Palo Alto Builds Historic Strength

The epicenter of avant-garde tech innovation relies on grace of historic buildings

THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JULY 2012

By Maria Shao

It makes for an interesting mix. On one side of the block, a cavernous sports bar opens onto the sidewalk. Next door, a New Orleans-style restaurant beckons from a courtyard featuring a Spanish fountain and colorful inlaid tiles. Across the street, pedestrians stroll by a wine lounge, jewelry boutique, nail salon, Venezuelan coffee bar and venture-capital offices. The diverse businesses are ensconced in vintage buildings with the arches, decorative windows and orange-tiled roofs that are hallmarks of California’s Spanish Colonial architecture. The lively street scene blends old and new into an ambience of casual elegance.

Monty Anderson

The 500 block of Ramona Street in downtown Palo Alto is also a showcase for the Peninsula city’s innovative policies to encourage the preservation of historic buildings. Several structures on the block are among the nearly two dozen in Palo Alto that have been rejuvenated under a city incentive program for developers and commercial property owners. Launched in 1986, the incentives have helped ensure downtown Palo Alto’s success as an exceptionally attractive location for start-up and mature companies.

Palo Alto is under constant development pressure. The city enjoys some of the Bay Area’s lowest commercial real estate vacancy rates. Its downtown, with its proximity to Stanford University, has a reputation as a prestigious address and cultivating influence for up-and-coming tech companies, including PayPal Inc., Google Inc. and Facebook Inc. in their early years. Employers like the downtown’s proximity to public transit and abundance of restaurants and shops. Venture capital consistently generates new tenants and leasing demand, and Palo Alto real estate values are among the highest in the country. It all creates opportunity for historic building renovations that can boost values and pay handsome returns.

The preservation measures are aimed at enticing owners and developers to renovate older buildings rather than demolishing and building new ones, which typically cost less. “The city has struck a tone that historic buildings are here to stay. The community values them. They didn’t want to see development pressures wipe out their historic resources,” said Montgomery Anderson, a principal at Palo Alto’s Cody Anderson Wasney Architects, which has worked on a dozen projects involving the preservation incentives.

Historic buildings, generally at least 50 years old, can contribute much to the vitality of a downtown. “They are very important. They have character,” said Roxy Rapp, a Palo Alto developer who has been involved in four restoration projects. “Historic buildings are a part of the fabric of community. They help give us our sense of place,” Anderson said.

[pullquote_right] “Often, that’s where the value of this [preservation] incentive is–in the relief from parking.” Montgomery Anderson, principal, Cody Anderson Wasney Architects[/pullquote_right]Dennis Backlund, Palo Alto’s historic preservation planner, counts 22 buildings that have been rehabilitated under the city’s preservation incentives, almost all since the mid-1990s when property values began climbing. “Incrementally, it is transforming the downtown into a more unique downtown that’s at a higher level of decorative appearance. It makes the whole downtown more upscale. It has created a sumptuous environment,” said Backlund, a Palo Alto native who lives in a historic apartment building on University Avenue, downtown’s main thoroughfare.

Older buildings that are restored and maintained well also can bring economic benefits. “Having multiple buildings in good shape in the same district helps the rent and the vibrancy of the district. It’s better for leasing and for pride of ownership,” said Jon Goldman, a partner at Palo Alto’s Premier Properties Management, which has been involved in a dozen historic-preservation transactions in the city.

It’s not surprising that Palo Alto is a leader in preservation. The city has a rich architectural heritage, with many early 20th century buildings in the Spanish Colonial Revival-style popularized by local architects such as Birge M. Clark (1893-1989).

Palo Alto city planners and preservationists tailored the rehab incentives to the downtown market, where space and parking are at a premium. The city awards the owner of a historically significant building in the downtown the right to develop bonus square footage in return for restoring and maintaining the structure according to national rehabilitation standards. But here’s the real carrot: The bonus space is exempt from city requirements to fund additional downtown parking, a substantial expense. In addition, the historic property owner can sell the bonus development rights—and parking exemption—to the owner or developer of a modern site elsewhere downtown. Hence, the historic site owner can raise money for the renovation. “Any developer will become a preservationist if it pencils out,” said Anderson.

