HomeMy WebLinkAboutStaff Report 9462
CITY OF PALO ALTO OFFICE OF THE CITY ATTORNEY
July 30, 2018
The Honorable City Council
Palo Alto, California
Adopt the Initiative Measure to Reduce the Comprehensive Plan’s
Citywide Cumulative Cap on Office/R&D Development (Initiative
Measure) as an Ordinance Without Alteration, or Adopt a Resolution
Placing the Initiative Measure on the November 6, 2018 Ballot
From: Joint Report of the City Clerk, City Manager and City Attorney
Recommendation
Staff recommends that Council:
1. Accept the fiscal impact report prepared by EPS Consulting (Attachment A); and either
2. Adopt an ordinance amending the Comprehensive Plan and Title 18 (Zoning) of the Palo
Alto Municipal Code, as proposed by the Initiative Measure to Reduce the Office/R&D
Development Cap (“Initiative Measure”), to reduce the citywide cumulative cap on new
office/R&D development to 850,000 square feet (Attachment B); or
3. Adopt a resolution calling an election to submit the Initiative Measure to the voters at
the next general municipal election on November 6, 2018 (Attachment C).
Discussion
The existing citywide cumulative cap on new office/R&D development in the updated
Comprehensive Plan 2030 and the Initiative Measure to reduce that cap are described
in the staff report for the June 11, 2018 City Council meeting:
https://www.cityofpaloalto.org/civicax/filebank/documents/65424.
Under the Palo Alto City Charter, Article VI, Section 2, when an initiative petition is
submitted with sufficient verified signatures to qualify for the ballot, the City Council
must either adopt the initiative ordinance without alteration or place it on the ballot at
the next general municipal election that is at least 88 days from the date of petition
certification. If the Council opts to place the initiative on the ballot, the Charter
authorizes the Council to also submit to the voters at the same election an amendment
to the initiative, and if a majority of qualified electors vote in favor of the amendment,
the initiative would be deemed amended. The Council is separately empowered under
this Charter provision to propose and submit any ordinance to the voters. The last day
to place any measure on the ballot for the November election is August 10, 2018.
Page 2
Fiscal Impact Report
Shortly before the Council’s summer recess, Council directed staff to prepare an
economic and fiscal impact analysis of the Initiative to the City and school district. This
analysis was to evaluate impacts on funding for infrastructure, below market rate
housing, traffic congestion, the Stanford Research Park and the community’s ability to
attract and retain business and employees. The Council also requested an analysis of
the Initiative’s consistency with the City’s Comprehensive Plan and other policy
documents, as well as compliance with state law.
The City contracted with Economic & Planning Services (EPS) to prepare the fiscal
impact analysis. This is the same firm that prepared the fiscal analysis for the
Comprehensive Plan and was selected based on their familiarity with the City and ability
to use existing, City-specific, economic models given the compressed timeline for
preparation of this report.
EPS evaluated the cost savings attributable to the Initiative that could result from less
office/R&D space and employment. Revenue reductions from reduced property tax,
sales tax, transient occupancy tax and other revenue sources were also analyzed.
Based on the foregoing, the consultant concluded a possible net revenue reduction of
$1,000,000 annually. This loss represents the difference between a full office/R&D
buildout at 1.7 million square feet compared to the Initiative proposal of 850,000
square feet. This impact would not begin to be realized until the Initiative limit was
reached and the full opportunity cost of $1,000,000 would not be realized until the
theoretical buildout of another 850,000 square feet of office/R&D was constructed (to
equal the Comprehensive Plan policy of 1.7 million square feet). This potential revenue
loss represents about 0.5 percent of the City’s operating budget1. EPS estimates the
City would generate 4,250 fewer jobs under the Initiative based on a full buildout
analysis.
The consultant also analyzed the potential fiscal impact on one-time development
impact fee payments to the City. Based on an overall fee burden on new office/R&D
space of $63 per net new gross square foot, EPS concluded the City would collect
roughly $50,000,000 less in impact fees at full buildout between 1.7 million square feet
and the Initiative proposal of 850,000 square feet. However, it is important to note that
development impact fees are earmarked for investments that directly mitigate the
impact of new development and that reductions in development could reduce the City’s
need for these revenues.
To understand the potential impacts to the Stanford Research Park and the City’s ability
to attract and retain business and employees, EPS conducted stakeholder interviews
1 Analysis is based on the City’s 2018 General Fund expense budget of $210.4 million.
Page 3
with individuals with local knowledge and regional perspectives2. Those interviewed
expressed concerns about the impact of regulatory actions on the City’s business
climate, uncertainty about business expansion potential, how the restriction on
office/R&D could create a fixed supply driving up rents, and impacts related to public
investment opportunities with reduced impact fee revenue. With respect to Stanford
Research Park, there is a recognition that the Park generates a significant amount of
revenue to the City in terms of higher property values, business-to-business tax
revenue and related revenue generated by research park tenants for business travel.
Under current regulations, there remains about 850,000 square feet of developable
area in the research park. It is unlikely, based on past development activity, that this
amount of development will be achieved by 2030. However, to the extent the Initiative
causes companies to re-think about locating or expanding in Palo Alto, it may have a
chilling effect on Stanford Research Park and other commercial areas in the City. EPS
and staff are unable to quantify conclusions as to the impact of the Initiative on the
Stanford Research Park or the City’s ability to attract or retain employees. This requires
a more qualitative analysis and individuals with different perspectives may not agree as
to the impact the Initiative may or may not cause.
