Carrot and Stick – Part Two
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In the last RPBG Newsletter, we looked at the impact of the Illinois Affordable Housing Special Assessment Program (AHSAP) and its impact on housing production in Chicago. The article was, well, kind of long. But, as long as it was, it missed a really important point – one that Stacie Young tried to get me to focus on, but one that I just could not squeeze into what had become a bit of a bear.
So, to rectify the oversight, I told Stacie I’d work with her on a second article that focused on what she sees as the legislation’s most important benefit. In her words, it may be helpful on the margins for new construction, but it’s a “game-changer” for substantial rehabilitation.
And she’s right. She ought to know. Stacie is President and CEO of Community Investment Corporation (CIC), the Chicago area’s biggest affordable housing lender and the funding source for countless renovations that have been done across Chicago and the region since CIC’s founding in 1974.
Perhaps the biggest challenge facing the AHSAP program is lack of awareness.
First, let’s recap what the state legislation includes as incentives for rental properties. The law (HB 2621) passed in May 2021 and provides a set of tax incentives that can make it financially attractive for developers to set aside a certain percentage of affordable units in their apartment building projects. The legislation says the program must be made available in Cook County and is optional anywhere else in Illinois where the local county has authorized its use.
There are three basic “buckets” of tax incentives that can be used in any new construction or substantial rehabilitation project as long as it is a multifamily building with seven or more units. In this article, we will focus on the first two of these buckets: the 15% Tier and the 35% Tier.
The 15% Tier provides a 25% reduction in assessed value if a building or development designates 15% of its units as affordable and the total cost of the renovation is not less than $8/SF.
The AHSAP is that rarest of things: a legislative win-win for both renters and housing providers/developers.
The 35% Tier provides a 35% reduction in assessed value for a 35% set-aside of affordable units and the total cost of the renovation is not less than $12.50/SF.
The affordability requirement must be maintained for a minimum ten-year period but can be renewed for two additional ten-year terms. Click here for the full text of the legislation or here for a shorter summary of the program
Stacie acknowledges that the cost of new construction has risen substantially, making the benefits of this program less impactful for ground-up development. But Stacie points out that, even in years with lots of cranes on the skyline, new construction accounts for just a fraction of the total housing in the Chicago region. The lion’s share is and will always be the vast, existing stock that is already standing.
And, in an older city like Chicago, a lot of this housing stock has been around for decades if not longer. Two of the city’s biggest growth spurts were during the 1920s and the 1960s, meaning a lot of the city’s housing stock is 50 to 100 years old.
Needless to say, housing has to be maintained if it is going to continue to function as safe and sound shelter for the region’s diverse population. This is especially true in a city known for its notorious weather extremes. Periodic upgrades and the replacement of building components and systems is an unavoidable part of building ownership. Without it, buildings fall into disrepair, creating health and safety problems for residents, and potential legal liabilities for owners.
But it’s the numbers that tell the real story of the benefit of the AHSAP for substantial rehabilitation projects. Let’s look at a basic cash flow model to help make this point.
Let’s assumes we want to renovate a 28-unit building in Rogers Park using the 15% Tier bucket. To keep it simple, let’s say that all 28 units are 1BR/1BA. We expect market rents for these units post-renovation to be $1,375. The current maximum rent for a 1BR unit in Chicago at 60% of area median income (AMI) is $1,173. (For a complete list of 60% AMI rents in Chicago as of April 2022, click this link.) Here’s how the numbers would look under the market versus 15% Tier structure:
In the market rate scenario, the 28 market rent units produce a higher total effective gross income than in the 15% Tier scenario. But, after accounting for the reduction in real estate taxes, the 15% Tier scenario actually produces a higher NOI than the market rate scenario.
Best of all – this model is not even the best-case scenario. You can literally have your cake and eat it too by renting your affordable units to low and moderate-income tenants with government-provided rental assistance. Under this “best of all worlds” scenario, you can receive full market rent on your affordable units and get the tax reduction at the same time! Tenants with rental assistance pay 30% of their income toward rent with the government picking up the balance.
Emily Bloom-Carlin, Senior Program Officer for The Preservation Compact at CIC, points out that there are several ways to rent units to tenants with rental assistance. The easiest way for most housing providers is through the housing voucher program. But it is also possible to enter into a HAP contract on a portion of your building units, either through the Chicago Housing Authority or through the City’s Low-Income Housing Trust Fund.
The main difference between voucher tenants and HAP contracts is that vouchers are tied to the tenant and HAP contracts are tied to the building. Although the rules and requirements for the CHA and LIHTF programs are different, HAP contracts stay with the building, typically cover 20% to 30% of the units and can run for up to 30 years.
After accounting for the reduction in real estate taxes, the 15% Tier scenario actually produces a higher NOI than the market rate scenario.
One final incentive to consider when crunching your numbers on the tax incentive versus straight market renovation – CIC’s ability to offer low-cost mezzanine debt up to 90% of total loan-to-value so long as that property includes a 20% affordable unit set-aside. Since voucher tenants qualify in your affordable unit count, you can receive full market rent on these units and still qualify for both the AHSAP benefits and CIC’s mezz loan financing.
If this is all too confusing and sounds like too much red tape, the last suggestion Stacie and Emily have for rehabbers is to reach out to the people and organizations who can help navigate the AHSAP process.
Emily recommends starting with the Cook County Assessor’s Office which has dedicated staff to ensure the success of this program and provide rehabbers with the tools they need to figure out whether or how to use AHSAP:
Under this “best of all worlds” scenario, you can receive full market rent on your affordable units and get the tax reduction at the same time!
This is the link to the Cook County Assessor’s Office for general program information. You can also call or email the Assessor’s Office at (312) 603-7821 or This email address is being protected from spambots. You need JavaScript enabled to view it..
CIC is also a great resource for anyone interested in exploring the AHSAP program. A good place to start is The Preservation Compact property tax incentive page.
The 2023 deadline for AHSAP applications to the Assessor’s Office is June 30. Applications made on or before that date will get you a tax reduction on your second installment tax bill this year (2023), assuming the application is approved. You can still apply after June 30, but the tax reduction will not appear on your tax bill until the following year (2024).
If this is all too confusing … reach out to the people and organizations who can help navigate the AHSAP process.
Perhaps the biggest challenge facing the AHSAP program is lack of awareness. Even though it’s been nearly two years since AHSAP was passed, housing providers and rehabbers still don’t know much (if anything) about it or what it can do for them. This article is one small step in helping to get the word out.
So, the next time you have a building that needs substantial renovation, consider the AHSAP before you start spending your money. You may be leaving money on the table by not taking advantage of the AHSAP. And you can also feel good about doing your part to help reduce the affordable housing shortage in Chicago. The AHSAP is that rarest of things: a legislative win-win for both renters and housing providers/developers.
So, go ahead. Take the plunge. Pencil out the benefits of the AHSAP vs. a market-rate renovation without the affordable set-aside. There are plenty of resources to help you do this. Don’t let a lack of familiarity with AHSAP or how it works keep you from exploring its use. There’s a good chance that it will be the financially smart business decision to make.
