entitled to receive the entire award made in connection
with any such temporary taking.
17. ASSIGNMENT AND SUBLETTING
17.1. Consent Required
Neither Tenant nor any sublessee or assignee of Tenant shall, directly or indirectly, voluntarily or by
operation of law, sell, assign, encumber, pledge or otherwise transfer or hypothecate all or any part of the
Premises or Tenant’s leasehold estate hereunder (each such act is herein referred to as an “Assignment”),
or sublet the Premises or any portion thereof or permit the Premises to be occupied by anyone other than
Tenant (each such act is herein referred to as a “Sublease”), without Landlord’s prior written consent in
each instance, which consent shall not be unreasonably withheld, conditioned, or delayed. Any Assignment
or Sublease that is not in compliance with this Article 17 shall be void. The acceptance of Rent by Landlord
from a proposed assignee, sublessee or occupant of the Premises shall not constitute consent to any
Assignment or Sublease by Landlord. In the event Landlord approves any Assignment or Sublease, fifty
percent (50%) of the excess, after amortization of the reasonable cost of leasing commissions and tenant
improvement costs actually incurred by Tenant in connection with such Sublease or Assignment, of the
total amount of rent and other consideration paid under or in consideration for any such Sublease or
Assignment over the Rent payable hereunder, shall be payable to Landlord as Additional Charges. As an
alternative to approving any Sublease or Assignment, Landlord shall have the right to elect, within the
response period provided in Section 17.2 below, to terminate this Lease as to the portion of the Premises
which is the subject of such proposed Assignment or Sublease (the “recaptured space”), in which event this
Lease shall terminate as to the recaptured space only and the Rent shall be abated as to such recaptured
space.
17.2. Notice
Any request by Tenant for Landlord’s consent to a specific Assignment or Sublease shall include
(a) the name of the proposed assignee, sublessee or occupant, (b) the nature of the proposed assignee’s
sublessee’s or occupant’s business to be carried on in the Premises, (c) a copy of the proposed Assignment
or Sublease, and (d) such financial and other information as Landlord may reasonably request concerning
the proposed assignee, sublessee or occupant or its business. Landlord shall have a response period of
fifteen (15) business days after receipt of all information reasonably necessary to evaluate the proposed
Assignment or Sublease in which to respond in writing to Tenant’s request, either approving the proposed
Assignment or Sublease or stating the reasons for any disapproval, or alternatively notifying Tenant of
Landlord’s election to recapture the affected space, as applicable. Tenant shall pay to Landlord the
reasonable costs of processing each request for approval of an Assignment or Sublease plus the reasonable
amount of all direct and indirect expenses incurred by Landlord arising from any assignee, occupant or
sublessee taking occupancy.
17.3. No Release
No consent by Landlord to any Assignment or Sublease by Tenant, and no specification in this Lease
of a right of Tenant to make any Assignment or Sublease, shall relieve Tenant of any obligation to be
performed by Tenant under this Lease. The consent by Landlord to any Assignment or Sublease shall not
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relieve Tenant or any successor of Tenant from the obligation to obtain Landlord’s express written consent
to any other Assignment or Sublease.
17.4. Entity Transfers
Any sale, assignment or other transfer, including without limitation by consolidation, merger or
reorganization, of twenty-five percent (25%) or more (whether in a single transaction or series of transfers)
of the equity ownership or beneficial interests in Tenant, if Tenant is a corporation, trust or limited liability
company, or of any general partnership interest in Tenant if Tenant is a general or limited partnership, shall
be an Assignment for purposes of this Lease. If Tenant is a corporation, the provisions of this Section 17.4
shall not apply at any time when the stock of Tenant is traded on a national exchange.
17.5. Assumption of Obligations
Each assignee or other transferee of Tenant’s interest hereunder, other than Landlord, shall assume all
obligations of Tenant under this Lease and shall be and remain liable jointly and severally with Tenant for
the payment of Rent, and for the performance of all the terms, covenants, conditions and agreements herein
contained on Tenant’s part to be performed for the Term. Each sublessee of all or any portion of the
Premises shall, as a condition to such sublease, agree in writing for the benefit of and pursuant to a written
instrument satisfactory to Landlord (a) to comply with all provisions of this Lease applicable to the
subleased premises (other than the amount of Rent payable under this Lease in the case of any sublease of
less than all of the Premises), and (b) that, at Landlord’s option, such sublease (and all further subleases of
any portion of the Premises) shall terminate upon any termination of this Lease, regardless of whether or
not such termination is voluntary, or such sublessee shall attorn to Landlord on and subject to all provisions
of the sublease.
17.6. No Signs
Tenant shall not, without Landlord’s consent, place or allow to be placed in, on or about the Building
any sign or other notice indicating Tenant’s desire to assign this Lease or sublet the Premises. Landlord’s
consent shall not be unreasonably withheld, conditioned, or delayed.
18. UTILITIES AND SERVICES
18.1. Landlord to Furnish
Landlord shall furnish during the Term, subject to reimbursement pursuant to Article 5 above,
(a) heating, ventilation and air conditioning (to the extent available in the Building) to the Premises during
the hours of 6:00 a.m. until 6:00 p.m. Monday through Friday (excluding holidays), (b) automatic elevator
service to the floor or floors where the Premises are located at all times, (c) electric power (110 volt) for
task lights, appliances and a reasonable number of computers (Tenant’s power requirements shall be
consistent with other tenants in the Building and shall not exceed the capacity of the Building taking into
account the uses by other tenants), (d) hot and cold water, if any, at those points of supply shown on the
approved plans for the Premises, and (e) janitorial service five nights per week (except labor holidays).
18.2. Excess Usage
Whenever heat generating machines or equipment or lighting are used in the Premises by Tenant
which materially affect the temperature otherwise maintained by the air conditioning system, Landlord shall
have the right to install supplementary air conditioning facilities in the Premises or otherwise modify the
ventilating and air conditioning system serving the Premises, and the reasonable cost of such facilities and
modifications shall be paid by Tenant as Additional Charges. Tenant shall also pay as Additional Charges
the cost, as determined by Landlord from time to time and applied consistently to other similar tenants of
the Building, of providing all heating or cooling energy to the Premises during hours other than those
specified in clause (a) of Section 18.1 above. Landlord shall furnish such after-hours heating or cooling
energy only upon at least twenty-four (24) hours’ advance notice from Tenant. If Tenant installs lighting or
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other equipment which results in an average electrical load per floor in the Premises in excess of the amount
specified in Section 18.1(c) above, Tenant shall pay for the reasonable cost of such excess power and the
cost of installing any additional risers or other facilities that may be necessary to furnish such excess power
to the Premises; provided, however, that Tenant shall have no right to install lighting or other equipment
which results in an average electrical load per floor in excess of the amount specified in Section 18.1(c)
above without Landlord’s prior written consent, not to be unreasonably withheld, conditioned, or delayed.
18.3. Interruption of Services
Landlord reserve the rights to disconnect, discontinue or limit Tenant’s use of any Building Systems
or Building services when reasonably necessary as determined by Landlord; provided that Landlord shall
give Tenant advance notice of any such interruption of services when reasonably possible, and shall restore
such services as soon as practical and in a manner so as to cause as little interference with Tenant’s use of
the Premises as is practical; provided further that Landlord shall not be obligated to perform work during
other than normal business hours, except in emergency situations. In addition, Landlord reserves the right
to limit or restrict any services or utilities serving the Premises or the Building, in compliance with the
requirements or voluntary guidelines or requests of federal, state or local governmental agencies or utility
suppliers for the purpose of reducing energy or other resources consumption and to make all alterations to
the Real Property or any Building Systems reasonably necessary therefor. Any such actions by Landlord
under this Section 18.3, or any other interruption of services provided for herein (unless caused by
Landlord’s gross negligence or willful misconduct) shall not (a) constitute an actual or constructive
eviction, in whole or in part, (b) entitle Tenant to any abatement or diminution of Rent, (c) relieve Tenant
from any of its obligations under this Lease, or (d) impose any liability on Landlord or its agents or
contractors by reason of inconvenience or annoyance to Tenant or by reason of injury to or interruption of
Tenant’s business, or otherwise, Tenant hereby waives its right to terminate this Lease under California
Civil Code Section 1932(1) and Sections 1941 and 1942 or any other similar laws, statutes or ordinances
now or hereafter in effect. Tenant shall cooperate reasonably with any voluntary energy conservation
program initiated by Landlord in cooperation with the efforts of federal, state or local governmental
agencies or utility suppliers to reduce the consumption of energy or other resources. Notwithstanding the
foregoing, in the event that Tenant is prevented from using, and does not use, the Premises or any material
portion thereof for more than three (3) consecutive business days as a result of any of the following, to the
extent within Landlord’s reasonable control: (i) a failure to provide any utilities to the Premises which
Landlord is required to provide under this Lease, (ii) Landlord making or failing to make any repairs,
alterations, additions or improvements in or to any portion of the Premises or the Property which Landlord
is required to provide under this Lease, or (iii) lack of access to the Premises (each, an “Abatement
Event”), then Tenant shall give Landlord written notice of such Abatement Event, and if such Abatement
Event continues for an additional two (2) consecutive business days after Landlord’s receipt of any such
notice (“Eligibility Period”) and Landlord does not diligently commence and pursue to completion the
remedy of such Abatement Event, then, except to the extent covered by business interruption or similar
insurance carried or required to be carried by Tenant hereunder, Base Rent shall be abated or reduced, as
the case may be, after expiration of the Eligibility Period for such time that Tenant continues to be so
prevented from using, and does not use, the Premises or a portion thereof, in the proportion that the rentable
area of the portion of the Premises that Tenant is prevented from using, and does not use, bears to the total
rentable area of the Premises. If, however, Tenant reoccupies any portion of the Premises during such
period, the Base Rent allocable to such reoccupied portion, based on the proportion that the rentable area
of such reoccupied portion of the Premises bears to the total rentable area of the Premises, shall be payable
by Tenant from the date Tenant reoccupies such portion of the Premises. Such right to abate Base Rent
shall be Tenant’s sole and exclusive remedy at law or in equity for an Abatement Event. Except as expressly
provided in this Section 18.3, nothing contained herein shall be interpreted to mean that Tenant is excused
from paying rent due hereunder.
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18.4. Security Systems and Programs
Landlord shall have no obligation or liability to Tenant, or any of Tenant’s agents, employees,
representatives, contractors or visitors, to provide any safety or security devices on or for the Real Property
or for the manner or quality of any such devices or services that Landlord may elect to provide on or for
the Real Property. The risk that any safety or security device, service or program may not be effective, or
may malfunction or be circumvented, is assumed by Tenant with respect to the property, personnel, and
interests of Tenant, and any of Tenant’s agents, employees, representatives, contractors and visitors, and
Tenant shall obtain insurance coverage to the extent Tenant desires protection against criminal acts or other
losses. Tenant agrees to cooperate fully at Tenant’s expense with any reasonable safety or security program
developed by Landlord on or for the Real Property or required by law.
19. DEFAULT
19.1. Events of Default
The occurrence of any one or more of the following events shall constitute a default or breach of this
Lease by Tenant:
(a) Failure of Tenant to make any payment of Rent when and as the same becomes due; provided,
however, that Landlord will give Tenant notice and an opportunity to cure any failure to pay Rent within
five (5) business days of any such notice.
(b) Failure of Tenant to perform any obligation of Tenant under this Lease, other than as described
in Section 19.1(a), where such failure shall continue for ten (10) business days after notice of such failure
by Landlord to Tenant; provided that if more than ten (10) business days are reasonably required for cure
of such failure, Tenant shall not be deemed to be in default if Tenant commences such cure within such ten
(10) business day period and thereafter diligently prosecutes such cure to completion.
(c) The filing by or against Tenant of any action or proceeding under any federal or state insolvency,
reorganization, bankruptcy or other debtor relief statute now or hereafter existing (unless in the case of such
action taken against Tenant, the same is dismissed within sixty (60) days); or the appointment of a trustee
or receiver for Tenant or its business, or the attachment of Tenant’s leasehold estate in the Premises or
Tenant’s assets at the Premises, unless the same is dismissed within thirty (30) days after such appointment
or attachment.
19.2. Remedies
Upon the occurrence of a default by Tenant under this Lease that is not remedied by Tenant within
the applicable cure periods specified in Section 19.1, Landlord shall use commercially reasonable efforts
to mitigate damages and have the following rights and remedies in addition to and without limiting any and
all other rights and remedies provided in Section 4.4 or otherwise available to Landlord at law or in equity:
(a) The rights and remedies provided by California Civil Code Section 1951.2, including without
limitation the right to terminate Tenant’s right to possession of the Premises and to recover the amounts
specified in California Civil Code Subsections 1951.2(a)(1)-(4);
(b) The rights and remedies provided by California Civil Code Section 1951.4, including, without
limitation, the right to continue the Lease in effect after Tenant’s breach and abandonment and recover any
and all Rent as it becomes due. Acts of maintenance or preservation, efforts to relet the Premises or the
appointment of a receiver upon Landlord’s initiative to protect its interest under this Lease, shall not in and
of themselves constitute a termination of Tenant’s right to possession;
(c) The right and power to enter the Premises and remove all persons and property, to store such
property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and to sell such
property and apply the proceeds thereof pursuant to applicable California law;
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(d) The right to have a receiver appointed for Tenant, upon application by Landlord, to take
possession of the Premises and to apply any rental collected from the Premises; and
(e) The right to specific performance of any or all of Tenant’s obligations hereunder, and to damages
for delay in or failure of such performance.
(f) The right to remedy such default at Tenant’s expense, upon two (2) days prior notice to Tenant
except that prior notice shall not be required in the case of an imminent threat to life or safety of any person
or to the impairment of the Building or its efficient operation.
19.3. Remedies Cumulative
The exercise of any remedy provided by law or the provisions of this Lease shall not exclude any
other remedies. Tenant hereby waives any right of redemption or relief from forfeiture following
termination of, or exercise of any remedy by Landlord with respect to, this Lease.
19.4. Default by Landlord
If Landlord fails to perform or observe any of the terms, covenants or conditions contained in this
Lease on its part to be performed or observed within thirty (30) days after receipt of written notice
specifically describing such default from Tenant or, when more than thirty (30) days shall be required
because of the nature of the default, if Landlord shall fail to proceed diligently to cure such default after
receipt of written notice thereof from Tenant, said failure shall constitute a default by Landlord under this
Lease. Tenant shall give written notice to any beneficiary of a deed of trust or mortgage covering the
Premises whose address shall have been furnished to Tenant of any default on the part of Landlord under
this Lease, and shall offer such beneficiary or mortgagee a reasonable opportunity to cure the default, in no
event less than sixty (60) days, including time to obtain possession of the Premises by power of sale or a
judicial foreclosure if necessary to effect a cure.