More information from the stakeholders interviewed and greater detail on the fiscal
analysis is available in Attachment A. Representatives from EPS will attend the Council
meeting.
While not included in the EPS analysis, staff has reviewed the Initiative compared to the
City’s Comprehensive Plan, Coordinated Area Plan (SOFA), and selected references to
state law. There were no inconsistencies identified in any of those documents when
compared to the Initiative. Some Comprehensive Plan polices related to business
attraction and retention, small businesses and fostering a culture of innovation are
implicated to some degree, but not found to be inconsistent with the Initiative.
As directed by Council, a Council subcommittee was formed to consider whether to
propose a companion measure to amend the Initiative Measure. The subcommittee
consisting of Mayor Kniss and Councilmember Scharff determined not to forward an
amending measure to the full Council.
Resource Impact
The estimated cost of the November 2018 election including this citizen initiative, 1
additional ballot measure, the 3 open seats on the City Council, and translation into
several languages is approximately $125,000. The FY 2019 Budget currently includes
funding of $100,000.
Environmental Review
2 Attachment A includes a list of individuals interviewed.
Page 4
The potential actions to adopt or submit to the voters the citizen initiative are not a
project under the California Environmental Quality Act (CEQA).
ATTACHMENTS:
Attachment A: Fiscal Impact Report (PDF)
Attachment B: Ordinance Adopting Office Cap Initiative Measure (PDF)
Attachment C: Resolution Calling Election to Submit Initiative Measure to Voters (PDF)
Department Head: Molly Stump, City Attorney
Page 5
M EMORANDUM
To: Jonathan Lait, City of Palo Alto
From: Benjamin C. Sigman, Jason Moody, and Anisha Gade,
Economic & Planning Systems, Inc.
Subject: Economic Review of Initiative Measure to Reduce Office/R&D
Cumulative Cap in the Comprehensive Plan; EPS #181111
Date: July 24, 2018
During April 2018, three Palo Alto residents submitted a notice of intent
to circulate an initiative petition (“Initiative Measure”) which, if adopted,
would amend Palo Alto’s Comprehensive Plan and the Palo Alto Municipal
Code to reduce the current citywide cap on new square feet of
office/R&D development by 50 percent (from the current cap of 1.7
million square feet to a new cap of 850,000 square feet, with certain
exemptions) and to require voter approval to change the new cap.
Initiative Measure supporters gathered sufficient signatures to qualify
the Initiative Measure for the November ballot. After accepting the City
Clerk’s Certificate of Sufficiency for the Initiative Measure, the City
retained Economic & Planning Systems (EPS) to review the Initiative
Measure and consider its potential fiscal and economic impact on the
City.
The goal of this Economic Review is to provide the City with reliable
information concerning resulting impacts if the Initiative Measure is
adopted by City Council or approved by voters. However, the analysis
contained in this Review is limited due to time constraints imposed by
California Elections Code. Working on an expedited timeline, EPS
coordinated with the City to understand the Initiative Measure, conduct
technical analysis of fiscal effects, and perform outreach to stakeholders,
local and regional economic experts, and others to understand the range
of possible economic ramifications. This Review does not directly
consider non-economic factors that may be important to the community,
including the potential implications of the Initiative Measure on traffic,
community characteristics, environmental conditions, or other quality of
life factors.
Memorandum July 24, 2018
Economic Review of Initiative Measure Page 2
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Key Findings
The Initiative Measure will not have an immediate, direct effect on new office/R&D
development in Palo Alto, but could curtail new development in the future.
From 2001 through 2017, new construction only added about 14,000 square feet of net new
office/R&D space annually in Palo Alto, on average. If this development pattern continues,
the Initiative Measure will not have a direct effect on growth. However, if the pattern of
development changes, it is possible that the Initiative Measure will reduce the City’s
office/R&D buildout. Impact estimates presented below (i.e., General Fund and Fee Revenues
effects) assume that office/R&D inventory would increase to the maximum allowed by the
Comprehensive Plan in the absence of the Initiative Measure.
The net fiscal impact of the Initiative Measure on the City’s General Fund is
estimated at a maximum of roughly $1 million per year (in constant 2018 dollars),
assuming that office/R&D development is reduced from 1.7 million square feet to
850,000 square feet at Comprehensive Plan buildout.
EPS estimates that General Fund revenue could fall by about $2.2 million per year and that
General Fund expenses could decrease by $1.2 million per year. The net fiscal effect $1.0
million represents only about 0.5 percent of the current City General Fund. A direct fiscal
impact would occur only if the cap becomes a binding constraint. The fiscal impact estimate
derives exclusively from office/R&D space reductions and does not factor in possible side
effects of the Initiative Measure, such as the potential impact on the business climate and
regional competitiveness of the City.
The Initiative Measure could reduce one-time development impact fee revenues by
over $50 million, assuming that office/R&D development is reduced from 1.7
million square feet to 850,000 square feet.
Considering current fees levied in the city, including the Housing Fee, Parks Fee, School Fee,
Traffic/Transportation Impact Fee, Community Center Fee, Libraries Fee, Public Safety
Facilities Fee, General Government Fee, and Public Art Fee, EPS estimates that the overall
fee burden on new office/R&D space is about $63 per net new gross square foot of
office/R&D development. If the Initiative Measure reduces office/R&D development in the city
by 850,000 square feet, the City would not collect one-time fee revenues for capital
improvements. However, it is important to note that development impact fees are earmarked
for investments that directly mitigate the impact of new development on public facilities, and
that reductions in development could reduce the City’s need for these revenues.
