Theoretically I believe it is still very difficult to create a flag lot (the city started discouraging flag lots quite a few years ago). However it was done recently on Marion Ave. The property was fairly narrow (55') and long. One adjacent neighbor already had a flag lot, the other didn't.
A substandard lot in Palo Alto is one which is less than 50' wide or less than 83' deep. The city of Palo Alto will probably not allow subdividing if it will create a sub standard lot.
Currently a normal R-1 lot is one which is between 6,000 and 9,999 sf. Shortly after Steve Jobs bought his neighbors house, bulldozed it, and turned it into a small apple orchard, the city made it difficult to combine lots to create a larger one. The current "goal" seems to be to prevent anything which reduces the number of homes (which is good if you are wanting to subdivide).
A 30,000 sf lot recently sold for $4.2M in a typical Palo Alto neighborhood (California & Louis). It would probably be easy to turn it into three lots, but turning it into more will take time, effort and skill. If you are thinking to subdivide a Palo Alto lot the land will probably cost over $2M.
It would be quite difficult to exceed the maximum allowed lot coverage or the maximum gross floor area. People wanting to build large houses need to find a large lot.
For some general guidelines see
To read a short diary of my experience building a new house in Palo Alto see
Living in and having sold more properties through the MLS in Palo Alto than any other agent, I can assure you there are no simple rules. If you can make a strong case for subdividing it can be done. Your neighbors will likely fight anything which requires a variance. Don't hesitate to give me a call and chat or to send me an email.
Top 2 agent nationwide at Keller Williams Realty, the nations largest
Over 30 years experience (and many more ahead)
Over 1,000 homes sold in Santa Clara and San Mateo Counties
If the process was easy there would be a lot more developers who would be buying old homes on large lots and subdividing. There are very few parts of Palo Alto where the lots are 10K or more. There are a few in Barron Park in the back towards Bol Park but I know those lots are not allowed to be subdivided. There are large lots in Old Palo Alto but most of the time one is sold for lot value it is because the small house will torn down and a large one built in its place. I am guessing that people have tried and been turned down by the city.
Keller Williams Palo Alto
I sold one of the largest parcels within city limits last year that will be subdivided for development (2.45 acres, $15.8M, closed in November - see "567 Maybell" under Sold listings in my Trulia profile).
Some parcels can be subdivided, some can't. You definitely want to check with the development department to get the straight scoop on zoning for the property you have your eye on.
That said, Palo Alto values are the best in Silicon Valley and if you can find a deal on a parcel it is without a doubt worth investigating.
You may be able to get some general information in regard to your question in this forum. I do not think you would be wise, however, to make a decision based on the information obtained here in regard to the rules for dividing a lot and building a house in Palo Alto.
The City of Palo Alto Building Department is the place to get the correct information that you need. http://www.cityofpaloalto.org/gov/depts/pln/building/default.asp