Municipal Code
The Palo Alto Municipal Code includes the following incentives and exceptions to encourage the preservation and rehabilitation of Category 1 and 2 Historic Inventory buildings.

Zoning Incentives in Title 18: 

• Sections 18.49.060 and 18.49.100 provide for Bonus Floor Area, exempt from on-site parking requirements, in exchange for historic rehabilitation of Category 1 and 2 buildings in the CD Commercial Downtown Zone District.
• Section 18.49.100 also provides for exemption from on-site parking requirements for conversion of residential Category 1 and 2 buildings (50 feet or less in height) to commercial use in exchange for historic rehabilitation (existing on-site parking must be maintained, however).
• Section 18.49.060 and Chapter 18.87 establish a Transferable Development Rights program that provides for parking-exempt bonus floor area to be transferred from historically rehabilitated Category 1 or 2 buildings in the CD Commercial Downtown Zone District to specified non-historic receiver sites in the CD or specified Planned Community Districts.

Building Regulations Incentives in Title 16:

• Section 16.09.160 exempts Category 1 and 2 buildings from the general prohibition of copper replacement roofing and gutters.
• Section 16.04.250 adopts the California Historical Building Code (CHBC) which provides alternative solutions to building code issues raised in the course of preserving and rehabilitating qualified historic buildings. While these alternative solutions are intended to protect historic buildings from the adverse impacts of certain requirements of the regular building code, they also translate into cost-effective incentives as described by the California Office of Historic Preservation:
• The "triggers" for full upgrading to current standards, with respect to length of vacancy, change of occupancy, or percentage of value of the work proposed, and which exist in other codes, are not recognized by the CHBC, which concentrates instead on the preservation-sensitive resolution of genuine safety considerations.
• Structural/Seismic upgrading issues are governed by the CHBC, permitting design based on real values of archaic materials, and solutions based on engineering principles and professional judgment, rather than solutions limited to codified prescriptive formulas.   This flexibility usually translates into a higher degree of retention of historic fabric.
• Because most qualified historical buildings cannot conform to California's energy standards without the alteration or loss of historic features, they are categorically exempt from those standards. To the degree practicable, new construction associated with the historic resource should conform.
• With respect to qualified historical buildings, both ADA and the CHBC make provisions for reasonable levels of equivalency for, and under special circumstances exemption from, accessibility mandates.
  Sections 16.52.040(a)(20), 16.52.040(a)(36) and (a)(36)(B), and 16.52.130 provide exemption from flood hazard area regulations for Category 1 and 2 buildings, contributing buildings in National Register historic districts, and buildings individually listed on the National and California Registers.

South of Forest Area Coordinated Area Plan
The regulations for the special zone districts established by the South of Forest Area Coordinated Area Plan (SOFA CAP) Phases 1 (approved 2000) and 2 (approved 2003) provide the following incentives for the rehabilitation of identified historic buildings (see the SOFA CAP on file at the Planning Department for details):

• Bonus floor area
• Transferable development rights
• Reduction of on-site parking requirements
• Exemption from on-site parking requirements
• Exemption from required minimum densities
• Continuance of non-conforming uses
• Special provisions for second units in the SOFA 2 R-2 zone

Palo Alto 1998-2010 Comprehensive Plan
Goal L-7 of the Land Use & Design Element of the Comprehensive Plan provides the following incentive policies and programs to encourage the preservation and rehabilitation of historic buildings:

• Policy L-57 : Develop incentives for the retention and rehabilitation of buildings with historic merit in all zones.
• Program L-59 : Allow parking exceptions for historic buildings to encourage rehabilitation.
• Program L-61 : Allow nonconforming uses for the life of historic buildings.
• Program L-66 : Revise zoning and permit regulations as needed to minimize constraints to adaptive reuse, particularly in retail areas.

History of Palo Alto's Historic Preservation Incentive Program
The City's incentive-based historic preservation program began in 1976, several years before the historic preservation ordinance and the Historic Resources Board were established. In 1976 a short historic preservation policy was included in the Urban Design Element of the new Comprehensive Plan. Several buildings worthy of preservation were mentioned and several state incentives were recommended for use. A single local zoning incentive was cited: "Allow non-conforming use for buildings of architectural or historic merit for the life of the building." The 1976 Comprehensive Plan recommended that additional incentives be developed. In 1979 an Inventory of historic buildings was completed, and in 1980 a historic preservation ordinance was adopted that provided for review of Inventory buildings by a Historic Resources Board (HRB).  In 1986 the ordinance was expanded to its present form.  