Interviewees expressed significant concerns about the Initiative Measure, primarily
owing to the potential effect on the overall business climate in the City, reduced
funding for community development priorities, and reduced potential for Stanford
Research Park to sustain its role as an essential economic engine for the City and
region.
Major themes captured from discussions with interviewees include:
o Regulatory actions affect the City's business climate;
o The Initiative Measure reduces certainty about business expansion potential;
o The Initiative Measure could create a fixed supply of office/R&D space;
o City fee revenues could decrease, thereby affecting affordable housing development and
other public investments;
Memorandum July 24, 2018
Economic Review of Initiative Measure Page 3
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o The Initiative Measure could result in a decrease in private-sector contributions to the
community; and
o The Initiative Measure may prompt unintended consequences.
These themes are detailed in the Interviews section, below.
Research Effort and Findings
Ongoing Fiscal Impact Analysis on City General Fund
This analysis relies on the fiscal impact model developed by EPS for the City’s Comprehensive
Plan Update. The model estimates ongoing, annual public service cost expenses and General
Fund revenues.1 In this application, EPS relies on the existing model to estimate:
cost savings attributable to the Initiative Measure that could result from less office/R&D
space and employment in the City; and
revenue reductions attributable to the Initiative Measure, including from reduced property
tax, sales tax, transient occupancy tax, and other revenue sources.
The model captures typical office development conditions citywide and typical City expenses for
non-residential uses. Key analytical assumptions are consistent with those in the EPS analysis of
Comprehensive Plan Update alternatives.
The EPS fiscal impact model is fully documented in the Fiscal Analysis of the City of Palo Alto
Comprehensive Plan.2 The analysis is based on the City’s Fiscal Year 2015 adopted budget, with
revenue and cost effects attributable to growth considered on a revenue-line-item and
department-by-department cost basis.3 The analysis incorporates analytical inputs from key City
departments, collected through an extensive interview process. Model outputs reflect 15-year
forecasts of fiscal outcomes, in constant 2018 dollars.4 The model holds current conditions and
operations factors constant, including tax rates, organizational structures, and governance
policies.5
1 Palo Alto Unified School District General Fund effects are not formally considered as part of this fiscal
analysis. However, EPS estimates that if the Initiative Measure reduces office/R&D by 850,000 square
feet, PAUSD will collect approximately $3.6 million (2018 dollars) less annually in property tax
revenue. In addition, the possible reduction in office/R&D could result in higher property tax rates for
PAUSD bonds, since these rates can decrease if assessed value increases. EPS coordinated with Cathy
Mak, PAUSD Chief Business Officer, on assumptions concerning PAUSD revenue estimates.
2 Documentation of the EPS fiscal impact model is available here:
https://www.cityofpaloalto.org/civicax/filebank/documents/65394
3 FY2015 data were current when the Fiscal Impact Analysis commenced. Since then, General Fund
revenue has increased notably, but expenditures also have similarly increased. The 2015 data are
believed to be sufficiently representative of current revenue and cost factors for land use planning.
4 For the cap analysis, results have been inflated to 2018 dollars based on the US Consumer Price
Index.
5 A complete discussion of analytical caveats is provided here:
https://www.cityofpaloalto.org/civicax/filebank/documents/65394
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Economic Review of Initiative Measure Page 4
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Initiative Measure Fiscal Impact Findings
Assuming full build out of 1.7 million square feet (MSF) of office/R&D versus 850,000 square
feet, the fiscal analysis identifies a change in the net annual fiscal impact on the City General
Fund of about $1.0 million per year. Revenues flow primarily from property tax, followed by sales
tax and transient occupancy tax. Costs are primarily attributable to the City’s provision of public
safety services. The reduction of the office/R&D cap could eliminate development of 850,000
square feet, reducing employment growth in the City by about 4,250 jobs, as compared with the
current development cap.6 In this analysis, each job generates an estimated net positive fiscal
impact on the City General Fund of about $240 per year, which consistent with findings from EPS
fiscal analysis of the City’s Comprehensive Plan alternatives. Actual impacts realized could be
greater or less depending on a number of factors, including the building types, geographic
locations, and tenant/end users affected by the Initiative Measure.
Figure 1 Estimate of Initiative Measure Impact on City General Fund (2018$)
Source: Economic & Planning Systems; based on Fiscal Analysis of the City of Palo Alto Comprehensive Plan
One-Time Fiscal Impact on Development Impact Fee Revenue
The California State Constitution authorizes cities to require the payment of fees or the
dedication of land as a condition of development approval. Municipalities may impose
requirements to defray the cost of a wide variety of public facilities, services, and infrastructure.
The most common uses include affordable housing, parks and recreation, transportation,
community facilities, and schools. When imposing fees, municipalities must be careful to exercise
their authority in a reasonable manner, making sure that the fee imposed directly reflects local
code requirements (e.g., open space dedication policy) or bears a “reasonable relationship” to
the public need that the new development will create. In the case of development impact fees,
the importance of establishing the “nexus” or proportional relationship between the impact of the
development on public facilities and infrastructure has been defined in both State law and in a
variety of State and federal court decisions.7
6 Assumes 200 square feet of office per job, consistent with efficient space usage alternatives
considered in EPS analysis of the Comprehensive Plan.
7 The Mitigation Fee Act (California Government Code 66000) defines standards for development
impact fees.
