Multifamily N Illinois

Exploring the Lightfoot platform, part one: Affordable housing

Exploring the Lightfoot platform, part one: Affordable housing,ph1

Though the bull market that has charged out of the Great Recession continues apace, Chicago residents overwhelmingly voted in progressive candidates during the April elections, including a new mayor, Lori Lightfoot. What impact might a more reform-minded agenda have on the city’s market-rate and affordable housing?

[This is the first in a two-part series looking at the policies of Chicago’s new administration. In the second part we focus on bringing economic development to communities outside the central business district.]

Before looking into the effects on commercial real estate, it’s worth mentioning that these reforms are severely needed. From gun violence to tax encumbrance, resident emigration to socioeconomic segregation, the city’s issues are well documented.

According to a recent report by the Urban Institute looking at investment inequality among Chicago’s neighborhoods, low-poverty neighborhoods received more than four times the market investment that high-poverty areas did between 2011 to 2017.

While public and mission-driven investment sources directed 10 times more funding to poorer neighborhoods, their work was far surpassed by the free market. From 2011 to 2017, the prime years of economic rebound following the Great Recession, private lenders invested $67 billion into the Chicago market—well more than the $4 billion that mission-based funding provided.

“We’re talking about literally decades of disinvestment,” Mayor Lightfoot recently said. “Seeing it from the ground level, talking to the people in those neighborhoods and understanding from their perspective what needs to be done is motivating to me and will be motivating to my team.”

So what solutions has the Lightfoot administration proposed to open up opportunities for those neighborhoods who haven’t enjoyed the fruits of this record-long development cycle? In a 116-page report compiled by her transition committees, a number of policies are laid out that her administration should take a hard look at.

These include everything from police reform, infrastructure and the environment. But the report goes into great detail addressing the multifaceted affordable housing and neighborhood outreach efforts that the Lightfoot administration should adopt to break down the barriers to opportunity that many in Chicago currently face.

Affordable Requirements Ordinance

The transition report suggests that Lightfoot and her administration consider how the Affordable Requirements Ordinance (ARO) can better support the creation of new affordable homeownership units across the city.

First introduced in 2007, the ARO requires some multifamily developments to supply at least 10 percent of units at affordable rates. An amendment in 2015 increased the in-lieu fees that developers must pay into the Affordable Housing Opportunity Fund. So has this program been a success and what are the prospects for its future?

“To me the verdict is out,” said Charlton Hamer, senior vice president, Habitat Affordable Group at The Habitat Company. “A lot of cities have provided for inclusionary housing through zoning. That’s where they are able to capture a developer and mandate the creation of affordable units. I think it’s a great idea.”

However, the ARO has faced controversy from many who argue that it has a deleterious effect on market-rate rents—and thus dampening the zeal of investors and developers. David Goss and Jon Morgan, both managing principals and co-founders of Interra Realty, see a vast potential of affordable units in existing stock. They also are wary of policies that create new affordable units if those come at the expense of market-rate development.

“We’re in favor of expanding affordable housing as long as that makes sense. We don’t want anything to stop development,” said Goss.

Whether or not the ARO has or will have an impact on development, the fact remains that Chicago still faces an affordability gap of roughly 120,000 units. This puts the efficacy of programs like this one into question.

“[The ARO] has yet to be truly implemented. The funding has not flowed toward affordable projects like it should,” said Hamer. “That’s one of the things that needs to be looked at.”

One part of the five-year housing plan that the City Council adopted last December that drew Morgan’s interest was the potential for legalizing accessory dwelling units. Though not yet codified, the possible legislation would allow for the rental of coach houses or “granny flats,” a viable option for those in need of affordable housing.

Rent control and the real estate transfer tax

During her inaugural address last month, Mayor Lightfoot proposed the implementation of a graduated real estate transfer tax (RETT) in Chicago. Unlike the flat tax the city currently collects on the sale of real estate, a graduated RETT would increase the rates on $1-million-plus real estate sales while stabilizing or even reducing the sale of smaller properties like single-family homes.

The goal is to create a funding source to ease homelessness, one that collects from the rich without burdening middle-class homeowners. While schemes like these win votes from the hoi polloi, there has been considerable pushback from those in the commercial real estate industry as a graduated RETT could dampen investor appetite for properties in the city limits.

“You want to fill a gap for those in need of affordable housing, but you don’t want to do it at the detriment of those coming in and adding significantly to the general revenue of the city,” Hamer said. “If you’re looking at a graduated transfer tax that will deter those at the highest rung from investing in the city, that’s a whole swath of revenue that you’re going to lose from a taxation standpoint. Those are revenues that could go toward creating more affordable housing.”

Goss agrees that changes to the current Chicago RETT could scare off investors. It has the added disadvantage, he argues, of exacerbating the affordable housing situation in Chicago if not properly implemented as the added tax will likely trickle down to apartment renters.

“There are ways to do it so it doesn’t also affect affordable housing investors and multifamily housing, because there are only so many people who can afford to buy homes,” Goss said. “Rental housing is a key factor on the South and West Side, so you don’t want to increase the cost of ownership there because that will get directly passed on to the tenants.”

One method of preserving workforce housing and preventing the gentrification of neighborhoods is rent control. This highly divisive strategy has been outlawed in Illinois for more than 20 years, but with the recent elections of Lightfoot, several self-professed socialist Chicago aldermen and J.B. Pritzker as governor, the political will may be in place to lift this ban.

“Rent control would certainly slow down the current real estate cycle to the detriment of the city,” said Morgan. “I think there are other ways, as opposed to rent control, to accomplish these goals.”

He argues that the natural economic limitations in place already act as rent control, as rates can only be raised so much and so quickly. Further, he argues, there is a high possibility that rent control could affect those people it is intended to protect most if not properly implemented.

“We have our problems, but Chicago is still a very vibrant city and people are moving here and people want to invest in the city,” said Goss. “I think the new mayor and her approach to everything has really energized people to have a little bit of optimism. Change is good at times and I think she has really presented a good initial impression to a lot of people.”