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HomeMy WebLinkAboutStaff Report 2602-5893CITY OF PALO ALTO CITY COUNCIL Special Meeting Monday, March 09, 2026 Council Chambers & Hybrid 5:30 PM     Agenda Item     10.Receive Update and Provide Direction to Staff on the Implementation of Senate Bill 79 (2025) and Work Related to the Downtown Housing Plan. CEQA Status: Exempt Under CEQA Guidelines Section 15262. Item Removed Off Agenda City Council Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Planning and Development Services Meeting Date: March 9, 2026 Report #:2602-5893 TITLE Receive Update and Provide Direction to Staff on the Implementation of Senate Bill 79 (2025) and Work Related to the Downtown Housing Plan. CEQA Status: Exempt Under CEQA Guidelines Section 15262. RECOMMENDATION Staff recommends that the City Council: Consider the implications of Senate Bill (SB) 79 in the identified transit-oriented development (TOD) areas and the potential approaches towards its implementation; and Provide direction on the preferred approach for the citywide implementation of SB 79 and the Downtown Housing Plan initiative. EXECUTIVE SUMMARY SB 79 will take effect on July 1, 2026. The legislation is intended to facilitate the upzoning of land located in proximity to qualifying transit stations, thereby promoting TOD through the establishment of new minimum standards for building height, residential density, and floor area. In the City of Palo Alto, numerous parcels are located within the influence areas of three qualifying transit stations: two Caltrain stations within the City of Palo Alto and one Caltrain station in the City of Mountain View adjacent to the City and are therefore subject to the provisions of SB 79. This report provides an overview of the implications of SB 79 and outlines the next potential steps for the citywide implementation of State law, including a range of policy options for City Council consideration and direction. BACKGROUND 1 staff provided the City Council an update on the Downtown Housing Plan and an overview of SB 79 and requested direction on the implementation of the State law. The classification of qualifying transit stops, and key statutory provisions discussed in that report are highlighted below: Distance from Pedestrian Access Point to a TOD Stop Tier 1 TOD Stop (Caltrain)Development Standard Up to ¼-mile Up to ½-mile “Adjacent” (within 200’) Bonus Height, Density, and Residential FAR Height2 Density Residential Floor Area Ratio (FAR) ANALYSIS 1 October 22, 2025 City Council Staff Report https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=18007 2 Note that a qualifying project may use the standards in SB 79 as its base density under state density bonus law; however, if the project exceeds the City’s height limit due to the provisions of SB 79, the City is not required to grant an additional height waiver. region’s designated Metropolitan Planning Organization, to prepare and publish official maps identifying applicable TOD zone boundaries, City staff have not yet received these maps. Key Takeaways Lack of data from MTC and HCD: SB 79 significantly reshapes development near transit: SB 79 establishes state-mandated minimums for height, density, and FAR on qualifying parcels near Caltrain stations, substantially limiting the City’s discretion under existing zoning and adopted planning frameworks. Cities can adopt an Ordinance temporarily exempting sites that are: within a Very High Fire Hazard Severity Zone, subject to Flooding, are Historic Resources listed in the local register, or that are zoned for high density residential use providing at least 50% of the capacity required by SB 79. Downtown Housing Plan Scope Is Smaller Than SB 79 Impact Area: While the University Avenue/Downtown Priority Development Area encompasses approximately 206 acres, the Downtown Housing Plan covers only 76 acres. In contrast, SB 79 affects a much larger area; approximately 325.23 acres, around the Downtown/University Avenue Caltrain Station. This includes the Downtown Housing Plan area, South of Forest Avenue (SOFA) areas, the transit center, and Stanford Shopping Center. Historic resources require consideration: Downtown Palo Alto and the San Antonio Road area contain a high concentration of historic properties or properties within historic districts. SB 79 includes limited provisions for historic resources. The City is allowed to adopt an ordinance to temporarily ensure these resources are protected. Ongoing protection is achievable only by adopting, prior to January 31, 2032, a TOD Alternative Plan; even then, protected historic resources cannot exceed 10% of the area of a TOD zone. SB 79 currently does not provide express guidance on the treatment of historic districts, but it appears that a local ordinance may protect historic districts in addition to individual historic structures. This is subject to change with additional guidance from HCD. Small parcel sizes limit realistic redevelopment potential: Feasibility analysis indicates that parcels smaller than approximately 5,200 square feet are less likely to redevelop, unless multiple parcels are combined. This reduces development potential particularly in the Downtown/University Avenue area, limiting the number of sites that can realistically take advantage of SB 79 standards. Historically, there has been little interest for lot consolidation in Palo Alto, even with development incentives. Redevelopment is likely to occur on a limited subset of eligible land: Although SB 79 enables substantial theoretical housing capacity across all three station areas, the realistic capacity is substantially lower and difficult to translate into future unit production. To illustrate potential housing growth over the next 25 years within these TOD areas, staff conducted a screening-level analysis that excluded parcels less likely to redevelop, including those with historic resource designations, properties redeveloped within the last 25 years, small lots that would not support