City Wants To Change Controversial Affordable Housing Ordinance, But Agreement Is Hard To Find
Want to get a jump-start on upcoming deals? Meet the major Chicago players at one of our upcoming events!
One of the city of Chicago’s most controversial methods used to create affordable housing units will likely be amended under Mayor Lori Lightfoot, but advocates and developers can’t agree on what needs changing, and for now at least, the new administration hasn’t decided what it wants to do.
The Affordable Requirements Ordinance was first implemented in 2007. In general, it requires private developers that need a zoning change for a residential project, or ones that receive city money, to set aside 10% of the total units as affordable housing, or pay an in-lieu fee to the city, generally between $128K and $178K per unit, which the city will use to create or preserve affordable housing elsewhere in the city.
The law did not live up to its promise, according to a report put out by Lightfoot’s transition team just before she took office in late May.
Developers mostly chose to pay the fees, and built only a few hundred affordable units to meet their ARO obligation, the team said. Meanwhile, the problem of housing affordability in Chicago worsened.
“A lot of us thought there would be more new units developed, and it is frustrating,” Chicago Rehab Network Director of Operations Rachel Johnston said.
The group, a citywide coalition of neighborhood and community development groups, pushed to enact the original ARO, and although they still consider it a valuable tool, they also hope the new administration will make changes that strengthen the law.
Through the in-lieu funds, the ARO program launched in 2007 and another begun in 2015 together have generated just over $100M for affordable housing. That is the city’s largest pool of money dedicated to affordable housing, and sustains thousands of affordable homes, Johnston said.
But that has come at the cost of the private affordable units advocates had hoped for. According to Cushman & Wakefield, which completed a study on the ARO for the Homebuilders Association of Greater Chicago and the National Homebuilders Association, found it created only 450 on-site units, or about 54 per year since it began in 2007. Another ARO program begun in 2015 is responsible for 332 units, either completed or planned.
Builders have criticized the ARO for years, and believe meeting its requirements adds a layer of complexity to development and acts as a tax.
One of the most controversial aspects of the law, and which may present the Lightfoot administration with its toughest challenge, was the introduction in 2017 of three pilot areas, which boosted the percentage of affordable units that developers needed to include, in some cases up to 20%, and would not allow the option of paying in-lieu fees.
One zone stretches north from the West Loop up to Goose Island, another covers much of the West Side and a third stretches along Milwaukee Avenue, encompassing many of the neighborhoods on the Northwest Side, including gentrifying areas like Logan Square.
The pilot areas were only meant to last for three years, but most people in the development community say the verdict is in.
“No one is saying inclusionary zoning is a bad thing, but the 20% requirement has killed affordable development in the pilot zones,” Cushman & Wakefield Managing Director Susan Tjarksen said.
The Cushman & Wakefield study found that no units were completed under the three ARO pilot programs.
However, it did find 72 units were under construction in these areas, suggesting a possible turnaround.
“The ARO pilots are temporary affordable housing requirements that are helping the City to evaluate the effects of targeted, anti-displacement policies alongside other local market conditions,” according to a city spokesperson. “It’s still early to make conclusions, but the Lightfoot administration is committed to learning from their impact and exploring new and innovative ways to help families remain in their neighborhoods.”
The city also reported somewhat higher numbers for unit production in the pilot areas. It found 149 units were either completed or will be completed in the Near North/Near West areas between 2017 and the end of 2020, and 27 in the Milwaukee Corridor.
And 27th Ward Alderman Walter Burnett, whose district includes much of the land covered by the Near North/Near West pilot areas, believes developers can hit the goals set out in the ARO, including in pilots.
“It’s hard for me to empathize with developers who say they can’t fulfill the requirements, when I’ve had so many others do so,” he said.
“The developers of Atrium Village are doing 20%,” he pointed out, referring to Onni Group’s planned community of 1,498 units rising on the Near North Side around the intersection of Division and Wells streets.
Although this project lies outside the pilot area, Vancouver-based Onni agreed to provide 300 total affordable units, roughly 20%, in order to win support from Burnett and the previous owners, a group of churches that built the original 309-unit building at the site.
Other developers have dropped hints that they may launch substantial projects within the Near North area that could hit the 20% goal. Last year Curbed Chicago reported that Deerfield, Illinois-based CRM Properties filed a zoning application to build a 465-foot tower with 500 units at 1520-1576 North Fremont, just inside the pilot area and Burnett’s ward.
Neither developer has unveiled final plans for the sites, and city officials say no formal plans have been filed. Representatives from CRM Properties and Onni didn’t return calls seeking comment.
But developers remain adamant that the pilot program has made new construction next to impossible, at least when zoning changes are needed.
Even Onni may not have figured it all out — last year, Crain’s Chicago Business reported that Onni planned to purchase Greyhound’s land on the southern tip of Goose Island for $50M, but the deal fell through partly due to concerns the 20% ARO requirement would make putting 1,000 apartments on the site prohibitively expensive.
“That is the opposite of what was intended,” Belgravia’s Goldman said.
His firm recently began construction on Triangle Square, a seven-story rental condominium development nestled between Lincoln Park and Bucktown, near the site of Sterling Bay’s $6B Lincoln Yards. It is outside the pilot areas, but as Belgravia needed a zoning change, the company was required to set aside 10% of the units for affordable housing, or contribute in-lieu fees to the city’s affordable housing fund.
Triangle Square will have 300 apartments and 66 condominiums, so that meant the developers were bound to create the equivalent of 37 affordable units.
“That was challenging, but we were able to make it work, even though it also meant increased risk,” he said.
Meeting the goal was easier with a project of this scale, he said. The structure will be around 80 feet high, making it cheaper to construct than a skyscraper, and the company tweaked the design, shrinking the units a bit to make it even more cost-effective.
