City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Planning and Development Services
Meeting Date: March 3, 2025
Report #:2412-3948
TITLE
FIRST READING: Adoption of an Ordinance Amending Palo Alto Municipal Code Title 18 (Zoning) to Modify the Housing Incentive Program, Affordable Housing Incentive Program, and Retail Preservation Ordinance (Housing Element Programs 3.3A, B, and D; 3.4A-D; and
6.2A). CEQA Status -- Addendum to the Comprehensive Plan Environmental Impact Report (EIR), adopted December 18, 2023 (SCH #2014052101).
RECOMMENDATION
Staff recommends that the City Council amend Title 18 (Zoning) of the Palo Alto Municipal Code (PAMC) (Attachment A) to implement Programs 3.3A, B, and D, 3.4A-D, and 6.2A of the Housing Element regarding the Affordable Housing Incentive Program (AHIP), Housing Incentive Program (HIP), and Retail Preservation Ordinance.
EXECUTIVE SUMMARY
The 2023-2031 Housing Element, adopted by the City Council on April 15, 2024, and certified by the California Department of Housing and Community Development (HCD) on August 20, 2024, includes two key implementation programs to support affordable and market-rate multifamily housing development beyond the housing sites inventory:
•Housing Element Program 3.3 outlines amendments to the Affordable Housing Incentive Program (AHIP) to streamline, incentivize, and improve project feasibility of affordable housing projects.
•Housing Element Program 3.4 seeks to expand development incentives in the Housing Incentive Program (HIP); extend the HIP to additional zoning districts to facilitate housing production; and modify the Retail Preservation Ordinance to reduce constraints on housing development.1
1 This draft ordinance does not include implementation of Program 3.3C regarding State Density Bonus Law updates, nor Program 3.4E regarding the El Camino Real Focus Area expansion, which will proceed through separate work efforts.
Incentives for larger units (3+ bedrooms) through the HIP also serve to implement Housing Element Program 6.2A.
The Background section of this report describes the existing HIP and AHIP programs and the Retail Preservation Ordinance, which is also affected by these modifications. The Analysis section outlines proposed amendments consistent with the Housing Element programs discussed above. The Analysis section also presents financial and physical feasibility analyses prepared to identify specific changes to development standards; and compares the relative benefits and drawbacks of incentive programs available to developers (see Attachment F).
BACKGROUND
The City of Palo Alto 2023-2031 Housing Element aims to implement State Housing Element law. As shown in Attachment C, to support those objectives, Housing Element Programs 3.3 (AHIP) and 3.4 (HIP) provide incentives for development of affordable and multifamily housing, respectively. This Background section also includes a brief description of State streamlining incentives and the Retail Preservation Ordinance that provide context for the proposed ordinance changes.
Housing Incentive Program (HIP)
The HIP program was enacted in 2019 as a local alternative to the State Density Bonus law. It allows for development incentives including no residential density restrictions, increased floor area ratios, and increased lot coverage. The program requires Architectural Review and the Planning & Development Services Director to approve the specific increases in development standards. The HIP does not require additional below-market rate units beyond the City’s existing inclusionary housing requirement. The only eligibility criterion is that the HIP is applicable in certain commercial mixed-use districts and locations.
The City has approved two development projects that utilized the HIP to create a total of 105 units, including a 3-unit and 102-unit project. However, given recent changes in State Density Bonus Law and other State-level streamlining bills, changes to the HIP are warranted to make sure that the program is providing a real incentive compared to State law.
The City approved a
102-unit residential
mixed-use
development at 788
San Antonio Road.
The project, which
includes 16 below-
market rate units,
was awarded
additional
residential density
through the HIP.
Affordable Housing Incentive Program
The City enacted an Affordable Housing Overlay in 2018 to promote 100% affordable housing development. In July 2022, the City modified the Affordable Housing Overlay district into the AHIP program to streamline the approval process. Currently, AHIP projects are eligible for increased density, taller heights, and reduced parking ratios, among other benefits. Eligibility is currently limited to projects that are:
•100% affordable rental housing (up to 120 percent of Area Median Income [AMI]); •Located within ½ mile from CalTrain or ¼ mile from a bus transit corridor; and •Located in the CD, CC, CN, CS, or North Ventura zoning districts.
The City has received only one development project application utilizing the AHIP. Given the narrow eligibility criteria and recent changes in State Density Bonus Law, changes to the AHIP are warranted to make sure that the program is providing a real incentive for affordable housing development compared to State law.
Wilton Court, at
3705 El Camino Real,
used the AHIP to
increase residential
density otherwise
allowed at the site
and construct 59
units affordable to
low-income
households.