“It’s largely found money for the seller,” said Jim Baer, a longtime Palo Alto developer and consultant. “They’re getting a very substantial contribution to the cost that will significantly improve the property.”

The preservation incentives took their current form in 1986. They cover buildings in the downtown listed as Category 1 or 2 (the most historically significant of four categories) on the city’s inventory of about 500 historic structures. The city’s database does not distinguish how many of those 500 are downtown, but “there’s definitely more opportunity,” said Russ Reich, senior planner for the City of Palo Alto.

A historic building owner can earn a bonus of 2,500 square feet, or 25 percent of the floor area of the existing property, whichever is greater. Combined with a similar bonus for seismic upgrades, the owner can win up to 5,000 bonus square feet for overhauling an older building.

Generally, the city requires a property owner to fund the cost of one parking space for every 250 square feet developed. So a 2,500-square-foot bonus normally would require an owner to pay the city for building 10 parking spaces in a garage. Currently, the city charges approximately $67,000 for a single parking space. Hence, an owner would face some $670,000 in parking expenses to develop 2,500 square feet of floor area. “Often, that’s where the value of this [preservation] incentive is–in the relief from parking,” Anderson said.

Typically, Palo Alto developers complete one or two sales a year involving development rights. Prices have varied from a low of $65 a square foot around 2009 to a high of $110 a square foot in 2005-2006, said Anderson, depending on the volume of development activity in downtown Palo Alto. The going rate today is about $75 a square foot to $85 a square foot, developers said. So a typical preservation bonus of 2,500 square feet can easily yield $200,000 to fund a historic renovation.

Preservation can also help developers of modern properties. By purchasing bonus square footage without parking requirements, they can save large sums and undertake bigger projects. “By adding 2,500 square feet, that’s 2,500 square feet that I can rent. It makes the project more profitable,” said Michael King of King Asset Management. His firm purchased development rights to contribute floor area and parking exemptions to a 30,000-square foot office-residential building now under construction at 265 Lytton Ave. With downtown Palo Alto office rents running in the mid- to high $6 a foot a month, 2,500 square feet is worth about $200,000 a year in additional rental income.

The incentive program has helped transform the 500 block of Ramona, just off University Avenue. The block is listed on the National Register of Historic Places, reflecting its concentration of Spanish Colonial buildings from the 1920s and 1930s by local designers Clark, Pedro de Lemos and William H. Weeks. The style features gracious courtyards, arches, tile roofs, recessed doorways and windows, colorful tiles, decorative metalwork and textured stucco evoking adobe.

City incentives enabled Phyllis Munsey to give a new lease on life to two buildings on the block designed by her grandfather, de Lemos, a local artist and architect. “I dedicated my life to taking care of those buildings,” said Munsey, a third-generation Palo Alto resident who inherited the properties with relatives.

On one of the buildings, Munsey did a rehab to fix exterior maintenance issues and to open up interior space that had been carved up by alterations. After finishing the project in 2007, she was awarded 2,500 square feet of bonus space, which she sold, raising about $175,000. The proceeds offset costs for uncovering and restoring two fireplaces, windows, tilework and other original details. Now, the Wine Shop, an elegant wine bar that is a fixture in downtown nightlife, occupies the building.

Across the street, Munsey partnered with her tenant on a makeover of the other building and its courtyard, which house Nola’s, a popular New Orleans restaurant. Besides structural fixes, they added a handcrafted pebble entryway, a courtyard fountain, handmade iron railings and tiles replicating the originals. After the work was completed in 2010, Munsey sold the development rights from the project the following year, raising $210,000 for her portion of the bill. Knowing that development rights could be turned into money was crucial to convincing Nola’s owner to participate in the renovation, she said. “Otherwise, it was hard for me to come up with the money.”

“Ramona Street has turned into a gem,” she said. “The historic renovation is certainly a main factor in the vibrancy of that street.”

PHOTOGRAPHY BY: Chad Ziemendorf