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What’s the Matter with Cupertino?

The Silicon Valley suburb has a rather large identity problem, and it begins with the biggest company on Earth.

SLIDESHOW

Leafy Cupertino, population 60,000.

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The futuristic Apple Campus 2, scheduled to open in 2017.

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Read more from the Real Estate Issue here.


Not a mile away
from the glass doughnut under construction on Apple’s new campus in Cupertino, the south entrance of the Vallco Shopping Mall is dark. It’s just after 5 p.m. on a bright Saturday afternoon, but the foot traffic, from a few stragglers heading to the AMC theater, evokes a hospital ward in the middle of the night. For the first decade after its opening in 1976, Vallco Fashion Park was packed on afternoons like this. That was before poor management decisions, coupled with competition from other malls and the Internet, sent the shopping center on a long, slow death spiral. The Vallco of more recent years, according to one Yelp reviewer, would make “a great setting for a zombie apocalyptic movie.” 

At the west end of the mall, local developer Sand Hill Properties has set up an exhibit that teases a reborn Vallco: Think San Jose’s chichi Santana Row pumped up on steroids and sculpted into an earthwork. Designed by architect Rafael Viñoly and dubbed the Hills at Vallco, the $3 billion project is envisioned as a mixed-use workplace and playground, with 640,000 square feet of retail, 2 million square feet of office space, and up to 800 apartments. Its most dramatic feature is a sloping 30-acre rooftop park with topographical rises and dips that echo the distant Santa Cruz Mountains. With 3.8 miles of trails, gardens, and even a working vineyard, the roof will be “the social capital of Silicon Valley,” says Sand Hill managing partner Reed Moulds, in full salesman mode. “It will draw people the way the department stores used to.”  

The proposed development would, in Sand Hill parlance, “revitalize” the ailing mall. And from a regional perspective, it would offer Cupertino a way to densify efficiently—jobs next to housing next to shopping—at a time when everyone from the governor to regional planners is pushing for such concentrated development. But one group of citizens isn’t convinced. For them, the retail benefits the project would bring are overshadowed by its office and housing components, which they say will worsen traffic, overtax public schools, and generally degrade the city’s quality of life. “Vallco sends out a lot of mailers, but what they never mention is the two million square feet of commercial office space,” says Steven Scharf, a longtime community organizer who is running for city council. 

Last spring, Scharf and a grassroots group of residents calling themselves Better Cupertino gathered more than 3,700 signatures to put forward a ballot initiative, Measure C, to block the Hills at Vallco and reserve the mall for future retail only. The initiative would also prevent the city council from green-lighting any future development that does not conform to the height and density limits in the city’s General Plan, unless approved by voters. Sand Hill fired back with a ballot measure of its own, Measure D, which would affirm the Hills at Vallco plan. As of June 30, Sand Hill’s Yes on D campaign had spent almost $2.1 million, compared with less than $30,000 spent by Measure C’s backers. Whether that 70–1 disparity in resources will swing the outcome remains to be seen, but Better Cupertino is vowing to fight on even if it loses this November. “Our work will never be done,” the group tells San Francisco

Cupertino’s latest development drama is just one version of the growing pains taking place all over Silicon Valley. With property values ballooning and stock options soaring, municipalities are struggling to strike a balance between preserving their suburban character and handling the increased demand that big tech places on their housing, roads, and schools. In September, Palo Alto mayor Patrick Burt vowed to limit the growth of large tech companies in the city’s downtown. In July, Facebook pledged to build 1,500 housing units to make its expansion plans go over easier in Menlo Park. Mountain View—home to Google—has stopped fighting growth and is planning for thousands of units of new housing. 

Cupertino, of course, is home to the most valuable tech company of them all: Apple. And therein lies a fascinating tension. Though some Cupertinians are bitterly opposed to a new development like the Hills at Vallco because they fear it will ruin their lifestyle, they seem to have few problems with the futuristic Apple Campus 2, another mega–office project that will likely bring a similar set of consequences—more cars on the road, more kids in the schools, more competition for limited housing stock—when it opens next year. Why is Apple’s growth unfettered, even embraced, when the Hills at Vallco receives the full brunt of NIMBY wrath? Where was Better Cupertino when the Apple spaceship was coming in for a landing?

In 2013, the Cupertino City Council unanimously approved Apple’s then–$5 billion expansion onto a 176-acre plot of land formerly anchored by Hewlett-Packard. “It was pretty unanimous support,” former mayor Orrin Mahoney recalls of the yes vote, over which he presided. “Just about anybody who might have spoken against it for whatever reason did not.”

