Accessory Dwelling Units

Men line up outside the Chicago Urban League at 3032 South Wabash Ave.
in Bronzeville in 1922 Read more here

Fashion is a funny thing. Today’s must-have item can quickly turn into tomorrow’s pariah, and then back again when a new generation rediscovers an old look.

I guess you could say that this is what is currently happening to Accessory Dwelling Units (ADUs) – including garden apartments, coach houses and other “ancillary units” that are part of, but distinct from, the primary dwelling unit or apartment building. ADUs were an integral part of Chicago’s early development, but were banned in the mid-50s as outmoded and undesirable. Now, after an absence of more than half a century, the humble ADU seems to have found new respect. It is also on the verge of regaining “legal” status.

A Little History

In Chicago’s early days, the city grew like mad with few restrictions on what got built where. No one had ever heard of zoning until they invented it in New York City in 1913. Zoning didn’t get implemented in Chicago until 1923.

After an absence of more than half a century, the humble ADU seems to have found new respect.

But, once it got established, zoning had a huge impact on development and changed the way the city developed. In the mid-20th Century, zoning proved instrumental in responding to two major changes that were altering the cityscape. The first was the widespread use of the automobile; the second was the migration of African-Americans to northern cities from the Deep South.

In both instances, at least from a contemporary perspective, it is fair to say that the zoning response to these issues ended up doing more harm than good. Regarding the spread of the automobile, zoning prioritized the rapid movement of cars across the city over other forms of transportation like walking and public transit. Regarding demographic changes, zoning quickly became a tool of exclusion by mandating lower density and prohibiting new rental housing.

After World War II, Chicago entered a period of economic prosperity and growth. Predictably, people flocked to the city to find work in its booming factories and offices. But this wave of in-migration included significant numbers of African-Americans fleeing the oppression of the Deep South and looking for a better life.

While it is certainly desirable to create more affordable housing and to provide more housing options for all Chicagoans to live in a wider variety of neighborhoods, the question is always how best to achieve this goal and, especially, how to pay for it.

Their welcome upon arriving in Chicago was anything but warm. NIMBY-ism quickly kicked in as white neighborhoods of all income ranges began to look for ways to keep African-Americans out. Angry, fearful (and, let’s be honest – racist) Chicagoans railed against the perceived evils of increased density, claiming it would lead to more crime, trash and rats, and a general deterioration of civic virtues. This was code for neighborhood change. One “solution” was to outlaw ADUs. The City obliged in 1957. After that year, any ADU not already in use has been deemed illegal, and the creation of any new ones strictly prohibited.

But time has a way of changing perspectives on what kind of city we want to live in, and how best to make it happen. Car-choked streets and highways quickly soured us on prioritizing cars over people. Similarly, the deep and persistent segregation of Chicago has called into question many of the zoning practices that helped create the separate and very unequal neighborhoods we know today. This history is central to today’s debate about ADUs, and whether and where to allow them.

The Push to Legalize Accessory Dwelling Units

The Chicago City Council is currently considering a new ordinance that would make ADUs legal again, and permissible in almost any residentially-zoned district across the city. This is a huge change, and holds tremendous potential to reverse some of the damage done by the restrictive zoning that had been in effect since the ban on ADUs went into effect.

But, like any piece of legislation that proposes such radical change, the current proposal to allow ADUs is not without its problems or its controversies. Predictably, the NIMBY’s have not gone away and still do not want to see their low-density, exclusive neighborhoods changed in any way. Thus, it is not surprising that the angry letters to the editors have already begun rolling in, decrying the evils of increased density and neighborhood decline as lower-income people move in and “spoil the neighborhood” for everyone else.

These kinds of complaints are nothing new. They have been common since anyone first figured out that zoning could be used to keep people out.

This new ordinance is problematic for the real estate community in a number of ways.

What is new is calls from the far left for even greater accommodation of lower income people as ADUs become legal and start to be built across the city. This is the antithesis of the age-old NIMBY complaints. To the far left, reversing the effects of discriminatory zoning requires much more than simply legalizing ADUs. The far left believes any and all new units should be subject to affordability requirements, ensuring a more equitable distribution of rental options for all income-groups across the city.

In many ways, these goals are laudable. No one can reasonably argue that Chicago is not a deeply segregated city or that this segregation has not been enormously harmful to people of color. In the wake of the George Floyd murder in Minneapolis, there is even wider recognition of this truth.

The ULI report strongly urges local Chicago government to adopt ADU legislation with as few restrictions as possible beyond the most important health and safety concerns.

But the devil is always in the details. While it is certainly desirable to create more affordable housing and to provide more housing options for all Chicagoans to live in a wider variety of neighborhoods, the question is always how best to achieve this goal and, especially, how to pay for it.

Affordable Conversion Unit (ACU) Ordinance

The voice of the far left in Chicago has grown stronger in recent years. Witness the increase in Democratic Socialists from one member of the Chicago City Council in the last election cycle to six. Housing is a key issue for this block and they prefer big government solutions, seemingly always at the expense of property owners.

