Palo Alto’s effort to assist people in purchasing affordable homes is hindered by a significant supply shortage and a laundry list of hidden fees that place these residences out of reach for many potential buyers, according to a new report from the City Auditor’s Office.
The Below Market Rate Housing Purchase Program covers a small subset of the city’s affordable housing strategy — about 10% of all existing affordable homes — and was the primary subject of the audit report conducted by Kate Murdock with consulting firm Baker Tilly, which acts as the city auditor. As a general rule, new for-sale housing developments coordinate with Palo Alto on an affordability plan, which may include setting aside below market rate homes or paying in-lieu fees that go toward a broader affordable housing fund.
The initial sale price is set by the director of the Planning and Development Department, and from there nonprofit organization Alta Housing solicits buyers based on a waitlist, with preference given to those who live or work in Palo Alto already.
There are 247 active below market rate ownership homes in Palo Alto, the audit found. Construction of these homes has been uneven, however, and the vast majority were built before the turn of the century.
In the 2010s, zero below market rate ownership homes were built, in part due to legal challenges against inclusionary housing requirements, City Attorney Chris Jensen told the council Policy and Services Committee on Oct. 13, which discussed the findings at its regular meeting.
“The big zero there jumped out at me,” Councilmember Keith Reckdahl said.
Committee Chair Julie Lythcott-Haims noted that the 2010s also included the ill-fated Maybell Avenue development that voters overturned in 2013. While that project would not have been for below market rate ownership homes, Lythcott-Haims said it represented “an era when the city mindset, mentality and value system seemed to be swaying toward less development.”
Below market rate ownership production started up again this decade and the city has constructed 15 more of these homes as of 2025.
Murdock noted that while the below market rate housing program does not itself create new housing, city policy can instead improve retention and long-term affordability of the homes that fall under the program.
One of the biggest takeaways from the audit was the lack of transparency around HOA fees, which can burden low-income residents who purchase an affordable unit. Michelle Kraus, who chairs the Human Resources Commission, suggested during the public comment period that the city consider subsidies or other policy measures to offset the HOA costs.
“It is becoming an issue of retention,” Kraus said. “It has been 20 years since subsidies have been offered, and we’re in a tremendously difficult financial time right now.”
The audit, however, focused its recommendation on increasing visibility of the fees so that new below market rate owners have as much information as possible going into the purchase. That includes working with Alta Housing to identify significant HOA dues and maintenance pressures, as well as starting to track formal complaints for existing below market rate homes — something the city does not currently practice.
Vice Mayor Greer Stone said that he often sees multifamily housing listings that have a number of hidden HOA costs, leaving him “constantly surprised and frustrated.”
“These (HOA) expenses are not controlled by the (below market rate housing) program, but they may affect a household’s ability to remain in the unit or maintain it over the long term,” the audit states. “The City has some existing resources that may assist homeowners with HOA assessments in certain circumstances, but interviews did not identify a consolidated approach for tracking HOA dues, special assessments, or major maintenance pressures across the ownership portfolio.”
Another primary issue identified in the audit is the fact that the city’s below market rate housing stock is aging. Each development has different timelines for when the homes are eligible to exit the program. The audit noted that it’s possible that some of the earliest below market rate homes built in the 1970s that have not transferred ownership may expire by 2033.
The fact that there was no construction in the 2010s places additional pressure on the existing stock, the audit added, meaning that “there is no corresponding replacement cohort to offset potential future losses in the near term.”
The city has the right of first refusal for some of the homes, Murdock said, meaning the city can elect to buy back the below market rate properties to prevent them from losing their affordability.
Similarly, the audit found issues with the resale restrictions associated with the BMR ownership program. While these restrictions are intended to preserve affordability, the longstanding formula to calculate the resale value means that older homes are significantly cheaper than newer ones.
Alta Housing reported that this causes people on the ownership waitlist to try and “hold out” for older homes, which “may make some newer ownership opportunities harder to place, particularly when HOA fees, unit condition, mortgage qualification, or other ownership costs are considered.”
At the same time, Lythcott-Haims said the city should focus on filling any existing vacancies and interrogating why homes are vacant in the first place. The audit recommended that the city follow Mountain View’s strategy of formally tracking below market rate home turnover and vacancies.
“If you build it, will they come? And if they don’t, what have we done wrong?” Lythcott-Haims asked. “To learn that units are not being occupied is so devastating.”
The policy committee voted unanimously to approve the audit’s findings, but it may not be until next year that the full City Council discusses potential policy changes that align with the recommendations.