20. INDEMNITY; WAIVER; INTEREST ON OVERDUE OBLIGATIONS
20.1. Indemnity and Waiver
Except to the extent caused by the negligence or willful misconduct of Landlord, Tenant shall
indemnify, defend through attorneys reasonably satisfactory to Landlord, and hold harmless Landlord, all
partners or members of any partnership or limited liability company constituting Landlord, and their
respective officers, directors, shareholders, employees, servants and agents, all mortgagees or beneficiaries
of Landlord’s interest in all or any portion of the Real Property, and the lessor or lessors under all ground
or underlying leases affecting any portion of the Real Property (sometimes collectively referred to herein
as “Landlord Related Entities”) from and against any and all claims, losses, costs, liabilities, damages
and expenses, including without limitation reasonable attorneys’ fees (collectively, “Claims and
Liabilities”), that are incurred in connection with or arise from (a) any default by Tenant in the observance
or performance of any of the terms, covenants, conditions or other obligations of this Lease, (b) the use or
occupancy or manner of use or occupancy of the Premises by Tenant or any person occupying the Premises,
(c) the condition of the Premises or any occurrence or happening on the Premises between the
Commencement Date or Tenant’s earlier entry onto the Premises and the time Landlord has accepted the
surrender of the Premises after the expiration or termination of the Term, including, without limitation,
COVID-19 or any other pandemics and any conditions arising from or related thereto, (d) any negligence
or willful act or omission of Tenant or any assignee or subtenant of the Premises or any of their respective
agents, employees, representatives, contractors or visitors while on the Real Property, or (e) Landlord’s
inability to obtain access to any portion of the Premises with respect to which Landlord has not been
furnished a key (if locked) or access has been otherwise restricted. Tenant, as a material part of the
consideration to Landlord, hereby assumes all risk of damage to property (including, without limitation,
any damage to personal property or scientific research, including loss of records kept by Tenant within the
Premises (in each case, regardless of whether such damage is foreseeable)) or injury to Tenant or any other
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Tenant Parties in, upon or about the Premises or any other part of the Real Property from any cause
whatsoever (including, without limitation, COVID-19 or any other pandemics and any conditions arising
from or related thereto) and hereby waives all Claims and Liabilities (including consequential damages and
claims for injury to Tenant’s business or loss of income arising out of any loss of use of the Premises or
any other part of the Real Property or any equipment or facilities therein, or relating to any such damage or
destruction of personal property as described in this Section) in respect thereof against Landlord and each
Landlord Related Entity, except that which is solely caused by, or solely the result of the grossly negligent
acts or willful misconduct of Landlord. Landlord shall not be liable for any damages arising from any act,
omission or neglect of any other tenant in the Building or of any other third party. The terms of this Section
20.1 shall survive the expiration or earlier termination of this Lease.
20.2. Interest on Past Due Obligations
Any amount due from Tenant to Landlord under this Lease which is not paid within five (5) business
days from the date when due shall bear interest from the due date until paid at the lesser of the highest rate
then permitted by law or a rate per annum equal to four percent (4%) plus the highest rate identified as the
“prime rate” in the Wall Street Journal between the date such amount was due and the date such payment
was received. Payment of such interest shall not excuse or cure any default under this Lease.
21. LANDLORD’S ACCESS TO PREMISES
Landlord reserves for itself and its agents, employees and contractors the right to enter the Premises
at all reasonable times (upon reasonable telephonic notice, if possible) to inspect the Premises, to supply
any service to be provided by Landlord to Tenant hereunder, to show the Premises to prospective
purchasers, mortgagees, beneficiaries or (during the last twelve (12) months of the Term) prospective
tenants, to post notices of nonresponsibility, to determine whether Tenant is complying with its obligations
under this Lease, and to alter, improve or repair the Premises or any other portion of the Building. Tenant
shall not place any locks on any interior doors in the Premises without the consent of Landlord, which
consent shall not be unreasonable withheld, conditioned, or delayed, and without providing Landlord with
copies of the keys for such locks. In the event of an emergency, Landlord shall have the right to enter the
Premises at any time without notice. Landlord shall have the right to use any and all means that Landlord
may reasonably deem necessary or proper to open doors in an emergency, in order to obtain entry to any
portion of the Premises; provided, however, that Landlord shall use commercially reasonable efforts to
minimize any interference with Tenant’s business at the Premises. Tenant hereby waives any claim for
damages for any injury or inconvenience to or interference with Tenant’s business, any loss of occupancy
or quiet enjoyment of the Premises, any right to abatement of Rent, or any other loss occasioned by
Landlord’s exercise of any of its rights under this Article 21. Tenant waives all rights to consequential
damages (including, without limitation, damages for lost profits and lost opportunities) arising in
connection with Landlord’s exercise of its rights under this Section 21.
22. NOTICES
Any payment required to be made by Tenant to Landlord, and any bills, statements, notices, demands,
requests or other communications given or required to be given under this Lease, shall be effective only if
rendered or given in writing, sent by personal delivery or registered or certified mail, return receipt
requested, by overnight courier service, or by confirmed email transmission with a following copy by first
class mail, addressed (a) to Tenant at the address set forth in the Basic Lease Information, (b) to Landlord
at the address set forth in the Basic Lease Information, or (c) to such other address as either Landlord or
Tenant may designate as its new address in California for such purpose by notice given to the other in
accordance with the provisions of this Section 22. Any such bill, statement, notice, demand, request or other
communication shall be deemed to have been rendered or given on the date of receipt or refusal to accept
delivery.
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23. NO WAIVER
No provision of this Lease may be waived, and no breach thereof shall be waived, except by a written
instrument signed by the party against which the enforcement of the waiver is sought. No failure by
Landlord to insist upon the strict performance of any obligation of Tenant under this Lease, and no course
of conduct between Landlord and Tenant, shall constitute a waiver of any breach or a waiver or modification
of any term, covenant or condition of this Lease. No payment by Tenant of a lesser amount than the
aggregate of all Rent then due under this Lease shall be deemed to be other than on account of the first
items of such Rent then accruing or becoming due, unless Landlord elects otherwise.
24. TENANT’S ESTOPPEL CERTIFICATES
Tenant, at any time and from time to time, within ten (10) business days after written request, shall
execute, acknowledge and deliver to Landlord, addressed (at Landlord’s request) to any prospective
purchaser, ground or underlying lessor, or mortgagee or beneficiary of any part of the Real Property, an
estoppel certificate in form and substance reasonably designated by Landlord. Tenant’s failure to do so
within such ten (10) business day period shall be conclusive upon Tenant that all facts set forth in Landlord’s
proposed certificate are true and correct.
25. RULES AND REGULATIONS
Tenant shall at all times observe and comply with, and cause all occupants of the Premises to observe
and comply with, the rules and regulations attached to this Lease as Exhibit B, and with all reasonable
modifications thereof from time to time adopted by Landlord (the “Rules and Regulations”).
26. TENANT’S TAXES
In addition to all other sums to be paid by Tenant under this Lease, Tenant shall pay, before
delinquency, any and all taxes levied or assessed during the Term, whether or not now customary or within
the contemplation of the parties hereto, (a) upon, measured by or reasonably attributable to Tenant’s
improvements, equipment, furniture, fixtures and other personal property located in the Premises, including
without limitation Tenant’s Work and all Alterations, (b) upon or measured by any Rent payable under this
Lease, including without limitation any gross income tax or excise tax levied by any federal, state or local
governmental body with respect to the receipt of such rental by Landlord; (c) upon or with respect to the
possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant
of the Premises or any portion thereof; or (d) upon this transaction or any document to which Tenant is a
party creating or transferring an interest or an estate in the Premises.
27. CORPORATE AUTHORITY
Each person executing this Lease on behalf of Tenant or any entity constituting Tenant at any
ownership tier hereby represents and warrants that such person is duly authorized and has full right, power
and authority to enter into this Lease and bind Tenant, without qualification.
28. MISCELLANEOUS
28.1. Non-Appropriation
This Lease is subject to the fiscal provisions of the Charter of the City of Palo Alto and the Palo Alto
Municipal Code. In the event the Palo Alto City Council does not appropriate funds for payment of Rent
due under this Lease in any year, this Lease shall terminate upon 90-days prior written notice thereof. This
section shall take precedence in the event of a conflict with any other covenant, term, condition, or provision
of this Lease.
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28.2. Financial Statements
Upon Landlord’s written request from time to time (not more frequently than twice per year), Tenant
shall promptly furnish Landlord with certified financial statements reflecting Tenant’s then-current
financial condition, in such form and detail as Landlord may reasonably request; provided, however, that if
Tenant is a corporation, then so long as the stock of Tenant is traded on a national exchange, Tenant may
furnish its annual or most recent quarterly report instead of financial statements. If Tenant is a municipality,
Tenant may furnish a digital copy of its fiscal year end Comprehensive Annual Financial Report.
28.3. Successors and Assigns
Without limiting Section 17 and subject to Section 28.10, the terms, covenants and conditions in this
Lease shall bind and inure to the benefit of Landlord and Tenant and their respective representatives,
successors and assigns.
28.4. Severability
If any provision of this Lease or the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision to any
other persons or circumstances, shall not be affected thereby, and each provision of this Lease shall remain
in effect and shall be enforceable to the fullest extent permitted by law.
28.5. Applicable Law
This Lease shall be governed by and construed in accordance with the laws of the State of California,
without giving effect to any principles of conflicts of law. If suit shall be brought by either party to this
Lease, the parties agree that venue shall be exclusively vested in the state courts of the County of Santa
Clara, or if federal jurisdiction is appropriate, exclusively in the United States District Court, Northern
District of California, San Jose, California.
28.6. Integration; Interpretation
The terms of this Lease (including, without limitation, the Exhibits and Schedules hereto) are intended
by the parties as a final expression of their agreement with respect to such terms as are included in this
Lease and may not be contradicted by evidence of any prior or contemporaneous agreement, arrangement,
understanding or negotiation (whether oral or written). The word “including” shall mean “including
without limitation,” the singular shall include the plural and vice-versa, and each gender shall include any
other gender. Time is of the essence of each and every provision of this Lease.
28.7. Quiet Enjoyment
Upon Tenant paying the Rent and performing all of Tenant’s obligations under this Lease, Tenant
may peacefully and quietly enjoy the Premises during the Term as against all persons or entities claiming
by or through Landlord; subject, however, to the provisions of this Lease, including Section 12.
28.8. Holding Over
If Tenant holds over after the expiration or earlier termination of the Term, the Term shall not be
extended thereby, and Tenant shall pay Base Rent equal to one hundred twenty-five percent (125%) of the
Base Rent payable during the final full lease year (exclusive of abatements, if any), together with an amount
reasonably estimated by Landlord for the monthly Additional Charges and other sums payable under this
Lease, and such holding over shall otherwise be on the terms and conditions herein specified so far as
applicable (but expressly excluding all renewal or extension rights).
28.9. Broker’s Commissions
Each party represents and warrants to the other that it has not entered into any agreement or incurred
or created any obligation which might require the other party to pay any broker’s commission, finder’s fee
or other commission or fee relating to the leasing of the Premises, except for the brokers specified in the
20
Basic Lease Information, whose commissions or fees shall be payable by the party designated in a separate
agreement with such brokers, and each party shall indemnify, defend and hold harmless the other and the
other’s constituent partners and members, and their respective officers, directors, agents and employees,
from and against any and all claims and liabilities for any such commissions or fees made by anyone
claiming by or through the indemnifying party.
28.10. Recovery Against Landlord
Tenant shall look solely to Landlord’s interest in the Real Property for any recovery of any judgment
against Landlord related in to this Lease and/or the Project. Neither Landlord, nor any of its partners
(whether general or limited), members, or any other equity or beneficial owners, directors, officers and
shareholders at any ownership tier, shall be personally liable for any such judgment. In the event that any
Landlord transfers or conveys its interest in the Building, all liabilities and obligations on the part of such
Landlord under this Lease accruing after the effective date of such transfer or conveyance shall terminate
and all such liabilities and obligations, including responsibility for the application or return of any security
deposit, shall be binding upon the new owner.
28.11. Amendments
No amendments or modifications of this Lease or any agreements in connection therewith shall be
valid unless in writing duly executed by both Landlord and Tenant. No amendment to this Lease shall be
binding on any mortgagee or beneficiary of Landlord (or purchaser at any foreclosure sale) unless such
mortgagee or beneficiary shall have consented thereto in writing.
28.12. Attorneys’ Fees
If either party commences an action against the other party arising out of or in connection with this
Lease, or institutes any proceeding in a bankruptcy or similar court which has jurisdiction over the other
party or any or all of its property or assets, the prevailing party shall be entitled to recover from the losing
party reasonable attorneys’ fees and court costs, including fees incurred on appeal and any other post-
judgment proceeding.
28.13. Parking.
Throughout the Term, Landlord shall provide Tenant with number of parking spaces specified in the
Basic Lease Information in the Building's parking area, such spaces to be unassigned. Landlord's obligation
to make such parking spaces available to Tenant shall be subject to ordinances and regulations of the
applicable governmental authority concerning off street parking and loading facilities, either now existing
or hereafter enacted.
28.14. CASp Disclosure.
For purposes of Section 1938 of the California Civil Code, Landlord hereby discloses to Tenant that
the common areas and the Premises, as of the date of this Lease, have not been inspected by a Certified
Access Specialist (CASp), as that term is defined in California Civil Code Section 55.52. In accordance
with subsection (e) of Section 1938 of the California Civil Code, Tenant is further notified as follows:
A Certified Access Specialist (CASp) can inspect the subject premises and determine
whether the subject premises comply with all of the applicable construction-related
accessibility standards under state law. Although state law does not require a CASp
inspection of the subject premises, the commercial property owner or lessor may not
prohibit the lessee or tenant from obtaining a CASp inspection of the subject premises for
the occupancy or potential occupancy of the lessee or tenant, if requested by the lessee or
tenant. The parties shall mutually agree on the arrangements for the time and manner of
the CASp inspection, the payment of the fee for the CASp inspection, and the cost of
making any repairs necessary to correct violations of construction-related accessibility
standards within the premises.
21
28.15. Binding
This Lease shall be binding upon the parties hereto only upon full execution and delivery by both
Landlord and Tenant. In the event that Landlord executes this Lease prior to Tenant, Landlord’s counterpart
shall be deemed an offer only and shall expire on the date which is thirty (30) days thereafter unless accepted
and executed by Tenant prior to the expiration of such thirty (30) day period.
28.16. Exhibits and Schedules
Exhibits A and B, Addendum I, and Schedule I, are attached hereto and by this reference incorporated
herein.
[signatures on following page]
A-1 r
EXHIBIT A
DIAGRAM/DESCRIPTION OF PREMISES
1,011 sf
Suite 110
1900 Embarcadero Road, Palo Alto
A-2 r
1,600 sf
Suite 201
1900 Embarcadero Road, Palo Alto
A-3 r
2,858 sf
Suites 205-207
1900 Embarcadero Road, Palo Alto
B-1
EXHIBIT B
RULES AND REGULATIONS
1. The sidewalks, halls, passages, exits, entrances, elevators, malls, and stairways of the Building
shall not be obstructed by Tenant or any of Tenant’s agents, employees, representatives, contractors or
visitors (“Tenant Parties”), or used by Tenant or any Tenant Party for any purpose other than for ingress
to or egress from the Premises. The halls, passages, exits, entrances, corridors and stairways are not for the
use of the general public, and Landlord shall in all cases retain the right to control and prevent access thereto
of all persons whose presence in the judgment of Landlord might be prejudicial to the safety, character,
reputation or interests of the Building and its tenants, provided that nothing herein contained shall be
construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of its
business, unless such persons are engaged in illegal or dangerous activities. Tenant and Tenant Parties shall
not go upon the roof of the Building, except in areas that Landlord may designate from time to time.
2. No awning canopy or other projection of any kind over or around the windows or entrances of
the Premises shall be installed by Tenant, and only such window coverings as are Building standard shall
be used in the Premises.
3. The Premises shall not be used for lodging or sleeping, and no cooking shall be done or permitted
by Tenant on the Premises, except that the preparation of food in microwave ovens and machines for
vending coffee, tea, hot chocolate and similar small food or drink items for Tenant and its employees shall
be permitted.
4. Landlord will furnish Tenant with ten (10) keys per floor of the Premises, free of charge.
Landlord may make a reasonable charge equal to Landlord’s cost for any additional keys. No additional
locking devices shall be installed without the prior written consent of Landlord, which shall not be
unreasonably withheld, conditioned, or delayed. Landlord may make reasonable charges for the removal of
any additional lock or any bolt installed on any door of the Premises without the prior consent of Landlord.