State Streamlining Incentives
Recent State laws offer qualifying development projects streamlined review, often with limited public hearings and/or subject to ministerial approvals. The City originally developed the HIP and AHIP incentive programs to retain full architectural review by the Architectural Review Board (ARB) in exchange for relaxed development standards. However, for these local programs to be effective and used, they must provide incentives for developers that exceed what is attainable under State law. Recent and commonly used State law programs are summarized and compared to the HIP and AHIP in Attachment F.
Retail Preservation Ordinance
In 2015, the City Council adopted an interim urgency ordinance prohibiting the conversion of ground floor spaces used for retail and retail like uses (i.e., restaurants and personal services)
to office or other uses. At that time, there was a trend of retail being replaced by office uses.
The Council adopted a permanent ordinance in 2017. It requires redevelopment projects to replace any existing ground-floor retail, restaurant, or service uses on a square foot basis.
The 2023-2031 Housing Element identified the retail preservation ordinance as a potential constraint to housing development. Program 3.4B calls for specific waivers from and modifications to these regulations to accommodate more housing density and affordability while focusing retail development in the most desirable locations in Palo Alto.
Planning & Transportation Commission (PTC) and Architectural Review Board (ARB) Review The PTC and ARB held study sessions on September 25, 2024, and October 3, 2024, respectively, to discuss planned and potential modifications to the HIP and AHIP. On December 17, 2024, the PTC held a public hearing on the resulting draft ordinance and recommended that the City Council adopt the ordinance unanimously (6-0 vote). The PTC provided the following comments, which have been incorporated in the draft ordinance (Attachment A):
•Provide floor area ratio (FAR) bonus for providing 3+ bedroom units; and •Extend AHIP eligibility to include all sites eligible for the HIP.
Additionally, the PTC requested the following considerations for future study:
•Consider allowing an additional five feet of allowed height for projects using the HIP/AHIP;
•Consider eliminating FAR standard for the HIP/AHIP citywide; and •Consider additional commercial nodes on El Camino Real and return to the PTC to review them within the first quarter of 2025.
City staff expect to consider the suggested additional building height and FAR modifications as part of a future citywide comprehensive zoning update. Since the City does not regulate residential density (i.e., dwelling units per acre) in many districts, removing FAR would remove almost all density/intensity limitations (setbacks and height/daylight plane would be the primary controls). This has implications for how the City calculates density bonuses under State Density Bonus Law and would eliminate one of the key incentives for applicants to use the HIP/AHIP programs—which provide greater FAR and residential density— compared with State Density Bonus Law. In addition, City staff anticipate returning to the PTC and Council later this year to making further updates to the City’s retail regulations. This could include further modifications to the policies and El Camino Real commercial node boundaries.
ANALYSIS
This section explains key aspects of the draft ordinance (Attachment A). Table 1 summarizes the substantive changes by chapter or section of the Municipal Code. Annotations in the margins of Attachment A further guide the reader about the rationale for key changes.
Table 1: Summary of Draft Ordinance
Chapter/Section Summary of Proposed Modification
18.14.030:
Housing
Incentive
Program
•Consolidate HIP regulations from Chapters 18.16 and 18.18. •Update development standards:
Increase FAR and building height maximums (see Attachment G for details of existing rules and proposed changes).
Reduce parking ratios to match State Density Bonus Law. Revise daylight plane and reduce front/street side setbacks. Allow bonus density/FAR for “family-friendly” (3+ bedroom units) (see Attachment G for an analysis of proposed changes). •Expand eligibility to include RM districts and GM/ROLM Focus Area. •Expand transportation demand management measures.
•Streamline process for projects that meet objective design standards, with cross-reference to Section 18.77.073: Streamlined Housing Development Project Review.
•Remove separate development standards for 100% affordable projects (and relocate to AHIP).
18.14.040:
Affordable
Housing
Incentive
Program
•Relocate Chapter 18.32 Affordable Housing Incentive Program. •Increase FAR and building height, reduce parking ratios, and streamline review process.
• Expand eligibility to include all locations eligible for the HIP.
18.40.180: Retail
Preservation
•Modify exemptions and partial exemptions in subsection (4). •Waive retail preservation requirement on Housing Element opportunity sites.
•Retain existing retail requirements in the Ground floor (GF) and Retail (R) combining districts and in commercial nodes on El Camino Real. •Reduce replacement retail floor area requirement in other locations. •Create incentives for ground-floor retail (i.e., parking reduction for first 1,500 square feet of retail and additional 5 feet of height). •Standardize definitions for 100% affordable housing and clarify meaning of existing regulations.
