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FROM:
DATE:
SUBJECT:
REQUEST
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City of Palo Alto
City Manager's Report
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FlONORA~LE CITY COUNCIL
CITY MANAGER
MarclI17. 1995
DEPARTMENT: City Manage.
CMR: 184:95
Midtow. Market Analysts Study SeSsioD
This City cOuncil study se..m.on bas been schedule<! 10 di=ss the M"><ltOWD M"rket Analysis
perfurmed by Xeyser },farslon Associates, Staff requests C<>uncil discussion reganrlllg the
ewnomic vitlility 0( Midtown Shopping Cenler.
RECOMMENDATION
This is • study s.>Ssion; DO Coo0C11 action is requested.
EXEClITIVE Sf MMARY
III July 1994, the City Council approved • consultant contract with Xe)'ser Mats!on
Associates, Inc. fur !be Midtown Mar1ret Analysis, !O pr.Mde the City assistance in resolving
the serious ecooomi<: issues facing the Midtown Shopping Centu.
la the c..-.nsultant's judgment, the key area for the fust .ffoos 0( maj<l< revitalization is the
area comprising the nor1!IeasI comer of MidtowlL However, the consultant does not believe
!har the reconslni<tion of Ille existing improvementS alone will materlally reverse the
ecooomic problems of \he atea O'Ier the long tern> ,.,.><1 create tbe dynamic neighborbood that
the residentiBl community desires. The reason is essenn.ny that the historic development
portell! &lid Ibe fragmented interests 0( the multiple property ownen of MJdtowa are
hlndnn<:est<>. coordinated upgracfmg in the Cenler. Hence. what is recommended fur the
Ioog-tern. ~talization of Midtown is reconstruction. Findings relative 10 redevelopment ore
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• Property owners could consider rowning a fee developer, ,.11l> tI-.e intent lila! Ille
existing owr.en essentially retain ownership 0I1lle Center.
• Alternativ.ly, !lie property o .. 'ner> C<>\lld wvek wit~ an Inchor tenant 10 a<>.:omplish
recons!r\lcDoo. A major tenant acting as "" .... loper minimizes Ille need 10 satisfy a
developer profit requirerneot.
• Additionally. reccnstructioo efforts will require a joint pub!ic1private partnel'3hip.
Unless Illere is a partnenhip ."""'8 Ille City. property o .. 'ne" and Ille community as
• whole. redevelopment will DOl work for both political and economic reasons.
The con.<ultant recommends that !be City talce an active role in !be r.>1talizatioo 01 t!,.,
Midlowa Shopping Cenler area .s follows:
• Cit} staff 10 assist i. tbe entitlement proceu icvolvod with any reconstruction.
including definition 01 the overall prOjecl.
• City to consider re>1sing its parking regulaoons, counting 111. Cily-owned parking
area as part of its overall parking requirements, and possibly relocating the ens-Jng
public parldng lot ..
• la addition 10 entitlements lL'ld parking. !be cocsultant recommends Ibat if private
redeveloprr.enl is not worbble, the City consider formation 010 redevelopment agency
for !he following reasons:
• Unless !be property "woors, .s ~ grouP ..... committe<llo creele a reviralized
area, !heir diverse inlerests cculd defeat Iny effort to revitalize the are. in L'>e
coordinaled manner needed 10 create a dynamic and vibcant neighborbood
center.
• Redevelopment ogene) formation allows <,woecs 10 :sen and reinv.st sale
proceeds lax free, prcv;ded that !be reiDvestmen! occurs within 1M staled time
frame. thew)' proo.iding an incentive for chose who ,...nllO sen but cannot due
to ~jgh taxes.
BACKGROL'lSD
011 1anuary 20, 1995. tile ".eyser Marslon study was distributed to the M'odtown Market
AnlLlysi. Subcommittee. Boll> the residents' and m,:rcbants' associations m M-.dto .. l11 have
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held oeveraI me<:lings 10 discuss !he markel study. Letters from both l'>e 1>r.dtows Residents
Association and tile Midlow. Merchants Association are included in Ille Council padrel.