feasible redevelopment or meet SB 79 unit density standards, public facility and planned community zoned properties, transit-owned land, sites with condominium subdivision maps, and properties with office development exceeding 1.5 times the parcel area. After applying these filters, staff estimates a more realistic picture of redevelopable property as follows: Downtown/University Avenue Transit Station Area: Approximately 163 acres California Avenue Transit Station Area: Approximately 222 acres San Antonio Transit Station Area: Approximately 32 acres Further discounting is necessary, however, because redevelopment is costly and carries risk for developers. Many property owners will be satisfied leaving their properties as-is despite the potential for increased housing development. Staff anticipates that the vast majority of single-family homeowners are unlikely to pursue apartment buildings on their property, though some may choose to do so. A review of development activity over the past 25 years shows that only ten percent of all parcels redeveloped, with exceedingly few single-family zoned properties converting to multifamily housing. Applying a ten percent redevelopment factor consistent with this historical activity, and a one percent factor for single-family zoned property, staff can estimate a theoretical range of future housing production from SB 79 for each transit station area over the next 25 years. These figures are not a projection or formal estimate; they are simply a calculation based on screening criteria and existing baseline data, and are subject to numerous variables that cannot be fully accounted for through this type of screening-level analysis. Downtown/University Avenue Transit Station Area: Approximately 1600 units California Avenue Transit Station Area: Approximately 900 units San Antonio Transit Station Area: Approximately 200 units The above analysis does not account for recent changes to state law that promote greater development potential including exemptions to the California Environmental Quality Act, allowances for taller buildings, greater floor area, reduced parking requirements, and state density bonus concessions and waivers and application streamlining. These measures add greater predictability to the development process and may encourage additional property owners to consider redevelopment. California Avenue faces the greatest zoning shift: The California Avenue SB 79 area contains a substantial proportion of single-family zoned property, including larger 10,000-square-foot lots in the Old Palo Alto neighborhood that would not require land consolidation to support apartment development. New construction built to SB 79 standards may appear contextually inconsistent with the historic development pattern northeast of the Caltrain station. The commercial areas along and near California Avenue have seen little significant redevelopment in recent years, due in part to small lot sizes and the former requirement for on-site parking, both of which made redevelopment economically impractical. The interaction of SB 79 with other state laws could catalyze future housing or mixed-use development, with uncertain implications for the area's retail environment. New development may also lack coordinated design or placemaking, with larger parcels likely proving more attractive for redevelopment than smaller ones. San Antonio Road area raises unique historic district uncertainties: San Antonio Road area includes large concentrations of Eichler homes and a designated historic district. SB 79’s treatment of historic districts, where individual properties are not separately listed, may be the subject of additional guidance from HCD. Because exclusion of historic sites is limited to 10% of TOD land area after January 31, 2032, not all historic sites can be protected in the long term. The Economic Feasibility Analysis prepared for the Downtown Housing Plan remains relevant: While SB 79 provides development opportunities to owners of qualifying properties, the feasibility of such projects depends on current market conditions, broader market trends, site constraints, competing uses, impact fees, and inclusionary housing requirements. This is outlined in the Economic Feasibility Analysis prepared for the Downtown Housing Plan, which was included as Attachment A to the October 22, 2025, City Council Staff Report.5 State Density Bonus Law: SB 79 projects are eligible to use State Density Bonus Law6 to seek a density bonus, incentives or concessions, waivers or reductions for development standards and parking ratios. The density allowed under SB 79 serves as the base density for calculating the density bonus. However, a project proposing a height allowed by SB 79 that is in excess of the local height limit is ineligible for a waiver for additional height beyond that specified in SB 79. This does not apply for 100% affordable projects located within one-half mile of a major transit stop. Assembly Bill (AB) 130 (2025): AB 130 (2025)7 significantly streamlines housing development approvals in urban communities by creating a new statutory exemption from CEQA for qualifying infill residential projects. This means that qualifying residential or mixed-use infill projects (generally up to 20 acres) that are consistent with either applicable Comprehensive Plan or zoning regulations (as modified by SB 79 and/or state density bonus law) could bypass CEQA review entirely, with an accelerated permitting timeline. The exemption applies to projects meeting minimum density thresholds, and site qualifications (i.e., not located in floodplains, fault zones, wetlands, or very high fire severity zones, not a hazardous waste site, and not demolishing a historic structure). AB 130 amends the Permit Streamlining Act by imposing strict timelines for City review and approval. If the City does not act within 30 days following its objective standards review and the required tribal consultation, a project may be deemed automatically approved. This substantially