Tenant shall in each case furnish Landlord with a key for any such lock. Tenant, upon the termination of
its tenancy, shall deliver to Landlord all keys to doors in the Building and the Premises.
5. Landlord shall have the right to prescribe the method of reinforcement or weight distribution (as
Landlord shall reasonably determine in its sole discretion) for all equipment, materials, supplies, furniture
or other property brought into the Building that will impose a load of more than fifty (50) pounds per square
foot. Landlord will not be responsible for loss of or damage to any such property from any cause (except to
the extent resulting from the gross negligence or willful misconduct of Landlord or its agents, employees
or contractors), and all damage done to the Building by moving or maintaining Tenant’s property shall be
repaired at the expense of Tenant.
6. Tenant shall not use or suffer to be used or kept in the Premises or the Building any kerosene,
gasoline or flammable or combustible fluids or materials except as customarily used in offices, or use any
method of heating or air conditioning other than that supplied by Landlord.
7. Tenant shall use reasonable efforts to ensure that all doors and windows of the Premises are
closed and securely locked and all water faucets, water apparatus and utilities are shut off at such time as
Tenant’s employees leave the Premises.
8. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any
purpose other than that for which they were constructed, no foreign substance of any kind whatsoever shall
be deposited therein, and any damage resulting to such facilities from misuse by Tenant or its employees
or invitees shall be paid for by Tenant.
B-2
9. Except as permitted in this Lease, Tenant shall not sell, or permit the sale from the Premises of,
or use or permit the use of any sidewalk or corridor adjacent to the Premises for the sale of, newspapers,
magazines, periodicals, theater tickets or any other goods, merchandise or service, nor shall Tenant carry
on, or permit or allow any employee or other person to carry on, business in or from the Premises for the
service or accommodation of occupants of any other portion of the Building, nor shall the Premises be used
for manufacturing or assembly of any kind, or for any business or activity other than that specifically
provided for in this Lease.
10. Tenant shall not install any radio or television antenna, microwave dish, telecommunications
apparatus, loudspeaker, or other device on the roof or exterior walls of the Building, without Landlord’s
prior consent, which shall not be unreasonably withheld or delayed.
11. Tenant and Tenant Parties shall not use in the Premises, or in the common areas of the Building,
any handtrucks except those equipped with rubber tires and side guards or such other material-handling
equipment as Landlord may approve, and Tenant shall use reasonable efforts to cause its invitees to comply
with the provisions of this Paragraph. No other vehicles of any kind shall be brought by Tenant or any
Tenant Party into the Building or kept in or about the Premises.
12. Tenant shall store all its trash and garbage within the Premises until removal. All trash placed in
any portion of the Real Property for pick-up shall be placed in locations and containers approved by
Landlord.
13. All loading, unloading and delivery of merchandise, supplies, materials, garbage and refuse shall
be made only through such entryways and elevators and at such times as Landlord shall designate. While
loading and unloading, Tenant and any Tenant Party shall not obstruct or permit the obstruction of the
entryways to the Building or any tenant’s space therein.
14. Canvassing, soliciting, peddling or distribution of handbills or any other written material in the
Building is prohibited, and Tenant shall cooperate to prevent such acts.
15. Tenant shall not permit the use or the operation of any video or mechanical games or pay
telephones on the Premises.
16. Landlord may direct the use of all reasonable and qualified pest extermination and scavenger
contractors to eliminate pests caused or introduced into the Premises by Tenant or any Tenant Party at such
intervals as Landlord may reasonably require, upon notice to Tenant, at Tenant’s sole cost and expense.
17. Tenant shall immediately, upon request from Landlord (which request need not be in writing),
reduce its lighting or other non-critical electrical usage in the Premises for temporary periods designated
by Landlord (but not more than one-third (1/3) of the total lighting or non-critical electrical usage in the
Premises for more than two (2) hours in any twenty-four (24) hour period), when required in Landlord’s
reasonable judgment to prevent overloads of the mechanical or electrical systems of the Building.
18. Landlord reserves the right to select and change the name and address of the Building as it may
deem appropriate from time to time, and Tenant shall not refer to the Building by any name other than:
(i) the name as designated by Landlord from time to time, or (ii) the postal address used for the Building.
Tenant shall not use the name of the Building in any respect other than as an address of its business
operations in the Building without the prior written consent of Landlord, which shall not be unreasonably
withheld, conditioned, or delayed..
19. Any requests made by Tenant of Landlord shall be made by telephone or in person by Tenant’s
designated representative at the office of the Building. Employees of Landlord shall not perform any work
or do anything outside of their regular duties unless under special instructions from Landlord.
20. Landlord may waive any one or more of these Rules and Regulations for the benefit of any
particular tenant or tenants, and no such waiver by Landlord shall be construed as a waiver of these Rules
B-3
and Regulations in favor of any other tenant or tenants or prevent Landlord from thereafter enforcing any
Rule or Regulation against any or all tenants of the Building.
21. These Rules and Regulations are in addition to, and shall not be construed in any way to modify,
alter or amend, in whole or part, any terms, covenants, agreements and conditions of the Lease or any other
lease of premises in the Building which expressly contradict these Rules and Regulations.
22. Landlord reserves the right to make such other and reasonable rules and regulations as in its
reasonable judgment may from time to time be needed for the safety, care and cleanliness of the Building,
and for the preservation of good order therein.
23. Tenant shall not obtain for use in the Premises ice, drinking water, food, beverage, towel or other
similar services, except at reasonable hours and under reasonable regulations fixed by Landlord.
24. Tenant shall be entitled to its proportionate share (based on rentable area) of listings in the
Building lobby directory. All signage, lettering or other writing or decoration on or visible from the exterior
of the Premises shall require Landlord’s reasonable prior written approval.
(1)
ADDENDUM I
OPTION TO EXTEND TERM
(a) Landlord hereby grants to Tenant the option (“Extension Option”) to extend the Term of this
Lease for an additional term (the “Option Term”) of five (5) years upon and subject to the terms and
conditions set forth in this Addendum. The Extension Option shall be exercised, if at all, by written notice
given to Landlord no more than one (1) year and no less than nine (9) months prior to the Expiration Date
of the Term. If Tenant exercises the Extension Option, each of the terms, covenants and conditions of this
Lease shall apply during the Option Term except the expiration date of the Option Term will be the date
five (5) years after the originally set forth herein as the Expiration Date of the Term, provided that (i) the
Rent to be paid during the Option Term shall be ninety-five percent (95%) of the Prevailing Market Rental,
as hereinafter defined, for the Premises for the Option Term, (ii) the Expiration Date for this Lease shall
become the expiration date for the Option Term; and (iii) there shall be no additional option terms. Anything
contained herein to the contrary notwithstanding, if Tenant is in monetary or material non-monetary default
under any of the terms, covenants or conditions of this Lease either at the time Tenant exercises the
Extension Option or at any time thereafter prior to the commencement date of the Option Term, Landlord
shall have, in addition to all of Landlord’s other rights and remedies provided in this Lease, the right to
terminate the Extension Option upon notice to Tenant. As used herein, the term “Prevailing Market
Rental” for the Premises shall mean the annual basic rental, payments for Expenses and Taxes as defined
in this Lease, and all other monetary payments that Landlord could obtain for the Option Term from a third
party desiring to lease the Premises for the Option Term taking into account the age and condition of the
Building and the Premises, the services provided under the terms of this Lease, the annual basic rental,
payments for Expenses and Taxes and all other monetary payments then being obtained for new leases of
space comparable to the Premises in the vicinity of the Building, provided however, no allowance for the
construction of tenant improvements, the payment of leasing commissions or moving expenses, or any other
tenant inducement shall be taken into account in determining Prevailing Market Rental.
(b) If Tenant exercises the Extension Option, Landlord shall send to Tenant a notice setting forth
the Prevailing Market Rental for the Premises for the Option Term, on or before the date that is one hundred
fifty (150) days prior to the Expiration Date of the Term. If Tenant disputes Landlord’s determination of
the Prevailing Market Rental for the Option Term, Tenant shall, within thirty (30) days after the date of
Landlord’s notice setting forth the Prevailing Market Rental for the Option Term, send to Landlord a notice
stating that Tenant disagrees with Landlord’s determination of Prevailing Market Rental for the Option
Term and elects to resolve the disagreement as provided below in subparagraph (c). If Tenant does not send
to Landlord a notice as provided in the previous sentence, Landlord’s determination of the Prevailing
Market Rental shall be conclusive and shall be the basis for determining the annual basic rental, payments
for Expenses and Taxes and all other monetary payments to be paid by Tenant hereunder during the Option
Term. If Tenant elects to resolve the disagreement as provided in subparagraph (c) and such procedures
shall not have been concluded prior to the commencement date of the Option Term, Tenant shall pay annual
basic rental, payments for Expenses and Taxes and all other monetary payments to Landlord hereunder
adjusted to reflect the Prevailing Market Rental as stated by Landlord in its original notice to Tenant of
Landlord’s determination thereof. If the amount of Prevailing Market Rental as finally determined pursuant
to subparagraph (c) is greater than Landlord’s determination, Tenant shall pay to Landlord the difference
between the amount paid by Tenant and the Prevailing Market Rental as so determined pursuant to
subparagraph (c) within thirty (30) days after the determination. If the Prevailing Market Rental as finally
determined pursuant to subparagraph (c) is less than Landlord’s determination, the difference between the
amount paid by Tenant and the Prevailing Market Rental as so determined pursuant to subparagraph (c)
shall be credited against the next installments of annual basic rental, payments for Expenses and Taxes and
all other monetary payments due from Tenant to Landlord hereunder.
(2)
(c) Any disagreement regarding the Prevailing Market Rental as defined in this Section shall be
resolved as follows:
(i) Within thirty (30) days after Tenant’s written response to Landlord’s notice to Tenant of
the Prevailing Market Rental, Landlord and Tenant shall meet no less than two (2) times, at a mutually
agreeable time and place, to attempt to resolve any such disagreement.
(ii) If within the thirty (30) day period referred to in clause (i) above, Landlord and Tenant
cannot reach Agreement as to the Prevailing Market Rental, they shall each select one appraiser to
determine the Prevailing Market Rental. Each appraiser shall arrive at a determination of the Prevailing
Market Rental, as defined in this Addendum, and submit its conclusions to Landlord and Tenant within
thirty (30) days after the expiration of the thirty (30) day consultation period described in clause (i) above.
(iii) If only one appraisal is submitted within the requisite time period, it shall be deemed to be
the Prevailing Market Rental. If both appraisals are submitted within such time period, and if the two
appraisals so submitted differ by less than ten percent (10%) of the higher of the two, the average of the
two shall be the Prevailing Market Rental. If the two appraisals differ by more than ten percent (10%) of
the higher of the two, then the two appraisers shall immediately select a third appraiser who shall within
thirty (30) days after his or her selection make a determination of the Prevailing Market Rental and submit
such determination to Landlord and Tenant. This third appraisal will then be averaged with the closer of
the two previous appraisals and the result shall be the Prevailing Market Rental.
(iv) All appraisers specified pursuant to this subparagraph (c) shall be members of the
American Institute of Real Estate Appraisers with not less than ten (10) years’ experience appraising
commercial properties in the San Francisco area. Each party shall pay the cost of the appraiser selected by
such party and one-half of the cost of the third appraiser plus one-half of any other reasonable third party
costs (excluding legal fees and disbursements) incurred in resolving the dispute pursuant to this Section.
If the commencement date of the Option Term is other than on the first day of a calendar month, then
the installment of Base Rent and Additional Charges for Expenses and Taxes payable on the first day of
any month during which an increase in the Rent, as provided for hereinabove, is to occur shall be prorated
based on the number of days in such month prior to the effective date of the increase and the number of
days in such month on or after the effective date of the increase.
(d) The Extension Option is intended to be personal to Tenant. Notwithstanding anything to the
contrary contained herein, if Tenant agrees to assign its interest in this Lease or to sublet all or any part of
the Premises prior to the commencement of the Extension Option, then unless otherwise expressly
consented to by Landlord in writing, the Extension Option shall immediately become null and void and of
no further force or effect.
(1)
SCHEDULE I
TENANT’S INSURANCE REQUIREMENTS
During the Term of this Lease, and during any period prior to the commencement of the Term in which
Tenant shall enter onto, occupy or use the Premises, Tenant shall provide at Tenant’s cost and expense the
following insurance coverage:
1. Property Damage Insurance. Tenant shall provide insurance coverage for all risks of physical
loss or damage insuring the full replacement value of Tenant’s Work, Alterations, Tenant’s trade fixtures,
furnishings, equipment, plate glass, signs and all other items of personal property of Tenant.
2. Liability Insurance. Tenant shall provide broad form commercial general liability insurance, and
automobile liability insurance, each with a minimum combined single limit of liability of at least the amount
set forth in the Basic Lease Information, and statutory worker’s compensation insurance with an employer’s
liability limit in the amount set forth in the Basic Lease Information covering all of Tenant’s employees.
Such broad form commercial general liability insurance shall include products and completed operations
liability insurance, fire legal liability insurance, contractual liability insurance applicable to all of Tenant’s
indemnity obligations under this Lease (provided that the amount of such insurance shall not be a limitation
on Tenant’s indemnity obligations), and such other coverage as Landlord may reasonably require from time
to time. At Landlord’s request, but not more frequently than every two (2) years, Tenant shall increase such
insurance coverage to a level that is reasonably required by Landlord.
3. Form of Policies. All insurance policies required to be carried by Tenant under this Lease shall
(i) be written by companies rated A 8 or better in “Best’s Insurance Guide” and authorized to do business
in California, (ii) name Landlord and any other parties designated by Landlord as additional insureds,
(iii) as to liability coverages, be written on an “occurrence” basis, (iv) provide that Landlord shall receive
thirty (30) days’ notice from the insurer before any cancellation or change in coverage, and (v) contain a
provision that no act or omission of Tenant shall affect or limit the obligation of the insurer to pay the
amount of any loss sustained. Each such policy shall contain a provision that such policy and the coverage
evidenced thereby shall be primary and non-contributing with respect to any policies carried by Landlord
and that any coverage carried by Landlord shall be excess insurance. Any deductible amounts under any
insurance policies required hereunder shall be subject to Landlord’s prior written approval (which shall not
be unreasonably withheld), and in any event Tenant shall be liable for payment of any deductible in the
event of any loss or casualty. Tenant shall deliver reasonably satisfactory evidence of such insurance to
Landlord on or before the Commencement Date, and thereafter at least thirty (30) days before the expiration
dates of expiring policies; and in the event Tenant shall fail to procure such insurance or to deliver
reasonably satisfactory evidence thereof within five (5) business days after written notice from Landlord of
such failure, Landlord may, at its option and in addition to Landlord’s other remedies in the event of a
default by Tenant hereunder, procure such insurance for the account of Tenant, and the cost thereof shall
be paid to Landlord as Additional Charges. The limits of the insurance required under this Lease shall not
limit any obligation or liability of Tenant under this Lease.
1227906/56198049v.8
City of Palo Alto (ID # 12299)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 6/15/2021
City of Palo Alto Page 1
Summary Title: Workplan for November 2022 Local Ballot Measure(s) &
Affordable Housing Funding Referral
Title: Recommend the City Council Approve the Workplan for Pursuit of a
Revenue-Generating Local Ballot Measure for the November 2022 General
Election; Review and Potential Guidance to Staff on Affordable Housing
Funding as Referred by the Council
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the Finance Committee recommend to the City Council approval of the
workplan for pursuit of a November 2022 or other local ballot measure(s) and any additional
guidance including but not limited to:
A) Affirming pursuit of a business tax, and refinement of the basis for such a tax (e.g.
headcount, payroll, square footage, gross receipts, or other);
B) Affirming pursuit of a utility use-based tax;
C) Direction to proceed with refinement of estimates and evaluation of potential tax
measures, including stakeholder outreach, polling and further feasibility analysis; and
D) Review of additional information regarding affordable housing funding as directed by
the City Council.
