City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Planning and Development Services
Meeting Date: November 18, 2024
Report #:2410-3587
TITLE
FIRST READING: Adoption of an Interim Ordinance Amending Chapters 18.04, 18.16, 18.30(A), and 18.30(C) of the Palo Alto Municipal Code to Implement High Priority Retail Revitalization Measures and Direction; Adoption of an Identical Emergency Ordinance; and Direction to Staff to Advance Other Initiatives Related to the City Council's Economic Development and Transition Policy. CEQA Status: Exempt Pursuant to CEQA Guidelines Section 15061(b)(3).
RECOMMENDATION
The Retail Ad Hoc Committee, Planning and Transportation Commission, and Staff recommends the City Council:
1. Adopt the attached emergency ordinance (Attachment A) and interim ordinance (Attachment B);
2. Direct staff to work with the Planning and Transportation Commission on the following:
a. continued refinement of the definition of retail-like land uses to establish a performance-based criteria that promotes pedestrian activity in commercial areas
b. expansion of the permitted uses in the ground floor (GF) and retail (R) combining districts and standards to allow non-retail like uses in certain circumstances; c. review and recommend changes to the geographic extent or applicability of the City’s retail preservation ordinance; and,
3. Direct staff to include a comprehensive update to the City’s zoning code as an objective for Council consideration in 2025 work plan.
EXECUTIVE SUMMARY
The report and accompanying urgency ordinance propose changes to streamline zoning regulations, increase flexibility in permitted land uses, and update parking policies to meet current needs.
Key recommendations include modifying the formula retail definition, increasing flexibility for “retail-like” uses, introducing practical waivers, and expanding permissible uses for ground- floor spaces. Additional provisions address the inclusion of pet grooming, financial institutions, and automobile showrooms as potential retail-like uses. Staff has also incorporated an ordinance to allow for practical waivers, replacing the high threshold required for waivers with a “practical difficulty” standard to facilitate space adaptations. This report seeks Council’s direction on these recommendations to enhance the city’s commercial district vitality and better meet evolving market demands.
These actions transmit the Planning and Transportation Commission and Retail Ad Hoc recommendation for specific zoning code changes to advance the objectives of the City’s Economic Development and Transition priority. The recommendations in this report are informed by prior work prepared by the City related to its retail resiliency interests and supplemented with professional services provided by Michael Baker International.
The Planning and Transportation Commission held multiple meetings from October 2023 through August 2024, examining various aspects of the Michael Baker International report.
These discussions led to prioritized recommendations for zoning code adjustments, which were subsequently reviewed by the City Council’s Retail Ad Hoc Committee in September 2024.
BACKGROUND
Staff have been working with the Planning and Transportation Commission and professional service contractor, Michael Baker International, to respond to the City Council’s Economic Development and Transition priority. Specifically, implementation of Objective ED&T 12 to conduct stakeholder outreach and present recommendations to Council for a citywide retail zoning strategy and receive direction for ordinance implementation.
This work ties into earlier efforts, including the City Council’s reinstated economic development position as part of the fiscal year 2023 budget and review of a comprehensive economic development strategy report prepared by Streetsense and presented to the Council in August 2023. Michael Baker International expanded upon the Streetsense report conducting additional local outreach, peer city reviews and policy review to identify strategies that support a more robust retail environment at the land use regulatory level.
The Planning and Transportation Commission reviewed various components of the Michael Baker International report at the following meetings and additionally formed an ad hoc group to examine the strategies more deeply on four other occasions:
•October 25, 2023: Introduction/check in including reviewing the scope of work •January 31, 2024: Peer cities comparison and stakeholder interviews results •February 28, 2024: The PTC met to create a PTC Ad Hoc
•March 13, 2024: Presentation regarding strategies and policy recommendations •March 27, 2024: Reviewed strategy recommendations
•April 24, 2024: Continued discussion on retail strategies •May 8, 2024: Continued discussion and initial recommendation development •August 14, 2024: Prioritization of recommendations to Council The culmination of this work was presented to the City Council’s Retail Ad Hoc on September 18, 2024.1
The Michael Baker International report (Attachment C) highlights Palo Alto's high retail and office vacancy rates, complex regulatory framework and market shifts as key factors impacting the city’s retail resiliency and includes recommendations to streamline zoning regulations with flexible land use definitions and updated parking policies to address these challenges. The specific, prioritized, zoning recommendations are provided in Attachment D and were the focus of the Retail Ad Hoc’s discussion in September.
