CITY COUNCIL
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Planning and Development Services
Meeting Date: June 15, 2026
Report #: 2605-6424
TITLE
FIRST READING: Adoption of an Ordinance to Amend Palo Alto Municipal Code Title 18 (Zoning) Section 18.18.120 (Noncomplying Uses and Facilities) to Allow Existing Floor Area to be Replaced in New Buildings Without Increasing the Degree of Existing Non-Compliance as Recommended by the Economic Development Committee. CEQA Status: Exempt from CEQA per Section 15061(b)(3) (Common Sense Exemption).
RECOMMENDATION
The Economic Development Committee and staff recommend that City Council adopt an ordinance to modify Palo Alto Municipal Code (PAMC) Section 18.18.120 consistent with the applicant’s request.
EXECUTIVE SUMMARY
On August 15, 2022,1 City Council held a prescreening for an applicant proposed text amendment to PAMC Section 18.18.120 to allow modifications to the requirements for non- complying uses and facilities in the Commercial Downtown (CD) District. Although the applicant chose not to pursue the code change at that time, a formal application for that text amendment has since been filed.
On October 8, 2025, the Planning and Transportation Commission (PTC) held a study session and provided feedback on the proposed code change.2 On February 25, 2026, the PTC voted unanimously to recommend Council approval of the applicant’s proposed text amendment.
On June 3, 2026, the Economic Development Committee voted unanimously to recommend Council approval of the proposed Ordinance to Amend Palo Alto Municipal Code Title 18 (Zoning) Section 18.18.120 (Attachment A).
The proposed amendment removes PAMC Section 18.18.120(a)(2)(C) and (b)(2)(C), allowing replacement of existing noncomplying floor area through renovation or new construction 1 Link to the August 15, 2022, City Council Meeting Study Session (Agenda Item 3):
https://cityofpaloalto.primegov.com/Public/CompiledDocument?meetingTemplateId=9028&compileOutputType=1 2 Link to the October 8, 2025, PTC Staff Report (Agenda Item 3):
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16596
without restriction to the existing building envelope (the three-dimensional shape and size occupied by an existing building), currently referred to as the “shrink wrap rule.”
BACKGROUND
The June 3, 2026, Economic Development Committee report includes a detailed summary of the legislative history of this code section, Council input associated with the 2022 prescreening for the zoning text amendment, and the ongoing City-led initiatives affecting the commercial downtown district.5
Economic Development Committee Review
On June 3, 2026, the Economic Development Committee reviewed the proposed text amendment and unanimously recommended City Council approve the ordinance to amend PAMC Section 18.18.120 (Attachment A).
Planning and Transportation Commission Review
On October 8, 2025,6 the PTC held a study session on the proposed code amendment and provided general feedback supporting efforts to clarify the Zoning Code and reduce barriers to reinvestment in existing buildings, while noting concerns about avoiding unintended increases in redevelopment flexibility beyond pre-2016 standards. The Commission did not take formal action and continued the item to allow additional staff analysis and coordination with other ongoing policy initiatives.
On February 25, 2026,7 the PTC considered the revised Zoning Text Amendment in the context of broader downtown planning efforts, including the Downtown Housing Plan, Senate Bill (SB) 79 implementation, and the Housing Element update. Discussion focused on the implications of modifying the “shrink wrap rule” on redevelopment feasibility, including effects on noncomplying buildings, potential housing production, mixed-use redevelopment, and commercial reinvestment, as well as related considerations around seismic safety and building modernization. Commissioners also discussed uncertainty regarding the scale of potential redevelopment and housing outcomes, and the appropriate timing of advancing the amendment relative to other City initiatives.
By a 6-0 vote (Vice Chair Chang absent), the PTC recommended City Council approve the applicant’s proposed text amendment.
Project Description
The applicant requests approval of a Zoning Text Amendment, which would amend PAMC Section 18.18.120 [Noncomplying (Grandfathered) Uses and Facilities] by removing subsections
18.18.120(a)(2)(C) and 18.18.120(b)(2)(C). While PAMC 18.18.120 currently allows 5 June 3, 2026, Economic Development Committee Meeting Agenda Item 2:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=20451 6 October 8, 2025, PTC Meeting Agenda Item 3:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16596 7 February 25, 2026, PTC Meeting Agenda Item 3:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=19288 noncomplying uses and facilities to be repaired, renovated, or rebuilt, it requires that any reconstructed noncomplying floor area remain within the original building envelope. The proposed amendment would allow greater flexibility in how noncomplying floor area is replaced. Specifically, buildings could maintain their respective non-complying floor areas, but could have differing heights, footprints, and building envelopes when redeveloped. However, below-grade floor area still cannot be moved above grade. These building changes would still be subject to the governing CD District regulations and would not increase the degree of existing non-complying floor area.