Yet when you compare the predicted impacts of Apple’s new campus and the Hills at Vallco—especially when it comes to the two subjects that get Cupertinians most exercised, traffic and schools—they appear somewhat similar. According to the project’s environmental impact report, completed in 2013, Apple Campus 2 will generate upward of 35,000 new daily car trips, more than twice the increase that Vallco would bring (both projects include aggressive plans to curb solo driving). Apple’s expansion is also predicted to add up to 283 new students to local schools over 15 years, based on estimates that 9,356 new Apple employees will come to work at Campus 2, of whom 1,660 might live in the school district. (Apple declined to update these estimates, which rely on 2013 projections.) Meanwhile, an environmental assessment commissioned by Sand Hill projects that the Hills at Vallco could add up to 258 new students to local schools as soon as all of its residents move in. Apple’s impact on schools occurs more slowly because it’s tied to job growth, not new housing, says Richard Recht, principal of Schoolhouse Services, which authored both reports. “The homes at Vallco will not have a lot of kids there, but what they will have will show up relatively quickly.”

Moreover, the Hills at Vallco would send significantly more money to Cupertino schools than Apple’s future headquarters will. Because most of the occupied building space in Apple Campus 2 will sit in the Santa Clara school district, Santa Clara schools will net an estimated $5.4 million annually in property taxes, approximately 6.5 times more than the roughly $832,000 that Cupertino’s high schools will receive. (Cupertino’s elementary and middle schools don’t stand to gain from property-tax increases because they are funded differently by the state.) Meanwhile, the Hills at Vallco would send $3.9 million in property taxes to Cupertino’s high schools every year. And that’s on top of about $52 million in benefits that Sand Hill is offering Cupertino schools, including $19 million in cash for the elementary and middle school district to use however it sees fit. 

When Apple Campus 2 came up for approval, Scharf had no objections because it would replace an older, albeit less populated, tech office park. Nor is he worried about the traffic that Apple’s new campus will bring: “Yes, there’ll be more traffic, but Apple has done a good job mitigating that by being a good corporate citizen,” he says, noting how many Apple employees he’s seen riding bikes. And the schools? Scharf pauses. “1,660 new residents in the school district? That’s not a huge amount.”

“Apple for some reason gets a pass on everything in Cupertino,” says one longtime city observer. “It’s always a ‘by the way’ kind of thing: ‘It’s a big campus; there are going to be traffic impacts, by the way.’ The Hills and other big projects are ancillary to Apple’s being here, and people are angry at those, not at Apple. Apple itself is taken as a given.”


So is everyone
in Cupertino drinking Apple-flavored Kool-Aid? It’s a complicated question. On the surface, Cupertino looks like a classic company town. Apple is the city’s largest employer and taxpayer. Another 2013 report, commissioned by Apple, estimated the company’s entire Cupertino workforce at 16,000, a number that was projected to swell to 23,400 with the opening of the new campus. Of those new employees, 1,906 people are expected to live in Cupertino—a little over 3 percent of the city’s current population of 60,000. The daytime population is twice that, buoyed by workers commuting in for jobs at Apple, Seagate, and De Anza College.

The benefits that Apple showers upon Cupertino overall are enormous. Apple estimates the company’s contribution of taxes and fees to Cupertino in the range of tens of millions of dollars annually, in addition to its funding more than $70 million in public works projects as a part of Campus 2’s construction. To help juice local coffers further, Apple confers one very important favor on its hometown: It chose Cupertino as the home of its sales tax office, which processes all of Apple’s business-to-business sales. That means Cupertino gets to collect sales tax on every transaction, whether the buyer is in California or Mumbai. Both Apple and the city’s finance department declined to give an exact figure for Apple’s sales tax contribution, but Mayor Barry Chang ballparks it at $18 million, or about 12 percent of the city’s overall revenues this year. Residents are at once proud of living in the home of the iPhone and dependent on Apple’s patronage—a dynamic that produces a few awkward moments of self-awareness. In 2011, when then–city council member Kris Wang asked Steve Jobs if Apple would give the city free Wi-Fi, the room erupted with guffaws. Jobs’s straight-faced demurral: “I think we bring a lot more than free Wi-Fi.”

Yet in another sense, Cupertino is less a company town than a suburb, with classic cul-de-sac concerns. It’s mostly a city of increasingly expensive single-family homes, with good schools and bad traffic at school drop-off and pickup times. “The number-one reason people move to Cupertino is the public schools,” says Rick Kitson, former public affairs director for the city. “For a lot of tech workers who want to be close to Silicon Valley jobs and excellent public schools, that’s a winning combination.” Demand for a Cupertino address is high: According to Zillow, the median price is now more than $1.7 million, a 72 percent hike from 10 years ago. Unlike Palo Alto, Mountain View, Los Gatos, and even tiny Campbell, Cupertino has no town center. The main drags, De Anza and Stevens Creek Boulevards, are wide, car-centric thoroughfares dotted with aging strip malls and Apple buildings. Many Cupertinians like it this way. When Better Cupertino member Ignatius Ding arrived from upstate New York in 1978, Cupertino immediately felt right. He thought, he says, that it was the ideal location: “the best schools, no downtown, no traffic.” 

