The city of Chicago recently enacted new changes to the Affordable Requirements Ordinance (ARO), which impacts multifamily residential developments that have 10 or more new units and also require rezoning, city land, downtown planned developments or city financial assistance.

Under the original ARO, such projects had to set aside 10 percent of units at affordable market rates, or pay an “in lieu” fee per required unit. Projects utilizing city financial assistance must include 20 percent ARO units or pay the “in lieu” fee. So if a newly built 500-unit apartment building met those requirement, for instance, it would either set aside 50 units at affordable rates or pay the “in lieu” fee for each of those 50 unites.

There are two key changes in the new ARO. First, it creates a “Zone Map” with three zones, and an “in lieu” fee schedule to match. Zones are: low-to-moderate income, higher income and downtown “D” zoning. Fees are assessed according to project location. Proposed maps are currently under review and will be finalized this summer. The new ARO requirements will affect those zones in different ways. Below is a chart examining how the new structure will function:

Zone	In Lieu Fee Effective Oct. 12, 2015	2nd Fee Increase Effective April 15, 2016
Low to Moderate Income	$50,000 per unit	Same
Higher Income*	$125,000 per unit	Same
Downtown “D” Districts*	$140,000 per unit Condo 100% Buyout: $160,000	$175,000 per unit Condo 100% Buyout: $225,000

*If ARO units leased or sold to the CHA or an “authorized agency,” fee is reduced by $25,000 per unit.

The second change is a requirement that projects MUST include 25 percent of the required ARO units in the building, regardless of “in lieu” fees paid for the other units. For the 10 percent level, this means 2.5 percent of total units on-site must be affordable. As an incentive to create more ARO units at less cost, in some cases developers have the option to create inclusionary units “off-site” in a “Linked Development.” Developers must invest an equivalent of the required in-lieu fee in off-site units. Off-site units can be new construction, rehabilitation or conversion of existing units. Also, off-site units must be located within two miles of a project in a higher income or downtown zone. One exception is that downtown for-sale buildings can build off-site anywhere in city.

This will this change development in Chicago in six different ways:

1. More Economic Analysis – Project economics must be carefully evaluated on how ARO fees and requirements will impact overall returns. Land prices will inevitably have to cover the increased cost of the ARO. As a result, fewer projects may get built, and the city may lose new development.
2. Less Rezoning – Developers will seek “as of right” zoned properties to avoid triggering ARO requirements. The city may miss opportunities for new growth, fees won’t be paid and affordable units won’t be built on those projects.
3. Downsizing – Developers may build smaller projects (less than 10 units) to lessen negative economic impact.
4. Linked Development – Finding affordable off-site locations for ARO required units will be critical to project viability. This one incentive could become the best tool for creating new affordable housing units in city.
5. Look Outside Chicago for New Projects – If the new ARO requirements become too challenging, developers will look outside Chicago’s city limits, or even to other markets, to find opportunities with better economic returns.
6. Don’t Seek City Financial Assistance – Obtaining financial assistance, such as TIF, increases the ARO requirement to 20 percent. As a result, fewer projects may get built in areas needing new development.

The Home Builders Association of Greater Chicago has been actively involved in the ARO process and will continue to monitor the implementation of the new ordinance to help protect the interests of the Chicago multifamily residential building industry.

The new ARO requirements take effect Oct. 12, 2015. Projects filing ordinances for rezoning downtown planned developments before then are subject to the old ordinance. Projects filing on or after are governed by the new ordinance.

Alan D. Lev, President of Belgravia Group, Ltd, was a member of the Mayor’s Task Force on Affordable Housing, and led the ARO Advocacy Working Group for the Home Builders Association of Greater Chicago.