Executive Summary
This report resumes the work that the staff and City Council placed on pause in March 2020
with the onset of the COVID-19 pandemic and resumes review of this as outlined as part of the
Community and Economic Recovery workplan and Council priority in 2021. Throughout the
past decade, the City has worked to structurally balance its long-term revenues against
increasing expenses. In 2019, the City Council adopted fiscal sustainability as an annual priority
and approved a workplan on that priority through CMR 10267.
As an element of the fiscal sustainability workplan, through iterative conversations with the
Finance Committee and the City Council, significant work was done on developing potential
business tax ballot measure. This report seeks to resume the City’s work effort to identify a
City of Palo Alto Page 2
potential revenue-generating local ballot measure(s) and to finalize a workplan and potentially
narrow the scope for staff to focus limited resources on reaching the general election
scheduled in November 2022. The report includes key attachments for the Finance
Committee’s review and reference:
• The earlier work on this topic included an analysis of potential options for raising
revenue and a summary of that work is included with this report as Attachment A.
• A summary of funding options for Affordable Housing is included with this report as
Attachment B.
• A summary of prior work specifically related to the development of a potential business
tax is included as Attachment .C
• A full list of prior CMRs on fiscal sustainability and the topic of a revenue generating
local ballot measure is included with this report as Attachment D.
In addition to review of the past and current work, staff has provided a workplan/timeline to
complete this priority with the target of consideration of a measure(s) on the November 2022
election. Consistent with past practice, staff recommends the Finance Committee will serve as
the main deliberative body for the development of a potential revenue-generating local ballot
measure and that updates will be taken to the City Council for review and ultimately direction
to staff in addition to the appropriation of resources.
Background
The City of Palo Alto has worked towards fiscal sustainability over the past decade through a
number of actions, specifically outlined in the Fiscal Sustainability Workplan of 2019. These
actions included proactive funding contributions for the city’s long-term liabilities for both
pension and Other Post-Employment Benefits (OPEB) and strategies to structurally balance the
General Fund’s revenue and expenditures on an ongoing basis. This work is detailed more fully
through CMR 10267 which details each of the 14 elements of the workplan to address the 2019
City Council priority of Fiscal Sustainability and CMR 11722 which adopted the City’s proactive
pension funding policy.
Despite this work, structurally balancing revenues and expenses on an annual basis has proven
difficult. The City Council has articulated numerous needs beyond current funding levels
including:
• Funding for Affordable Housing
• Funding for electrification and Climate Change Resilience and Adaptation
• Funding for Capital Needs (including but not limited to railroad grade separation
alternatives)
• Funding for Delivery of Core Services – i.e. Parks, Youth Services, Community Services,
Libraries, Fire and Emergency Medical Services, and Police
City of Palo Alto Page 3
The economic impacts associated with the COVID-19 pandemic, and efforts to contain and
mitigate the spread of the virus resulted in a $40 million gap between revenues and expenses in
the FY 2021 Adopted Operating Budget, which was balanced through significant reductions in
departmental operating expenses throughout the organization, significant reduction in capital
investment including catch-up and keep-up costs as well as new projects, and concessions from
some of the City’s bargaining units.
The table below shows the amount of general fund revenues from FY 2019 through FY 2022 in
the major categories. The precipitous decline seen at the end of FY 2020 continued through FY
2021 as reflected in the FY 2021 estimate column.
Table 1. Summary of General Fund Revenues: FY 2019 and FY 2020 Actuals, FY 2021 Estimate
and FY 2022 Proposed
FY 2019 –
Actual
FY 2020 –
Actual
FY 2021 –
Estimate*
FY 2022
Proposed
Property Tax $47.3 $51.1 $53.17 $51.2
Sales Tax 36.5 30.6 25.03 28.2
Transient Occupancy Tax 25.6 18.6 4.8 8.4
Utility Users’ Tax 16.4 16.1 14.1 14.4
Documentary Transfer Tax 6.9 6.9 6.9 7.1
Charges for Services &
Licenses and Permits
35.8 31.6 29.5 32.5
All Other Revenues 57.3 54.8 55.4 63.8**
Total General Fund
Revenues
$225.8 M $209.7 M $188.9 M $205.6 M
* This reflects the FY 2021 estimate as shared with the Finance Committee at the outset of the budget development process;
staff subsequently communicated to the Finance Committee and the City Council that it anticipated slightly higher levels at
year-end depending on activity levels in certain revenue streams.
**The FY 2022 Proposed Estimate for other revenue did not include the 60/40 Split of American Recovery Plan Act (ARPA)
funding, nor the final allocation of that funding. Subsequent to the issuance of the proposed budget, all other revenues have
increased to $65.8 million bringing total FY 2022 Proposed Revenues to a total of $207.6 million.
As seen in Table 1, sales tax and transient occupancy tax revenues and their contributions to
the General Fund were a strength in FY 2019 that helped fund the myriad of services in Palo
Alto that differentiate it from other jurisdictions. Unfortunately, primarily as a result of the
economic impact of efforts to contain and mitigate the spread of COVID-19, these revenues
contracted and declined.
Adding to revenue challenges, in FY 2021 a local court held that a portion of the City’s
longstanding annual transfer of funds from the gas and electric utilities – which has funded
general City services such as police, fire, parks and libraries for many decades – could not
lawfully continue absent voter approval. While the court ruling is not final and may be
appealed, for FY 2022 the City has prudently set aside the disputed funds in a reserve pending
resolution of the issue. On the November 2022 ballot, the City could seek voter approval to
City of Palo Alto Page 4
confirm the longstanding transfer or could seek to replace the transfer revenues with an
increase in the utility user tax or some other type of tax.i
The current FY 2022 Operating Budget adjusts for both the current impacts of the pending
litigation as well as the recovery period due to the current pandemic and relies on one-time
funding to bridge the current uncertainties and delay further service reductions beyond those
approved as part of the FY 2021 Adopted Budget. However, the significant reductions taken in
FY 2021 will persist on an ongoing basis unless revenues can be brought into alignment with
expenses. This report represents the next step in discussions with the Finance Committee and
the City Council to address structural financial needs and is the first step in resuming prior
discussions regarding a business tax and potentially a utility use-based tax and how they can be
brought forward for voter consideration as part of the November 2022 general election.
Discussion
As discussed in CMR 10392 charter cities have two primary mechanisms for generating
revenue: 1) charging for services and 2) taxes. More information on these mechanisms, a brief
summary of Palo Alto’s major existing tax categories, and the potential impacts associated with
pursuing changes to various tax rates are explored in greater detail in Attachment A of this
report. Potential revenue estimates are meant to offer context at this early stage to inform the
conversation with the Finance Committee and guide potential next steps. Consistent with the
discussions associated with a potential business tax through FY 2019 and FY 2020, it is
anticipated that these estimates are maximums and are likely to be refined downward through
additional variables, exemptions, changes to the eligible bases, and other considerations as
they are more fully developed.
Prior to COVID-19, the City undertook a significant work effort to discuss potential revenue
generating ballot measures. Links to each of the City Manager Reports associated with the prior
work effort are included in Attachment D. Through those discussions, staff presented a
discussion of the various taxes that contribute to the General Fund and proposed using Equity,
Administrability, Stability and Economic Benefits (EASE) as the framework for analysis. The EASE
framework is discussed further in Attachment A.
Previous work on local ballot measures included three parallel paths that were pursued by staff,
augmented by consultant resources, and a fourth path that was not reached during the prior
effort. Staff recommends that the Committee and Council continue to use this framework as
the organization resumes this work. These four paths, the consultants used, and the
contractual authority were:
• Research, Analysis, and Modeling – Matrix Associates - $75,000
• Stakeholder Outreach – TBWB - $94,125
• Polling – FM3 Associates - $85,000
• Drafting Ordinance Language – N/A
City of Palo Alto Page 5
The City suspended consideration of a ballot measure before the fourth element of drafting an
ordinance got underway. Regardless of which local ballot measures are pursued further to
place on the November 2022 ballot, it is likely that the work will once again be organized into
these three focus areas and that the City Attorneys’ Office will retain outside counsel to assist
with drafting the ordinance language to enact the measure. More discussion of these paths is
included in Attachment C.
In addition, staff has provided detailed information regarding affordable housing funding as
referred to staff and the Finance Committee in the Housing Workplan. Attachment B provides
a summary of funding strategies for affordable housing initiatives. Overall, staff has found that
a combination of financial/funding strategies and partnerships is the most common framework
for a successful affordable housing project. As noted above, the Council has identified a
number of financial needs, therefore staff has included this Council referral as part of the
discussion of potential local ballot measure(s) to provide the full context of potential expenses
to be coupled with potential sources to fund them.
In order to reach the November 2022 ballot, a proposed workplan is detailed here for
discussion and refinement with the Finance Committee and the City Council, including their
respective engagement roles. It is important to narrow the scope of work as quickly as possible
not only to focus limited staff resources and optimize the use of consultants but also to avoid
placing too many measures on the ballot.
Governance:
To meet that timeline, staff recommends that the Finance Committee serve as the working
body to assist in the review of potential revenue-generating local ballot measures for the
November 2022 election and to review staff and consultant work as well as stakeholder
feedback. The Finance Committee could then make its recommendations for consideration and
action to the full seven-member City Council.
Finance Committee: would serve as the public body to review periodic progress reports,
allowing for structured public discussion and the provision of feedback and recommendations
on the review and development of a potential revenue-generating local ballot measure. Staff
will manage, review, and synthesize work done in-house and by external consultants and
incorporate stakeholder feedback into regular progress reports to the Finance Committee.
Ultimately, the Finance Committee would recommend their preferred potential revenue-
generating local ballot measure(s) to the City Council for further action.
City Council: would serve as the governing body for policy direction at key decision points. This
includes direction to conduct polling, approval of alternatives to be evaluated, and decisions on
what should be placed on the November 2022 ballot.
City of Palo Alto Page 6
Timeline
Given the constrained timeline and resources for pursuing the placement of a ballot measure(s)
on the November 2022 ballot, the aforementioned approach once again seems worth pursuing.
The table below shows the aggressive timeline necessary to finalize ballot measure language
and draft a potential ordinance by late Spring 2022 in order to reach the November 2022 ballot.
SCHEDULE TASK
JUNE 2021
Finance Committee:
- Recommendation to City Council on Workplan for 2022 ballot measure(s)
- Review and discussion of affordable housing funding and other funding
needs in the context of available revenue generating strategies.
Agreement on an approach to the development of revenue estimates and
options, workplan, and roles.
JULY 2021
Staff Work:
Development of Agreements for consultant services (may require RFP or sole
source exemption). Depending on which potential revenue-generating local
ballot measures are pursued, staff will seek consultant expertise including
financial analysis, modeling, additional research, stakeholder engagement and
polling.
No funding is currently allocated for this and staff recommends use of the
“Reserve: Strategic Investments” which is currently recommended to have a
balance of $750,000 in FY 2022 to fund these services.
AUGUST
2021
–
SEPTEMBER
2021
City Council:
- Direction to staff on which ballot measures to pursue and allocate
resources, as recommended by Finance Committee.
(tentatively to be considered in August 2021)
Finance Committee:
- accept initial analysis of revenue generating proposal estimates.
Estimates to be completed internally by staff and intended to assist in
informing various working groups in financial planning and focus further
refined analysis.
City Council award of consultant contract(s): as necessary to complete this
workplan.
OCTOBER
2021
Finance Committee:
- Accept refined analysis of revenue generating proposals estimates;
- discuss and provide guidance on initial polling and initial stakeholder
outreach.
With the assistance of consultant expertise, a more in-depth review of revenue
generating proposals will be presented to the Finance Committee providing
more accurate financial estimates to assist in financial planning.
City of Palo Alto Page 7
Staff work: Complete initial outreach to key stakeholders
City Council: Discuss Councilmember and community leaders and advocates
roles
NOVEMBER
2021
City Council:
- confirmation on potential revenue generating proposals including revised
revenue estimates
- Direction to complete initial polling and initial stakeholder outreach.
Work completed with the Finance Committee to be reviewed by the full
Council in order to receive input and direction on more refined steps.
DECEMBER
2021
City Council:
- decision on revenue generating proposal(s) to pursue.
Decision to be informed by the Finance Committee, financial analysis, polling
results, and a more refined understand of potential projects and associated
costs.
DECEMBER
2021
–
APRIL 2022
Staff work:
Continue stakeholder outreach, draft required legal documents, complete
polling as appropriate. City Council and Finance Committee will be provided
updates as necessary for status check-ins, additional rounds of polling,
feedback, and policy decisions.
MAY 2022
–
JUNE 2022
City Council: approval of November 2022 ballot measure and specific measure
language.
Should the City Council choose to pursue a ballot measure(s), final approval
including the ballot measure language will need to be submitted to the Santa
Clara County Registrar of Voters in early August 2020.
Resource Impact
Implementation of this workplan to develop revenue-generating local ballot measures will
require significant resources, including internal staffing and consultant expertise as well as
extensive stakeholder engagement. Depending on which ballot measure(s) the Finance
Committee and the City Council direct staff to pursue, the resource needs will scale
proportionately. It is important that the scope of potential ballot measures be narrowed to
effectively deploy necessary resources and stay on the timeline as noted above.
To the extent that consultants are required to augment staff on topics such as research,
modeling and analysis, polling, stakeholder outreach, and eventually the drafting of ballot
measure and ordinance language, staff will return to the City Council for appropriation of funds
and approval of contracts as appropriate. For reference, the prior single initiative was directly
resourced by approximately the equivalent of 2.0 full-time dedicated staff, significant support
from staff stakeholders in key departments, and consultant services support of $250,000 (until
the pausing of the work). Staff have gone through resource reductions and therefore expect
there will be impacts to other projects, and additional funding needed in excess of the amount
used previously, consistent with the work completed in 2019 and 2020. As the Council may
City of Palo Alto Page 8
choose a variety of measures for analysis and consideration, funding and staff resources will
increase accordingly.
Stakeholder Engagement
Staff has solicited input and feedback at multiple junctures through evaluation of a potential
business tax through previous conversations with the Finance Committee, the City Council,
residents, and the business community. As the scope of this work is refined, staff will work to
develop a corresponding stakeholder engagement plan specifically for this effort and
incorporate that into the ongoing process. Staff will include stakeholder engagement and
feedback as an element of any potential revenue-generating local ballot measure workplan and
will regularly report on the status of those efforts.
Conclusion and Next Steps
This report restarts the Finance Committee and the City Council guidance to staff in the pursuit
of additional revenue streams to be brought forward for voter approval through the November
2022 general election. Based on prior discussions with the City Council and the Finance
Committee, staff anticipates pursuing a business tax and a potential utility use-based tax.
Depending on the revenue stream, the City could allocate the funds either towards specific uses
or general city services to support City services, capital infrastructure needs, funding affordable
housing, or other priorities per City Council direction.
The timeline, resource impact and stakeholder engagement effort will each be impacted by the
decisions of the Finance Committee and the City Council and will scale according to the
necessary scope of work. In order to meet the timeline to place a ballot measure on the
November 2022 ballot, timeline noted above provides a guide on next steps and cadence for
approvals needed by the Finance Committee and City Council.
Attachments:
• Attachment A: Options for Raising Local Revenue
• Attachment B: Summary of Affordable Housing Funding Options
• Attachment C: Overview of Prior Work on a Potential Business Tax
• Attachment D: List of Prior City Manager's Reports on Local Ballot Measure
i Green v. City of Palo Alto (Santa Clara Superior Court, Case No. 1-16-CV-300760), a class action lawsuit, was filed on October 6, 2016. Plaintiffs
claim that the City’s gas and electric rates are taxes that exceed the cost of providing service, absent voter approval, because the rates fund
annual transfers from the utilities to the City’s general fund. The lawsuit seeks a refund of three years of alleged overpayments by gas and
electric ratepayers and an injunction prohibiting further overpayments.
