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Illinois Property Tax Incentive Could Change The Game For Affordable Housing Development

Chicago's local development community has worried for years about the specter of higher property taxes and the city's more stringent requirements to include additional affordable housing units in new multifamily projects.

But last year’s Affordable Housing Omnibus Bill, signed into law by Illinois Gov. J.B. Pritzker in August, created a property tax relief program that could calm both fears while serving as a model for getting affordable housing built.

Developers and landlords of all sizes, who do work in all kinds of communities — from low-to-moderate-income neighborhoods on Chicago’s South Side to pricey downtown submarkets — will now be able to get their assessed values reduced and limit the amount of property taxes owed if they reserve a set percentage of units for affordable housing after rehabbing or constructing a new building.

The law took effect Jan. 1. And developers that had been reluctant to build in the city say it could be a game-changer.

A CIC-funded rehab on Chicago's South Side

“We have been looking at Chicago on a much more limited basis for about three years,” Fifield Cos. Executive Vice President Lindsey Senn said. “But based on the conversations we’re having today, we do believe this incentive, if it comes to fruition as the state intends it, will again make deals financially feasible in the city of Chicago.”

“[This] is groundbreaking legislation that will fundamentally change the way developers approach affordable housing in this state,” Related Midwest President Curt Bailey said in a statement. “It creates affordability in areas where none previously existed and leads to higher quality housing.”

Related Midwest plans to seek such property tax relief for its 900 West Randolph, a 43-story, 300-unit mixed-use project for Fulton Market that broke ground in November, Bailey added. It is part of a special district created by the omnibus bill that specifically covers downtown Chicago and the surrounding neighborhoods

But the program is statewide and designed to benefit everyone from developers launching $100M residential towers in hot markets like Fulton Market and the Gold Coast to rehabbers of seven-unit buildings in low-to-moderate-income neighborhoods such as Englewood or Pullman on the South Side, according to Stacie Young, president and CEO of Community Investment Corp., a nonprofit lender.

“The borrowers who come to CIC are typically looking to do rehab work in neighborhoods that historically have experienced disinvestment,” she said. “Hopefully, having some predictability and transparency when it comes to property tax relief means these borrowers can buy more buildings and do more rehabs in a responsible way.”

There are three tiers of benefits to the program, each designed to help a different kind of developer or landlord, said Young, who until last year headed The Preservation Compact, a CIC program that for years brought together property owners, community groups, affordable housing advocates, developers and government agencies, including Cook County Assessor Fritz Kaegi’s office, to help design legislative solutions for property tax relief and to ease the construction of affordable units.  

“We brought all of the constituents together and said, ‘Let’s come up with something that helps everyone,’” Young said.

The strategy worked. Although disputes between developers and housing advocates can be contentious, the omnibus bill passed the state Senate by a 59-0 vote. 

Anyone wanting to qualify for the first tier needs to reserve 35% of units for affordable housing, meaning they are rented to tenants at 60% or less of the area median income, as well as investing at least $12.50 per SF into the building. In return, these owners will get a 35% reduction of their buildings’ assessed values for up to 30 years. This will likely work best in low-income neighborhoods where the rents are already low, making it easy for landlords to hit this benchmark, Young said.

The second tier calls for reserving 15% of a building’s units as affordable housing, along with new investments of at least $8 per SF, which gets owners a 25% reduction in their assessed values. This will work best for owners in higher-cost markets such as Rogers Park or Lincoln Square on the North Side, where lowering the rents on 35% of the units would be tough, Young said.

A key aspect of the program is that the investments made must be for things that increase long-term value, which can include boosting energy efficiency, accessibility or in other primary building systems.

“The investments can’t be in marble countertops,” Young said.

Cook County Assessor Fritz Kaegi at the December 2019 Analysts Day

Young added that the program isn't a way to simply lower property taxes. Instead, it should encourage landlords to invest in their buildings and create affordable housing. CIC did a few case studies of some of its renovated affordable multifamily properties and found that if landlords did the same renovations under the new law, the projects would likely owe roughly the same in taxes despite the increased values.

