An Unexpected Pioneer

By Naphtali H. Knox, FAICP

Palo Alto is known as the home of Stanford University and the birthplace of Silicon Valley. It also is known for its extraordinarily expensive housing.

But did you know that the Bay Area city was also a front runner in the country's experimentation with inclusionary housing? It's ironic to think that a place consistently ranked today as one of the priciest enclaves in America started working nearly 50 years ago to address its steadily shrinking supply of affordable housing.

Palo Alto wasn't a big city when I got here in 1972 (56,000) and at 64,400 it still isn't very big. Its housing costs, however, are definitely outsized. Today, the median value of a single-family home is $3,270,200 and the standard single-family lot is just 6,000 square feet. One-third of all housing units are in apartment complexes.

The inclusionary housing policy that has been in place for decades has only helped ease the crunch in a small way. Since the creation of inclusionary units is tied to the construction of a certain number of market rate units in a development, no affordable units get built if market rate projects aren't going forward — and in recent years, they haven't been. Still, the experiment has contributed to the kit of tools planners and policy makers have at their disposal — as well as the notion that it is their job to do so.

In a 2017 letter to their colleagues, four city council members summed up it up this way: "While Palo Alto may never be a truly affordable place to live, the city council has an obligation to current and future residents to explore policies that expand housing choices for people of different incomes, generations, and needs."

A small step toward maintaining diversity

Inclusionary housing — or as it's commonly referred to here, below-market-rate housing, or BMR — was our go-to Band-Aid in the early 1970s to keep Palo Alto available to both working class and white-collar households. The concept was (and still is) hotly debated, even in liberal California.

A December 2012 report by The Urban Institute for the U.S. Department of Housing and Urban Development cites Fairfax County, Virginia, and Montgomery County, Maryland, as the birthplaces of inclusionary housing, but the first four inclusionary units in America were built in Palo Alto and occupied in 1974.

A commonly accepted definition of "inclusionary housing," according to the same HUD report, is "any program or policy that requires — or offers incentives for — the creation of affordable housing when new development occurs."

I became Palo Alto's planning director in 1972. The city of 56,000 was grappling with a dearth of suitable land zoned for residences. Jobs were being added faster than builders could provide housing. We had 2.5 jobs for every household and the ratio was trending upward — it is now 3.8 jobs per household. The median house price back then was $54,000, and only four percent of Palo Alto households earned more than $35,000.

The worsening jobs-housing imbalance raised several concerns. One was the rapidly growing in-commute traffic. A second was that the new workers with their higher salaries were successfully competing for the city's existing for-sale housing and the small supply of new homes. Lower-income Palo Altans were moving out, and the community was losing its economic diversity.

When I heard about Montgomery County's inclusionary housing purchase program, I called a planner there who explained their approach. Without hesitating, I borrowed the concept to help address our concerns about diversity and outlined a possible approach to the city planning commission late in 1972.

The premise was that we could never build enough housing to accommodate our already large and steadily growing workforce, but maybe we could find a way to assure that at least some of whatever housing that was built would be affordable to low- and middle-income households. The rationale was that housing developers had a responsibility to build for all segments of the market. As the city's comprehensive plan would state three years later, "the desired result of the housing policies and programs" was to "help Palo Alto continue to provide a high-quality residential environment for the diversity of people who make up the community."

The first developer to use the program had proposed applying for federal Section 235 mortgage subsidies to provide four low-income units in a small single-family subdivision. His offer was accepted and incorporated into the relevant Planned Community zoning for the development. But while the project moved ahead, President Richard Nixon declared a moratorium on nearly all federal housing programs, including Section 235.

In response, the developer advised the city he could not afford to carry the subsidy on four single-family homes, and instead offered to include in his development two duplexes to be sold at "below market rate" prices under the still-evolving BMR program. The city would amend the PC zone (needed to increase the specified number of units by two) and approve a subdivision map that would split two single-family lots into four smaller ones that were, by Palo Alto regulations, substandard in size and frontage. The four units — the first ones sold under what the city's BMR program — went to their new owners at previously negotiated prices that were less than half the cost of the 25 larger single-family homes in the development. A precedent was set.