On October 27, 2020, the Santa Clara County Superior Court issued a “Statement of Decision Regarding Phase II Trial” granting the relief sought
by the plaintiffs as to the City’s gas ratepayers only. The court’s ruling established the City’s liability at $12.6 million, which the City may have to
refund to gas customers after the judgment is final and all appeals, if any are filed, are resolved. Once a judgment is issued by the Superior
Court, which is likely to occur during the summer of 2021, both the City and the plaintiffs may appeal. A decision by the City Council whether to
appeal is likely to be made after the Council’s summer break. If either the City or the plaintiffs appeal, a decision by the Court of Appeal is not
expected until late 2022 or early 2023.
Because important areas of law are unsettled relevant to the City’s positions on appeal, the exact exposure to the City's general fund cannot be
determined with certainty at this time. In the FY 2022 budget, the City has set aside funding to cover the $12.6 million remedy the Superior
City of Palo Alto Page 9
Court identified in Phase II, plus interest, as well as the estimated future reduction in the gas equity transfer, should the current Santa Clara
County Superior Court decision stand. The City estimates the annual financial impact would be $8 million over the coming four years (FY 2022 –
FY 2025 and an average of $4 million annually after the initial four-year period beginning FY 2026).
ATTACHMENT A
Attachment A - 1
Options for Raising Local Revenue
This attachment includes information previously presented to the City Council through City
Manager’s Reports (CMRs) 10392 and CMR 10445, describing the City’s main revenue streams
and the impact of changes to those streams, as well as information regarding the potential
issuance of a General Obligation (GO) bond or the imposition of a parcel tax. It also includes a
brief discussion of potential changes to the basis for the Utility Users Tax. Information related to
a potential business tax can be found in Attachment B.
As discussed in City Manager’s Report (CMR) 10392, cities have two main mechanisms for raising
revenues: 1) taxes and 2) fees for services. The City of Palo Alto has a Municipal Fee Schedule
which it reviews annually as part of the budget process for a robust span of fees and charges. The
City also has service agreements with neighboring jurisdictions for services rendered, ranging
from the regional water quality control plant to the provision of fire protection and
communication services to Stanford. These fees for services are governed by various state laws
and contractual agreements. In some cases, fees are designed to fully cover our cost of providing
services. In other cases, fees are designed to pay part of the cost of providing services, with the
balance provided by tax revenues. Finally, some fees and charges lawfully exceed our costs,
providing excess revenues to help fund other programs and services to residents.
Cities can also impose taxes; however adoption of, or changes to, those taxes must be approved
by the voters in accordance with California law, including Propositions 218 and 26. For a general
tax, a simple majority of votes cast (50% + 1 vote) is required for approval, while for a specific tax
a 2/3 supermajority approval is required. By state law, cities may place a general tax before the
voters only at a general municipal election, which is an election that includes open seats on the
governing body. (The exception to this rule is a fiscal emergency declared unanimously by the
governing body).
Tax Revenues
Property Taxes
Property taxes are the largest revenue generator for the City of Palo Alto. All taxable real and
personal property is subject to a 1% basic tax of assessed value collected by local jurisdictions
and school districts for general service purposes. The City of Palo Alto receives only 9.42% of the
assessment, with the majority (45.61%) going to Palo Alto Unified, followed by Santa Clara County
(15.93%) and ERAF (13.88%). Due to Proposition 13, the effective property tax rate is only 0.49%
of assessed value – less than half of the 1% basic tax.
Potential Property Tax Rate Change
Property taxes are regulated by state laws, including voter-approved constitutional provisions
such as Proposition 13. Changing the rate itself is not within a municipality’s authority. However,
cities can use mechanisms such as parcel taxes which are levies on parcels of property. Typically,
ATTACHMENT A
Attachment A - 2
these are set at some fixed amount per parcel and cannot be based on the value of a property.
These levies can be based on lot square footage and or land use designation. Parcel taxes are
usually special taxes requiring a 2/3 voter approval. Parcel taxes are levied on the property
owner; however, property owners may pass on these costs to their tenants in the form of
increased rent or more expensive leases.
Sales and Use Tax
Sales and Use Taxes are usually the second largest revenue generator for the City of Palo Alto,
raising $30.6 million in General Fund revenue in FY2020. Sales Tax rates include state, regional,
and local assessments. Currently, the City of Palo Alto has a tax rate of 9.0 percent. The City
receives 1% point of the purchase, or 11.1% of each tax dollar. The remaining distribution is State
of California (5.75% point), Santa Clara County (0.125% point), Santa Clara Valley Transportation
District (1.625% point) and Public Safety Fund (0.5% point). As seen in Table 1 of CMR 12299,
Sales Tax revenues can fluctuate significantly depending on the overall state of the economy.
Potential Sales Tax Rate Change
An increase in the Sales Tax rate of ¼ cent, or 0.25 percentage points, as a district tax, would
generate approximately $4.5 million in additional revenue annually. The State of California caps
local sales taxes levied by local jurisdictions at 3.0%, meaning the total percentage can be no
greater than 10.25%. This tax would be equitable across businesses of the same industry,
however, it does not apply to industries that are not subject to sales tax. Sales tax is widely
considered to be an outdated tax structure and according to the City’s consultants only applies
to up to 40 percent of the economic base. This structure and the driver for it, disposable income
being a significant portion this tax, is subject to economic fluctuations as well as longer term
fluctuations and the consumption of goods changes in society.
Transient Occupancy Tax
Prior to COVID-19, Transient Occupancy Tax (TOT) was the third largest tax revenue generator
for the City of Palo Alto, generating $18.6 million in revenue in FY 2020, down from $25.6 million
in FY2019. The Palo Alto rate of 15.5% is applied to the daily rate charged by a hotel, motel, or
other lodging establishment. In November 2018, Measure E was passed raising the rate from 12%
to the current level of 15.5%. TOT revenues have sharply declined due to the shelter in place
declared due to COVID-19.
ATTACHMENT A
Attachment A - 3
Potential Transient Occupancy Tax Rate Change
An increase in the TOT rate would primarily impact the visitor population. A 0.5 percentage point
increase in the rate from 15.5 percent to 16 percent would generate approximately $900,000 in
additional revenue annually.
Utility Users Tax
Utility Users Tax generated the next largest revenue, with receipts of $16.1 million in FY20, down
from $16.4 million in FY19. The Utility Users Tax is charged to all users of electricity, gas, water
and telephone services. This tax is based on consumption by each respective utility. The revenue
decline was due to lower consumption of both utility commodity and telephone caused by
COVID-19. The electric utility revenues are comprised of approximately 70-75 percent
commercial usage and 25-30 percent residential. The gas utility revenues reflect approximately
45-50 percent commercial usage and 50-55 percent residential usage. Water utility revenues are
approximately 30-35 percent commercial and 65-70 percent residential. The current rate for
electricity, gas and water is 5.0% and for telephone is 4.75%.
Potential Tax Rate Change
A 1 percentage point increase in the current UUT rates, bringing the electricity, gas, and water
rate from 5 percent to 6 percent, and increasing the telephone rate from 4.8 percent to 5.8
percent, would generate an estimated $2.3 million in additional revenues annually. As a
consumption-based tax, high volume customers bear more of the cost.
Potential On-Bill Tax for Gas and Electric Services
As noted in the staff report, the City is currently in litigation over the longstanding practice of
transferring a portion of revenues from gas and electric charges, according to a formula, to the
general fund to support City services such as police, fire, libraries and parks. In FY 2020, the Gas
Fund transferred $6.9 million to the General Fund and the Electric Fund transferred $13.1 million
to the General Fund. Of these, approximately 65% of the Gas Fund Transfer was from commercial
customers, while 82% of the Electric Fund transfer was from commercial customers. No final
judgment has been entered and litigation is ongoing, however, the Superior Court has entered
an order upholding the electric transfer but determining that a portion of the gas transfer is
unlawful absent voter approval. To resolve all legal questions about the transfers, the City could
seek voter approval for the transfers in November 2022.
One form that a voter-approved equity transfer could take would be a percentage charge on gas
and electric utility bills that could be used to fund general city services. The exact percentage and
the amounts expected to be raised could be analyzed, discussed, and potentially tiered by
ATTACHMENT A
Attachment A - 4
volume. This could be structured as an increase to the Utility User’s Tax for gas and electric, or
as a separate line item tax on gas and electric services to replicate the longstanding equity
transfer. Depending on the rate and structure, the tax could be cost-neutral to rate payers. In
other words, rather than incorporating the , thereby lowering the initial rates, and then would
be offset by a corresponding increase to the Utility Users’ Tax rates.
Documentary Transfer Tax
Documentary Transfer Taxes generated $6.9 million in revenue for the City of Palo Alto in FY2019
and FY 2020, ranging from $3.1 million in FY 2009 to a high of $10.1 million in FY 2015. This tax is
applied to the sale of real property within Palo Alto as property ownership is transferred. The
State of California has a standard base rate of $1.10 per $1,000 of sale price, of which the City
and County split the proceeds 50/50 which applies to general law cities. As a charter city, the City
of Palo Alto has more discretion to set its rate. The City of Palo Alto currently has a non-
conforming rate, meaning that it varies from the State’s standard rate, currently set at $3.30 per
$1,000 of sale price.
Potential Tax Rate Change
Property owners who sell their property would be impacted by an increase in the rate and would
pay this tax once per sale of a parcel. Assuming approximately $9 million in annual proceeds, a
$1.10 increase in the rate to $4.40 per $1,000 of the sale price would result in additional revenue
of approximately $2.8 million.
Other Revenue-Generating Options – Parcel Tax and General Obligation (GO) Bond
Parcel Tax
The City could choose to pursue the placement of a parcel tax on the November 22 ballot, either
as a general parcel tax or one specific to businesses. CMR 10445 detailed further information on
Parcel Taxes and their potential applicability. That information is repeated here for ease of
access.
In California, local agencies (e.g. city, school and community college district, etc.) are authorized
to impose parcel taxes which require a two-third supermajority vote approval for specified
purposes. For cities, parcel taxes are subject to limitations under Government Code Section
50075 et seq.
Recent decisions of the California Supreme Court and Courts of Appeal have held that voter
initiatives are not subject to certain procedural requirements that apply to tax measures placed
on the ballot by local governments, including the timing of elections (general municipal election
or any election) and supermajority approval requirements. This area of the law is continuing to
evolve. More information can be provided as needed.
ATTACHMENT A
Attachment A - 5
Parcel taxes are levied on a property owner’s property tax bill and may be a specific amount (that
may escalate) or it can be based on a factor such as building square footage. The most common
type of parcel tax is a fixed amount, identical for all parcels regardless of use, size, or value, and
often includes a sunset provision. Per California Article XIIIA, Section 4, special taxes (like parcel
taxes) cannot be ad valorem (based on the value of property). A parcel tax can be approved for
a set period (e.g., 10 years) or it can be permanent.
Fixed amount parcel taxes if applied to all property owners equally typically require
owners of smaller or lower valued property to pay the same amount as owners of larger
or higher valued property and therefore are referred to as regressive. A fixed parcel tax is
different from an ad valorem property tax, in that it is imposed on a per-parcel basis and
is not based on the AV of the property.
A parcel tax based on square footage if applied to all property owners would be more
equitable on the properties that it applies to (also referred to as “progressive”) since it
would require owners of properties to pay proportionally based on the size of the parcel.
However, this structure would most likely result in a more complex administration of the
tax. As discussed in prior reports, in November 2018 the City of East Palo Alto passed a
parcel tax based on square footage ($2.50 per square foot) that only applies to
commercial office space that is over 25,000 square feet. This limits the scope of impacted
parcels that meet these criteria, thereby theoretically limiting both the complexity of
administration and the revenue generated through the tax.
In general, properties exempt from the general 1 percent ad valorem (property) tax are exempt
from parcel taxes. In addition, there is a separate statute in the Government Code for school
district parcel taxes (Gov. Code Section 50079 et seq.) and it differs from the more general parcel
tax authority in Section 50075 et seq in two important ways: (1) School districts require a tax that
applies uniformly to all taxpayers and (2) they are specifically allowed certain exemptions:
1. Persons who are 65 years of age or older.
2. Persons receiving Supplemental Security Income for a disability, regardless of age.
3. Persons receiving Social Security Disability Insurance benefits, regardless of age, whose
yearly income does not exceed 250 percent of the 2012 federal poverty guidelines issued
by the United States Department of Health and Human Services.
Though the above exemptions do not apply to city parcel taxes, it may be possible to include
specific exemptions like these to the extent it is concluded that the exemption is reasonable
based on the purposes of the tax. Further research would be necessary on this based on specific
exemptions that Council and/or staff are interested in exploring.
The following table shows the City’s property breakdown by land use as of 2018. For example,
based on the following data, a fixed $350 parcel tax on 20,087 parcels that are eligible to be taxed
would generate approximately $7 million in annual revenue. Potential revenue from an
ATTACHMENT A
Attachment A - 6
alternative methodology, such as a tax measure based on commercial square footage is described
below.
TABLE A-1: Property by Land Use
A parcel tax measure based on commercial square footage can have a simple structure like East
Palo Alto’s and/or a more complex tax structure based on types of properties (e.g. office, retail,
industrial, etc.). The following table shows potential annual revenues, by property type, based
on a $1 rentable building area per square feet parcel tax using CoStar Data. It is not intended to
suggest nor provide a structure for a parcel tax. Based on the Committee’s feedback and/or
direction, staff can return with specific tax structure(s) and their potential revenues.
TABLE A-2: POTENTIAL PARCEL TAX REVENUES
BASED ON RENTABLE BUILDING SQUARE FEET ($1 PER SQUARE FOOT)
PROPERTY TYPE Rentable Bldg. Area
(Square Feet)
Estimated Annual
Revenue ($)
HOSPITALITY 1,366,278 $1,366,278
INDUSTRIAL 2,453,992 $2,453,992
OFFICE 13,304,877 $13,304,877
RETAIL 4,010,544 $4,010,544
FLEX BUILDING 4,640,212 $4,640,212
GRAND TOTAL 25,775,903 $25,775,903
EXCLUDES: GOVERNMENT, SCHOOL, PARKING GARAGE/LOT, RELIGIOUS FACILITY,
LODGING/MEETING HALL, SELF-STORAGE, CONTRACTOR STORAGE YARD, CAR WASH,
SHELTER, AND THEATER/CONCERT HALL.
ATTACHMENT A
Attachment A - 7
Compared to GO Bond Measures, in the June and November 2018 elections, the approval for
City parcel tax measures was slighter better, with 75 percent passing in June 2018 and 83.3
percent passing in November 2018. In June and November 2018, there were 62 parcel tax
measures with 34, or 54.8 percent, passing. For City only tax measures, 81.3 percent passed. In
addition, of the 13 school parcel taxes 10, or 76.9 percent, passed. As for the sunset provision
for parcel tax measures in the last three elections, most school ballot measures had them while,
in a given election year, only a third to less than half of non-school measures had them.
TABLE A-3: PARCEL TAX VARIABLES & E.A.S.E.
PARCEL COUNT SQUARE FOOTAGE
EQUITY For fixed (per parcel tax), results
in owners of smaller or lower
valued property to pay the same
amount as owners of larger or
higher valued property.
A rentable building square feet tax aligns
the tax with both the size and potentially
the property types it’s assessed on which
would be considered more progressive.