“It’s not as if this is going to be a big shift in the property tax burden,” she said. “It just means if landlords hold onto the affordable units, they’re not going to get some wild, unpredictable tax bill.”

Keeping a couple of units affordable in small buildings and getting property tax relief in return are relatively straightforward deals, and that simplicity could bring in many landlords and developers who have been reluctant to jump into the world of subsidized housing, according to Veronica Gonzalez, regional director of development for the Midwest at the NHP Foundation, a nonprofit that seeks to preserve and create affordable housing.

Landlords could accept tenants with housing vouchers from their local housing authority, but many owners fear getting entangled in that bureaucracy, she added. And although Low-Income Housing Tax Credits and other tools can also finance affordable units, these usually involve complicated, multilayered financing, which frequently means bringing on a partner that knows how to put such deals together, Gonzalez said. Some people are just not ready for that.

“It’s a niche part of the commercial real estate market, and either you know it or you don’t, and it’s not how you make your money,” Gonzalez said.

Senn said she is optimistic these changes will kick-start new deals.

“We won’t pencil deals in Chicago, but they are starting to make sense again,” she said.

Fifield Cos. developed several West Loop apartment towers over the past decade, helping transform it into an upscale residential neighborhood. In the last three years, though, the company got hit with a double whammy, Senn added.

Kaegi won election in 2018 by promising to rebalance assessed values in favor of single-family homeowners, shifting some of the property tax burden toward commercial owners, who he said had been getting favorable treatment from his predecessor. Then, in 2021, the Chicago City Council updated the city’s Affordable Requirements Ordinance, which now requires downtown developers to set aside 20% of new units for affordable housing — or pay fees into the city’s affordable housing fund.

“That was pretty much the nail in the coffin,” according to Senn.

She added that Fifield Cos. didn't simply opt to avoid new downtown deals. Its institutional partners and lenders were looking at the prospective bottom lines, and they decided uncertainty over property taxes, as well as that 20% affordable requirement, made it impossible to move forward with new developments.

“We were not hitting the metrics they required to make a deal,” Senn said.

43 Green

The property tax relief program may provide a way around both obstacles, she added. Now, instead of just absorbing the costs of setting aside a chunk of units as affordable, developers that hit the 20% affordable threshold will get something in return. In the first three years, they will get a 100% reduction of the difference in assessed values between the base year, meaning one year before the affordable units are occupied, and the post-construction values. The reduction goes down to 20% by the 13th year and lasts until the property is 30 years old, as long as the affordability is maintained.

An added benefit, according to Senn, is that it will encourage builders to include affordable units on-site rather than just paying into the affordable housing fund, helping the city achieve its goal of making sure low-income renters have affordable places to live in all communities, even expensive neighborhoods such as downtown.

Although a lot of details need to be ironed out with the assessor’s office, potential lenders and investors are sending positive signals to Fifield Cos., Senn said.

“It’s really, for us, the only way that projects work,” she said. “We don’t dictate that; the debt and equity markets do.”

Developers of large-scale affordable housing projects are also cheering the new program, according to Jeff Head, vice president of development for The Habitat Co.’s affordable housing division. His firm has several major projects underway, including the 91-unit first phase of 43 Green, a mixed-use development now rising near the 43rd Street Green Line stop in Chicago’s Grand Boulevard neighborhood, which will reserve 50% of its units for affordable housing.

The company is also building Ogden Commons, a 10-acre, $200M mixed-use development on Chicago’s Near West Side. It is also handling the redevelopment of LeClaire Courts, a former Chicago Housing Authority community on the Southwest Side. Both of these new developments will provide mostly affordable housing.

Unlike market-rate developers, Habitat can’t just raise the rent if escalating property values push up the amount of tax owed, so the company plans to pursue the 35% reduction in assessed values for all three, according to Head. That will do more than improve Habitat’s bottom line. Limiting the amount owed in property taxes means more funds that can go toward the buildings’ upkeep, and perhaps even allow the firm to set aside enough to launch new projects.

“The stability and certainty on taxes that comes out of this is the biggest win for us,” he said. “It’s a big benefit for the entire affordable housing community and will make a significant difference going forward.”