The Capitola City Council recently discussed potential incentives for developers to build new housing and shops at the Capitola Mall. (Jesse Kathan — Santa Cruz Local file)

CAPITOLA >> A mix of tax breaks, fee waivers and other incentives could invigorate a potential redevelopment of the Capitola Mall, a consultant said Thursday at a Capitola City Council meeting. It remains unclear whether the mall’s owner would be open to such measures.

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Two city council members expressed frustration with the mall’s majority owner, Merlone Geier Partners, which has stated that a mall overhaul with new homes and shops remains financially infeasible.

“I’ve been on this council for eight years, and the question people most ask me about is, ‘What’s going on with the mall? Why haven’t we seen anything done with it? Why is this taking so long?’” said Capitola Mayor Kristen Brown. “And every year there’s a new reason that I have to tell them.”

She said the council has repeatedly given Merlone Geier what it has asked for, yet the firm has not moved forward with a project. “The community has waited nearly 10 years, and what we’re hearing just continues to be, ‘Sorry, that doesn’t work for us,’” Brown said during the council meeting. 

“I’m disappointed in where we are today with the developer. We have bent over backwards as a council,” said Capitola Vice Mayor Yvette Brooks.

The mall’s redevelopment into hundreds of new homes is part of the city’s state-mandated Housing Element of the city’s General Plan. Capitola must permit 1,336 new housing units by 2031, and more than half of those units are to be rented below market rate for very-low and low-income residents. State authorities set income limits annually.

Ways to spur mall redevelopment

At Thursday’s council meeting, Kosmont Companies, a real estate and economics advisory firm contracted by the city, presented the results of a recently completed study on how Capitola could support the mall’s redevelopment

It named several potential tools for pushing the project along, including:

  • Waiving or reducing development fees.
  • Increasing residential height and density limits. Capitola already agreed to raise its height limit for buildings at the mall site from 40 feet to 75 feet — or roughly six-and-a-half stories. It has also agreed to exclude parking garages from its calculation of density at the site. 
  • Entering into a tax-sharing agreement with the developer. “There’s lots of ways to creatively structure” agreements, said Ken Hira, president of Kosmont Companies. 
  • Establishing a special revenue district that could divert some property tax revenue to help fund housing development and maintain infrastructure. 
  • Issuing bonds to fund necessary off-site infrastructure.
  • Helping with parking. For example, the city could fund the construction of a nearby public parking garage. However, Kosmont noted in its study that the city does not own large lots of land adjacent to Capitola Mall.

“This is a menu of options that may be used,” Hira told the council. “They may be used in conjunction with each other. They may not be used, because at the end of the day it’s your decision.”

Capitola Mall includes more than 46 acres on Capitola Road and 41st Avenue. (Kosmont Companies)

Capitola Mall includes more than 46 acres on Capitola Road and 41st Avenue. (Kosmont Companies)

Kosmont recommended that residential units be located next to commercial spaces at the mall, not on top of them. Vertical mixed-use developments haven’t worked well outside of very urbanized environments, Hira said. He added, “Those projects tend to be very costly.”

Private developers face challenges that include high interest rates. “At the same time,” Hira said, “the public sector shouldn’t be making decisions that aren’t fiscally sound and aren’t community driven.”

Hira said that city representatives could now get in a room with Merlone Geier to “understand the problem, identify solutions, collaborate and move forward.”

Capitola City Councilmember Alexander Pedersen said, “I hope that some representatives from Merlone Geier will be able to work with us to determine which of these incentives may be beneficial.” Pedersen said, “At this point I wouldn’t rule out any of the proposed incentives, whatever we can do to make this happen.”

Merlone Geier representatives did not speak at Thursday’s meeting, nor did they respond to requests for comment from Santa Cruz Local.

A reimagined 41st Avenue

Opened in 1977, the Capitola Mall includes 640,000 square feet of retail space and 3,000 parking spaces. Like many other malls across the United States, it has struggled in the face of increased competition from online shopping. Recognizing this, Capitola leaders have discussed its redevelopment since at least 2013.  

In 2019, Merlone Geier, which controls about two-thirds of the 46.3-acre site, submitted a conceptual plan that called for 637 new homes. That plan was withdrawn following the outbreak of COVID.

The mall site could support more than 1,000 homes if all buildings were 60-75 feet tall, according to a city staff report. But at a city council meeting in February, David Geiser, managing director of Merlone Geier, said his firm would build 645 homes even with the height increase. He also said a city mandate to build 419 affordable homes at the site rendered it economically unworkable.

Merlone Geier later wrote that mandates for commercial use onsite would likewise render the redevelopment economically unworkable, city council members said at Thursday’s meeting. Developers currently get more profit from new residential development than they do from new commercial development, Hira said.

The Capitola Mall redevelopment is just one part of the city’s vision for a reimagined 41st Avenue corridor. “We have a need for higher-density residential and really focusing in on that corridor and transforming it into a place [where] not only people shop, but [where] they want to be and raise their families,” said Katie Herlihy, Capitola’s community development director.

In addition to hearing Kosmont’s Capitola Mall recommendations, the city council on Thursday authorized a “request for qualifications” from consultants for a 41st Avenue corridor plan to improve biking and walking access and redesign the busy thoroughfare. Submissions are due in February.

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Jesse Greenspan is a freelance journalist who writes about history, science and the environment. His work has appeared in The New York Times, Scientific American, Audubon and other publications.