ADMINISTRATION Further research is needed to understand the full administration cost for a
parcel tax. What is known are as follows: (1) the University Avenue parking
assessment bonds are consider a parcel tax for which the County of Santa
Clara’s administrative cost is 1 percent of the levy; (2) depending on the tax
structure, the county might have a $16 per parcel cost which is far more
expensive than the 1 percent of levy fee; staff is working with the county to
understand when this is applicable. There likely will be an annual consultant
cost to prepare and submit the parcel tax assessment to the county. If these
revenues are used to issue bonds, then there will be costs associated with a
bond’s issuance and on-going management similar to the GO Bond issuance.
STABILITY Very stable with low
volatility.
Very stable with low volatility.
ECONOMIC
BENEFITS
Economic development
implications of a flat, parcel
tax would depend on any
policy choices for
exemptions. However, as
noted in the discussion a flat
tax would be regressive as it
does not scale to size or
another unit not scale to
size or another of
measure.
This method could be tailored to
promote certain economic development
objectives; however, the selected
exemptions or varying tax rate scales
could result in unanticipated
complexities that would make the tax
difficult to administrate.
ATTACHMENT A
Attachment A - 8
General Obligation (GO) Bond
Other options that were previously discussed included the issuance of General Obligation bonds.
These were also further discussed in CMR 10445 and that information is repeated here for ease
of access.
A common form of long-term capital project financing is the General Obligation (GO) bond. Cities
can only issue GO bonds to pay for the acquisition and improvement of real property (California
Constitution Article XIIIA). Under Article XIIIC of the State Constitution, City GO bonds require a
favorable two-thirds supermajority vote of the registered voters that vote on the measure. For
California cities, GO bonds are secured by a promise to levy ad valorem property taxes (property
taxes based on the value of the property) in an unlimited amount as necessary to pay debt
service. Voters approve the maximum amount of debt (bonds) that can be issued. The ad valorem
taxes levied to pay debt service on city GO bonds are in addition to the 1 percent general ad
valorem property tax. Although the California Constitution was modified in 2000 through the
enactment of Proposition 39 to allow schools, community colleges, and county education offices,
under defined circumstances, to have a 55 percent popular vote threshold, City GO bonds still
require a two-thirds favorable vote.
Generally, based on assessed values (AV), approximately two-thirds or more of a GO Bond
assessment is paid by residential parcels and one-third by businesses/commercial parcels in the
City of Palo Alto. While GO bonds can be issued for different lengths of time, the most common
are 30-year bonds with 40 years being the maximum maturity duration. The City of Palo Alto has
issued GO bonds for library and school infrastructure improvements. The City’s net library bond
issuance of $71 million currently adds $10.62 per $100,000 in AV to each property owner’s tax
bill, or about $106 per year for a residence appraised at $1,000,000. This is based on a FY 2020
secured property tax AV of $37.3 billion and unsecured property tax AV of $1.9 billion.
The below table reflects a range of potential GO bond issuance size, an initial assessment rate
for $1 million in AV for residential/commercial properties and the unsecured property taxes and
potential annual debt service payments. The term “unsecured” refers to business personal
property that can be relocated and is not real estate (e.g. aircraft, boat and machinery and
equipment, etc.).
TABLE A-4: POTENTIAL GO BOND ISSUANCE AMOUNT
POTENTIAL
GO BOND ISSUANCE
AMOUNT
Residential/Commercial
(Rate for $1 M in
Assessed Value/Yr)
Unsecured Property
(Rate for $1 M in
Assessed Value/Yr)
Estimated Annual
Debt Service
$100M $178 $203 $6.6 million
$200M $356 $406 $13.2 million
$300M $533 $608 $19.8 million
$500M $888 $1,012 $32.9 million
ATTACHMENT A
Attachment A - 9
Note: the above tax rates will be re-calculated annually based on the annual debt service
and the City’s total AV. Historically, the AV increases annually while the debt service
remains stable resulting in the GO Bonds’ tax rates declining.
The below table addresses the E.A.S.E. framework as applied to the analysis of a potential GO
Bond issuance.
EQUITY Though the GO Bond tax rate is applied uniformly against the property’s
Assessed Value (AV), due to Proposition 13, properties that have
changed ownership will have a higher AV and corresponding burden
from a GO Bond tax assessment than those properties with a lower AV.
ADMINISTRATION The County of Santa Clara charges 0.25 percent to administer the
assessment collection via the annual property tax bill. A $100M bond
issuance with a $6.6M annual debt service payment would incur $16,500
in annual administrative fees by the County to collect the tax.
Considerable cost and staff resources would be incurred associated with
the actual bond(s) issuance and ongoing staff time would be necessary
to manage the debt service and bond covenant requirement for the
bond duration (e.g. 30 years) and the annual GO Bond tax rate
calculation which is submitted to the county.
STABILITY Very stable with low volatility even during a recession.
ECONOMIC
BENEFITS
A GO Bond mirrors the current assessment and weight of the baseline
1% property tax assessment. The ad valorem levy is the same as the
baseline tax structure for both the administrator and the taxpayer,
therefore, minimal administrative disruption is anticipated. However,
inequities associated with current regulations such as Proposition 13 as
referenced above may disproportionately impact certain owners.
The Bay Area GO Bond measures considered in June and November 2018 elections had mixed
results, though the majority passed, a few did not. In November 2018, there were eleven non-
school GO Bond measures totaling $2.4 billion. Five passed and a total of $1.3 billion in local non-
school GO Bonds were issued. In June 2018, there were three local non-school GO Bond measures
and two of those measures passed, both cities in the Bay Area. Though the overall passage rates
in the last two elections were high, the passage rates for measures for school GO Bonds is higher,
86 percent, than City, 62 percent.
ATTACHMENT B
Attachment B - 1
Summary of Affordable Housing Funding Options
As requested by Council, this attachment provides greater detail on different options for funding
affordable housing. It includes an overview discussing affordable housing and then briefly
describes various options that can be used to raise revenues for this purpose. Some of the options
are already in place in Palo Alto to raise funding for this purpose, while other options may be
present in Palo Alto but not specifically directed to affordable housing. Other options are not yet
being used in Palo Alto for affordable housing or any other purpose.
Affordable Housing Overview
The Federal Government, through the Department of Housing and Urban Development (HUD),
considers housing that requires 30% or less of a household’s income as affordable to that
household. Once a household pays more than 30% of its income for rent or a mortgage, the
household is defined as “cost burdened.” Although there is debate about the appropriateness of
30% as the measurement, the proportion of households spending more or less than 30% of their
income on rent is one measure of affordability of in a city or region.1
The Joint Center for Housing Studies of Harvard University produces maps that show cost burden
across the nation.2 In 2017, the San Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area
(MSA), 36% of households were cost burdened, with 17% experiencing severe cost burden. This
is similar to the 37%of households cost burdened and 18% severe cost burdened by households
in the San Francisco-Oakland-Hayward MSA. Severe cost burdening occurs when a household
spends more than 50% of its income on housing costs.
One way to ensure more households can afford housing is by constructing deed-restricted,
income-based housing. These units are typically offered for sale and for rent to lower-income
households in a region. To determine if a household is lower income, the HUD assesses the
median incomes of counties nationwide. Each year, HUD publishes a table for each county
identifying the median income, and the incomes of extremely low-, very low-, and low-income
households. The table also varies based on household size. As of April 26, 2021, the median
income in Santa Clara County for a household of 4 is $151,300.
1 Rental Burdens: Rethinking Affordability Measures
https://www.huduser.gov/portal/pdredge/pdr_edge_featd_article_092214.html
2 Cost Burden Maps by the Joint Center for Housing Studies of Harvard University:
https://www.jchs.harvard.edu/son2019-cost-burdens-map
ATTACHMENT B
Attachment B - 2
Table C-1: Income by Household Size
Santa Clara County Income Table Issued by HUD April 26, 20213
Household Size
Income 1 2 3 4 5 6 7 8
Extremely
Low
$34,800 $39,800 $44,750 $49,700 $53,700 $57,700 $61,650 $65,650
Very Low 58,000 66,300 74,600 82,850 89,500 96,150 102,750 109,400
Low 82,450 94,200 106,000 117,650 127,200 136,600 146,050 155,450
Median 105,900 121,050 136,150 151,300 163,400 175,500 187,600 199,700
Moderate 127,100 145,250 163,400 181,550 196,050 210,600 225,100 239,650
Funding Affordable Housing
Since the rents that low-income households can afford to pay are less than the market rent, the
private market does not build new housing units for these households. Instead, states, counties,
and cities deploy several tools to aid in the construction of deed-restricted, income-based
affordable housing. Overall, the tools represent strategies to find funding to either (1) construct
the affordable housing or to (2) decrease the cost to construct and operate the housing. Below
are some potential funding tools to offset the costs of affordable housing. Those marked with an
* are already in place in Palo Alto but may not be specifically dedicated to affordable housing.
• General Taxes*
• Inclusionary Housing Requirements and/or Fees*
• Commercial Linkage Fee*
• Documentary Transfer Tax*
• Jobs-Housing Linkage Policy
• Enhanced Infrastructure Financing District
• Bond Measures
• Project Specific Funding
• California Community Housing Agency
• Use of Public Land and/or Land Lease
General Taxes - Tax revenues can be dedicated to affordable housing through a jurisdiction’s
budget process, or a jurisdiction can choose to raise a tax and specifically dedicate it to affordable
housing. The City of Palo Alto could choose to dedicate existing tax revenues to the construction
of affordable housing, could ask voters to dedicate a new tax to affordable housing, or could ask
voters to approve a new tax that will be dedicated to affordable housing via the legislative
process (budget). Although the City currently collects taxes, none are explicitly allocated towards
affordable housing. Either a general tax, requiring a simple majority for passage, or a specific tax,
requiring a 2/3 supermajority to pass, could be used for affordable housing.
Below Market Rate Housing Requirements and/or Fees - The City of Palo Alto has two affordable
housing programs: 1) Below Market Rate (BMR) and 2) Affordable Housing Fund. The BMR
ATTACHMENT B
Attachment B - 3
program requires housing developers to include below market rate housing units in new housing
developments. The City requires that ownership projects include 15% of the units as affordable
to moderate income households. Rental projects are required to pay a fee instead of including
the units in the development; the fee goes into the Affordable Housing Fund to contribute to
100% affordable housing projects.
The City has explored the feasibility of increasing the inclusionary percentage above 15%. A study
completed in 2020 indicated that increasing the rate must be accompanied by adjusting some
development standards, otherwise a higher inclusionary rate is not feasible. The state requires
that inclusionary rates above 15% must be financially feasible. Staff could return with draft
legislation to adjust development standards so that more inclusionary housing is financially
feasible. The changes to standards may also allow the City to require on-site BMR units for rental
housing projects.
In addition, a series of recent state laws, including the state density bonus, allow developers to
become eligible for certain concessions and/or permit streamlining when a certain percentage of
units are affordable.
Documentary Transfer Tax - One type of tax the Council may consider for supporting affordable
housing is a documentary transfer tax. A documentary transfer tax (transfer tax) is a tax imposed
by the County and/or City for the transfer of property. The City could increase this tax and
dedicate the revenues to affordable housing.
For example, the City and County of San Francisco passed Proposition I in 2020 by a margin of
57.55% to 42.45%. This tax raised the property transfer tax rate on commercial and residential
properties valued between $10 million and $24.99 million from 2.75% to 5.5%, and on properties
valued at $25 million or more from 3% to 6%. This was passed as a general tax, though by
resolution the revenues were dedicated to housing related funds. The table below presents
documentary transfer taxes throughout Santa Clara County to provide context on neighboring
jurisdictions.
ATTACHMENT B
Attachment B - 4
Table C-2: Documentary Transfer Tax Rates in Santa Clara County
City General
Law/Chartered
Per $1,000 Property
Value (City Rate)
Rev & Tax Code
Sec 11911 –
11929
County Rate
Per $1,000
Property Value
(Total)
Campbell General $0.55 $0.55 $1.10
Cupertino General $0.55 $0.55 $1.10
Gilroy Chartered $0.55 $0.55 $1.10
Los Altos General $0.55 $0.55 $1.10
Los Altos Hills General $0.55 $0.55 $1.10
Los Gatos General $0.55 $0.55 $1.10
Milpitas General $0.55 $0.55 $1.10
Monte Sereno General $0.55 $0.55 $1.10
Morgan Hill General $0.55 $0.55 $1.10
Mountain View Chartered $3.30 $1.10 $4.40
Palo Alto Chartered $3.30 $1.10 $4.40
San Jose Chartered $2 M AV Exempt $1.10 $1.10
1.25% $1M - $3M $1.10 $13.60
2.5% $3M - $10M $1.10 $26.10
3% > $10 M $1.10 $31.10
Santa Clara Chartered $0.55 $0.55 $1.10
Saratoga General Law $0.55 $0.55 $1.10
Sunnyvale Chartered $0.55 $0.55 $1.10
Commercial Linkage Fee (CLF) – Commercial linkage fees became effective in Palo Alto in 2017. A
CLF is similar to other impact fees levied on new development and helps cover the cost associated
with creating new or expanded public facilities to meet the additional demand created by the
development. Before levying a CLF, jurisdictions are required by state law to complete a nexus
study that shows the linkage between the new development and the increased demand for the
facilities. The results of the nexus study establish the maximum legal fee that may be charged.
ATTACHMENT B
Attachment B - 5
Table C-2: CLF Affordable Housing Fee Levels in Santa Clara County (per sq. ft)
Non Residential
Fees by City
Office/R&D Retail Hotel Industrial
Palo Alto $36.53 $21.26 $21.26 $21.26
Mountain View* $28.25 $3.02 $3.02 $28.25
City of Santa
Clara
$20.00 $5.00 $5.00 $10.00
Cupertino $24.60 $12.30 $12.30 $24.60
Sunnyvale** $17.20 $8.60 $8.60 $17.20
Milpitas $8.00 $8.00 $8.00 $4.00
Average Fees $22.43 $9.70 $9.70 $17.55
*Mountain View: Office/R&D<10k sq. ft. pays ½ fee. Hotel/Retail <25k sq. ft.
pays ½ fee
**Sunnyvale fee for Office/Industrial is ½ fee level up to 20k sq. ft. and full fee for
sq. ft. above 20k
Source: siliconvalleyathome.org
Jobs Housing Linkage Policy - A jobs-housing linkage fee is similar to the commercial linkage fee,
but it identifies the nexus between commercial development and housing demand. The fee then
goes to support the development of housing to meet the demand created by the commercial
development. The nexus study can include examining the housing demand generated by the new
workforce occupying the commercial facility, but also the demand for other jobs created by the
new workers. For example, a new office building may create demand for more low-wage work in
the restaurant industry; and those low-wage workers need housing as well as the office workers.
Infrastructure Financing District – The Enhanced Infrastructure Financing District (EIFD) provides
broad authority for local agencies to use tax increment to finance a wide variety of projects,
including affordable housing, mixed-used development, sustainable development, and transit-
oriented development. According to the California League of Cities:
The EIFD provides broad flexibility in what it can fund. No public vote is required to
establish an authority, and though a 55 percent vote is required to issue bonds, other
financing alternatives exist. Unlike former redevelopment, this tool imposes no
geographic limitations on where it can be used, and no blight findings are required. An
EIFD can be used on a single street, in a neighborhood or throughout an entire city. It can
also cross jurisdictional boundaries and involve multiple cities and a county. While an
individual city can form an EIFD without participation from other local governments, the
flexibility of this tool and the enhanced financial capacity created by partnerships will
likely generate creative discussions between local agencies on how the tool can be used
to fund common priorities.3
3 Source: https://www.cacities.org/Policy-Advocacy/Hot-Issues/New-Tax-Increment-Tools
ATTACHMENT B
Attachment B - 6
This tool does not necessarily collect taxes from a new source but uses the incremental tax
increases in a given geography to finance infrastructure investments. Generally, tax increment
financing assumes the infrastructure or investment will yield higher tax revenues in the future,
allowing the district to afford the investment.