KILlCY IMP! JCATIONSJDISClJSSIQ."I
The pIlbIic policy implkations ol !he Midtow. Market Analysis are defined by the role that
local government can piay in assisting private property owners 10 rejuvellBte I neighborhood
c<>IIImercial renter. Tbe consultant, Keyser Momon A..sociates, b .. identified four
olternalives 10 be considered in addressing how the Midtown Shopping Center might be
revitalized. To that end, the following is a diocussioa o(!hose alternatives and the policy
issues associated with each one:
I. SI." .. QIIO Option -The C;ry bas Ihe option ol conlir,uing with bis\orlcal trends ol
defining the City', role via land use pl. nning, while .nowing private secIor market
tOrtes 10 lake over all <XheT market considerations without further C;ry participation.
Post public investment jR Mid!"",. bas talcen !he form of assessment district focmation
i. the i960s, IlK: continued application of zoning regulations, City·funded traffic
anaIyses,and signalization install.bon. Should the City COIlncil opt Co< minimal
involvement in neighborhood commucial re,italiution, action"""" be lakes only 10
I"CllIOYe barriers 10 building reuse, soch as zoning restrictions on grocery slon: size and
porlcing requirements for building reuse. Eventu.ny, it can be anticipated thaI madet
forces will intervene, given 0101 the Keys.er Marslon study bas identified a substanthl
loss in sales in !he area doe 10 current conditions withill !he Midt""", Shopping Center,
and thaI economk: decline ultimately leads 10 private developer in!er>ention where
strong!C!ail market support exists. In IlK: inlerim, 1I"",,,,,,ec, Mid!oWR will likely
expecieoce continued high vacancies and pos sible los, of additional ,mall businesse •.
2. ~!j£ Assisfance....c.ndc.r Existing ~ -"fb.e City bas the c¢on of
assisting property owners in the Midtowl1 Neighborhood Commercial Cenler in
re>iralizing the Cenru in. variety olways. TIl<' 1>fIdIOWA Market AruIIysis noie, the .
lack of defined entry 10 the Cenler, inadequale circulation wlthiIt the Cenler,
inadequate parking wllltin !he Midtowl! core area for change of use where additional
par!r:ing is required, the existence of zoning caps and!o< prohibition ol specific uses,
obsolesoence <-of struclures, ele. The City can play an instrumental role in addressing
all ol lite .. issues, with !he underlying l5sumptioo Ibat public as>istar!ce will be
beneficial in the mid-10 Iong·term under ousting physical conditlons (o.e., without
redevelopment 0( existing structures). TIl<' consultant'. fioolngs suggest otherwise,
and staff agrees willt !heir l5sessment.
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Specific role., that the City rould pl.y in I Midtowo re,·italizationJrell.bilitatioo role
(a.. opposed 10. physical rede·;elopment role) include the fol'owing: racilitatioll of
traffic improvements, botlI external (i.e .• ingress .00 egres, from ~'1c Center) and
inJernal circulation, the latter of wllich could involve implementatioa of I 1981 Cily
funded study !hal identified needed internal drculatioo and parking improvements foe
the Midlowo Cae Area. Tho City cool<! adopt a perle)' fo< reuse of e><i,ling structu..--es
il! Midtowll that did Dol invoke Ill. site-by-site .naly~s required by City zoning
ordinanceJ fo< change of use. In addilicn, the City could inyestigate the initiation of
City loan and/or grant programs 10 assist in the .. ismic upgrade, bo.ndicap
accessibility, and fire code requireme llts of building rebabilitatioa iI. the Midtown
Neigbborhood ecmrnercial Center ..... !though some cities bave socII programs, they
are generally predicated upon the desire to maiowo existing physical conditions, I
presumption ,.!tich the market analysis consultants ,ouest is neither <!csntlle ncr
realistic fo< Midto", •.
Throoghout !he conduct of the Midto",. M arke! Analysis, staff has held • number of
conversations with poIentim tenants in ~.idtow". An ir,forl1lal request was made to !he
City by a major drug cIWn WalgreeB Drug Stores (Walgreens) IofaciJitale its Iocatioa
io the former M>dtowlI Market building. The proposed tenant ",oold make a
substantial ilrvestment in building rehabilitation. and in return request that the C;'''y
either relocate the existing signal at Moccoo and Middlefield 10 be ill frOnt of the
MidIOWD Markel driveway elllranCe, 0< 10 pi""" a new signal at the ",iveway entrance
IocaIicn. The existing signal at Mo<eno was installed in 1991 I<> facilitate pedestrillJl
crossing of MIddI<oJieId; it does Dol functioa ..,en fo< ingress/egress 10 the
neighborbond commercial cenler. Representatives foc W.lgreens indicate that they
wiD not coosidec a oon-comer location ,,·ithou! the signalized entry, and tha! the cos!
of buiIdi"ll rehabilitation and teean! improvement fo< the MMltow" MerIret precludes
inveslmenl in signal relocation. Also important is the underst.and"mg tha! any long
term lease for • map tenant could delay eventual reclevelcpment of the Mldtown
commen:ial c.enter.
