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Ups and Downs - Winter 2023

 

 

I’ve been alternately intrigued and alarmed about recent plans to convert the LaSalle Street corridor in the Central Loop into a mixed-use commercial and residential district. The city says it would like to see a handful of functionally obsolete, half-empty office buildings converted into as many as 2,000 new apartment units and wants to solicit bids from developers to make this happen. But is this a realistic proposal, or is it just a publicity stunt in advance of a competitive election?

As much as I like the idea of bringing more residential into the Loop – both to provide economic resiliency to an area over-dependent on office uses and to liven up what is basically a ghost town on weekday nights and on weekends – I have some pretty serious questions about costs.

Yes, it would be great to see the Loop turn into more of a 24-hour destination, following the example of River North and the Fulton Market District. Key to this transformation is bringing people to the area during non-working hours. It’s not a stretch to say that a good place to start would be to create more opportunities for people to actually move to the area and live there full-time.

But the challenges are enormous! First, the cost of converting old office buildings into residential uses will be high – much higher, say the experts, than starting from scratch or working in less congested areas of the city. Second, the market-rate rents that can be charged will be lower than in other, more desirable areas, putting a lid on the potential cash flow that can pay for these conversions.

But mostly, it’s the city’s stated goal of reserving 30% of the newly created units for people earning around 60% of area median income that has me scratching my head. The combination of high construction costs, limited market rents and the large percentage of deeply subsidized units all adds up to one thing: a very large commitment of public money to make it all happen.

Don’t get me wrong. I have no objections to creating housing opportunities for moderate-income tenants in downtown Chicago. But, as I always seem to be asking when I write these kinds of articles – who, ultimately, is supposed to foot the bill?

Let’s assume renovation costs will be at least $300,000 per unit to create these apartments – a big number, but hardly out of line for new construction or substantial rehabilitation in the city’s downtown area. That cost will be higher for buildings with large floor plates, and higher still if these renovations include any sort of government assistance. Of course, that’s all before you add in the cost of building acquisition. All in, it’s not inconceivable that these costs could equal or exceed $500,000 per unit.

Now let’s say the city will need to find subsidy money to cover $100,000 per unit of this cost to make it all work. To be clear, this is a guess – maybe the actual number is smaller – could also easily be bigger. The important thing to remember is that market rents will be lower than typical for downtown and three out of ten units will have rent caps that are far below what a market rate unit could charge. High costs and lower revenues mean more subsidy money to make it feasible. If I’m in the ballpark, that’s 600 units (30% of 2,000) x $100K, or $60 million dollars – a big, big number.

One obvious source for these funds could be Low Income Housing Tax Credits (LIHTC). According to what I could find on the internet, the entire state of Illinois received less than $30 million in tax credits in 2022 from the federal government. Another source could be Chicago’s Affordable Housing Opportunity Fund. At the current time, the AHOP has about $33 million of which a significant percentage is already intended to be used for other projects.

TIF money and the new tax abatement program (see related article in this Newsletter) will also likely play big roles in overall project feasibility. The city has never been shy about using TIF money for pet projects and the tax abatement program will meaningfully reduce real estate taxes, especially during the first ten or 12 years post-development.

But a project this big will require a TIF allocation to match. Even if my subsidy number is high, it is clear that the LaSalle Street venture would scoop up a lot of money from limited public sources that are already stretched thin. Do the benefits outweigh the huge price tag and expenditure of political capital that would ensue?

The bottom line is, office buildings to apartments is a great concept, and office buildings for the people is even better. But someone has to pay for it. Money spent on this project is money not spent somewhere else where the need could be greater and the money would almost certainly go a lot further. Is this really the best use of limited affordable housing resources or is this just another headline-grabbing news story that never gets off the ground?

We’ll have to wait and see, but my bet is that the 30% affordable allocation is just too high a hurdle and will have to be scaled back if this project is ever going to happen.

 

 

 

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