Bond Measures - Bond measures can also be used by different levels of government to fund
affordable housing.
For example, the State of California put Proposition 1 on the ballot in 2018. The proposition
passed and gave the state permission to borrow $4 billion to fund affordable housing
construction as well as rental and home loan subsidies. These were structured as General
Obligation (GO) bonds. GO bonds are described in greater detail in Attachment A. The money
from Proposition 1 can be used to build and renovate rentals ($1.8 billion), to offer home loan
assistance to vets ($1 billion), to construct additional housing in dense urban areas and near
public transit ($450 million), to offer down payment assistance and other aid to low- and
moderate-income homebuyers ($450 million) and to provide loans and grants for agricultural
workforce housing development ($300 million). Likewise, Santa Clara County voters passed
Measure A in 2016. This bond generated revenues for affordable housing in the county.4
Project Specific Funding – The above represent options local governments can use to generate
revenues for affordable housing development. In addition to these measures, there are project
specific funding sources available for affordable housing developments. For example, the
Measure A monies raised by the County are allocated to specific housing projects. Federally, the
Low-Income Housing Tax Credit (LIHTC) can provide funding for specific projects. Lastly, state-
funded Project Home Key provides funding to create housing for unhoused persons. This funding
source is allocated to specific qualifying projects.
The key point is that additional funding sources exist for affordable housing overall. These funds
come from different sources and are then allocated to specific projects, not to municipalities or
other agencies.
California Community Housing Agency (Project Specific Funding) - The California Community
Housing Agency (CalCHA)5 is the State’s first public agency focused exclusively on the production,
preservation and protection of middle-income housing. The “Essential Housing” model has
already created over 2,000 affordable rent-restricted rental units. Founded in 2019, CalCHA is a
Joint Powers Authority (JPA) created pursuant to Chapter 5 of Division 7 of Title 1 of the
Government Code of the State of California. The JPA purchases existing housing and restricts the
4 Website regarding Measure A:
https://www.sccgov.org/sites/osh/HousingandCommunityDevelopment/AffordableHousingBond/Pages/home.asp
x#:~:text=%E2%80%8B%E2%80%8B%E2%80%8BIn%20November,%24950%20million%20affordable%20housing%2
0bond.&text=The%20bond%20proceeds%20would%20contribute,approximately%204%2C800%20affordable%20h
ousing%20units.
5 Website: https://www.calcha.org/
ATTACHMENT B
Attachment B - 7
homes to income-qualified households (no more than 120% of area median income). The JPA
issues revenue bonds for specific projects. Revenue bonds are project specific bonds that use the
revenues of a project to service any debt obligations. Cities that join the JPA have no
responsibility or obligation to the bonds. To be active within the boundaries of a local jurisdiction,
the jurisdiction must join the JPA via a resolution.
Use of Public Land and/or Land Lease – Public agencies may also utilize land owned by the agency
for housing. In the Bay Area, land acquisition can be one of the most challenging and expensive
parts of building housing—both affordable and market rate. If a government already owns the
land, the cost of the housing can decrease significantly. Local governments often issue RFPs to
work with private developers to build the housing. The development may be 100% affordable,
though subsidies are required from other sources to build the housing. The development may
also be a mixed income project that includes both market rate and affordable housing. Often
times, with mixed income projects, the low or no-cost land is leveraged for very high amount of
below market rate housing (up to 50% or more in some cases). Typically, the government agency
enters into a long-term land lease (50 years, 99 years, etc.) with the developer so that the land is
still retained as publicly owned. These projects are typically rental housing, and not for sale. Some
work has been done to advance community land trust models that do allow ownership of the
unit by an individual or family, but retain ownership of the land by a non-profit or government.
ATTACHMENT C
Attachment C - 1
Overview of Prior Work Efforts related to a Business Tax
The City of Palo Alto does not currently have a Business Tax. In 2014, the City approved a Business
Registration Certificate (BRC) Program, which has a $54 annual registry fee per business. Due to
the impact of COVID-19 on businesses, this fee was waived for FY 2021 and FY 2022. This fee is
in addition to any special assessments, such as the Downtown Business Improvement District
(BID) or Downtown Parking Assessment District. The BID fees were also waived for FY 2021 and
FY 2022 in light of COVID-19.
The discussion of a business tax is not new to Palo Alto. On June 22, 2009, the Palo Alto City
Council voted 6-2 to put Measure A, a general tax measure on the November ballot, where it
failed to meet the simple majority required for passage. 57.28% of voters voted against the
measure and only 42.75% voted in favor. That measure was expected to raise $3 million a year
in general fund revenues through a $75 fee on all businesses and an additional cost of $35 to
$75 per employee depending on the size of the firm.
In 2016, the Council renewed talks of a business tax, but the effort was dissolved when the
Finance Committee opted instead to pursue a hotel tax increase via Measure E. In 2019, by a vote
of 6-1, the Council began a new effort to place a business tax on the November 2020 ballot to
help support their Fiscal Sustainability priority. Significant work by staff, augmented by
consultant resources, was put into the pursuit of developing a potential business tax ballot
measure. This included exploration of different options ranging from headcount to square
footage to gross receipts. This attachment provides an overview of the prior work efforts
including the three paths that were used to organize the work so that could it proceed
concurrently.
The three paths were analysis and modeling, stakeholder outreach, and polling. These three
paths would likely be used to organize work on an ongoing basis in order to facilitate the
necessary conversations in a prompt and timely manner.
• The analysis path consists of creating models to estimate potential revenues, refining
those revenue estimates, and incorporating iterative direction on elements of the model
such as tiering of rates, exemptions, or other nuances that can be altered. During the
2019 and 2020 work on a potential business tax, the City used Matrix Associates as the
consultant to augment the work on analysis.
• The stakeholder outreach path consists of targeted and tailored communication to the
community around the potential local ballot measure. This includes both the potential
rate-payers that would be impacted by a new local ballot measure and other members
of the community. During the 2019 and 2020 work on the development of a potential
business tax, the City used TBWB as the consultant to facilitate stakeholder
engagement.
ATTACHMENT C
Attachment C - 2
• The polling path consists of polling voters on the specific language and elements of a
potential ballot measure to inform the wording of the ballot measure and incorporate
potential changes to aid the measure’s passage. During the 2019 and 2020 work on the
development of a potential business tax, the City used FM3 associates as the consultant
to engage on polling.
Although the Finance Committee and City Council had given direction to staff to pursue a
business tax based on employee headcount, that may no longer be the most viable nor
administratively feasible option as a result of changes to the work environment from COVID-19.
The remainder of this attachment retransmits information previously sent to the Finance
Committee and City Council through CMR 10392 and CMR 10445 to restate the context for a
potential business tax and present additional options for re-consideration. Subsequent City
Manager Reports that more fully explore a potential employee head-count business tax are listed
and available in Attachment D.
Limits and Constraints on Business Taxes
The City can consider any tax that is not arbitrary in its application or otherwise prohibited by
state law or the constitution. Jurisdictions may only tax conduct with a constitutionally-sufficient
nexus to the jurisdiction. For businesses that conduct business in multiple jurisdictions, the city’s
business license tax can only be applied to the portion of business transacted in the city. Business
tax measures follow the same voter thresholds for a general tax or special tax and could be
proposed as either.
Some businesses and occupations are exempt from local business taxation under state or federal
law; these include non-profit or charitable organizations (e.g., non-profit hospitals), banks and
other financial institutions that pay the state in-lieu tax, small residential care facilities, and small
home childcare facilities. This list is not exhaustive or exclusive. The City can include other
exemptions (e.g., small business, limited duration activity) in addition to the exemptions required
under state or federal law in a proposed tax measure.
Analysis of Neighboring Jurisdictions’ Business Taxes
Staff reviewed election results for cities in the Bay Area (Santa Clara County, San Mateo County,
City and County of San Francisco, Alameda County, Contra Costa County, and Marin County) for
business license tax measures in the past five years, that did not specifically target a type of
business (such as landlords, parking lots, warehouses, sugary drinks, gaming, cardrooms,
gambling, soil recycling and recycling). Over the past five years, general use business tax
measures, which require a simple majority vote, have passed at the polls.
Over the past 10 years, there were a handful of examples of business tax measures in the Bay
Area that did not pass. An example of a failed business tax measure was in November 2014 for
the City of Milpitas (Measure E) that targeted licensed gaming establishments. Measure E would
have allowed the City to tax licensed gaming establishments 10.5 percent on gaming revenues.
ATTACHMENT C
Attachment C - 3
According to Ballotpedia.org, the following business tax measures in the Bay Area, that did not
target a specific business type and failed on the ballot were in November 2009 for the City of
Redwood City (Measure Y, business tax increase) and City of Palo Alto (Measure A, to establish a
business tax). City of East Palo Also voters passed Measure O (a general tax) in November 2016
by simple majority which, in addition to the City’s business license tax assessed on the business
community at-large, added a landlord business license tax to the City’s overall business tax
structure.
As part of the effort in 2019, the City engaged Matrix Consulting Group (Matrix) to conduct
research that will assist in development of a potential business license tax. The scope of the
engagement included
- comparative research of selected Bay Area communities to understand each agency’s
business license tax practices regarding the development, implementation, and
administration of each program; and
- to perform data analysis and modeling, based on available data resources, of the potential
revenue range the City may generate if a business license tax measure were to be
approved by the voters.
Comparative agencies were selected based on a few general criteria: proximity to Palo Alto,
business community and population size, business industry environment, and Bay Area agencies
that have brought business license tax measures to the ballot in the last few years. 2017 data
from the U.S. Census was used to compare Palo Alto’s industry environment to selected
comparable agencies. The Business License Tax Program Comparative Assessment and Revenue
Projections report completed by Matrix, which can be found as Attachment C to CMR 10445,
indicated that according to U.S. Census Data for 2017, Palo Alto’s business environment was
comparable to the selected agencies, where professional and healthcare services are the top
industry types. The U.S. Census data, however, includes business conducted in Stanford, which is
primarily business in the education and healthcare segments and depending on location, these
businesses would not be subject to a Palo Alto Business License Tax.
ATTACHMENT C
Attachment C - 4
Table B-1: Employment by Industry as of 2017
IN
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PROFESSIONAL 29% 6% 23% 14% 22% 13% 15% 21% 27% 25%
INFORMATION 7% 3% 13% 5% 6% 4% 5% 8% 8%
MANUFACTURING 22% 7% 13% 8% 4% 16% 9% 19% 20% 13%
EDUCATION 7% 8% 9% 9% 7% 8% 8% 8% 14%
HEALTHCARE 9% 12% 9% 11% 11% 12% 11% 9% 15% 11%
RETAIL 7% 12% 7% 10% 9% 9% 9% 8% 5%
HOSPITALITY 3% 14% 6% 7% 9% 8% 9% 6% 6% 5%
ADMINISTRATIVE 11% 3% 6% 4% 5% 6% 2%
CONSTRUCTION 2% 8% 3% 7% 3% 6% 5% 3% 1%
Professional, scientific and technical services is the largest industry segment in the City of Palo
Alto. To further validate the U.S. Census data and to review average number of firms, employees
and employee wages, the City obtained data from the California Employment Development
Department (EDD) which excludes businesses located at Stanford. Please see the “Employment
and Wages by Northern American Industry Classification System (NAICS) Code from EDD Data”
table on p. 39 in the Consultant Study – page 70 of CMR 10445 - for detail of the City’s 2018
number of firms, employment, total annual wages, and average employee wage, organized by
Industry NAICS code. Please note that data for some industry types are suppressed from the
report due to EDD’s confidentiality and disclosure restrictions. Although grand totals for number
of firms, employment, and annual wage is included in the report, information for an industry is
redacted if the industry category 1) has less than five reported business in that industry and 2)
one business comprises 80 percent or more of the total for the industry.
According to the EDD data, in 2018 the City of Palo Alto had:
Approximately 942 professional, scientific, and technical firms (NAICS code 54), or 22
percent of total reported businesses, within the City that are dedicated to this industry
type. Healthcare and social assistance and other services (excluding public
administration), are the second and third largest industries totaling 854 firms (20 percent)
and 495 firms (12 percent), respectively.
The average employee wage data (which includes regular salary, bonuses, and sometimes
stock option income) is also telling of the type of employment market within the City. The
highest paid industries in the City are finance and insurance, averaging approximately
$307 thousand per employee; information, averaging $296 thousand per employee; and
management of companies and enterprises, averaging $242 thousand per employee.
ATTACHMENT C
Attachment C - 5
In 2018, there was an average of 103,921 employees within City limits (excluding
Stanford). Of those employees, 97,350 were non-government employees. This data is
presented in the Consultant Report and the verified data from InfoGroup was used to
calculate the employee head count revenue estimate.
Agency demographic information that was examined in the Consultant Study included
- population
- number of businesses;
- total revenue generated and percent
total of General Fund revenues;
- business tax revenue generated
compared to total agency full-time
equivalent (FTE) as a benchmark unit
of measure;
- whether the tax is general or specific;
- business tax structure;
- exemptions in addition to those
specified in State or Federal law;
- sunset of the tax;
- annual escalator; and
- whether the tax is administered in-
house or by an outside firm.
Of the agencies selected for comparison, all agencies approved ongoing taxes without sunset
provisions and chose to administer the tax in-house. Each agency had varying types of tax
exemptions and methods of an annual escalator for the tax. The tables below summarize the
demographic and business license tax information for each selected agency and how each
compare to Palo Alto as well as business tax exemptions by agency. Five of the nine selected
agencies use employee head count as the tax method; all but East Palo Alto have a general tax.
ATTACHMENT C
Attachment C - 6
Table B-2. City Demographic and Business Tax – General and Financial Information (As of August
2019)
CITY POPULATION
# OF
BUSINESSES
THREE
LARGEST
INDUSTRIES
TAX
METHOD
GENERAL
OR
SPECIAL
TAX
REVENUE /
% GENERAL
FUND
REVENUE
PER FTE
CUPERTINO 60,777 3,800 Professional
Manufacturing
Healthcare
Square Foot General $0.8M, 1% $4,344
EAST PALO
ALTO
29,765 1,527 Hospitality
Healthcare
Retail
Gross
Receipts
Specific $1.2M, 4% $10,239
MOUNTAIN
VIEW
81,438 3,700 Professional
Information
Manufacturing
Employee
Count
General $6.0M, 4% $9,438
REDWOOD
CITY
86,685 6,275 Professional
Healthcare
Retail
Employee
Count
General $2.6M, 2% $4,757
SAN
FRANCISCO
884,363 242,000 Professional
Healthcare
Hospitality
Gross
Receipts;
Payroll
General $820.0M,
9%
$26,469
SAN JOSE 1,035,000 58,000 Manufacturing
Professional
Healthcare
Employee
Count
General $72.2M, 6% $11,259
SAN MATEO 104,748 7,486 Professional
Healthcare
Retail
Gross
Receipts
General $5.9M, 5% $8,659
SANTA CLARA 127,134 13,000 Professional
Manufacturing
Healthcare
Employee
Count
General $0.9M,
0.5%
$823
SUNNYVALE 152,389 7,875 Professional
Manufacturing
Healthcare
Employee
Count
General $1.8M, 1% $2,027
PALO ALTO 66,649 5,496 Professional
Healthcare
Manufacturing
N/A N/A N/A N/A
ATTACHMENT C
Attachment C - 7
Table B-3: Business Tax Exemptions by Agency
STATE EXEMPTIONS LOCAL EXEMPTIONS
CITY Non-
Profit
Charitable
Organizations
Public
Utility
Small
Business
Disabled
Veteran
Low Income
Rental Units
CUPERTINO
EAST PALO ALTO
MOUNTAIN VIEW
REDWOOD CITY
SAN FRANCISCO
SAN JOSE
SAN MATEO
SANTA CLARA
SUNNYVALE*
* BANKS AND OTHER FINANCIAL INSTITUTIONS THAT PAY THE STATE IN-LIEU TAX ARE EXEMPT FROM A LOCAL
BUSINESS TAX. THE CITY OF SUNNYVALE EXEMPTS ALL BANKS AND FINANCIAL INSTITUTIONS FROM THE LOCAL
BUSINESS LICENSE TAX.