Scenario Expenses Revenues Net Revenue
1.70 MSF Scenario $2,318,000 $4,346,000 $2,028,000
0.85 MSF Scenario $1,159,000 $2,173,000 $1,014,000
Initiative Measure
Impact Estimate -$1,159,000 -$2,173,000 -$1,014,000
Memorandum July 24, 2018
Economic Review of Initiative Measure Page 5
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EPS has assessed current development impact fees applicable to office/R&D development in Palo
Alto. The goal of this task is to identify current levels of statutorily-required contributions to
public goods and infrastructure. EPS considered City development impact fees levied on
office/R&D projects and calculated the reduction in revenue attributable to the Initiative
Measure, in the event that it reduces office/R&D development in the city by 850,000 square feet.
The analysis considers the following development fees:
Housing Fee (PAMC Section 16.65.060): Fee on non-residential, commercial and industrial
development to contribute to programs that increase the City's low income and moderate-
income housing stock.
Traffic/Transportation Impact Fee8
o Citywide Transportation Impact Fee Ordinance (PAMC Ch. 16.59): Fee on new
development throughout the City to fund public facilities and services that relieve
citywide traffic congestion caused by new development projects.
o Transportation Impact Fee for New Nonresidential Development in the Stanford Research
Park/El Camino Real Commercial Service Zone (PAMC Ch. 16.45): Fee on new
nonresidential development to fund capacity improvements at four intersections.9 This
traffic fee (one of three transportation fee areas in the City of Palo Alto) is the highest in
the City.10
Parks, Community Centers, Libraries, Public Safety, and General Government (PAMC
Ch. 16.58): Fee on new residential and non-residential development to provide community
facility funds for parks, community centers, libraries, public safety, and general government.
Public Art for Private Developments (PAMC Ch. 16.61): Fee on all new, commercial
developments that have a floor area of 10,000 square feet or more and have a construction
value of $200,000 or more must either provide on-site construction/installation of public art
or pay in-lieu fees.
Schools: The Board of Education of Palo Alto Unified School District (PAUSD) collects school
impact fees on new residential and commercial construction within District boundaries. Fees
are used only for construction and reconstruction of school facilities.
All of these fees are categorized as Development Impact fees. As such, the fee levels bear a
reasonable relationship to the public need that new development creates. Therefore, it is fair to
conclude that these fees pay for infrastructure and community improvements that are
8 Please note that during August 2018 the City anticipates bringing forward for Council consideration a
municipal code amendment to increase the citywide transportation impact fee in Ch. 16.59 and to
cease collection of the Stanford Research Park/El Camino Real fee, as recommended by the City’s
traffic consultant in the 2017 nexus study.
9 This fee was originally adopted in 1989 to mitigate at 8 intersections, but in 2002 the list was
updated to reflect 4 capacity improvement projects, 2 of which have been completed and 2 of which
will be improved as part of a County project.
10 The Stanford Research Park/El Camino Real Commercial Service Zone Transportation Fee is
included in the analysis to reflect the potential maximum effect on traffic/transportation impact fee
revenue based on the City’s existing fees. If unrealized development would have occurred elsewhere,
the traffic fee revenue reduction would be lower.
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Economic Review of Initiative Measure Page 6
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necessitated by growth, and lower growth would generally be expected to result in lesser
impacts to be mitigated. However, it also is important to note that fee revenues often provide
matching funds that leverage funding sources from other governmental agencies and private
institutions for affordable housing and other capital improvements with communitywide benefit.
Furthermore, since the cap restricts development of net new office/R&D space, not job growth, it
is possible that employment gains could continue even with the cap, leaving the City with
increased traffic and other impacts and fewer fee dollars with which to mitigate those impacts.
Initiative Measure Fee Revenue Impact Findings
The analysis calculates unrealized fee revenue under the assumption that the Initiative Measure
reduces office/R&D development from the buildout level identified in the Comprehensive Plan,
based on the City’s current fee schedule. Figure 2 presents development impact fee estimates.
Memorandum July 24, 2018
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Figure 2 Development Impact Fee Revenue Estimates
Effect on Below-Market-Rate Housing Production
The City has two housing funds, the Residential Housing Fund and the Commercial Housing Fund,
that consist of impact fees paid to the City by residential and commercial developments for the
purpose of rehabilitating and developing housing. Uses of the funds are governed by a set of
Guidelines last amended by the City Council in August 2015. These funds, which can only be
used to support housing, represent a significant resource that can be leveraged to address the
City’s housing goals.
Fee Category
Fee
Per
Square
Foot
Comprehensive
Plan
Maximum
Revenue
(1.7 MSF)
Initiative
Measure
Maximum
Revenue
(0.85 MSF)
Initiative Measure
Loss of Revenue
Estimate
Housing Fee $35.00 $59,500,000 $29,750,000 -$29,750,000
Traffic/Transportation Impact Fee (1) $17.75 $30,175,000 $15,087,500 -$15,087,500
Parks Fee $5.06 $8,603,700 $4,301,850 -$4,301,850
Public Art Fee (2) $3.00 $5,100,000 $2,550,000 -$2,550,000
General Government Fee $0.73 $1,239,300 $619,650 -$619,650
Public Safety Facilities Fee $0.58 $984,300 $492,150 -$492,150
School Fee (3) $0.56 $904,400 $452,200 -$452,200
Community Center Fee $0.29 $486,200 $243,100 -$243,100
Libraries Fee $0.27 $462,400 $231,200 -$231,200
TOTAL IMPACT FEES $63.24 $107,455,300 $53,727,650 -$53,727,650
(1) This fee is a combination of two components: the Citywide Transportation Impact Fee as well as the highest of Palo
Alto's Area-Specific Transportation Impact Fees, that of the Stanford Research Park / El Camino Real Commercial Service
Zone. Hexagon Transportation Consultants calculated the Citywide fee to be $5.33 per square foot, based on the Institute of
Transportation Engineer's standard trip generation rates. The City of Palo Alto's publication on Development Impact Fees
lists the SRP/ECR CS Zone fee as $12.42 per square foot. The City anticipates bringing forward for Council consideration a
municipal code amendment to increase the citywide transportation impact fee in Ch. 16.59 and to cease collection of the
Stanford Research Park/El Camino Real fee, as recommended by the City’s traffic consultant in the 2017 nexus study. The
proposed code amendments are currently planned for the August 13th, 2018 City Council agenda.