Like many affluent communities, Cupertino is wary of adding new housing. Between 2007 and 2014, the city issued permits for 67 percent of the 1,170 units the Association of Bay Area Governments deemed necessary—a track record that’s both lackluster and better than that of many Bay Area cities. But the fear of new development flooding the schools with children is misplaced, says a former city official, because condos and townhomes add fewer students per unit than single-family homes that turn over: “The greater impact is from families moving into houses, replacing seniors.”

Some Better Cupertino members see the Hills at Vallco as a threat to the suburban character that drew them to Cupertino in the first place. Bringing even more office space to town, the thinking goes, begets new jobs begets housing growth begets an insatiable need for more of the same. “It’s like a loop—it never ends,” says Better Cupertino member Michael Chaba. “Eventually, every patch of grass will be gone; every single-story building will be a five-story building.” 

For development critics, the fact that Sand Hill is pitching the Hills at Vallco as “the social capital of Silicon Valley” is exactly the problem. “It’s too much, it’s too dense, and it’s going to put too much strain on our community,” says Jane Tang (not her real name). She faults the city council for amending Cupertino’s General Plan to allow two million square feet of office space at the mall, a change that Sand Hill claimed it needed in order to make the Vallco redevelopment viable. In Tang’s view, Vallco’s exemption “opens the door for other developers to ask for more.” Cupertino needs Measure C, she says, as a check on what she sees as too many exceptions granted to developers who want to sidestep the General Plan.

“The General Plan is the constitution of the city. How many amendments to the [U.S.] Constitution are there?” Tang demands, rapping an Apple Watch–ensconced wrist on the table. 

Tang, it turns out, works at Apple. (She didn’t want to use her real name while discussing her employer in this story. Full disclosure: This reporter’s spouse is also an Apple employee.) It isn’t a gotcha moment—practically everyone in Cupertino, on both sides of the debate, works in tech. But, given her position, the question is unavoidable: Why is Apple’s mega-campus OK while Sand Hill’s mega-mall is not?

At first, Tang suggests that this line of inquiry is moot, because the Apple campus is already rising—“What’s done is already done”—and anyway, she didn’t attend her first city council meeting until December 2014, the year after Apple’s new campus was approved. At the time, she remembers thinking about her company’s headquarters, “This is so cool. It’s going to be a model of engineering, and it’s going to be one of a kind, a landmark.” But what does she think now? What about the effects on the community? “I agree, it’s going to have a big impact on the schools and traffic,” Tang concedes. “That makes the whole situation scary.” But that very fact only makes it all the more important to hold off on further developments, she says. “We need to see what’s going to hit us before we rush into any decision like this.” 

Tang also argues that because the Apple site was already an office park anchored by HP, the net increase of workers will be much less than the 6,700 new office jobs that the city estimates Vallco will bring. Tang is right: If you go back far enough, to when the site held up to 9,800 workers in the early 2000s, you can say that Apple Campus 2 adds just 4,400 new jobs. But the environmental impact report for Apple Campus 2 puts the job increase at 9,356, more than that of Vallco, because the analysis was carried out in 2011, when HP’s Cupertino workforce was already declining.

Scharf, for his part, thinks the estimate of 6,700 office workers coming to Vallco is unrealistically low. He believes the count could reach as high as 20,000, if Sand Hill’s future tenants choose to pack employees in at a density of one employee per 100 square feet. (The city’s estimate is based on a more modest ballpark of one employee for every 300 square feet.) “I agree with the city’s estimate,” says Sand Hill’s Reed Moulds, though he acknowledges that he can’t predict the future.

After several rounds of “Whose numbers are right?” it starts to seem that the exact amount of growth matters less than who’s proposing it. Tang and others are more worried about getting burned by a developer than by a tech firm—especially when that tech firm is Apple. “From a credibility perspective, Apple has a better reputation,” Tang says of her employer. “Apple cares about the long-term health of that property more than Sand Hill would care for Vallco.”