Further, staff is recommending removing the references of “grandfathered” from the code section due to its negative connotations. A draft ordinance is provided in Attachment A.
Attachment B includes the applicant’s request letter that accompanies the proposed text amendment.
ANALYSIS
The analysis below assesses how many properties may be affected by the proposed amendments and highlights policy considerations given the context of other ongoing city-lead initiatives.
Affected Properties
The text amendment to PAMC Section 18.18.120 would affect properties with “noncomplying” or “grandfathered” structures in the CD district. Of the 302 parcels in CD District (228 Property Parcels and 74 airspace subdivisions), 66 contain a noncomplying floor area ratio above 1:1 that would be directly impacted. Out of those 66 parcels, 19 parcels were redeveloped within the last 30 years. Attachment C provides a map of these properties, with the key data summarized below:
302 total parcels zoned CD (228 Property Parcels and 74 airspace subdivisions) 66 parcels with historic resources (Not subject to text amendment) 66 parcels with more than 1:1 FAR (Subject to text amendment) 87 parcels with commercial remodels/additions from building permits from 2011-2025 35 parcels built within the last 30 years (unlikely to rebuild soon), 19 of which are over 1:1 FAR
The conclusion of this data is that there are approximately 66 parcels that may be directly affected by the text amendment. However, 19 of those were more recently developed and less likely to take advantage of this proposed code provision in the near term, if adopted.
Policy Considerations
Historically, Council has taken a conservative approach to noncomplying structures, balancing the preservation of existing development patterns with opportunities for reinvestment and modernization. From 1988 to 2016, the City allowed noncomplying buildings to be remodeled or replaced provided that noncomplying floor area or other noncomplying features did not increase. Ordinance 537317 in 2016, added more specificity and defined “Building Envelope”, which had the effect of limiting redevelopment. Staff anticipates the applicant’s proposed amendment would restore redevelopment flexibility that existed prior to 2016, rather than introduce new development potential beyond what was historically allowed.
The proposed amendments encourage redevelopment of downtown commercial sites by allowing owners to modernize spaces and improve site design when redeveloping. This furthers goals and policies in the Comprehensive Plan related to safety, energy efficiency, and pedestrian-oriented design pursuant to current building and municipal code requirements. For these reasons staff supports revisiting the current “shrink wrap rule.” Staff had previously recommended to the Planning and Transportation Commission that this amendment be considered in the context of other downtown initiatives that are currently underway. While staff still believes there could be a benefit linking the subject amendment to housing production policies, the net gain in housing is likely less than 100 units (and probably more on the order of 20 units). Moreover, advancing this ordinance now does not prevent the city from exploring additional incentives with continued work on the Downtown Housing Plan.
The applicant proposed text amendment may also create opportunities for improved ground floor retail space and pedestrian orientation.
FISCAL/RESOURCE IMPACT
The recommendation in this report is not anticipated to have any fiscal or resource impact to the City. While office uses do not generate year-over-year direct tax revenue for the City, renovated buildings could accommodate a range of uses permitted under the zoning district, which would be determined by future tenants and property owners. These uses may result in indirect benefits, such as office-driven foot traffic that may support nearby retail downtown, which could partially offset the difference in tax revenue compared to retail and retail-like uses that more directly contribute to the sales tax base.
STAKEHOLDER ENGAGEMENT
Across the three public hearings staff received consistent feedback from stakeholders that this amendment would help address a development barrier and allow greater flexibility with reinvestment downtown. The Palo Alto Municipal Code requires notice of this public hearing to be published in a local paper at least ten days in advance. Notice of a public hearing for this project was published in the Daily Post on May 22, 2026, which is 13 days in advance of the meeting.
ENVIRONMENTAL REVIEW
The draft text amendment is considered categorically exempt from the California Environmental Quality Act (CEQA) under CEQA Guidelines Section 15061(b)(3), the common sense exemption, because it can be seen with certainty that there is no possibility that the activity in question may have a significant effect on the environment. While the amendments would allow changes to building envelopes (the three-dimensional shape and size occupied by an existing building, not the maximum buildable potential of the site) when replacing noncomplying floor area, such projects would be limited to reconfiguring existing floor area without increasing the degree of noncompliance. These potential reconfigurations would involve negligible expansions of existing or former uses that are still subject to compliance with their governing zoning district regulations, City design guidelines, and project-level CEQA review.
ATTACHMENTS
Attachment A: Draft Ordinance
Attachment B: Applicant’s Request Letter
Attachment C: Parcel Disposition Map
APPROVED BY:
Jonathan Lait, Planning and Development Services Director