Sources: City of Palo Alto; Palo Alto Unified School District; Hexagon Transportation Consultants, Inc.; Saylor Current
Construction Costs 2018; Economic & Planning Systems, Inc.
(2) The City's Public Art for Private Developments Ordinance states that this fee shall total "1% of the first $109.36 million
construction valuation and 0.9% of construction valuation for valuation in excess of $109 million for commercial buildings
with a floor area of at least 10,000 sq. ft. and construction value of at least $200,000." Because it is impossible at this stage
to estimate true construction costs of potential future development, this assessment assumes a 1% fee based on average
commercial construction costs of $300 per square foot, derived from Saylor Current Construction Costs 2018 .
(3) This fee is levied on per square foot of commercial accessible space. A modest adjustment has been made to square
footage, to relfect the building area to which this fee is applied.
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Economic Review of Initiative Measure Page 8
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The impact of the Initiative Measure would reduce revenues accruing to the Commercial Housing
Fund, a subsidy account for affordable housing production. Given that the estimated City subsidy
per affordable unit is about $136,100, if a maximum of $29.8 million in affordable housing fees
are not collected due to the development cap (as shown in Figure 2), approximately 219
affordable housing units would not be funded.11 At the same time, the lower fee revenue reflects
the lower need for new affordable units attributable to office development.
Effect on Transportation Improvements
In addition to affordable housing, a maximum of $15.1 million in funding for transportation
improvements and traffic congestion mitigation efforts might not be collected. To put this figure
in the context of local cost metrics, $15 million is sufficient to fund signalization, enhanced
bikeways, mobility and safety improvements, complete streets improvements, and intersection
improvements, for example. City transportation fees also might contribute to grade separation
improvements being considered as part of the Caltrain electrification and High Speed Rail
projects. Figure 3 presents transportation improvement projects, and associated cost estimates,
included in the Palo Alto Transportation Impact Fee Nexus Study 2017, some of which might be
affected by funding reductions.12
11 City of Palo Alto Housing Work Plan, February 2018.
12 Future fees will be updated to reflect evolving transportation improvements and escalating costs.
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Figure 3 List of Transportation Capital Improvements
Source: City of Palo Alto Transportation Impact Fee Nexus Study, 2017
Office/R&D Development History and Outlook
As part of this review, EPS also considers past office/R&D development patterns to identify the
likely point at which the Initiative Measure office/R&D cap could become a binding constraint on
future office/R&D development in the City. The following analysis of historic office/R&D
development suggests that it is unlikely that the cap will have a binding constraint on
development in the near term. However, at least three factors should be considered before
characterizing the cap as superfluous, including (1) historic net new development has been
modest in part due to conversions of office to other uses and the demolition of significant office
structures, (2) the cap could extend past 2030, and (3) there is development potential at the
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Stanford Research Park that could increase net new development relative to past development
patterns, although no future redevelopment plans for the Park have been made public.
From 2001 through 2017, City-sourced data reveal Palo Alto has only added approximately
240,000 square feet of net new office/R&D space citywide, or about 14,000 square feet per year
on average. This net addition of space is modest relative to the level of development in the City,
owing to the conversion and/or demolition of office stock to other uses.13 More recently, from
2015 through 2017, the city saw a net increase in office/R&D of approximately 134,000 square
feet, or almost 45,000 square feet per year on average, in part because there were fewer
conversions and/or demolitions in the City. If the level of net new development during these time
periods were to continue into the future, it would take 19 or more years (starting in 2015) for
the Initiative Measure cap to be a binding constraint on office/R&D development in the City.
Figure 4 illustrates the historic trend in net additions to office/R&D building stock in Palo Alto,
based on data compiled by the City.
Figure 4 Net Change in Citywide Office and R&D Development Floor Area
Source: City of Palo Alto
13 Sun Microsystems was converted to the Oshmann Family Jewish Community Center (~390,000
square feet). The former Facebook headquarters (~323,000 square feet) has been demolished.
‐400,000
‐300,000
‐200,000
‐100,000
0
100,000
200,000
300,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Sq
u
a
r
e
F
e
e
t
o
f
N
e
t
O
f
f
i
c
e
/
R
&
D
S
p
a
c
e
A
d
d
e
d
2015‐2017 Average
= 45,000 SF2001‐2017 Average
= 14,000 SF
Memorandum July 24, 2018
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Despite the modest net additions to office/R&D space in recent history, new deliveries (gross
development) of office space in Palo Alto totaled over 1.8 million square feet citywide between
2001 and 2017, or an average of about 107,000 square feet per year.14 If demolitions and the
conversion of office space to other uses were to slow and new deliveries maintain their historic
pace (i.e., gross development of about 107,000 square feet per year), it is conceivable that the
Initiative Measure cap of 850,000 square feet could become a binding constraint more quickly.
Current zoning at Stanford Research Park alone allows for the addition of about 850,000 square
feet of net new office/R&D development capacity. However, the likelihood of net new
development hitting the cap in the near term is remote, absent a major shift in the development
pattern at Stanford Research Park.
