As affordability crisis rages on, an innovative approach emerges

by Peter Thomas Ricci

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Nearly half of Chicago adults spend more than 30 percent of their income on housing. Seventy-three percent think that housing affordability is a serious problem. And 67 percent believe it is harder to find stable, affordable housing today than for past generations.

Those alarming statistics, courtesy of the “How Housing Matters” report from the MacArthur Foundation, drive home just how big a problem housing affordability has become in today’s market. And now, ARO Offsite Solutions has introduced an innovative approach to the problem, one that utilizes arguably Chicago’s most controversial development regulation – the Affordable Requirements Ordinance.

The ordinance, which regulates new developments that utilize city land, TIF dollars, planned unit developments (PUD) or zoning changes, was updated a year ago with new regulations to boost affordable inventory in the city.

Previously, developers were required to set aside 10 percent of their new construction units at affordable market rates, or pay the city a per-unit fee to avoid such construction. The new ordinance, though, changed several things:

  • The city is now divided into three zones, each of which feature different fees if the developer does not include affordable units in a project. In the Downtown zone, where most of the city’s new development is occurring, the new fee is $175,000 per unit, and in the higher-income zone, the fee is $125,000 per unit.
  • Also, even if rental developers opt to pay the per-unit fee, they still must provide 25 percent of the initially required affordable units in their new building, while the remaining 75 percent can be provided at an off-site “Linked Development.”
  • And with the new fees, a Downtown developer must commit $175,000 to off-site units. While condo developers can invest in affordable units anywhere in the city, rental developers must do so within two-miles of the development.
  • Downtown condo developers can opt out of the affordable requirements entirely, but only if they pay $225,000 per unit.

“Creative approaches” in housing affordability

The ordinance’s “Linked Development” is where ARO Offsite Solutions enters the picture, and as Garry Benson, a co-owner of of the firm, explains it, the company intends to address the city’s affordable housing crisis in creative ways.

“With the ordinance, the city is asking for creative approaches to help expedite the process,” Benson says. “We believe we have come up with a creative approach, and we are excited about the opportunity to have some impact.”

Here is how ARO Offsite Solutions works: first, the company locates opportunity condominiums – particularly projects from the boom-era that became hotbeds for investors – and buys a large share of the building’s units, with the end goal of decreasing the investor share to less than 50 percent of the units; once that happens, the building is eligible for financing through Fannie Mae and Freddie Mac. Then, Benson explains, the ARO plays its role.

“Once we identify these condominiums, we get the city to approve them – which is no small task – and then we pair them up with developers who are in the Downtown district,” Benson says. “They then serve us as off-site replacement units.”

So the developer invests the required money in the condominium, and ARO Offsite Solutions not only increases the city’s stock of affordable housing, but also benefits an ailing condominium and, by proxy, the neighborhood’s housing market.

Barriers and bureaucracies

ARO Offsite Solutions is currently working on a condominium in the Midway area, and Benson says they are looking into opportunities in Rogers Park.

Outside of his company’s efforts, Benson says there has been only one other ordinance transaction thus far – a townhouse project in the West Loop – and though he is aware of a half dozen other projects that are currently in the pipeline, there are some issues with the ordinance that could limit its impact.

On the supply side, city developers have been planning projects that are outside the ordinance’s reach. If a project does not require a zoning change, and does not use TIF funds, city land or PUD, then it is exempt from the ordinance, and developers do not have to contribute any affordable housing.

There are also potential issues on the demand side. For instance, in an effort to maintain the accessibility of all affordable units the ordinance creates, the city is limiting the amount of appreciation a homeowner can expect. So via a 30-year deed restriction, a homeowner’s appreciation is capped at $25,000, which Benson fears will discourage improvements. “I think that is somewhat crippling, but we’ll find out how bad it is,” he says.

And finally, Bensons says the ordinance’s enforcement is ultimately in the hands of the alderman, who can shape its particulars to the needs of their ward.

“The aldermen are really calling the shots,” he says. “Certain alderman are mandating 15 percent [of units be affordable], when the ordinance only calls for 10 percent; some alderman do not care if affordable units are in their ward, while some really want them in their ward.”

Ultimately, as housing affordability becomes ever more precarious, Benson sees cooperation between city and business leaders as the best way to tackle the affordability crisis.

“The ‘affordable housing market’ is so tied with bureaucracy that it’s self defeating,” he says. “There are pockets in Chicago that are being delivered under the affordable housing premise, yet the city is buying them for $400,000 a door, and they do not cost that much. The paperwork and bureaucracy that goes into those deals creates a chain of expense that is not beneficial for anybody.”