The City Council’s Retail Ad Hoc met to consider the recommendations that would facilitate the establishment of retail and retail-like uses in the City in support of the City’s Economic Development and Transition Policy. The ad hoc voted unanimously to support the following motion:
MOTION: Council Member Lythcott-Haims moved, seconded by Council Member Burt, to recommend the City Council:
1. Direct staff to bring an urgency ordinance with the following recommendations:
a. Approve Recommendation # 2, raising formula retail threshold from 10 to 50 (based on number businesses in California)
b. Approve Recommendation #8 but excluding gyms directly on California Ave c. Approve Recommendation #7.1 of retail-like definition d. Approve Recommendation # 6
2. Direct staff to:
a. Analyze Recommendation #1 with analysis of AB 2097 and interchangeability of uses and evaluate reactivation of parking assessment district. b. Analyze Recommendation #3 to amend retail preservation ordinance and evaluate geographic boundaries for its application and permitted uses for what remains within potentially amended boundaries.
1 Staff Report, dated September 18, 2024:
https://cityofpaloalto.primegov.com/Public/CompiledDocument?meetingTemplateId=14948&compileOutputType=1 Action Minutes, dated September 18, 2024:
https://cityofpaloalto.primegov.com/Public/CompiledDocument?meetingTemplateId=14947&compileOutputType=1 Meeting Recording from September 18, 2024:
https://cityofpaloalto.primegov.com/Public/CompiledDocument?meetingTemplateId=14947&compileOutputType=1 c. Analyze Recommendation #7.2
d. Carry out Recommendation #5
e. Recommend dation #11 and 13 to merge with Recommendation #15 f. Carry out Recommendation #15
3. Reject the following recommendations:
a. Recommendation #4
b. Recommendation #9
c. Recommendation #10
This report advances components of the first multi-part portion of motion (#1) and provides an update on the other recommendations.
ANALYSIS
The attached urgency and interim ordinances makes a few discrete changes to the City’s land use policies as set forth in the zoning code, including:
•modification to the formula retail requirements;
•changes to the retail-like definition and addition of an automobile showroom definition; •adjustments to the permitted land uses in the ground floor (GF) and retail (R) combining districts; and,
•relaxed standards to request a waiver or adjustment from the requirement to establish a retail or retail-like use in the GF and R combining districts.
Formula Retail (Recommendation 2, Attachment D)
The City’s formula retail requirements only apply to commercially zoned property on California Avenue. The ordinance was established in 2015 with the intent to preserve the unique character of the shopping district by restricting the proliferation of chain stores while also supporting an environment conducive to small local business owners.
Formula retail is defined in the zoning code as a business with 10 or more locations in the United States that share standardized characteristics such as menu, services, décor, uniforms, architecture, façade, color schemes, signs, trademarks or servicemark. While formula retail is not prohibitive, the requirement for a discretionary conditional use permit is a deterrent to applicants seeking to establish these uses.
The Michael Baker International report recommends changes to the formula retail requirements to increase flexibility and encourage a balance between local and franchise businesses in this district. Specifically, the consultant recommends revising the definition of formula retail to apply only to restaurant uses and raising the threshold from 10 to 50 United States locations before a conditional use permit is required. The recommendation also encouraged the City to go further and change the standard from a national perspective to just California; the Retail Ad Hoc agreed and the attached ordinance has been drafted accordingly.
Adjust Conditional Use Permit Threshold From 1,800 to 3,000 Square Feet (Recommendation 8, Attachment D
One of the recommendations in the Michael Baker International report was to relax the threshold for when a conditional use permit was required for gyms. Throughout much of the city where gyms are permitted, there is a requirement for a conditional use permit when the space for the gym exceeds 5,000 square feet or at any size when fronting University Avenue.