Interviews
EPS conducted telephone interviews with local, private, and not-for-profit entities to provide a
qualitative characterization of the potential economic impact of the Initiative Measure. In
particular, these interviews were intended to provide diverse perspectives on:
Potential positive or negative impacts of the Initiative Measure on Palo Alto's ability to attract
and retain business and employment, generally; and
Potential positive or negative impacts of the Initiative Measure on the Stanford Research
Park, specifically.
Interviewees included representatives from the Stanford Research Park, the Chamber of
Commerce, former City officials, local employers, an affordable housing developer, and local and
regional economic experts. EPS coordinated with City staff to identify interviewees. The following
is a summary of selected comments derived from this process.
Regulatory actions may affect the City's business climate.
Most companies seek growth. They need to be nimble, to innovate, and to evolve. The
Initiative Measure sends the message that Palo Alto is closed for business; economic growth
is unwanted.
The announcement of the Initiative Measure likely already has had an effect on the business
climate in Palo Alto.
A regulatory restriction on office/R&D space is likely to have a dampening effect on the ability
of Palo Alto to attract and retain business enterprises. If this restriction makes office space in
Palo Alto more expensive, it will disproportionately affect small enterprises and early-stage
startups.
The cumulative effect of various local policies and regulations is becoming severe (i.e., the
cap adds to the recent increase in minimum wage, higher tax rates, and restrictive and
subjective planning/land use regulations).
Palo Alto’s office market already is showing some signs of weakness, including increasing
vacancies.
14 New deliveries of office data from CoStar Group (R&D deliveries are not included due to potential
definitional conflicts between CoStar Data and City land use code).
Memorandum July 24, 2018
Economic Review of Initiative Measure Page 12
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Interviewees increasingly view Redwood City and Sunnyvale, among other Bay Area locales,
as business locations that are competitive with Palo Alto, and friendlier to business interests.
The Initiative Measure sponsors point out that there is economic research that finds there are
limits to the economic benefit of urban density. These interviewees expressed the opinion
that Palo Alto is strained by traffic congestion to such an extent that it could negatively affect
future growth.
The Initiative Measure sponsors also clarify that Initiative Measure is not a moratorium on
growth in perpetuity. Rather, the Initiative Measure would moderate growth to a level that is
in line with the historical average. If the development cap were to become a binding
constraint prior to 2030, voters can choose to increase, modify, or remove the Initiative
Measure’s limitations.
The Initiative Measure reduces certainty about business expansion potential.
Businesses desire a predictable and objective framework that defines land use and real
estate potential.
The cap makes space availability less certain in the future, which is undesirable for business
planning.
Firms that want to grow in Palo Alto desire the flexibility to expand readily, sometimes
scaling up rapidly to take on new lines of business.
The passage of the Comprehensive Plan was viewed as a positive accomplishment from the
business perspective. Through that Plan, the community documented its vision for future
growth. The Initiative Measure compromises the clarity of the Comprehensive Plan, and firms
are increasingly concerned about additional, future regulations.
The Initiative Measure could create a fixed supply of office/R&D space.
Interviewees provided mixed accounts of the effect that a fixed office/R&D supply might
have. Most indicated a strong belief that fixed office/R&D will have a negative impact on Palo
Alto’s economic competitiveness and productivity potential. However, the Initiative Measure
sponsors identify a vein of economic research that finds congestion and other side effects of
density can have a negative effect on economic competitiveness and productivity.
Numerous interviewees noted that the Initiative Measure may not fully curb office/R&D space
demand. Palo Alto is perennially desirable due to its proximity to Stanford University, the
Stanford Research Park, a highly-skilled labor force, and local venture capital sources.
There is some potential for a run on office/R&D development entitlements, and interviewees
expressed concern about a regulation-driven increase in development permitting.
The basic laws of economics dictate that fixed supply will result in rising rents and property
values as demand increases. High rents and the challenges of expanding locally could make
Palo Alto a less viable location for small businesses and startup enterprises.
The Initiative Measure may prompt unintended consequences.
Commercial real estate trends indicate many businesses are seeking to increase the
efficiency of their office usage. The Initiative Measure’s limits on office expansion could
Memorandum July 24, 2018
Economic Review of Initiative Measure Page 13
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further incentivize increases in employee density in Palo Alto. Business owners may choose
to add employees without growing their physical space.
In Palo Alto, from 2001 through 2014, the number of jobs in the city increased by roughly
8,000, despite modest net new office development during this period. Furthermore, national
data reveal that during economic boom times office space usage becomes increasingly
efficient as companies grow their payroll without commensurate increases in office space.
Between 1992 and 2001, average office space per worker in the US fell by about 15
percent.15 Some interviewees indicated that workplace densification potential suggests that
the Initiative Measure does not necessarily limit economic and job growth in the City.
Stanford Research Park
Stanford Research Park (SRP) has historically been and continues to be a critical economic
engine in Palo Alto.
The development capacity throughout the SRP is about 850,000 square feet (i.e. the entire
office/R&D allowance, if the Initiative Measure passes.)
Tenants want the flexibility to expand and certainty for long-range planning.
The SRP model relies on ground leases that last 51 years. This structure limits the flexibility
to develop quickly. Some tenants with sufficient unbuilt capacity and significant remaining
lease terms might undertake new office/R&D projects. If not, SRP management must wait to
redevelop or reinvest until the tenant’s lease expires. A run on office/R&D development
proposals could be detrimental as SRP management cannot move quickly, given its leasing
structure. Currently, three tenants control approximately 380,000 square feet of unbuilt
office/R&D capacity at SRP.
