Chicago has a long standing love affair with the notion of “affordable housing” – not CHA built housing but privately developed housing that people below various income limits can afford to buy or rent and are granted access to this housing by the city. But it’s not clear if they really love affordable housing or just the idea of affordable housing or if maybe they just hate gentrification. And who is “they” anyway?
In all fairness there are different constituencies who have different views on what is “affordable”, where it should be located, and how it should be created. As with most things Chicago there is a messy political process for determining the policy. Best I can tell the city has had an Affordable Requirements Ordinance (ARO) in order to encourage the development of affordable housing going back to at least 2003, which was updated in 2007 and again in 2015.
Of course, as with most attempts by the government to interfere with market forces, it’s not at all clear that they are achieving their desired outcome. As I’ve previously posted, Chicago’s anti-gentrification efforts are futile. And it certainly doesn’t help the credibility of the program that the city lost $4.6 MM that was paid into the Affordable Housing Opportunity Fund. The whole thing is a quagmire and it may be about to get worse because they are reevaluating the whole program again right now.
You can check out the current incarnation of this program by going to the first link in this post. Knock yourself out trying to understand it because it’s pretty damn complicated. Basically a developer attempting to build certain types of developments in certain areas under certain circumstances will be required to make a certain percentage (10 – 20%) of their units affordable either on-site or off-site in certain other areas or they can opt to pay certain penalties (a fee in-lieu) to avoid the whole mess and build a more economically viable project. The penalties can be as high as $225,000 per unit built under certain circumstances. I kid you not. The penalties go into that Affordable Housing Opportunity Fund where the city misplaced $4.6 MM.
So guess what? It’s extremely common for the developers to just pay the penalties – especially in the more expensive neighborhoods – to the tune of $77 MM over an 11 year period. Consequently, over the life of the ARO, the program has produced less than 20 on-site units per year, though 1600 units have been built in low income neighborhoods through the Opportunity Fund.
So what does that tell you? It should tell you that the affordable housing requirements would otherwise cost the developers more than $77 MM in lost profits so they just pay the penalties. And you should also conclude that there was a cost for all the other developments that did comply with the affordable housing requirement but we don’t know what it is.
So who pays for the cost of this program? Well, it has to be the people who are buying in these developments that have an added cost to them. In other words the program makes housing less affordable for everyone else and just ends up exacerbating the whole housing affordability problem in Chicago.
It’s like this conversation I recently had with a New York City investor about rent control. I had always assumed that investors would hate rent control but he informed me that it was just the opposite. They loved it because the experienced investors knew how to manipulate the system and they could use that knowledge to find investment opportunities. In addition, rent control made it difficult to acquire buildings for development so it drove up the value of real estate in the city. The whole conversation basically confirmed what I intuitively knew all along: rent control made housing more expensive in New York.
Anyway, the city is unhappy with the results of the current ARO program so the mayor and a couple of aldermen have introduced a pilot program in two areas that intensifies the market meddling of the program. They are increasing the required affordable unit percentage from 10% to 15% or 20%, depending on the circumstances, and they are eliminating the option of paying the penalties. Basically they just increased the cost of housing for everyone not eligible for “affordable housing”.
#Gentrification #AffordableHousing
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider’s view of the seamy underbelly of the real estate industry, or you just think he’s the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.