Only on California Avenue itself is the threshold set to 1,800 square feet. The consultant recommendation was to raise the 1,800 square foot threshold for gyms on California Avenue to 3,000 square feet. It is unclear from the Retail Ad Hoc’s motion if the intent was to eliminate gyms from occupying any space on California Avenue or to not adjust the conditional use permit threshold. Accordingly, there is no change in the attached ordinance. The City Council can give direction to staff on what if any changes it would like to make concerning gyms and conditional use permit thresholds for inclusion in the ordinance.
Retail-Like Definition and Changes to GF and R overlays (Recommendations 7.1 and 8, Attachment D)
The Michael Baker International report recommends expanding the retail-like definition to include uses that generate pedestrian activity. This change aims to allow greater flexibility filling ground floor vacant spaces with businesses that contribute foot traffic and vibrancy, even if the use does not fit traditional retail definitions. This approach is intended to help reduce persistent vacancies, support a lively commercial environment, and adapt to evolving consumer behaviors that may prefer a wider range of services and experiences in commercial shopping districts.
Providing increased flexibility however suggests moving away from detailed lists of land uses that defines what is permitted at a given tenant space and enabling staff to exercise judgement when deciding if a proposed use meets the intent of the code to generate pedestrian activity.
The Retail Ad Hoc supported the consultant recommendation to add language to the retail-like definition to allow commercial uses that are accessible to the general public, generate walk-in pedestrian clientele, and contribute to a high level of pedestrian activity. The Retail Ad Hoc did not get into sufficient discussion to further define retail-like uses and this report and ordinance provides an opportunity to do so. However, the staff recommendation in this report would have the City Council make a minor but meaningful adjustment to the definition to allow financial institutions and add a catch-all category. Staff recommends deferring a more in-depth conversation to the Planning and Transportation Commission to review and recommendation.
Based on the Michael Baker International report, staff has also made some changes in the proposed ordinances to allow pet grooming and financial institutions as permitted land uses in the GF floor (University & Middlefield Avenues) and R (California Avenue) combining districts.
These changes were not explicitly discussed by the Retail Ad Hoc and are presented to the City Council for deliberation and direction to staff.
Pet Grooming
Pet grooming services can attract regular foot traffic and contribute to activity within mixed-use urban areas. These services bring consistent, repeat visits from pet owners who return for routine grooming and care, which may increase nearby foot traffic. Customers often utilize nearby retail or dining options while waiting, potentially benefiting surrounding businesses.
Additionally, pet grooming meets a practical need in urban environments, especially for residents in apartments who may have limited space for pet care. This service aligns with efforts to create a pedestrian-friendly, community-oriented downtown setting.
Pet grooming would also be permitted as a retail-like use in other parts of the City with the proposed changes to that definition.
Financial Institutions
Financial institutions are also listed in the attached ordinance and recommended by the consultant for inclusion in the retail-like definition and staff has also added it to the GF and R combining districts. Historically, this City has resisted allowing financial institutions or banks in the core retail zones for a number of reasons. While banks generate pedestrian traffic, it’s clientele may be more limited generating less foot traffic than other retailers. It may also result in less cross-shopping creating fewer synergistic opportunities with other land uses in the area.
Bank storefronts can be uninviting compared to the visual appeal of retailers with changing storefronts. Bank hours are also not generally aligned with evening or nighttime activity potentially reducing a retail area’s liveliness or appeal.
While banks may not have the dynamic storefront appeal of certain retailers, their presence in a pedestrian retail area can bring stability, economic support, and a steady flow of potential customers, fostering an environment where other businesses can thrive. The City Council could consider concentration limits if there was concern about too many banks being located in an area but this too begins to reduce some of the flexibility that brokers, property owners and property managers have been seeking.
Automobile Showroom
A new definition is proposed in the ordinance to allow automobile showrooms as a retail-like use. This definition is narrower than and replaces “automobile dealership” as a retail-like use.