The draft ordinance also includes minor modifications to base district regulations to consolidate and add cross-references to the new housing incentive regulations in Chapter
18.14. As shown in Attachment C, Housing Element Program 3.3 provides explicit direction on the modifications to be made to the AHIP and so they are not discussed further here.
Incentives for Larger Units
As noted in Table 1, the draft ordinance provides an incentive for projects that include larger units (projects in which at least 10% of the proposed units are 3+ bedroom units). This incentive includes unlimited residential density and/or FAR bonuses of 0.5 FAR. This proposed amendment also implements Housing Element Program 6.2A: study to incentivize larger units:
Research and implement incentives to encourage larger units, such as FAR exemptions for three or more bedroom units, and creation of family-friendly design standards.
Meet with housing stakeholders and conduct public hearings before the Planning and Transportation Commission to receive public and commissioner input on ways to achieve stated objective. Make recommendations to Council and follow up with an ordinance to effect a change in local zoning regulations as directed.
The 10% minimum threshold for 3+ bedroom units results from conversations with four developers and architects and evaluation of eight proposed or recently approved multi- family projects in Palo Alto. This threshold is intended to stretch project applicants to achieve this incentive, while still being a realistic goal. A higher threshold is unlikely to be achieved except for townhome projects (which do not need unlimited density nor FAR bonuses).
Retail Preservation Ordinance Modifications
Housing Element Program 3.4B calls for changes to the Retail Preservation Program, separate from the HIP changes. As listed in the table above, the modifications are within the Exemptions section and include:
1. Waive retail preservation requirement on Housing Element opportunity sites. (State law requires 100% residential development be allowed on sites identified as accommodating lower income housing units. To simplify administration and support housing production and affordability outside of priority retail areas, the draft ordinance extends this waiver to all Housing Element opportunity sites.)
2. Retain retail requirements in the:
a. Ground floor (GF) combining district;
b. Retail (R) combining district; and
c. Commercial nodes on El Camino Real.
3. Reduce replacement retail floor area requirement in other locations.
4. Create incentives for ground-floor retail (i.e., parking reduction for first 1,500 square feet of retail and additional 5 feet of height).
5. Clean-up existing regulations to clarify intent and standardize definitions for 100% affordable housing exemptions.
The draft ordinance outlines four “nodes” on El Camino Real, where the retail preservation ordinance would continue to apply. These nodes are intended to provide clarity to the general areas shown in the South El Camino Design Guidelines for pedestrian-oriented nodes and were also informed by site visits and the recently adopted North Ventura Coordinated Area Plan (NVCAP). Figure 1 identifies the following nodes for required ground-floor retail and retail preservation:
1. California Avenue: The intersection of El Camino Real and California Avenue to continue this dynamic retail corridor, especially at the El Camino terminus.
2. NVCAP: The North Ventura area where the NVCAP requires ground-floor retail along the El Camino Real frontage.
3. Focus Area: The El Camino Focus Area frontage, where large sites combined with more genera Focus Area allows for higher density development close to existing retail development on California Avenue and El Camino Real.
4. Triangle/El Camino Way: A smaller scale and block pattern, with existing crosswalks across El Camino Way that are more conducive to pedestrians, existing restaurants and retail uses, and Housing Element opportunity sites that allow for redevelopment of housing with ground-floor retail.
For Housing Element opportunity sites located within these nodes a developer will still have the ability to build a 100% residential project. However, if they wish to use the incentives of the HIP program, then retail replacement would be required. Existing regulations allow a reduced retail replacement requirement of up to 1,500 sq. ft. for higher density housing projects (at least 30 units/acre) outside of the GF and R combining districts. The draft ordinance extends this reduction outside of these nodes and exempts this commercial area from required parking. This amount of commercial floor area would accommodate a small cafe or retail establishment but provides more flexibility at the ground-floor than current requirements.
Attachment I provides examples of how the retail preservation ordinance applies to different locations, project types, and affordability levels, and highlights changes between the existing and proposed regulations.
Figure 1: El Camino Real Required Retail Nodes
Physical and Financial Feasibility Studies to Evaluate Potential Changes to the HIP As required by Housing Element Program 3.4, City staff and consultants prepared physical and financial feasibility studies to determine the types and densities of housing that current zoning standards2 produce and to determine whether these housing types are likely to be financially feasible for a developer to build.
Attachment D illustrates the physical models prepared by architects at Urban Field Studio and planners at Lexington Planning and reports the high-level financial feasibility findings prepared by economic consultants, Keyser Marston Associates (KMA). Attachment E is the detailed report on KMA’s financial feasibility findings.3 Figure 2 (below) summarizes this process and the outcome of the studies.