But even with those strategies, Triangle Square will only end up with nine affordable units on-site, and the developers paid in-lieu fees totaling roughly $3.6M for the remaining 28. It is easier that way, because the on-site units’ lower rents generate little or no profit, which in turn makes a project more difficult to finance, or to attract institutional buyers if the developer wants to exit after lease-up, Goldman said.
Choosing to satisfy most of the affordable housing requirement by paying in-lieu fees is not the best option for the city, because although the funds generated by such fees are helpful in building and preserving thousands of affordable homes, they don't help create mixed-income communities that break Chicago’s long-standing patterns of segregation, according to Kendra Freeman, director of community development and engagement at the Metropolitan Planning Council, a Chicago-based nonprofit that promotes cooperative planning and development.
“These units are typically in segregated areas of high poverty and disinvestment.”
Furthermore, even the units developers place on-site frequently don’t meet the needs of families that need affordable housing, Freeman said. The most acute need is for apartments with several bedrooms, but it is far cheaper for developers to satisfy the ARO by including one-bedroom units and studios.
From 2007 to 2017, developers created only 22 three-bedroom units under the ARO, Freeman said.
That amount of production is not going to solve the region’s affordable housing problem, according to statistics from DePaul University’s Institute for Housing Studies. Researchers found the gap between the supply and demand for affordable units in Cook County stood at about 180,000 in 2017, up from 176,000 in 2012.
“The ARO is just scratching the surface,” Freeman said.
Even though Belgravia specializes in less expensive low-rise construction, Goldman said the company has been unable to successfully launch any new projects in any of the pilot areas.
“Land isn’t cheap, and construction costs continue to dramatically rise,” he said. “My experience has been that the increase in affordable requirements essentially stopped new development in those areas.”
“I applaud the intentions to create more affordable housing through the ARO, but I also think it’s important to note that this method is not achieving the desired result, and the changes to the pilot areas has just exacerbated the problem,” he added.
He said the Goose Island development that Onni might build, along with CRM Properties’ proposal on the 1500 block of North Fremont, may be unusual cases. The size of each project gives them economies of scale, which may make it easier for these developers to include the number of affordable units called for by the pilot programs.
The willingness of Greyhound to eventually accept $38M from Onni for its land was also a bit unusual, Tjarksen said.
“Onni is a great, very responsible developer, so if anyone can figure [out] how to include so many affordable units it is them, but Greyhound is very much an outlier,” Tjarksen said.
Even Onni’s Atrium Village affordable housing proposal has generated controversy. It unveiled plans to put more than 200 of its affordable units into the original building, constructed in the 1970s, which it wants to preserve, and put the remainder into the gleaming new towers rising on the site. That would make providing the affordable units far less expensive. A group of residents sued the developer, saying it was discriminatory to put the lower-income units into the older building, but the case was settled, and Onni’s proposal won the support of Burnett and the city.
Residential development has continued in pilot areas on projects that don’t require zoning changes, but Goldman maintains that by putting a damper on at least some new development, and forcing developers to raise the prices of the remaining units in affected projects, the ARO squeezes many renters.
“I’m not talking about the 1-percenters, I’m talking about middle-class people working in the city, including teachers, firefighters and nurses, that make too much to qualify for the subsidized units, but can no longer afford the others,” he said.
He hopes the new administration will consider lightening the burden on residential developers, perhaps by spreading that burden to others. The office sector, for example, gets tremendous benefits from the new residential buildings, as their employees gain comfortable and convenient places to live, cutting down commutes and boosting productivity, but office landlords and developers aren’t required to contribute anything to affordable housing funds.
“I know no one is going to step up and say, ‘yes, we will take up some of the burden,’ but we all have an obligation to address the housing crisis, because it’s an issue that concerns the viability of the real estate industry, and the viability of the city of Chicago.”
Whatever direction the Lightfoot administration takes, the Metropolitan Planning Council doesn't want to ditch the ARO. The organization sees it as one tool among many in the fight to create a more affordable and less segregated city, and wants to see it strengthened and reformed.
Freeman said that in addition to more funding, developers and the city need to make sure the ARO benefits families in need. She suggests it may be helpful for private developers working to satisfy ARO requirements to partner with affordable housing developers, similar to Related Midwest’s efforts to redevelop the Chicago Housing Authority’s Lathrop Homes on the Near North Side, where the firm works with the Heartland Alliance, a social service organization, and Bickerdike Redevelopment Corp., an affordable housing developer.
“A lot of private developers don’t have the skill set or the knowledge to do this well,” she said.
Her biggest fear is that even though the funds generated by the ARO are sorely needed in many areas, if it continues to produce few on-site units in healthy, vibrant neighborhoods, it will re-create the city’s patterns of segregation.
“We have to be thoughtful about how affordable housing is being built, and where it’s being built.”
She is heartened that Lightfoot re-established the city’s Department of Housing as a separate entity, and selected Marisa Novara, a former housing activist and former vice president of the Metropolitan Planning Council, as its commissioner.
“It’s a strong signal that the city is taking housing affordability seriously.”
“Like Mayor Daley, Mayor Emanuel would go out to housing events, like a ribbon-cutting, and then talk about other things, like education or employment, and even though those are important, it showed how he didn’t get the role played by affordable housing in creating stability.”
She points to the loss of population in many African American neighborhoods as a sign the city hasn’t done enough to promote stability.
Whatever limitations the ARO has, she feels private developers can play a role.
“We’re not an anti-development organization, and the ARO is also not anti-development, and at the very least, it forces a conversation about affordable housing and forces private developers to think more about it.”
UPDATE, JULY 25, 4 P.M. CST: Comments from a city spokesperson have been added, along with some figures on the numbers of ARO units.