Will new legislation fix Chicago’s affordable housing crisis, or stymie development?

As Chicago struggles with an affordable housing crisis like many cities across the nation, a coalition of local aldermen and community activists have proposed a new set of rules to govern the city’s affordable housing requirements in new development projects.

Dubbed the “Development for All Ordinance,” the proposed legislation was the topic of a press conference and City Council hearing on Wednesday. Introduced in July, the measure aims to address the “failures” of Chicago’s current Affordable Requirements Ordinance (ARO), said its chief sponsor, Alderman Byron Sigcho-Lopez (25th).

“Under the previous ordinance, the city, in over a decade, created just over 400 units of affordable housing and a few dozen units for families,” said Sigcho-Lopez. “The results are very clear: Over 40,000 Latinx residents left communities like Pilsen, Logan Square, and Humboldt Park, and 280,000 Black residents left the city because of a lack of affordable housing. Today, we tell the City Council that affordable housing is not an option; it is a priority.”

What is the ARO and how did it fail?

In Chicago, the ARO requires developers to provide a percentage of affordable housing in projects that receive financial assistance from the city, such as a zoning change or the contribution of city-owned land. These units must be affordable for households earning 60 percent or less of the Area Median Income (AMI).

The existing ARO rules call for a minimum of 10 percent affordable housing in these projects. In certain areas of the Near North Side, Near West Side, and Milwaukee Avenue corridor, the ratio increased to 15 to 20 percent as part of a pilot program introduced by the city in 2017.

Instead of building those units on-site, developers frequently take advantage of an option to pay an “in-lieu fee,” which goes to city initiatives like the Affordable Housing Opportunity Fund and the Chicago Low-Income Housing Trust Fund. Developers choose to make these one-time payments because it is typically more profitable than charging lower rents over the lifetime of a building.

Between 2007 and 2017, the ARO accounted for roughly 440 affordable units in market-rate developments. During that same time, 88 projects opted out of providing any affordable units on-site. Had developers not been given that option, the ordinance would have created more than 1,200 units, according to the Chicago Housing Initiative advocacy group.

The majority of the units that were built under the ARO have been smaller studio and one-bedroom apartments, which opponents argue don’t fit the needs of families. And a 60 percent AMI studio still rents for $904—which can be a difficult ask for households with two adults working full-time at minimum wage jobs.

How the Development for All Ordinance would change the ARO

Under the terms of the ordinance, developers would no longer have the option of paying a fee and must instead provide physical units—either directly on-site or in a similar building nearby.

The percentage of required affordable units would increase, depending on location. In low-income areas, new developments would require the same 10 percent of affordable housing as before. The ratio steps up to 20 percent in moderate-income neighborhoods and swells to 30 percent in “affluent areas” as well as in moderately-priced areas undergoing intense gentrification and displacement.

Additionally, the legislation redefines “affordable” to include a wider range of lower-income individuals and families by proposing that 50 percent of units provided under the ARO will be set aside for residents earning 50 percent of the AMI. The remaining units will be split evenly between 30 percent and 20 percent AMI.

Even with the proposed changes, the ARO has limitations

Supporters hope the legislation will help reverse decades of segregation and exclusionary policies that led to Chicago’s “two cities” narrative where downtown and the North Side flourish while areas of the West and South sides are challenged by disinvestment.

Chicago’s ARO was envisioned as an inclusionary measure that would create new affordable housing in areas already experiencing new investment. So the policy, at least in theory, adds affordable options to neighborhoods in which low-income renters and minorities are being priced out.

The ARO itself, however, has little direct impact on areas where no development occurs. Housing assistance programs in these neighborhoods often come from the same developer in-lieu contributions that Development for All Ordinance proposes to eliminate.

“The ARO is not and never has been one of the city’s primary vehicles for production [of affordable housing],” explained Daniel Kay Hertz, policy director with Chicago’s Department of Housing. “In 2018, the ARO approved deals with 270 units, which was relatively a high year, but the our other multifamily rehab and construction programs produced over 1,200 units during the same time, and we subsidized over 2,500 rental households through the affordable housing trust fund.”

In other words, amending the ARO won’t necessarily solve Chicago’s affordable housing crisis on its own. Critics say a consequence of the Development for Ordinance could be reduced funding for other affordable housing initiatives and programs in low-income areas. The ordinance might encourage more development in low-income neighborhoods compared to more affluent areas saddled with steeper affordable housing requirements, but developers won’t build in areas where they can’t get a return on investment.

“We absolutely share in the goal of finding ways to make development and investment patterns in the city more equitable than they are now,” added Hertz. “But we do have some concerns about the viability of the ARO as a mechanism to do that simply because, in many of the low-income neighborhoods, full market rates aren’t enough to cover the cost of construction. So the only multifamily homes being built there are the ones that are subsidized.”

Making the numbers work

It will be vital to establish a balance between the affordable housing policy and incentives for private developers.

If the requirement cuts too aggressively into profit margins, builders won’t be able to recoup already soaring construction costs or get financing from banks. Whether the city requires 10 percent affordable housing or 30 percent, the number of units is zero if a project never gets off the ground.

During the meeting’s public comment period, Jonathan McCulloch, co-CEO of development firm Belgravia Group, voiced concerns based on his company’s experience abandoning a condo project after the passage of the Near North Side ARO pilot zone slashed projected profits from 15 percent to 5 percent.

“When a developer seeks to build slightly larger, family-style for-sale units, the cost impact of additional on-site units is exponential, not linear. This creates a huge impediment for the creation of market-rate and affordable housing.”

“We need to find that sweet spot,” said Alderman Daniel LaSpata (1st), a cosponsor of the Development for All Ordinance, who acknowledged that the developers work within specific pro formas that ultimately determine if a project is financially feasible or not. “It’s our challenge as a city to get that right.”