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City's New ADU Ordinance Is Another Tool For Affordable Housing, But Without Burdens On Multifamily Developers

Mayor Lori Lightfoot has been in office exactly two years, and in that time, she and the Chicago City Council changed the landscape for affordable housing. Some of the new rules imposed what many multifamily developers see as burdens, especially recent updates to the Affordable Requirements Ordinance, which now requires builders receiving zoning changes or other city assistance to set aside 20% of the new units in many neighborhoods as affordable.

Affordable housing advocates achieved another long-held goal last year when the Chicago City Council approved the Accessory Dwelling Unit Ordinance, overturning the ban on the construction of coach houses. New construction of such homes, which populate backyards across the city, was prohibited in 1957 after some residents complained to City Hall that they led to overcrowding.    

A proposal for a new Chicago coach house

But for neighborhoods with a gap between the supply and demand of affordable housing, advocates consider density a big plus. The new rules took effect on May 1, allowing small building owners in five pilot areas to add a backyard coach house or create new interior apartments in spaces such as basements.

“Is this going to solve our affordable housing crisis on its own?” 35th Ward Alderman Carlos Ramirez-Rosa said. “Absolutely not. But is it a good tool we should be employing? Absolutely.”

Unlike other initiatives to boost affordable housing production, homes created under the ADU ordinance will not require funds from the city or impose set-asides on large multifamily developers. And experts say they expect small property owners, rather than large developers, to use the ADU and that the new rules will help ease gentrification in areas such as Logan Square by providing more options for renters and boosting the incomes of homeowners and small landlords who add new apartments or houses to their properties.

“What we hope is that building that additional unit will help people keep up with their bills,” Ramirez-Rosa said. His Northwest Side ward is mostly within a pilot zone. The five targeted areas total 50 square miles on the North Side, Northwest Side, West Side, Southwest Side and Far South Side.   

“This is not something that really fits within our wheelhouse, but it is in the wheelhouse of small property owners,” according to Vic Howell, development manager of Chicago-based Focus, the general contractor and co-developer of 167 North Green St., a new 750K SF office tower in Fulton Market, among other projects.

Focus joined last year with bKL Architecture to produce feasibility studies, renderings of possible ADU designs and cost estimates that helped guide city officials and council members as they crafted the ordinance, Howell said.

Focus found the construction cost for a two-story coach house prototype would be about $192K, including materials and labor, significantly less than typical new construction units. That means a homeowner could secure a loan with no money down and rent the unit for about $1,550 per month, which could result in net additional annual income of around $2K after loan repayment.

And unlike ARO units, city officials won’t need to impose income restrictions that govern who can live in the new homes.

“Any units added to this market is going to benefit everyone,” Howell said. “And if they can create a large number of units at low price points, it will take stress off of other areas.”

“In the cities we studied, more often than not, because these are small units, they tend to rent out at a low cost, so it adds to the affordable housing stock,” Urban Land Institute-Chicago Director of Community Engagement Swasti Shah said.

After examining the record of ADU-type ordinances in other cities, including many on the West Coast, ULI-Chicago developed last year a set of best practices that Chicago officials used to design their own ADU ordinance.  

Ramirez-Rosa said once ADU development in Chicago gathers steam and increases neighborhood density, it will bolster more than housing markets.

A Bucktown coach house

“A key marker of thriving commercial corridors such as Lawrence, Fullerton and Milwaukee avenues is the density of the surrounding neighborhoods, because it’s density that provides the shoppers that stores need. In too many neighborhoods, we’re seeing a lot of expensive new single-family housing that doesn’t provide the density needed by commercial corridors.”

The city started accepting intake forms from building owners on May 3, and in the first 10 days, 110 were filed, according to Chicago Cityscape, which examined city records. Seventy were for new interior conversion units, and the rest for new backyard coach houses. 

Ramirez-Rosa said he considers that level of interest a big victory.

“That’s 110 units that weren’t legal before, and they will provide housing for people for generations to come,” he said.  

Howell said starting with mostly interior conversion units will also help get the program off the ground. Separate coach houses will be more complicated than simply transforming basements into apartments, and most property owners have little or no experience in development.

“That’s in line with what we assumed would happen,” he said. “We believe that at least initially, it’s probably going to be more conversion units because these will be less costly and take less of a skill set.”  

Whether the ADU ordinance succeeds will depend on how well city homeowners learn the development game, Howell added. City officials, nonprofits and developers will need to step up and educate interested landlords so they have the financial literacy needed to break ground on what for many will be major projects.

“This ordinance is a great idea, obviously, but for most people, it’s also something they’ve never done before,” he said.

Along with the American Institute of Architects and several city officials, ULI-Chicago launched a free webinar series earlier this month to teach homeowners the basics of development, Shah said.

Howell said it’s also possible that as more homeowners jump in and complete units, the city will need to tweak the law, perhaps by adding more financial incentives, if income from the new units doesn’t offset the costs of construction.

Shah said it did take a few years to ramp up unit production in West Coast cities with similar ordinances. But these cities typically included costly obstacles for homeowners, such as requiring additional parking spaces for new units. Chicago officials learned from these mistakes, ditching new parking requirements, among other features that should cut costs.

“Chicago’s ordinance comes out of the gate already having the elements that a lot of cities had to go back and modify,” Shah said.

Ramirez-Rosa hopes that as the program takes hold, larger owners and developers will see it as a way to increase the values of their own properties.

“Some of the folks who own courtyard buildings will be able to add multiple ADUs to their properties,” he said. “They won’t need to go through a zoning change, so if you have the capital, our hope is that they will build out that space.”