Also in 1986, an ordinance creating the Downtown CD Zone District was adopted that provided for the retention of the character of Downtown in general and of Downtown's historic buildings in particular. The new Downtown CD District ordinance included a bonus square footage incentive for Category 1 and 2 Historic Inventory buildings whereby the historic building was allowed to increase its floor area by 2,500 square feet (or by twenty-five percent of the existing building, whichever was greater), without having this increase count toward the Floor Area Ratio. No historic rehabilitation was specifically required to receive the incentive; the intent was that allowing substantial additional development to the building would make the reuse and rehabilitation of the historic building more attractive. Furthermore, since the historic preservation ordinance and the Historic Resources Board had already been established, the use of the bonus square footage would be reviewed by the HRB. The Category 1 and 2 buildings that were eligible for the bonus square footage were limited to those that were not in Seismic Categories I, II, or III. This was because there was already a 2,500 square footage bonus for buildings in those seismic categories that undertook seismic rehabilitation, and the Council's goal was to restrict a historic building to one bonus in order to support the stated goal of "...limit[ing] nonresidential development in the Downtown to ... ten percent (350,000 square feet) above the development existing or approved in May 1986." Also in 1986 -- a major year for the creation of historic preservation incentives in Palo Alto -- a Transferable Development Rights (TDR) program was added to the Comprehensive Plan that allowed Category 1 and 2 buildings on the Historic Inventory to transfer to non-historic sites in the Downtown CD District any remaining development rights on the property (bonus square footage, however, could not be transferred off site through the new TDR program; it had to be used on site). The new program required the lengthy Planned Community zone process to be followed which involved review by the Planning Commission and the City Council.  

By early 1987 it was recognized that the bonus square footage incentive approved for Downtown Category 1 and 2 residential buildings in 1986 would enhance the likelihood of conversion of those buildings to commercial use. However, conversion to commercial use would trigger stringent commercial parking regulations that could function as a disincentive. To make the commercial adaptive reuse of these residential buildings even more attractive, parking provisions were added to the Downtown CD District ordinance that exempted Category 1 and 2 converted residential buildings from commercial parking requirements provided that an HRB-recommended and City-approved historic rehabilitation was undertaken (the first time an incentive was explicitly based on required historic rehabilitation). The City Council expressed the purpose of the new parking provisions as follows: "...residential historic structures located in the commercial downtown district are in need of rehabilitation; and ... the Council wishes to provide an incentive to those residential historic structures to be rehabilitated." Also in 1987, the City Council adopted the Secretary of the Interior's Standards for Rehabilitation as the HRB's standard of review (the Secretary's Standards were not cited in the Municipal Code itself until 1995).

In 1992 Palo Alto became a Certified Local Government, overseen and assisted by the State Office of Historic Preservation, which required professional training for members of the HRB and formalized the City's commitment to preservation goals.

In 1995 parking provisions were added to the Downtown CD District ordinance that exempted residential conversions to commercial use and bonus square footage projects from additional new parking regulations, and guaranteed the availability of those exemptions for the life of the historic building. Also, by 1995 it was evident that Downtown development resulting from use of single historic and seismic floor area bonuses had been less than anticipated. Therefore, the City Council amended the Downtown CD District regulations to allow bonus square footage provisions for Category 1 and 2 historic buildings and bonus provisions for seismic hazard buildings that undertake seismic rehabilitation to be combined. The 5,000 square-foot double bonus incentive was intended to greatly increase the likelihood that a historic building with major seismic needs would be seismically rehabilitated for a compatible new use. The amended CD regulations required double bonus projects to be approved by the City Council based on a recommendation from the Historic Resources Board (whose review of the project would include interiors as well as the exterior).   In addition, the application of bonus square footage to Category 1 or 2 historic buildings was required to be reviewed under the Secretary's Standards -- the first citing of the Secretary's Standards in the Municipal Code. Finally, the amended CD regulations allowed bonus square footage with its parking exemptions to participate in the Transferable Development Rights (TDR) program. Historic rehabilitation of the building, however, was still not specifically required by the Municipal Code for the granting of a floor area bonus.

In 1996 the City Council approved mandatory historic rehabilitation as the basis for granting bonus square footage to Category 1 and 2 buildings. The newly amended CD District regulations also adopted the Secretary's Standards' definition of historic rehabilitation. In addition, the Council approved a streamlined process for the City's TDR program. Finally, the Council approved a new TDR ordinance for the Municipal Code that provided detailed administrative procedures for the TDR program; the TDR ordinance became effective in January 1997. With this new streamlined and clarifying ordinance in place, the TDR program began to be used by property owners for the first time.  

In 1998 the City Council adopted a new Comprehensive Plan that added further policies and programs for historic preservation along with continued emphasis on the development of incentives.