Palo Alto will have to revise its newly adopted housing plan after the state Department of Housing and Community Development (HCD) concluded that its latest submission remains out of compliance with state law.

In a stinging setback for the City Council, the state agency notified the city's planning department in an Aug. 3 letter that the Housing Element that the council adopted on May 8 fails to meet the requirements of the State Housing Element Law.

The state agency’s decision means that the city will have to revise dozens of programs in the newly approved document and perform additional studies to demonstrate that housing production is actually feasible on the sites that are listed in the document.

The HCD's determination also means that for at least the next few months the city will remain vulnerable to "builder’s remedy" development applications — zone-busting housing proposals that builders have been pitching with ever greater frequency in jurisdictions that do not have an approved Housing Element. The city has already received four such applications, including the 380-apartment project that a developer pitched last week for the current site of The Fish Market in the Barron Park neighborhood.

The letter from HCD’s Proactive Housing Accountability Chief Melinda Coy also notes that if the city fails to adopt a compliant element within one year from the statutory deadline, which was Jan. 31, the agency will not find the document in "substantial compliance" until the city completes the rezoning needed to accommodate a shortage of housing sites.

This is the second time that the HCD has rejected Palo Alto's submitted Housing Element. After the initial rejection in March, city staff spent months revising the Housing Element before the council formally adopted it in May. City planners and council members had hoped that the new Housing Element, which took roughly two years to draft, would be deemed in "substantial compliance" with state law. That HCD dashed that hope with its Aug. 3 letter.

The HCD determination comes just as the city is launching a multi-year effort to revise the zoning code to comply with the newly adopted Housing Element, which aims to achieve the state mandate of accommodating 6,086 new dwellings between 2023 and 2031.

The changes that the new Housing Element proposes include raising the allowed density in multi-family zones and encouraging residential construction in historically commercial areas in the southeast portion for the city, around San Antonio Road and Fabian Way.

City planners are also completing a study as part of an effort to expand and modify its recently created "housing incentive program" (HIP), which grants density and height bonuses, as well as other zoning breaks, to housing developers.

The new HIP program is one of dozens of programs in the Housing Element that aim to boost housing production. Others include encouraging housing on public parking lots and church lots; allowing denser residential projects in commute corridors; and encouraging the construction of more accessory dwelling units throughout the city.

The letter from the HCD does not take issue with any of these proposed programs and concurs that the HIP is a great tool for housing developments. The agency also found, however, that the city has not done enough to prove that the non-vacant sites on the city’s adopted housing inventory are actually suitable for housing.

As such, Palo Alto is now required to provide an analysis that looks into possible impediments to residential development, including "existing leases or contracts that would perpetuate the existing use or prevent additional residential development or other relevant information to demonstrate the potential for redevelopment such as expressed owner and developer interest."

The HCD also found that the city has not sufficiently analyzed some of the existing commercial zones for potential addition of residential use.

The agency is also requiring the city to further analyze the development standards in recent projects to better understand whether its processes for expedited project reviews are effective. Based on the analysis, the city may need to add programs to "address constraints on local processing and permit procedures," the letter states.

Addressing past patterns of discrimination

Another area in which Palo Alto will have to make significant revisions is the section dedicated to "affirmatively furthering fair housing," which looks at past patterns of discrimination and proposes policies to address historic injustices.

The city’s adopted Housing Element describes past practices such as blockbusting, redlining and use of restrictive covenants, policies that made it difficult for Black people and other racial minorities to purchase homes in Palo Alto.

The HCD, however, indicated in its letter that the city must firm up its commitments to reversing those practices. This means adding goals and actions based on the outcomes of a complete analysis. The analysis, according to the letter, "could examine past land use practices, investments and quality of life relative to the rest of the City and region and then formulate appropriate programs to promote more inclusive communities and equitable quality of life."

The HCD’s letter mirrors some of the criticism that the council had received in the past from local housing advocates, including the group Palo Alto Forward, which had argued that the city’s housing plan is too reliant on non-vacant sites in the commercial district.

It also shares the view of Council member Julie Lythcott-Haims, who suggested during the council's May discussion that the city’s section on housing integration and discrimination "felt like we largely avoided the topic and handled it in an oblique way."

"I’d like to see our Housing Element make a declarative statement about our problematic history with zoning, redlining and restrictive covenants and an avowal to undo these vestiges by intentionally creating truly inclusive communities going forward," Lythcott-Haims said.

The letter from HCD orders the city to not only include a complete analysis of affirmatively furthering fair housing plans but to also "add goals and actions based on the outcomes of a complete analysis."

"Actions must have specific commitment, milestones, geographic targeting and metrics or numeric objectives and, as appropriate; must address housing mobility enhancement, new housing choices and affordability in high opportunity areas, place-based strategies for community preservation and revitalization, and displacement protection," the letter states.