The council held a closed session on Monday to discuss Sobrato's concerns. It did not take any reportable action.
The property, which is often referred to as the "Fry's site," is a key component of the North Ventura Coordinated Area Plan, a vision document that the city has been working on since 2019, and is zoned for multifamily residential use (RM-30). The city's housing documents have for decades envisioned the area as a future site for housing, and the city's existing Housing Element states that it has a "realistic capacity" for 221 dwellings.
Despite the long-term vision for housing, the council voted in 2006 to allow the electronics store to operate there as a "non-conforming use," a move that was intended to keep the revenue-generating business in town. Under city law, a "non-conforming" designation is discontinued if the use is abandoned and not reestablished within a year. Given that the vacancy at 340 Portage has now met the threshold, staff has suggested that it's time to reevaluate the uses at the site and potentially switch to residential.
While the city's vision of housing on Portage Avenue remains in the distance, council members are wrestling with a more immediate concern: What sort of commercial uses should be allowed at the site now that Fry's is gone? Along with startups, the sprawling site includes a mix of small tech companies and research-and-development firms. The council required in 2006 that the property owner maintain the "ratio of non-conforming uses in the building" that existed at the time, a tricky proposition for Sobrato now that Fry's is no longer in the mix and one that would require it to use some of its existing research-and-development space for retail.
Sobrato argued in a letter last September that the primary value of the property, which it purchased in 2011, is in the 142,774 square feet of research-and-development space and that reducing this space by "any material amount" would create uncertainty and significantly impact the value of the property. The company also argued that requiring it to re-balance its uses would constitute a "taking" under the Fifth Amendment. Such a condition, the letter argues, cannot be made without an amortization study that analyzes the economic impact of the zoning interpretation.
Attorney Tamsen Plume of Holland & Knight LLP, who is representing Sobrato, argued in the letter that to pursue the staff interpretation of the zoning law without commissioning such a study would be "unreasonable and arbitrary and creates substantial legal risk."
"In the event that the City Council approves the recommended interpretation without amendment, please be advised that Sobrato will exercise its rights under the Takings Clause of the Fifth Amendment of the United States Constitution made applicable to the states through the Fourteenth Amendment and Article 1, section 19 of the California Constitution."
Council members have generally supported an amortization study for the Fry's site, with the idea that this would establish a reasonable timeframe for Sobrato to convert the property to residential use while recouping its investments. During its last discussion of the topic in June, council member Tom DuBois spoke for most of his colleagues when he said that the goal is to have retail and housing at the site.
DuBois also argued that the goal of converting the land to residential use has only grown more urgent given recent state mandates that require cities to plan for additional housing. Under the Regional Housing Needs Assessment process, Palo Alto is required to identify locations for 6,086 new dwellings that could be constructed between 2023 and 2031. By revising the zoning codes, past councils were trying to both help the property owner and retain their vision for ultimately building housing.
"The council's intent has been to have retail and also an interest in underlying residential zoning," DuBois said at the June 14 meeting.
The council agreed at the time that the zoning code requires Sobrato to retain the same mix of retail, warehouse uses and research-and-development that was in existence in 2006, the finding that the property owner is now challenging. The council also opted not to impose this requirement immediately but to give planning staff more time to negotiate with Sobrato and come up with a solution. Members also generally supported pursuing an amortization study that would pave the way for establishing residential space at the site.
"If we were going to go on the basis of historical intent, then the amortization needs to come back," council member Eric Filseth said.
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