Alderman Harry Osterman, 48th Ward, is the sponsor of the Affordable Conversion Unit (ACU) Ordinance. While Alderman Osterman is not one of the six Democratic Socialists, his North Side Ward is one of the areas of the city where progressive politics is strong and the Democratic Socialist ideology has found a receptive audience. Thus, it is not surprising that Alderman Osterman’s ordinance, as currently proposed, will require that 50% of all new ADUs created must be subject to strict affordability requirements. The most important requirements of this new ordinance are as follows:

This new ordinance is problematic for the real estate community in a number of ways. On the positive side, passage of the ordinance will enable owners of real estate to legally create additional rental units at their properties, enjoying the enhanced cash flow these units will create. Organizations such as RPBG, the NBOA and other property-owner groups have strongly supported the concept of allowing widespread use of ADUs across Chicago.

But RPBG and other property-owner groups maintain that ADUs, particularly garden units, will be “naturally occurring” affordable units since there is typically at least some rental discount between garden units and upper-floor units.

If the City is serious about alleviating the huge shortage of affordable units in Chicago, then the focus must be on increasing supply.

The property owner groups are backed up by an exhaustive study undertaken by the Urban Land Institute (ULI) over a roughly six-month period that started in late 2019 and continued into 2020. The ULI study brought together a wide range of interest groups including property owners, community developers, architects, engineers and city officials from all the City’s major Departments (Housing, Planning, Building, etc.).

The report produced by ULI at the end of this process made a strong case for the widespread adoption of zoning-friendly ADU units across the city in a wide range of residential and mixed commercial areas. Importantly, the ULI report looks at the experience of other cities in the United States that have already implemented ADU zoning. A key finding of the ULI report is that ADU development is most successful in the cities that limit the impediments to its development. Such impediments include fees, permits and affordability restrictions.

Alderman Harry Osterman, chairman of the Committee on Housing
and Real Estate; and a coach house in Dunning (Credit: Zillow)

In brief, the ULI report finds that many cities initially put numerous conditions on the production of new ADU units and found that total production of new units was far below expectations. In several of these cities, some of these conditions were removed with subsequent legislation, resulting in an increase in the rate of ADU production in all cases.

The Osterman ordinance mandates an affordable threshold that is likely to discourage owners of larger properties from converting multiple units into rentals, even when multiple units are feasible.

Citing these examples, the ULI report strongly urges local Chicago government to adopt ADU legislation with as few restrictions as possible beyond the most important health and safety concerns.

ADUs from the Property Owners’ Point of View

Alderman Osterman’s ordinance adopts some of these recommendations, but with a significant caveat – that 50% of all new ADU units created must be subject to long-term affordability restrictions. While the real estate community is excited about the prospect of being able to add new rental units to existing properties, the 50% affordable requirement could be a deal killer for many owners of larger properties where multiple ADUs are feasible.

Property owners are grateful to the City and Alderman Osterman for their leadership on this important issue, and recognize that any ability to increase the supply of units at our properties will benefit our members and all of Chicago.

If the City is serious about alleviating the huge shortage of affordable units in Chicago, then the focus must be on increasing supply. This is especially true when that increase is likely to come from units that are likely to come online at below average rents for the neighborhoods in which they are built.

The Osterman ordinance does not do this. Instead, it mandates an affordable threshold that is likely to discourage owners of larger properties from converting multiple units into rentals, even when multiple units are feasible. The incentive to do so may simply be outweighed by the added costs and hassle of the conversion, not to mention the lower rents that can be charged.

With ADUs, the City has an opportunity to unleash market forces that could create thousands of new rental units. They should not squander this opportunity.

Property owners are grateful to the City and Alderman Osterman for their leadership on this important issue, and recognize that any ability to increase the supply of units at our properties will benefit our members and all of Chicago. At the same time, we feel increasingly worn down by the heavy-handed approach local and state government continues to take towards owners of real estate in regulating our businesses and tying our hands.

The City seems to believe that the only solution to the affordable housing crisis in Chicago is to obligate property owners to provide housing at reduced prices. This can be seen in efforts to pass rent control and a host of other measures that place the entire burden of housing “solutions” on our industry.

Banned in the 1950’s advocates are now petitioning to adopt an ordinance
that re-legalizes coach houses and rear houses, and
newly legalizes "accessory dwelling units"

With ADUs, the City has an opportunity to unleash market forces that could create thousands of new rental units at prices that will almost always be below the average for the neighborhoods in which they are created. They should not squander this opportunity by imposing additional affordability restrictions on property owners who will likely respond by leaving fallow space unbuilt.

If ADU legislation with fewer restrictions is introduced, it holds the potential to result in a substantial increase in unit production across the city. If the City insists on regulating affordability, the opposite result may occur.

It is clear that many Aldermen are distrustful of the market and wish to bend it to their will. They should trust the market more, and their own omnipotence less. If ADU legislation with fewer restrictions is introduced, it holds the potential to result in a substantial increase in unit production across the city. Many of these units will be “naturally occurring” affordable housing in neighborhoods where demand is strong and supply is limited.

If the City insists on regulating affordability, the opposite result may occur. Fewer new units will enter the market, resulting in higher rents on a constrained supply. Simply put, if passed as currently proposed, the ACU Ordinance will be a missed opportunity for Chicago.