PALO ALTO, CA --- The city of Palo Alto and Tesla Motors said the electric vehicle manufacturer will develop and produce vehicle components in a renovated building in the Stanford Research Park in Palo Alto.

Tesla, which is already producing and selling highway-capable electric vehicles, will lease an approximately 350,000-square-foot building on a 23-acre parcel at 3500 Deer Creek Road. The facility will supply all-electric powertrain solutions to Tesla Motors vehicles and other automakers.

Tesla will also move its corporate headquarters from San Carlos to the site later this year. Roughly 350 employees will work in Palo Alto initially, with space for up to 650 people at the facility.  

The facility was formerly occupied by Hewlett-Packard and Agilent Technologies. The three-building complex is minutes away from Stanford's main campus and from the garage in Palo Alto where Bill Hewlett and Dave Packard built their original audio oscillator.

"Silicon Valley and the Stanford Research Park are synonymous with innovation and entrepreneurship," said Tesla CEO Elon Musk. "It's an ideal place for a new car company trying to rethink many aspects of the traditional automotive business."

"Our city is a leader in promoting sustainability and has a strong commitment to green technology. Therefore we're extremely pleased to welcome Tesla to Palo Alto," said James Keene, Palo Alto city manager.

Tesla sells powertrain components to other automakers so they can get affordable EVs to customers faster. Tesla is already producing EV components for Germany's Daimler, maker of Mercedes. The company will build the electric version of the Smart city car using Tesla battery packs and chargers. 

Tesla is probably best known for its $128,500 all-electric Roadster Sport. But the company is due to release its more affordably priced Model S at the end of 2011. The all-electric Model S will start at $49,900, after a $7,500 federal tax credit.

"Tesla is rapidly recruiting new employees, and this fabulous working environment and proximity to Stanford University will give us excellent access to top engineering talent," said JB Straubel, Tesla's chief technology officer and leader of the powertrain group. Straubel received a bachelor's degree in energy systems engineering and a master's in energy engineering, both from Stanford.

Tesla is in site negotiations for an assembly plant for the all-electric Model S. The sedan will be produced at a separate assembly plant in California -- not at the Palo Alto site.

Tesla said it will renovate the Deer Creek Road facility to the highest environmental standards, incorporating sustainable building practices certified by the Leadership in Energy and Environmental Design program. Construction is expected to begin in early fall.

Financing will come in part from loans from the U.S. Department of Energy. Last month, Tesla received approval for nearly $465 million in low-interest loans to accelerate the production of affordable, fuel-efficient electric vehicles.

The loans are part of the Advanced Technology Vehicle Manufacturing (ATVM) Program, which provides incentives to new and established automakers to build more fuel-efficient vehicles.