reduces staff’s ability to present projects for review by the ARB, PTC, or City Council. Developers must comply with the new labor standards for 100% affordable housing projects and buildings over 85 feet in height, meet air quality requirements, and perform 5 October 22, 2025 City Council Staff Report: https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=18007 6 https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=65915&lawCode=GOV 7 https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202520260AB130 contamination cleanup as appropriate. The law does not alter State Density Bonus Law provisions, including waivers and parking reductions. This means that in addition to the increased FAR permitted under SB 79, developers could seek to waive maximum lot size limitations in residential zones, setbacks, open space requirements, site coverage, daylight plane requirements, or even retail preservation requirements through the State Density Bonus Law. Assembly Bill (AB) 2097 (2022): AB 2097 (2022)11 eliminates minimum parking requirements for new development (residential, commercial, and most other uses) located within one-half mile of high-quality transit service (i.e., major transit stops such as the Caltrain Station). This essentially prohibits local governments from enforcing minimum parking requirements for qualifying projects. In Palo Alto, the State law is applicable to all properties that lie within one-half mile radius of the University Avenue, California Avenue, and San Antonio Road Caltrain Stations. It is unclear at this time whether the applicable area for AB 2097 will be identical to the applicable area for SB 79, as the two statutes have slightly different language regarding the one-half mile radius. Downtown Housing Plan/SB 79 Implementation Ad Hoc Committee: On January 27, 2026, staff presented four potential approaches to implementing SB 79 to the Ad Hoc Committee, each reflecting varying levels of effort and scope. These approaches considered: Existing and ongoing planning initiatives; Anticipated additional workload and its potential impact on City Council priorities for the current year; Expected near term planning initiatives; Staff capacity and available resources; Fiscal implications; Opportunities for community engagement; and Review and approval timeline established by HCD pursuant to the state law. While all four approaches advance the State’s pro-housing objectives, they differ in the degree to which the City exercises local control. The City may choose to allow SB 79 to preempt local codes, adopt an ordinance clarifying how SB 79 applies locally, including exclusion of historic properties, and/or prepare a Transit-Oriented Development (TOD) Alternative Plan, based on 11 https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB2097 the considerations outlined above. Both an ordinance and a TOD Alternative Plan may require environmental analysis and are subject to HCD review. Approach 1: No action on SB 79 Approach 2: Adopt an Ordinance Approach 3: Rezone all TOD eligible sites to allow 50 percent of the SB 79 development potential Given the anticipated timeline for environmental review, Planning and Transportation Commission consideration, and City Council adoption, it is unlikely that the rezoning could be adopted prior to July 1, 2026. As a result, there would be an interim period during which SB 79 default standards would apply until the rezoning becomes effective, likely twelve months after receiving direction to proceed. Approach 4: Prepare a TOD Alternative Plan Under this approach, the default SB 79 standards would take effect on July 1, 2026, while the City concurrently prepares a TOD Alternative Plan applicable to all TOD zones. The TOD Alternative Plan could include targeted development standards, infrastructure planning, and a structured community outreach process. Adoption of a TOD Alternative Plan would render planning efforts such as the Downtown Housing Plan redundant and may overlap to some degree with other work related to Housing Element Program 3.7: Objective Design Standards for the SOFA area. The approach, however, provides greater local control and public input, but would require several hundred thousand dollars for consultant work and significant staff resources, both of which are currently unaccounted for and resourced. The TOD Alternative Plan would be subject to HCD review and approval. As suggested, continuing with the Downtown Housing Plan with Approach 4 is not recommended, but remains an option for the other approaches. NEXT STEPS Based on Council direction, staff will proceed with implementation efforts for SB 79 and the required environmental analysis as directed. For Approach 4, staff would need to return to Council with a scope of work and cost estimate before seeking consultant solicitation for the planning and environmental work. For Approaches 1-3 staff will engage the Council ad hoc as necessary. Based on guidance for the Downtown Housing Plan – if the initiative continues, staff will engage the Council ad hoc throughout the remainder of the year to strategize on continued analysis and community engagement and strive to complete the project, likely in 2027. FISCAL/RESOURCE IMPACT Fiscal and resource impacts will vary based on Council direction and the associated level of effort. Approaches 1 and 2 would not result in additional fiscal nor resource impacts. Approach 3 would require preparation of an environmental analysis, necessitating consultant support and associated costs. However, these costs are not anticipated to exceed existing funding available within the department’s budget. If Council directs staff to pursue Approach 4, staff will return with a detailed scope of work and cost estimate. Preliminary estimates indicate that the effort would cost approximately $500,000 in additional funds beyond those already allocated for the Downtown Housing Plan, including the grant funding from MTC. STAKEHOLDER ENGAGEMENT ENVIRONMENTAL REVIEW ATTACHMENTS APPROVED BY: