Costs rise for Palo Alto’s ‘transitional housing’ project

When Palo Alto city officials approved last month the construction of a transitional housing development near the Baylands, they acknowledged that the biggest question mark surrounding the project is its cost.

Despite uncertainty about the capital and operating costs of the 88-apartment complex, the City Council favored moving ahead with the project, with the understanding that most of the costs would be covered by a state grant as well as by private donations solicited by LifeMoves, the nonprofit that would be running the new facility at 1237 San Antonio Road.

While those assumptions still hold, city officials are now confronting the reality that the project will likely cost millions more than it had expected just weeks ago. According to a revised cost estimate that the council will discuss on Monday, Nov. 1, the project that was once projected to cost about $17.6 million now carries a $26 million price tag.

A report from city suggests that much of the difference can be attributed to revised calculations of per-unit construction costs — namely, the failure of LifeMoves staff to account for the fact that the family units at the complex would cost more to construct than the studios. The project would consist of 64 single apartments and 24 units that can accommodate up to three people.

“Given the size, the family units should have been costed as the equivalent of two single units,” the report from the office of City Manager Ed Shikada states. “This equates to approximately $4.8 million additional project expenses.”

The revised cost estimate also includes $1 million for a solar panel system that would be part of the project and $2.5 million in “contingency funding” to cover potential cost overruns in design and construction of the modular complex, which would occupy a site that formerly housed the Los Altos Water Quality Control Plant.

Despite the higher price tag, the city still expects much of the construction funding to come from outside sources. About $21 million would come from Project Homekey, the same program that helped pay for Mountain View’s new shelter at 2566 Leghorn St., a 100-unit shelter that is many ways serves as the blueprint for the San Antonio development. A private donor has also pledged $5 million for construction costs, according to staff. And the Palo Alto Community Fund announced on Oct. 14 that it plans to provide $100,000 for the shelter’s operating costs, funding that would be meted out in two $50,000 installments in 2022 and 2023.

In a letter announcing the grant, Palo Alto Community Fund Executive Director Lisa Van Dusen and board chair Bruce Gee wrote that they are “grateful to the City staff for their leadership on Project Homekey Palo Alto.”

“We will continue to support the City and LifeMoves in their efforts however possible,” Van Dusen and Gee wrote.

Even with these assurances, the project’s long-term costs remain somewhat of a wild card for the city, which is just starting to recover from the economic devastation of the COVID-19 pandemic. With sales- and hotel-tax revenues now on the rise, the council began on Monday the process of adding staff and restoring services that had been cut over the past two years. The LifeMoves project is a factor in that discussion. Council member Alison Cormack observed during the Monday discussion that costs for the project are rising and urged her colleagues not to “run off and start allocating money that we either do or don’t have yet.”

But Deputy City Manager Chantal Gaines suggested that the project is unlikely to require significant contributions from the city in the near term. Gaines said the facility will require about $7 million in operating expenditures over the next seven years, though given the availability of alternate funding sources, the city will likely be able to defer its own expenditures. The Homekey grant, if approved, would cover the operating costs for the first two years, while Santa Clara County has pledged to cover an additional two years. This means that the city could potentially defer spending money on the shelter’s operations until its fifth year.

“If it’s tighter for us in the next fiscal year, I think we’ll be able to have flexibility to make the city’s contributions come in subsequent years,” Gaines said. “We’re still looking at a lot of these details.”