This land use may enhance visual appeal and introduce some novelty and attraction while potentially increasing foot traffic and complement other retailers in the area. Such a land use may or may not generate sales tax revenue and may not be as appeal to all visitors to the area but it creates additional opportunities to potentially fill vacant tenant spaces. As drafted, the ordinances do not permit automobile showrooms in the GF and R overlay areas, but the Council could direct their inclusion.
Practical Waivers and Hardships
The Michael Baker International report highlights that the City’s current waiver standard, which allows the replacement of a retail space with a non-retail or retail-like use, is overly restrictive.
This standard requires property owners to prove an “unconstitutional taking of all economic value” to qualify for relief, presenting a major obstacle to adapting spaces to evolving market needs. This high threshold limits flexibility, contributing to increased vacancies as property owners struggle to meet the stringent requirements for waivers.
To address this issue, Recommendation 6 in Attachment D proposes amending zoning regulations for the ground floor and retail combining districts to incorporate more practical waivers and adjustments. Key changes include replacing the high unconstitutional taking standard with a more accessible “practical difficulty” standard, enabling property owners to seek relief more easily. Additionally, it incorporates an existing provision from the retail preservation ordinance to establish an Alternative Viable Active Use standard, permitting alternative active ground-floor uses that promote pedestrian activity and align with district goals. A request for a waiver is reviewed and approved by the City Council.
These adjustments aim to reduce vacancies, increase flexibility in space adaptation, and ultimately support the economic vitality of commercial areas.
Other Retail Ad Hoc Recommendations
The Michael Baker International report included a number or other recommendations that the Planning and Transportation Commission and Retail Ad Hoc reviewed. One of these items related AB 2097 is already scheduled for Council review, discussion and direction. Two other recommendations related to evaluating the retail preservation ordinance and exploring opportunities to allow non-retail or non-retail-like uses in the back portion of an existing retail- oriented tenant space requires further research and analysis. The recommendation in this report is for staff to work with the Planning and Transportation Commission to further develop these policies and report back to Council. Recommendation 5 in Attachment D does not require Council action and staff will follow up by preparing a handout that provides clarity on what land uses are permitted in the City’s various commercial zoning districts. There are three other recommendations that are mid- to long-term work related to comprehensively updating the City’s zoning code. This is an overdue, costly and time-consuming effort that staff intends updating the Council further during the priority setting and budget update for next fiscal year.
Lastly, there three recommendations that were not supported by the Planning and Transportation Commission or Retail Ad Hoc. One was related to the aforementioned state law concerning AB 2097 (Recommendation 4). The other two recommendations (9 and 10) relate to changes in long standing City policies concerning office floor area. Staff concurs and notes that direction to follow up on these two recommendations represents a distinct planning initiative that is not accounted for in the current department work plan and would compete with other Council priorities in the upcoming priority setting discussion.
FISCAL/RESOURCE IMPACT
The recommendation in this report does not have any significant fiscal or resource impacts.
Preparation of the ordinance and implementing policies can be absorbed through existing department funding.
STAKEHOLDER ENGAGEMENT
Michael Baker International and staff conducted stakeholder interviews with landowners, businesses, the Chamber of Commerce, and interviewed peer cities. In addition to agendized action item discussions, the PTC held six study sessions and held four PTC ad hoc meetings. As discussed in this report, the City Council‘s Retail ad hoc committee also met to discuss this on September 18, 2024.
ENVIRONMENTAL REVIEW
The recommended action is exempt from the California Environmental Quality Act (CEQA) in accordance with CEQA Section 15061(B)(3) of the CEQA Guidelines in that it can be seen with certainty that the project will not have a significant impact on the environment.
ATTACHMENTS
Attachment A: Emergency Interim Ordinance Implementing Near-Term Retail Items Attachment B: Temporary Interim Ordinance Implementing Near-Term Retail Items Attachment C: Final Retail Revitalization Report (May 2024) Attachment D: Michael Baker International Report Prioritized Recommendations APPROVED BY:
Jonathan Lait, Planning and Development Services Director