There are I number of significant issues and cone"rns raised by Ibis proposal. The
request wool<! repre .. !!! • substantial pubUc invesuner.! 10 attract. single tenant, an
acIioo tho! would not necessarily address OIher vacancies within MidtOWlL Secondly,
installation of I new signal 10 serve the Midtown Market driveway entry may DOt
resuit in the optimum location for other rew1 use. within the Center. particularly if
redevelopment were 10 occur in the future. T11is proposal rJns counter 10 the
consu!ta.;t'. assessment 111M oosolescence 0( structures and the eJ<isting physical plant
in Midtown are principal reasoos 1ix its decay. I'Ilblic expenditure 10 .bor. up a
buildir.g rehabilitation sunario in Midtown is DOl considered cost effective.
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3. Cq AseistarlCe-jn Private Redeyelopmenl~E.ffoc1s • The City has the optioo. of
facilitating private sectoc redevelopment. particularl) within the Midtown ~ area.
Slrong inlerest h .. been expressed by Safeway 10 expand ilS focility in Midtown and
\0 rel«ate their food store 10 Ibe core area, In!eres! has also been expres.oed by
Walgree;'. 10 occupy space within the Midt""'_ area, and several existing tenants
presently located in Mkltowa have indicated their desire !o remain. Key \0 an)'
redevelopmenl ;. Ille poIential for private sec!or capital investment. and MidlOWR
exhibits s!rOOg interest from twl> wen""apitalized national stores, In conducting the
Mid!oIw MalhI Analysis. existing property owners were Sllrveyed .. 10 !heir interest
is redevelopmenl, and !he results were mixed regarding the desire 10 participate"
Seven! existing property owners are not in the posi600 10 provide substantial capi!al
investmenl in their propenles. This presents a dilemmg; substantial iovcstmenl ;.
ne«1ed !o ready many <>f tbe buildings for tenancy. yet tbC abill!)' or de.ire to make
Ibose lnves<.menIs is Iacldng. Several property owners e.pressed :he desire for a long
term income stream from !heir properties, and most aclrnowledged !he ~ 10
redevelop for tile ecooomk viability <>f the Center. A few property owners expressed
interest in ou-ectly participating in redevelopment efforts, provided !heir property
interests would be aclrnow!edged in !lie final plans.
The Maliet Analysi. <""su.ltan has suggested !hal redevelopment will necessitate boIh
subslantial private sectoc investment and C~ facilitation. The coosultanl also staleS
II-.a! !be Iradltiof.al developec role in Midt"",,~, i.e" ac<jUisi600 and developmelll <>f the
coo: area for • ncigh!>orhood commercial center, would neoessiwe • profit m ... gin thal
mighl preclude several exi.ong lenaots. Evea if a devek¥"-were willing 10 play th.t
role in MidIow ... !be risk fac10r is very high. and C~ faCIlitation "''''J1d h"lely stiII be
required.
Ore way Ie approaclIa redevelopmenl planning process "'ilhout formal redevelopment
agency formation coold be as follows:
A. Poll all. interested parties .s 10 their desire !o co-funcJ. master planning eifurt
by a 'lualified retail cecter arcbirect{,) for !he MidtOWD Neighborhood
Commercial Center. Both Safe","} and Walgreen. hav: expressed inleresl in
dOOlg so, and some eJcisfing property owners may also be wl1Jing 10 contribute
10 Illat effort. It i. staW. opinion Ella! several alternative site plans could be
generated for !be MX!town core area that consider redevelopment S«llJIrios on
• not-Io-excc:e<l basis foc less than $20,OCIO. Suclo plans would not lnclude
archltec!llral dra",ings, but would allow for phased redevelcpment !o
acrommodate eximng tenants and fe< developrnentfrelocation alternatives for
!he Co-op Market. It is staff. expecta60n that ,"clo plans coold be developed
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'programmatically,' with • smoll worlcing group of interested pnrties.
