Departure of Fry’s Electronics leaves Palo Alto with a zoning dilemma

Few properties epitomize Palo Alto’s planning failures better than 340 Portage Ave., which is zoned for high-density housing but which for decades has been dominated by retail, office and research uses.

In 1995, the City Council agreed that all nonconforming uses at the site should be concluded by July 2019, at which point the site would convert to housing. But in 2006, the council tried to mollify the site’s anchor tenant, Fry’s Electronics, but scrapping the termination clause and effectively allowing commercial use to be retained indefinitely.

That decision continues to reverberate today, as the city is looking to forge a new vision for the Ventura neighborhood, which includes 340 Portage, and to meet a regional mandate that calls for Palo Alto to plan for more than 6,000 new housing units between 2023 and 2031. Even though Fry’s Electronics vacated its space in December 2019 and the Portage Avenue site remains listed on the city’s housing inventory (with a “realistic capacity” of 221 residences), the council’s action in 2006 means that the type of residential development that city leaders have long envisioned is unlikely to occur in the near future.

The site’s owner, The Sobrato Organization, has resisted calls to redevelop the site as housing, even as it is proceeding with a different residential project, which includes 91 townhomes nearby at 200 Portage Ave. And while the city’s zoning code states that nonconforming uses that are “discontinued” or “abandoned” for one year or more “shall not be resumed,” suggesting that the Fry’s space should now be used for housing, Sobrato has challenged this view and argued that even though Fry’s had left more than a year ago, the space has not been “discontinued” or “abandoned.”

“To the contrary, we have remained diligent, active and continuous in our efforts to re-tenant the vacant space during the COVID-19 global pandemic, which has created enormous challenges and affected retail even more than most other types of land use,” Tim Steele, senior vice president for real estate development at Sobrato, wrote to the city in May.

Even if the council buys this explanation and allows nonconforming uses to remain, it will have to answer another question: What types of businesses should be allowed to fill the 84,000-square-foot space left behind by Fry’s?

On Monday, the council will try to answer the question by considering two different approaches to this dilemma. The zoning code requires nonconforming uses at the site — namely, retail, research-and-development, warehouse and storage — in “approximately the same ratio” that existed in 2006 and limits retail space to 60,000 square feet.

Planning staff had determined that this could be interpreted in two ways. Under one scenario, the departure of one tenant would require the property owner to reshuffle its leases to maintain the same ratio of nonconforming uses that existed in 2006. This would likely require Sobrato to terminate existing leases with tenants to achieve the needed balance, according to a report from planning staff.

Under another interpretation, which is supported by Sobrato, the ratio would not pertain to the mix of businesses but rather to the footprint of each existing nonconforming tenant in the building. As long as these uses don’t expand, they would be allowed to remain in place even if another business leaves.

The council’s interpretation of the zoning code could have a ripple effect well beyond 340 Portage. The site is a critical component of the 60-acre area for which the city is crafting a new vision as part of a process known as the North Ventura Coordinated Area Plan. What happens — or doesn’t happen — at 340 Portage will thus likely influence the city’s plans for other portions of the north Ventura area.

The decision will also give the council a rare opportunity to exercise some power over the future of a critical site for potential housing after 15 years of helplessly watching commercial uses occupy it and leave. Planning Director Jonathan Lait, who typically makes zoning interpretations, cited in his report the “significant public interest in present and future uses of the site,” which prompted him to seek direct guidance on the matter from the council.

“This code interpretation provides immediate clarity to the property owner and staff regarding the allowed mix of nonconforming uses in the building,” Lait wrote. “Staff anticipates that the property owner would utilize the information to inform any future proposals for this property or to otherwise determine if the building is currently in conformance with the code.”