Inclusionary Housing Task Force Underway

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The first meeting of the Inclusionary Housing Task Force (IHTF) was held on December 12, 2019. The twenty members of this committee represent a cross-section of neighborhood activists, affordable housing providers, and for-profit developers. The IHTF is co-chaired by three Adlermen: Harry Osterman (48th Ward), Walter Burnett (27th Ward) and Byron Sigcho-Lopez (25th Ward).

Ms. Levinger presented a compelling history of zoning regulation in Chicago and how that regulation has significantly contributed to the current hyper-segregation of the city.

The day before the IHTF meeting, Alderman Osterman held a public hearing on the proposed Development For All (DFA) ordinance that would fundamentally alter the Affordable Requirements Ordinance (ARO) and how it works. (Forty-Ninth Ward Alderwoman, Maria Hadden, is a co-sponsor of the proposed DFA ordinance.) This meeting was attended by many Aldermen, representatives from several housing advocacy groups, Daniel Kay Hertz representing the City of Chicago, and numerous citizens and industry professionals who would be impacted by this legislation in different ways.

Leah Levinger, Executive Director of the Chicago Housing Initiative, outlined the rationale for the proposed DFA ordinance and why her organization and other housing advocates in Chicago support it. Ms. Levinger presented a compelling history of zoning regulation in Chicago and how that regulation has significantly contributed to the current hyper-segregation of the city. She explained that the proposed DFA seeks to disrupt this pattern of segregation by changing the ARO in the following ways:

  1. The ARO currently limits rents in affordable units to no more than what a household earning 60% of Area Median Income (AMI) can pay, using no more than 30% of total household annual income for rent. Under the DFA proposal, affordable units would be divided into three buckets – one for households earning up to 20% of AMI; one for households earning up to 30% of AMI; and one for households earning up to 50% of AMI. Twenty-five percent of the affordable units would be allocated to the 20% of AMI households; another 25% of the affordable units would be allocated to the 30% of AMI households; and the remaining 50% of the affordable units would be allocated to the 50% of AMI households. According to Ms. Levinger, rents for a family of four renting a three-bedroom unit would top out at $1,086/month at 50% of AMI; $640/month at 30% of AMI; and $392/month at 20% of AMI.
  2. Instead of the current requirement that allows developers to pay a “fee-in-lieu” to the city’s Low Income Housing Trust Fund (LIHTF) for off-site construction of some portion of the required affordable units, the DFA ordinance would not allow any opt-out fee at all. Under the new ordinance, all affordable units would have to be provided on site.
  3. Under current ARO requirements, 10% or 20% of all units must be affordable, depending on location. Under the new DFA requirements, that requirement would be increased to 30% in high-income census tracts; 20% in moderate-income or “transitional” census tracts; and would remain 10% in low-income census tracts.
  4. Finally, the DFA ordinance would require that 60% of the affordable units required in any building be either two or three-bedroom floor plans. Under the current ARO, there is no unit size or unit type requirement. Affordable units are typically studios and one-bedroom units, reflecting the predominant unit type in new construction buildings.
Mr. Hertz made it clear that, whatever the deficiencies of the current ARO rules, this program has been a valuable tool for raising money for the LIHTF which produces affordable housing across the city for households at the lowest end of the income range.

Following the presentation of Ms. Levinger and the other housing advocates, Daniel Kay Hertz, Policy Director for the City of Chicago Department of Housing, described how the current ARO program works, and how the ARO produces both units on-site, and in-lieu fees to expand affordable housing in Chicago.

Mr. Hertz made it clear that, whatever the deficiencies of the current ARO rules, this program has been a valuable tool for raising money for the LIHTF which produces affordable housing across the city for households at the lowest end of the income range – i.e. at or below 30% of AMI. Mr. Hertz warned that, if the proposed DFA measures are approved – requiring all ARO units to be built on-site – the flow of money to the LIHTF would cease, severely impacting the City’s ability to expand affordable housing for these very low-income households.

Following Mr. Hertz’ presentation, a number of private developers and representatives of the housing industry spoke about the potential impact of the proposed DFA. While many of these individuals agreed that the city needs more affordable housing, these same individuals noted that the DFA requirement would make it much harder for new development deals to “pencil out.” These individuals made it clear that the DFA requirements could make most new development infeasible – lowering cash flow from property operations to such an extent that both investors and lenders would be unable or unwilling to provide the equity and debt necessary to make these new development feasible.

The DFA requirements could make most new development infeasible.

In summary, the net effect of these proposed DFA measures would be to completely alter the economics of any proposed, new construction building in Chicago. In high-income census tracts (where almost all new construction takes place), the DFA would increase the percentage of affordable units to 30%; mandate that all units be provided on-site; greatly reduces the rents that can be charged for affordable units; and increase the average size of affordable units to meet the two and three-bedroom requirement.

The bottom line is this:

In high-income census tracts, the DFA would increase the percentage of affordable units to 30%; mandate that all units be provided on-site; greatly reduces the rents that can be charged for affordable units; and increase the average size of affordable units to meet the two and three-bedroom requirement.

However desirable it may be to use inclusive zoning to correct the wrongs of past development and the harmful legacy of segregation; as much as it is desirable to see greater income and racial integration in Chicago; and as much as inclusive zoning can be an effective tool in bringing lower-income households into higher-income neighborhoods, NONE OF THESE BENEFITS CAN HAPPEN IF THESE INCLUSIONARY ZONING REQUIREMENTS ARE SO EXTREME AS TO CAUSE NEW CONSTRUCTION TO BE INFEASIBLE TO BUILD.

Equity investors will only invest in a new development is they believe they can earn an acceptable risk-adjusted return. And the risks in building new apartment towers are substantial – as anyone who lived through the last recession can tell you. Banks will only provide debt to properties that can generate sufficient cash flow to comfortably service the debt.

As currently proposed, the DFA will so profoundly alter the economics of new development that much of this new development will simply shut down. Ironically, this will only increase the cost (or rent) on the units already built, leading to even faster price and rent increases as demand continues to increase while supply precipitously falls.

Many members of RPBG agree that the city would benefit from more affordable housing and greater income and racial integration. But few RPBG Members believe that the proposed DFA is the way to accomplish this goal. To the contrary, if it passes as currently proposed, we can safely predict that the production of new owner-occupied and rental housing will be greatly diminished, driving up the price and rents of existing housing, and creating further harm to low and moderate-income households.

As an organization, the RPBG is firmly opposed to the DFA proposal. The proponents of the DFA believe that it will create more housing in better neighborhoods for greater numbers of low and moderate-income households. The RPBG believes the opposite is true. If it passes, the consequences to our industry and all the citizens of this city will be profound and destructive. We are resolved to fight it as currently proposed. We are also ready and willing to work with community groups to find a better and more workable solution.