Programmatic development ~lk>",. foc rO<!evelopment scenarios by square
fooIage of D5O. By this method, major and mini anchor "'.ants can be
identified, as can satellite sbop space based 00 exlsling aM futu. ... I:03nls. A
modified version of the Midtown Market Analysis Subcommittee. which
mctuded property owners, lenant!, devek>pers, commerciallcasing 08°.($. and
neighborbood representatives. would be nlu.bI~ in developlng Il>e alternative
site plaJt5. Soch plans would c<>ocenlr.te 00 the coce area, bur would include
tle-iD 10 the oilier intersections of the Midtown Neitbborbood Commercia!
CenIe< ...vs alte=tive rouse of the existing Safeway building if Saf.",.y were
10 relocale 10 the V.tdtOWD Core Area. It js onticipated thai the alternative
maslec plans for Midtown redevelopment .,oold follow a traditional
Architectural Review BoardlPlanni ng Commission/City Council review
proceS3.
B. A secOtld role that the City could play in a private secIor redevelopment
S<:enario i. 10 resolve the traffic ' .. ues raised in the Comprehensive Plan
Advisory Committee process. At. neigbborbood meeting of MldlOWl!
residents. held CD January 31, 1995, Council Member Andersen asked foe-a
show of hands as 10 those who support. two-lane Middlefield cor.figun;tion
verst'S those who support four lanes; arod the attendee, appeared 10 be splil
fairlyeverJy_ During the time that the ~ldlOWll Markel Anslysis wu being
conducted. the t,!idtowo Market Analysis Subcommittee mel severalliroes; and
!he issue of traffic, and particularly the M"iddlefield configuration of (wo versus
four lanes. was a dominant theme. Redeve10pment plan scenarios coold be
affected by this issue (oltbough only sfightly), in tna! any oo-strect parking
which may be acllieved by • two-lane conl;guratloo could reteve the on-site
parking required within tn. Midtown Co<e Area. More itnportant, however,
is that the issue is seen as one of pedestrian safery and ambiance by some
members of the community. A two-lane configuration would bave the naturol
effect of slo ... ing traffic, which can be positive fo.-bo!!t retailers and
pedestrians. TIle Midtown Market Analysis consultan! It.. suggested lIlal
greater tie-in of lOe Midto ... " CO<e Area 10 tne other b'1ree commercial corners
coyld be achieved will> I narrowe4 Middlefield cDI'.figura!ion •• nd staff
generally agrees with :hat asse"ment. We do DOt. however, know the traffic
consequences of I two-lane versus foor-Jane configuration. It i. reasonable !O
assume lila! if narrowing Mi<MIefield \0 r..·o lanes ,,'auld result in substantial
deflected tra."fic I<> surrounding resi<lentiaJ areas it would not be feasible, .nd
if minimal deflecti<>n were 10 occur it may weli be. TIle lecbnical inquiry on
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this j"ue i. fairly straightforward; the political implications are complex.
Debating the issue in tl-.e .l>se oee of le<::hnicallrnowledge is of 1itt.1e value.
A narrowly defined traffic stud} that addresses ingress aild egress from the
M">d\OWD Cenler area, $llnali211tioo r.eed. fQ< ph ysicsl rede·.e:.,pment, and the
traffic consequences of two versus four lanes could accompany the
redevelopmem site planning efforts. GiveQ present transportation staff work
load, they ,",ve indicated !hal an outside consultant woold be required Ii>
conduct this srudy. Economk Resource. $taff inquiries indicate that suck •
study coold be prepared for under SIS ,000. While. traffic study is DOt
esscnliallo create redevelopment sit~ planning scenarios for MidlO'ND, it nay
assist in keeping the is.ue. of w.J'fic in perspective.
4. cit) Formation of I Redeyelq:)P'H':Dt Agency ;nMH.lt.awn -An option recommeDded
by the consultant 10 accomp[j,h redevelopment in M"idtown is the furm.tion of •
RedeveIopmeIlt Agency under Caflfornia Slate Law. A multitude of Calif<l<nia cities
have availed themselves of Slate Redevelopment Law 10 accompli.Il ecooomic goah
in distressed areas socb as MidtowB.. Criteria for Redevelopment Agency f<>c:mtion
wi!hin com mercia! areas include inadequate parldng, obsolesce nee of struclures,
multiple property ownership, poor vehicular circulation, e\c. While the enabling
legislative req;rirements bave become mC<e aild m<:M'e stringeDl, M'ldtOWD Sbopping
Center exhlbits a uu mber of the qualifyi"8 requirements (0< formal redevelopment.