If development potential in SRP is lost, the fiscal impact could be greater than what is shown
in Figure 1. This would be due to a number of factors, chiefly among them, higher property
values, higher business-to-business tax revenue, and greater business travel that likely is
generated by SRP tenants. It also is possible that the cost of providing City services to new
development at SRP is less than estimated by the EPS model.16
SRP has produced a Fiscal Analysis that presents an assessment of potential fiscal impacts
attributable to office/R&D space at SRP.17 The analysis points to a number of factors
(consistent with those described above) that result in potentially greater net fiscal
contributions to the City General Fund. EPS has not fully vetted the SRP analysis but concurs
15 Trends in Square Feet per Office Employee: An Update, CoStar Portfolio Strategy, Fall 2017
16 The EPS fiscal impact model attributes costs of service to commercial uses generally. A significant
cost of service is related to police calls for service. According to the Police Department, a key driver of
calls for service is commercial activity, primarily attributable to vibrant mixed-use areas of the City
where retail, restaurants, and office uses are present. As a single-use business park, SRP likely
generates fewer calls for service than other commercial areas in the City.
17 Stanford Research Park Fiscal Analysis, July 17, 2018.
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Economic Review of Initiative Measure Page 14
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that the net fiscal benefit of employment at SRP likely is higher than EPS’s citywide
estimates.
The SRP analysis also considers potential significant jumps in assessed value and the fiscal
benefits of redevelopment at SRP, including benefits to the City and to PAUSD.
Redevelopment potential at SRP still exists even if the Initiative Measure reduces the
maximum development potential of the Park. However, a modest amount of net new
development potential can incentivize full scale redevelopment of a site. When this occurs,
the entire project is reassessed and taxed at its new higher value, thereby creating
significant tax revenue benefits, above those captured by the fiscal analysis.
A lack of new office/R&D development potential at SRP also could affect the possibility of new
housing and other uses at SRP, if the cap hinders the ability of SRP to sustain its
competitiveness. With growth potential, SRP offers opportunities for creative, beneficial
development programming in which employee housing is available on site.
Interviewees
Stakeholders
Joe Rice and Jennifer Paedon, Lockheed Martin
Jon Goldman, Palo Alto Chamber of Commerce Board Member
Candice Gonzalez, Palo Alto Housing
Tiffany Griego and Amy Herman, Stanford Research Park
Leah Popoff and Iris Gai, VMWare
Local and Regional Experts
Micah Weinberg, Bay Area Council Economic Institute
Steve Levy, Center for Continuing Study of the California Economy
Nardin Sarkis, Silicon Valley Leadership Group, Government Relations Associate
Initiative Sponsors
Greg Schmid, former City of Palo Alto City Councilmember
Joe Hirsch, former City of Palo Alto Planning Commissioner
SL/2018 Elections/Office Cap Initiative/ORD Adopting 1 July 2018
Office Cap Initiative
** NOT YET ADOPTED **
DRAFT
Ordinance No. ____
Ordinance of the Council of the City of Palo Alto Adopting the Provisions of an
Initiative Measure Amending the Comprehensive Plan and Title 18 (Zoning) of
the Palo Alto Municipal Code to Reduce the Maximum Allowable New Office and
R&D Development Citywide from 1.7 Million Square Feet to 850,000 Square
Feet, Subject to Specified Exemptions
RECITALS
A. On May 22, 2018, the proponents of the initiative to reduce the
citywide cumulative office/R&D development cap by fifty percent from 1.7 million
square feet to 850,000 square feet submitted petition signatures to the Office of the
City Clerk, which signatures the City Clerk transmitted to the County of Santa Clara
Registrar of Voters for verification in accordance with Elections Code Section 9115.
B. On June 3, 2018, the Registrar of Voters certified that the initiative
petition qualified with the sufficient number of valid signatures with a total of 2,430
which is greater than 6% of the registered voters in the City of Palo Alto at the last
general municipal election for the City.
C. On June 11, 2018, the City Council accepted the Certificate of
Sufficiency of the Initiative Petition issued by the Registrar of Voters and directed
staff to provide a report on the potential effects of the initiative.
D. On July 30, 2018, the City Council accepted the report.
E. The Palo Alto City Charter, Article VI, Section 2 authorizes the City
Council to adopt without alteration the proposed initiative ordinance to amend the
Comprehensive Plan and Title 18 of the Palo Alto Municipal Code.
NOW, THEREFORE, the Council of the City of Palo Alto ORDAINS as follows:
SECTION 1. The text of the proposed initiative ordinance amending the Comprehensive Plan
and Title 18 of the Palo Alto Municipal Code to reduce the cap on the maximum allowable new
office/R&D development citywide by fifty percent from 1.7 million square feet to 850,000
square feet, subject to specified exemptions, is set forth in full in Exhibit A attached hereto and
incorporated herein by this reference.
SL/2018 Elections/Office Cap Initiative/ORD Adopting 2 July 2018
Office Cap Initiative
SECTION 2. The Comprehensive Plan and Title 18 of the Palo Alto Municipal Code are hereby
amended to read as set forth in full in Exhibit A attached hereto and incorporated herein by
this reference.