2 Notably, these analyses exclude zoning changes that went into effect in January 2024 on Housing Element opportunity sites. These recent changes improve physical and financial feasibility on opportunity sites only. Modifications to the HIP are expected to assist developers/property owners of sites that are not listed as opportunity sites, but will also further improve feasibility on opportunity sites.
3 Financial feasibility findings are based on assumptions about costs, land values, and profits that are averages, and represent KMA’s local research and professional opinions. These assumptions may not reflect the economic situations and assumptions for individual sites and developers, based on their specific values and priorities.
Figure 2: Feasibility Analysis – Process and Outcome
Figure 3 illustrates an example of the physical feasibility analysis detailed in Attachment D.
Architects modeled what existing standards yield (image and column at left) and then modified various standards to try to increase yield (image and column at right). In general, this process aimed to keep building height increase to no more than 10-20 feet (one to two stories) and retain on-site parking.
However, zoning standards are interconnected; there are tradeoffs that the City can consider when evaluating changes to standards. For example, reducing parking can free up space at the ground-level for housing units or commercial spaces without substantial changes to building height. If side/rear setbacks and daylight planes are priorities, then building heights may need to be higher and front/street side setbacks lower to achieve sufficient yields. In the example in Figure 3, the architects increased building height, reduced the rear setback,
modestly reduced the parking requirement, met the open space requirement on top of the podium, and substantially increased the FAR. This results in an increase from four to seven units.
Figure 3: Excerpt from Physical Feasibility Report (see Attachment D) The result of this analysis, and subsequent discussion with the ARB and PTC is a draft ordinance that modifies maximum FAR and building height, reduces parking ratios, revises daylight planes, and reduces front/street side setbacks, as described in Table 1 above.
POLICY IMPLICATIONS
As part of the implementation of Program 3.2 (Monitor Constraints to Housing) of the Housing Element, the City committed to prepare an analysis in staff reports for initiatives proposing new regulations. This analysis details how the regulations may impact housing production, if at all, and recommend solutions to address any adverse impacts.
The draft ordinance implements the following Housing Element programs:
•Housing Element Program 3.3A, B, and D to streamline, incentivize, and improve project feasibility of 100% affordable housing projects. •Housing Element Program 3.4A-D to expand development incentives in the Housing Incentive Program (HIP) and extend the program to additional zoning districts to facilitate housing production. Based on quantified objectives in the Housing Element, this modification is anticipated to generate 550 housing units. •Housing Element Program 6.2A to incentivize larger units and create family-friendly housing.
As a result, the draft ordinance would help affirmatively affirm fair housing goals expressed in the Housing Element by revising zoning in a range of high resource areas and different locations within the City, including: existing residential neighborhoods, along commercial corridors, in the GM/ROLM Focus Area, as well as in Downtown and California Avenue. This ordinance also supports implementation of Housing Element Goal 2.0 (Affordable Housing) and Goal 3.0 (Housing Development).
FISCAL/RESOURCE IMPACT
The implementation of the proposed ordinance is not anticipated to have any direct fiscal impacts on the City budget.
STAKEHOLDER ENGAGEMENT
Preparation of the Housing Element included a range of community outreach methods, including surveys, Working Group meetings, community workshops, and public hearings.
Hundreds of community members have participated in the Housing Element update over the course of the project. City staff and consultants are working with developers and architects familiar with the City’s regulations to test potential standards. Community members have an opportunity to provide feedback on the draft standards at PTC, ARB, and City Council study sessions and public hearings.
ENVIRONMENTAL REVIEW
On April 15, 2024, the City Council adopted Resolution No. 10155, approving an Addendum to the Comprehensive Plan Environmental Impact Report (EIR). The addendum analyzed potential environmental impacts of the 6th Cycle Draft Housing Element. This includes implementation of Housing Element Programs 3.3, 3.4, and 6.2, and associated increase in housing production including and beyond what was projected by the RHNA and Housing Element sites inventory.
ATTACHMENTS
Attachment A: Amendments to Title 18 to Implement Housing Element Programs 3.3A, B, and D and 3.4A-D
Attachment B: HIP and AHIP Applicability Map
Attachment C: Excerpt from 2023-2031 Adopted Housing Element Program Attachment D: Physical Feasibility Analysis Report
Attachment E: Financial Feasibility of Multifamily Housing Typologies (Executive Summary; link to full report)
Attachment F: Comparison of HIP/AHIP vs. State Law Incentive Programs Attachment G: Summary of Draft Density, FAR, Building Height and Daylight Plane Modifications
Attachment H: State Density Bonus Law Handout
Attachment I: Retail Preservation Ordinance Example Matrix APPROVED BY:
Jonathan Lait, Planning and Development Services Director