The p<>Iential advantages 10 use of Slate Redevelopmeol Law in M"Idtm".,. are
sub>'!InIial. Tax increme ... lin&ncing can conceivably be utilized 10 offset Il-.e COSts of
inilialland acquisition and/or p!1y.icoJ improvements 10 tl-.e area, a1lhoogll sharing
taxes ... ith oa... agencie< may mitigate or even negate the ",.Ivantages of tax increment
finaocing. Ia addition, the powers of eminent domain can be used I<> acquire hold
out P"opertie. resistant \0 redevelopment eff"",... Pernaps most importandy and
relevan! 10 Palo Aho, Redevelopment u.w pewjts the friendly acquisition of
commercial properties whkb aIIo ..... property owners 10 ovoid substantial capital gains
tax consequences. lit essence, a commercial property acquired by • RedevelopmeDt
Agency can be treated compardbly 10 • cbange in principal residence, wbere
reinvcsbnenl in like or of greater value has no immediate capiw gains tax
consequences. Thi. provision of the law has been increasingly instrumental in
allowing property owners 10 dive st their interests wilh.in • Redevelopment Area
without negative tax consequences.
The down~ 10 Redevelopment Agenc} formation I<> accomplisb pbysical
",,",",!ruction in M'ldtOWIl are also numer"".. fonning. Redevelopment Agency can
~ • lengthy and controversial p<oces •. Property owner buy-in is generally seen as
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politically essential, ",hiel. i. wby more .nd lOOre communities predicate tl1eir
redevelopment effort> on friendly condefilnatioo only. Se---.:.ndIy,!he tax-ineument
financing is based 00 a frozen property tax base at tl-.e time of agency formation, with
all of die anticipo!ed IDcreased pr"P"rty taxe. (based 0" increasingly hig!Jcr land value
over time) llloc.te<I \<) the Age~. 'The fiscal imptjcations of this \<) <><her Il"bfic
agencies CliD be substantia!; once a. area redeve10ps and P"09"rty values inc:use
substantially, onIylbe ~elopmenl Aie"')' is die be..e6c1ary ofincrease<l pr<lp"..rty
tax values. The State Redevelopment Low alJQ.." individt;al ~ng agencies \<)
negotiate that portion olllle tax revenues that would normany be allocate<! 10 them.
Consequently, it is pos3ibIe L'u!t ~Jdt(),'lD Re<Ie"elopment AgellC)' fonnaoon could be
.ccompl.isbro willi little or DO negalive propeny tax coosequences 10 other taxing
agencies, which include Ille Palo Alto Unified School Distri.."I, Santa Clara County,
and ... orlous special districts. W1u1e such .n action might addre .. poli!lcal problems
and issues 0( fairness, the primary purpose of Slale Re<Ie\'ekoprnen! Law .. · .. 10 allow
for an age"')' 10 offset l:p-froot costs by increased propeny tax reveDues over lime.
If thal ability is substantially diminished in order 10 rninim~ the f.scal impacts 00
adler taxing agencies, !he cost-effe<;-.j"enes. of Redevelopment Agency focmatioo may
be reduced substanlially _ More im ponantly, Redevelopment AgellC)' formation, in
staff'. opinion, sbooId be pursued only "'bere no other alternatives e:Ust. ID the case
of~KI!own, we have the benefits 0( high discretionary income, demonstrated unmel
market needs, and interested capital investors. In the Midi""' .... Marltet Analysis
consultllnl's opinion. bowever, these (aclOt'S can easily be ootweigbed by lJ,e many
burdle. inherent in private secIOr redeve10pment "'iL', multiple private property
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FISCAl, IMPA.CT
'The iiscal impact will ultimately be determined by the role that the City C<lUncil desires the
City \<) play in imp;o\ing conditions in the Midtown Shopping Center.
Nooe_
None.
None.
P1U!PARED BY: Carol Jansen, Manager, B:onomic Resources Planning
CITY MANAGER APPROVAL:
cc: MXftov. ... Marice! Analysis Subcommittee
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