INTRODUCED:
PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
NOT PARTICIPATING:
ATTEST:
____________________________ ____________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
____________________________ ____________________________
Assistant City Attorney City Manager
____________________________
Director of Planning & Community
Environment
Exhibit A
1
SL:/2018 Election/ RESO Initiative Measure Office Cap
** NOT YET ADOPTED **
DRAFT
Resolution No. ___
Resolution of the Council of the City of Palo Alto Submitting to the Voters
at the Next General Municipal Election on November 6, 2018 an Initiative
Ordinance to Amend the Comprehensive Plan 2030 and Title 18 of the Palo Alto
Municipal Code to Reduce the Maximum Allowable New Office and R&D
Development Citywide from 1.7 Million Square Feet to 850,000 Square Feet
RECITALS
A. An initiative petition to amend the Comprehensive Plan and Title 18 (Zoning) of
the Palo Alto Municipal Code to reduce the citywide cumulative office/R&D development cap
by fifty percent from 1.7 million square feet to 850,000 square feet (referred to herein as the
“Initiative Measure” or “Initiative Petition”) has been submitted to the City in accordance with
the requirements of Section 2 of Article VI of the Charter of the City of Palo Alto.
B. On June 11, 2018, the City Council accepted the Certificate of Sufficiency of the
Initiative Petition issued by the County of Santa Clara Registrar of Voters and directed staff to
return with a resolution putting the measure on the November 6, 2018 ballot.
C. By Resolution No. 9776, adopted on June 18, 2018, the City Council called a
general municipal election for November 6, 2018 (“Election”).
D. Pursuant to Section 2 of Article VI of the City Charter, the City Council is required
to submit to the electors of the City of Palo Alto the Initiative Measure at the next general
municipal election which is a regularly scheduled general municipal election on November 6,
2018.
NOW, THEREFORE, the City Council of the City of Palo Alto does hereby RESOLVE as
follows:
SECTION 1. Initiative Measure Submitted to Voters at General Municipal
Election. A regularly scheduled general municipal election has been called for the City of Palo
Alto to be held on Tuesday, November 6, 2018. Under Charter Article VI, the following question
is submitted to the voters at the election:
CITY OF PALO ALTO INITIATIVE MEASURE ________:
Shall an ordinance amending the Palo Alto Comprehensive Plan and Municipal
Code to reduce the maximum amount of new office/research and development
(R&D) that may be developed in Palo Alto from 1.7 million square feet to
850,000 square feet, subject to certain exemptions, and to preclude the City
Council from increasing this development cap until 2031 without voter approval,
be adopted?
For the Ordinance ____
Against the Ordinance ____
2
SL:/2018 Election/ RESO Initiative Measure Office Cap
SECTION 2. Adoption of Measure. The measure to be submitted to the voters is
attached to this Resolution as Exhibit “1” and incorporated by this reference. If a majority of
qualified electors voting on such measure shall vote in favor of City of Palo Alto Initiative
Measure “___”, it shall be deemed ratified and shall read as provided in Exhibit “1”.
SECTION 3. Notice of Election. Notice of the time and place of holding the
election is hereby given, and the City Clerk is authorized, instructed and directed to give further
or additional notice of the election in time, form, and manner as required by law.
SECTION 4. Impartial Analysis. The City Council hereby directs the City Clerk to
transmit a copy of the measure to the City Attorney. The City Attorney shall prepare an
impartial analysis of the measure, not to exceed 500 words in length, showing the effect of the
measure on the existing law and the operation of the measure, and transmit such impartial
analysis to the City Clerk on or before August 21, 2018.
SECTION 5. Ballot Arguments. Arguments in favor of or against the measure
shall be submitted to the City Clerk on or before August 14, 2018 at 5:00 p.m. under Elections
Code section 9286 et seq. If the City Clerk receives more than one argument for and/or against,
the priorities established by Elections Code section 9287 shall control.
SECTION 6. Rebuttal Arguments. Rebuttal arguments shall be controlled by the
provisions of Elections Code section 9285. The deadline for filing rebuttal arguments shall be
August 21, 2018, at 5:00 p.m.
SECTION 7. Duties of City Clerk. The Palo Alto City Clerk shall do all things
required by law to effectuate the November 6, 2018, general municipal election, including but
not limited to causing the posting, publication and printing of all notices or other election
materials under the requirements of the Charter of the City of Palo Alto and the California
Elections and Government Codes.
SECTION 8. Request and Consent to Consolidate. The Council of the City of Palo
Alto requests the governing body of any other political subdivision, or any officers otherwise
authorized by law, to partially or completely consolidate such elections and the City Council
consents to such consolidation. The Council requests the Board of Supervisors of Santa Clara
County to include on the ballots and sample ballots, all qualified measures submitted by the
City Council to be ratified by the qualified electors of the City of Palo Alto.
SECTION 9. Request for County Services. Under Section 10002 of the California
Elections Code, the Council of the City of Palo Alto requests the Board of Supervisors of Santa
Clara County to permit the Registrar of Voters to render services to the City of Palo Alto relating
to the conduct of Palo Alto’s General Municipal and Special Elections which are called to be
held on Tuesday, November 6, 2018. The services shall be of the type normally performed by
the Registrar of Voters in assisting the clerks of municipalities in the conduct of elections
including but not limited to checking registrations, mailing ballots, hiring election officers and
arranging for polling places, receiving absentee voter ballot applications, mailing and receiving
absent voter ballots and opening and counting same, providing and distributing election
supplies, and furnishing voting machines.
3
SL:/2018 Election/ RESO Initiative Measure Office Cap
SECTION 10. Transmittal of Resolution. The City Clerk is hereby directed to submit
a certified copy of this resolution to the Board of Supervisors and Registrar of Voters of the
County of Santa Clara.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
____________________________ _____
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
____________________________
Assistant City Attorney City Manager
Exhibit 1