On June 18, 2019, staff received direction from the Finance Committee to model three types of
business tax models: employee head count, square footage, and payroll. In addition to these
structures, staff was directed to examine potential exemptions, in addition to those legally
exempted, to provide the Committee with information to make informed policy decisions for the
tax. The below discussion summarizes the results of the business license tax modeling from 2019
as presented in the Consultant Study, which is Attachment C of CMR 10445.
Table B-4: Estimated Business Tax Annual Revenue*
HEAD COUNT $3.6M using City of Mountain View’s rates
SQUARE FOOTAGE $1.0M to $3.2M using City of Cupertino’s rates
PAYROLL $15.5M to $16.5M assuming 0.1% of total payroll expense
*REVENUE ESTIMATES INCLUDE EXEMPTED BUSINESS CATEGORIES PER STATE AND FEDERAL LAW, SUCH AS NON-PROFIT
AND CHARITABLE ORGANIZATIONS.
Business Tax: Employee Head Count
Fundamentally, the employee head count business tax model applies a tax rate based on the
number of people a business employs within the City’s boundaries. The tax rates are commonly
separated into ranges and the tax is applied based on how many people are employed by the
business. In our survey of comparative agencies, employee head count is the most common
business tax structure and, perhaps the simplest form business tax model.
For purposes of a headcount business tax structure, establishing a definition for an “employee”
will be the foundation of this tax and can be defined as any person who works for, under the
direction of, on behalf of, or as an agent of a business owner. Amidst the growing trend of non-
traditional employment structures (i.e. outside consultants, employees working from sites
ATTACHMENT C
Attachment C - 8
outside of City boundaries) in information and professional services industries, establishing the
definition and criteria of an employee and setting a tax around such definition will be critical.
Staff recognizes that there a wide range of datasets which identify number of employees
citywide, with varying conclusions of the total number of employees in the City of Palo Alto.
Several reasons may be the cause of this – inclusion of businesses located in Stanford proper,
various definitions of an employee, confidentiality parameters, or how the data is collected (self-
reported, mandated, audited, etc.) – just to identify a few. Site-based employment headcount
and wage data, in total, is available from the EDD. Staff has previously presented employee head
count totals from the American Community Survey, which totaled 97,000. InfoGroup is another
data set that was utilized in the City Auditor’s Office most recent audit of the Business Registry
Certificate Program. The revenue estimates presented in the Consultant Report are modeled
using the verified database from InfoGroup. The verified data from InfoGroup provided the most
detailed information by firm at the time of the analysis.
EQUITY Palo Alto’s top three industry types for average employee head count are
healthcare/social assistance, professional, and information.
This tax model would directly relate revenue to the daily phenomena of the
influx of daytime population within the City’s boundaries and tax this activity as
such.
Equity concerns within the same type of industry are to be determined,
however, businesses that are labor driven and have lower average wages will be
bear a higher tax based on employee head count and such as tax will not
correlate to the business’ ability to pay. Examples of these industries are
manufacturing, retail, social assistance, and food service/hospitality.
ADMINISTRATION Establishing criteria that sets the definition of an employee should be included
so that businesses are able to accurately report data and remit tax.
Self-reported employee head count by the business owner would be the
simplest method of administering this tax, however there is a higher risk that
data is reported incorrectly.
An alternative is to use data from the EDD and assess the tax based on this data.
Data on firm size is currently being generated by the EDD. The recently passed
business tax measure in Mountain View, Measure P, calculates the tax based on
the employee count form the last four quarters submitted to the EDD.
Structure for this tax model should define whether headcount related to from
alternative employment models should be included or not be included in the
assessment.
ATTACHMENT C
Attachment C - 9
STABILITY Tax revenue driver is directly related to how many businesses are in the City and
the number of employees at each business. Depending on the policy is
developed and how the tax definitions are written, the basis will be impacted as
companies transition to alternative employment models (i.e. outside
consultants, employees working from offsite locations outside of City
boundaries), which is becoming a trend in consulting and high-tech companies.
ECONOMIC
BENEFITS
Administration of the tax is simple if based on number of employees at a site
address, which is already reported by businesses to the EDD on a quarterly basis;
results in minimal operational disruption to the tax payor. Implications of
economic development goals would be dependent on the specific structure,
potential exemptions, and business classifications
Of the nine selected comparison agencies, five of the cities used employee head count as the tax
method. Although total employee count for each selected agency could not be readily obtained
as of the drafting of the report, a summary table of those agencies is below, similar to the table
presented earlier in this report, that includes the number of businesses, tax method, exemptions,
total generated revenue, and revenue per FTE:
Table B-5: Employee Headcount Agencies
CITY
# OF
BUSINESSES TAX METHOD EXEMPTIONS REVENUE
REVENUE
PER FTE
MOUNTAIN
VIEW 3,700
Base tax plus tiered
incremental rate (scaled
increase)
Public Utility $6.0M $9,438
REDWOOD
CITY 6,275
Base tax plus flat tax
based on employee or
business type
Public Utility
Veteran $2.6M $4,757
SAN JOSE 58,000 Tiered incremental rate
(scaled decrease)
Small Business
Low-Income
Rental Units
$72.2M $11,259
SANTA CLARA 13,000 Tiered flat rate (scaled
increase) or flat; has cap $0.9M $823
SUNNYVALE 7,875 Tiered incremental rate
(scaled increase)
Public Utility
Veteran $1.8M $2,027
Generated tax revenue compared to City FTE was used as a benchmark to compare each agency’s
business license tax. The cities of Redwood City and Santa Clara both use employee count as the
tax method. Redwood City generates $2.6 million annually and has approximately half the
number of business firms compared to City of Santa Clara. However, Redwood City generates
three times the amount of business license tax revenue compared to Santa Clara. The driver of
this difference is that Redwood City’s employee count model incrementally increases based on
number of employees, where Santa Clara’s model is a flat tax.
The City of Sunnyvale also uses the employee head count model and, in addition to businesses
that often times are exempt or receive preference from a grant perspective (such as non-profits,
ATTACHMENT C
Attachment C - 10
residential care facilities, or Veteran-operated businesses), Sunnyvale exempts banks and
financial institutions and insurance brokers-agents. Like Redwood City, but unlike Santa Clara,
Sunnyvale uses an incremental employee count model as opposed Santa Clara’s flat tax model.
This results in approximately $1.8 million in annual revenue and $2,027 in tax revenue per FTE.
City of San Jose is the largest agency, for both population and number of businesses, that uses
the employee head count model. It is also the only agency that was reviewed that encourages
large business by using a tiered model where the tax rate is incrementally scaled down as the
business has more employees and has a total maximum cap that can be collected per year.
Business Tax: Square Footage
The square footage business tax model commonly calculates the tax based on a tiered square
footage range. There are several options of how a square footage tax can be structured by either
applying a single square footage rate, depending on which tier the business falls under; a flat tax
based on tier; or a combination of a flat tax and square footage rate. The rates can be structured
to either benefit or penalize certain commercial space sized businesses.
Real estate market analytic tools are available for purchase and provide dependable, real-time,
census information that can be used as a tool for administration, regulation, and revenue
forecasting purposes. The Consultant Study used verified InfoGroup data to perform tax revenue
modeling and also reviewed data from CoStar, a real estate market analytical tool which
categorizes commercial property into several categories (distribution/manufacturing,
healthcare, hospitality, industrial, office by class, retail, specialty, and sports/entertainment) and
into various subcategories. Data from CoStar (available LINK) also discloses whether the
commercial space is owner occupied, leased, or sub-leased. These lease arrangements should be
considered when structuring, administering, and regulating this tax model. Matrix found that the
data from InfoGroup appeared to have the largest population of reported businesses within its
“verified” roster.
ATTACHMENT C
Attachment C - 11
EQUITY If industries within the City require an average square footage that is similar to
the business’ competitors, the tax burden would fall equally among businesses
in the same industry.
This tax model would place heavier tax burden on industries that require larger
square footage to operate, such as manufacturing.
ADMINISTRATION The source of compliance data would be an actively maintained and updated
third-party real estate database.
Whether the commercial space is owner occupied, leased, or sub-leased, how
regulation is administered, and allocation of the tax is administered by the
property owner or the City should be addressed and clarified in the tax language.
Examples of complex areas in this tax structure are common areas, shopping
centers, franchises and how a business may define their company’s site(s).
STABILITY Tax is assessed on commercial square footage and, although some exemptions
can be made to encourage certain industries to expand in the City, overall
revenue growth using this model will be limited based on policy decisions
related to commercial space in the City.
ECONOMIC
BENEFITS
This tax model would appear to inhibit square footage growth, however
depending on how the tax is structured, this model has the potential to
encourage growth for targeted industries and/or business sizes and/or property
types.
Of the nine selected agencies in the Consultant Study, the City of Cupertino was the only agency
that used the square footage tax method for a business tax. It should be noted as discussed
earlier in this report that the City of East Palo Alto recently approved a parcel tax based on a
commercial square foot metric.
Table B-6: Square Footage Agency
CITY # OF
BUSINESSES
TAX METHOD EXEMPTIONS REVENUE REVENUE
PER FTE
CUPERTINO 3,800 Flat base rate plus
tiered incremental
rate (scaled
decrease)
Non-Profits $0.8M $4,344
Cupertino considered a November 2018 ballot measure to restructure the City’s business license
tax, which was enacted in 1992, however it was decided to defer the proposed tax restricting
plan to the November 2020 election. The proposed structure would shift Cupertino’s business
license tax from square footage to employee head count, which is consistent with most agencies
selected in the Consultant Study. According to the City of Cupertino’s website, restructuring the
business license tax would generate approximately $10 million annually and would fund the City’s
transportation infrastructure and traffic congestion programs.
ATTACHMENT C
Attachment C - 12
Business Tax: Payroll Expense
Using payroll data as the basis for a business tax is similar to the methodology of an employee
headcount structure. Relevant data can be accessed through the EDD and the sensitivity of the
tax resets on the composition of employees in the data but instead of the focus being the volume
of employees, the focus is on how much employees earn. Based on data from the EDD,
approximately half of the City’s job market is in high wage sectors including information and
professional services. Based on the City’s business environment and economy, a tax structure
based on payroll earnings would result in a progressive tax that relates the amount of tax paid by
the business to the ability to pay the tax.
In considering the payroll tax model, the definition of wages should be detailed enough to
determine the type of pay that should be included in the calculation of the tax. The policy choice
of including earnings aside from regular wages such as overtime, commission, allowances,
bonuses, stock options, and/or cash fringe benefits, should be considered when structuring the
payroll tax model.
EQUITY Wage data will include bonuses and sometimes stock options, which can
drastically vary across industries and within sub-categories of an industry.
Based on the industry data from EDD, the higher wages are in professional
services industries which indicates the average employee wage is higher than
manufacturing, retail, social assistance, and food service/hospitality industries.
ADMINISTRATION Similar to a business tax based on employee headcount, the simplest form of
administration would be self-reported by the business owner, however there is
a risk that data is reported incorrectly.
Data from the EDD can validate and support regulation of this tax structure.
Similar to the employee headcount tax model, the payroll tax model will be
impacted as companies transition to alternative employment models. Structure
for this tax model should define how wages for such employees are included in
the tax.
STABILITY Tax revenue driver is directly related to how many businesses are in the City and
the average employee wage. According to data from the EDD, high wage sectors
in the City are information, financial activities, and professional services which
is comprises half of the City’s employment base.
ECONOMIC
BENEFITS
Administration of the tax is simple if based on wages of employees at a site
address, which is already reported by businesses to the EDD on a quarterly basis;
results in minimal operational disruption to the tax payor. Depending on
structure, this model has the potential to encourage growth for targeted
industries and/or business sizes and/or employee types.
ATTACHMENT C
Attachment C - 13
The City and County of San Francisco was the only city of the nine selected in the Consultant
Study that uses the payroll expense tax method to assess the City’s business license tax. Prior to
the November 2012 election, San Francisco used the payroll expense tax as the City’s tax method
and was the only city in California to use the payroll expense tax method. The gross receipts
method was approved by voters in November 2012, with implementation beginning 2014 over a
five-year period. The Consultant Study details the structure for both the gross receipts method
and payroll expense method. The table below illustrates San Francisco’s payroll expense tax
method.
Table B-7: Payroll Expense Agency
CITY
# OF
BUSINESSES TAX METHOD EXEMPTIONS REVENUE
REVENUE
PER FTE
SAN
FRANCISCO
884,363 Payroll phase-out over
5 years: 1.35% to 0%
by end of 2019
Small
Businesses
$820.0M $26,469
ATTACHMENT D
Attachment D - 1
Summary of Prior Work on Potential Revenue Generating Ballot Measures
As discussed in the body of City Manager’s Report (CMR) 12299, the City of Palo Alto has been
discussing its options for potential revenue-generating ballot measures through 2019 and 2020.
This work was suspended at City Council direction in March 2020 in order to marshal available
resources to manage through the COVID-19 pandemic. A brief timeline of the CMRs and
discussions with the Finance Committee and the City Council since April of 2019, when staff was
formally directed to begin working on this project by the City Council, is included below for
additional context. The date, the forum of the meeting (Finance Committee or City Council), the
summary title, and the CMR number are included for ease of reference.
Timeline:
4/22/2019 City Council, “2019 Fiscal Sustainability Workplan”, CMR 10267
4/22/2019 City Council, “Approve Workplan for a Potential Revenue Generated Ballot Measure”,
CMR 10261
6/18/2019 Finance Committee, “Review, Comment, and Accept Preliminary Revenue Estimates
for Consideration of a Ballot Measure”, CMR 10392
8/20/2019 Finance Committee, “Evaluation and Discussion of Potential Revenue Generating
Ballot Measures”, CMR 10445
9/16/2019 City Council, “Evaluation and Discussion of Potential Revenue Generating Ballot
Measures and Budget Amendment”, CMR 10615
10/1/2019 Finance Committee, “Revised Workplan for Consideration of a Ballot Measure”, CMR
10712
10/15/2019 Finance Committee, “Stakeholder Outreach, Initial Polling, and Discussion of a
Potential Ballot Measure”, CMR 10743
11/4/2019 City Council, “Potential Ballot Measure Polling/Outreach, Contract, Solicitation
Exemption and Budget Amendment”, CMR 10792
12/2/2019 City Council, “Structure and Scenarios of Initial Round of Polling for a Potential Local
Tax Measure”, CMR 10891
12/17/2019 Finance Committee, “Consideration, Evaluation, and Discussion of a Revenue
Generating Local Tax Ballot Measure, Review of Refined Modeling, Analysis, Tax Structure and
Recommendation to the City Council”, CMR 10655
1/27/2020 City Council, “Update, Consideration, and Potential Direction on Possible Local Tax
Measure for 2020 Election”, CMR 11019
ATTACHMENT D
Attachment D - 2
3/23/20 City Council, “Consideration of Analysis, Public Outreach, and Refined Polling and
Further Direction on a Potential Local Business Tax Ballot Measure for 2020 Election”, CMR 11161
3/23/20 City Council, “Consideration of Analysis, Public Outreach, and Refined Polling and
Further Direction on a Potential Local Business Tax Ballot Measure for 2020 Election”, At-Places
Memorandum