Look no further, Tang says, than to a troubled Sand Hill project just one town over, the Sunnyvale Town Center. Like the Hills at Vallco, it was conceived as a kind of civic hub, mixing big retail with housing and offices. Though it broke ground in 2007, the Town Center sits partly finished, with offices and a new Target but only the shell of condos and small shops that have yet to arrive—a dead mall of a more recent vintage. The project began to unravel in 2009, when Sand Hill’s capital partner, RREEF, pulled its funding. After four years of litigation, a foreclosure, and several attempts to buy the project back, Sand Hill lost out to a new development team, which was set to resume construction in mid-October. (According to Sand Hill, RREEF accepted responsibility for triggering the foreclosure.) “It was a horrible situation,” says Moulds, and one that prompted the developer to choose its investors more carefully. Sand Hill’s partner in the Vallco proposal is the Abu Dhabi Investment Authority, or ADIA, which controls the Abu Dhabi government’s wealth. ADIA doesn’t disclose its value, but last year the Wall Street Journal estimated it at $621 billion—not quite Apple’s valuation, at press time, of $637 billion.


As Ignatius Ding
sees it, ADIA’s investment in the Hills at Vallco makes the project more suspicious, not less. Ding, Better Cupertino’s media guy of sorts, is sipping a large iced mocha at the Homestead Road Peet’s on a warm Friday afternoon in September. He’s wearing the big smile of someone about to blow open a scandal. The smile is ridged with a thin line of chocolate syrup that dries into the beginnings of an Inspector Clouseau–like mustache. “This is an international front for money laundering,” Ding says of the Vallco project. “It’s a safe haven for the rich and famous in the Middle East to park their money in a progressive and prosperous region, Northern California.” He claims that Sand Hill is just the small-time cover for an elaborate fraud perpetrated by “high-caliber international figures” who “use the Arabs as a front to channel the money through the Cayman Islands and back into the U.S. via investment into real estate.” This entire operation is being replicated up and down the California coast, he says, where hard-to-trace global capital is foisting outsize development on communities that don’t need or want it. It’s all right there in the Panama Papers, Ding says. “Google it.”

And how did Ding first catch on to this alleged international conspiracy? Simple: parking. He thought Sand Hill’s parking allotment for the Hills at Vallco, 9,060 spaces, was insufficient for a project of its size. “You can’t market this in the United States. People are not stupid,” says Ding. “The only way they’re going to do it is sell overseas. That’s the way it is in Shanghai—illegal parking, double, triple parking—but we are law-and-order in this country.” 

According to Moulds, however, Sand Hill’s parking plan was inspired not by international crooks but by a place much closer to home: Apple. When Apple proposed the new campus, 28 percent of its employees were already getting to work without driving alone. To lessen the impact of the new campus, Apple pledged to increase that number to 34 percent. “We thought that was a good model,” says Moulds. Accordingly, Sand Hill plans to take a hit on office rents to attract tenants who are willing to cap their parking and form their own alternative-commute programs.

Ding may be wrong about the origin of Vallco’s parking plans, but he’s on to something—although not exactly what he thought—about big companies stashing revenues overseas. When it comes to avoiding U.S. tax rates, Apple leads the pack. At the end of 2015, Apple held $215.7 billion in cash overseas, more than any other U.S. company—a distinction it has enjoyed since 2009, according to the ratings agency Moody’s. Rounding out the top five tax avoiders are tech giants Microsoft, Google, Cisco Systems, and Oracle, all based in the Bay Area save Microsoft. Cupertino, and the region generally, does have a foreign-money problem. It’s just flowing in the other direction.

In the parallel universe where everyone’s U.S. profits are taxed by our own IRS, hundreds of millions of dollars slosh back to the localities generating them. According to the think tank Citizens for Tax Justice, it’s impossible to know how much more of Apple’s revenues might belong in the United States. But the decline in Apple’s reported U.S. revenues over the past decade might offer a clue. In 2005, the tech giant’s U.S. revenues accounted for 58 percent of its overall haul; by 2015, they accounted for just 35 percent. If we assume that 58 percent of the $233.7 billion Apple banked in total revenues last year belongs in the United States, we get $135 billion, much more than the $81.7 billion Apple reported. If Cupertino had a gross receipts tax similar to San Francisco’s, Apple would have forked over $641 million to Cupertino in 2015. Forget traffic woes: That’s enough to kick-start a fearsome light-rail fund.

Of course, that parallel universe doesn’t exist. And so here we are, in the universe we have, calculating the likely square footage per office worker and treating parking plans as international conspiracies. How much easier it is to obsess over rush hour gridlock and the future sardine quotient of cube jockeys than to ask your resident multibillion-dollar company—nay, your employer—to pay its share of taxes to absorb the influx of people that it helped spur. Why bite the hand that feeds you, when you can bite the other people trying to eat?

 

Originally published in the November issue of San Francisco

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