But Palo Alto's inclusionary housing program was still a work in progress, and planners, the city's Housing Advisory Committee, and city council hashed out what size development would trigger the policy and what percentage of housing in a development must be affordable to gain approval. I initially suggested a policy with a threshold of 12 units or more requiring 20 percent of units priced below market rate. Various configurations were considered, but in the end, the numbers game was settled with Palo Alto's very first comprehensive plan, adopted November 29, 1976. It declared that "In new housing developments of 10 or more units, not less than 10 percent of the units should be provided at below-market rates to moderate- and middle-income families."

Units for lower-income households were not considered, since the city's experience during the previous three years indicated that the typical price of the inclusionary units approved under the program was "around $30,000 — too high to reach low-income households." Today the city's required percentage of BMR units is 15.

From the time the city agreed to the first four BMR units in 1973 until I left my job as director of planning and community environment in 1981, 63 BMR units were built and occupied at 12 different locations in our small city.

Where inclusionary housing stands today

Since its inception, Palo Alto's BMR purchase program has been managed by the nonprofit Palo Alto Housing Corporation, now Palo Alto Housing. PAH also runs a BMR rental program for Palo Alto, and administers the inclusionary housing programs for nearby Redwood City, Mountain View, and Los Altos.

Today, when a development of three or more housing units is built in Palo Alto, the developer is required to contribute at least 15 percent of those units at below-market rates. The city currently has 237 units for purchase in Palo Alto, and all of them are occupied, according to Lauren Bigelow, BMR administrator at PAH. But no market-priced residential developments of any scale have been built since 2008, and thus neither have any new BMR units. However, BMR resales have occurred under terms preestablished by a formula that sets the resale price at well below market and gives the city the right of first refusal.

"Owners generally have had a difficult time reconciling their Below Market Rate selling price with the market rate values of their neighbors' homes," notes Bigelow. "In almost all of the resales I've handled over the past three years, the owners explicitly said there would have been no way they could have stayed in the area without this program, and they are incredibly grateful for it."

Palo Alto's early experiment with inclusionary housing was picked up by other California cities, most notably San Francisco, which adopted its policy in 2002. Under that city's policy, as explained in 2017 by Kristy Wang, community planning policy director at SPUR, the San Francisco Bay Area Planning and Urban Research Association.

"New developments with 25 housing units or more are now required to either make 18 to 20 percent of their units affordable, build affordable units at another location equaling 30 to 33 percent of the total units, or pay an in-lieu fee equivalent to the cost of 30 to 33 percent of the units, which will then be used to build affordable housing elsewhere." That means that most new for-sale and rental multifamily developments in San Francisco include below market rate units within the community, nearby, or in another building by that same developer, according to a 2018 article by Chris Roberts in Curbed SF, who notes that there were more than 85,000 applications for the 1,210 BMR units built in San Francisco in 2017.

According to the Lincoln Institute of Land Policy's 2017 working paper "Inclusionary Housing in the United States: Prevalence, Impact, and Practices," by Emily Thaden, PhD, and Ruoniu Wang, PhD, by the end of 2016 more than 83 California jurisdictions had adopted 144 inclusionary housing programs noted that more than 80,000 Californians now live in a homemade affordable through an inclusionary policy. I'm gratified that what we started in Palo Alto 45 years ago has blossomed across California to help so many people find affordable housing.

Naphtali H. Knox began his planning career in 1957 in Colorado and has worked in Des Moines, Iowa; Chicago; San Francisco; and Palo Alto, California. For 27 years until his retirement in 2009, Knox & Associates prepared plans for communities across northern California. For the past 13 years, Knox has been editor of Northern News, the official publication of APA's California Chapter, Northern Section.