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Chicago Studies Inclusionary Zoning

by Bob Tivnan, CMI, Chicago, March 2020

 

Chicago Mayor Lori Lightfoot appointed a new task force to come up with ways to increase affordable housing through inclusionary zoning. Cities nationwide use this type of zoning to produce more affordable housing without having to spend tax dollars. With strict zoning laws in place, developers ultimately subsidize the creation of more affordable homes.

 

Builders worry that any move to require more affordable apartments or condominiums in their projects could be counterproductive. They say it could discourage, rather than encourage new residential development, due to increased construction costs, additional complications in raising money for new projects, and concerns about rising property taxes.

 

Affordable Requirements Ordinance

 

Chicago’s Affordable Requirements Ordinance (ARO) was created in 2003 and rewritten with stronger requirements in 2015.

 

The ordinance is complicated with different standards for different neighborhoods. Developers must charge below-market rents or prices in 10% of the units in a residential project. The city has created ARO Pilot zones in some gentrifying neighborhoods, where as many as 20% of the units in a project must be considered affordable.

 

Some critics contend the 20% requirement doesn’t go far enough. They propose developers be required to set aside 30% of units as affordable.

 

According to an analysis by Cushman & Wakefield, the ARO can push down a housing project’s profit so much that a developer will decide not to build.

 

The brokerage examined several scenarios for a hypothetical apartment building on the Near North Side and found that a 20% affordability requirement pushed the project’s return as low as 4.2%. That’s below the minimum 6% to justify it.

 

Sidestepping ARO

 

The ARO only applies if developers seek a zoning change allowing them to build a larger development or if they seek other assistance from the city.

 

Developers are adapting in different ways, Ron DeVries, senior managing director in the Chicago office of Integra Realty Resources told Crain’s Chicago Business. “Many have been trying to find sites that already have zoning in place, rather than asking the city for a zoning change, which would require them to comply with the ARO,” he said.

 

Other developers are moving into lower-rent neighborhoods where the disparity between market rents and affordable rents is narrower.

 

There’s evidence to show that inclusionary zoning curbs investment. However, many downtown developers have been willing to agree to affordability requirements in exchange for more generous zoning. DeVries forecasts developers will complete nearly 13,000 apartments downtown from 2018 through 2022.

 

Summary

 

The Mayor wants a revised ARO by midyear. Her challenge will be finding an acceptable middle ground. An optimal level with a reasonable amount of revised regulation that generates more affordable housing without depressing new development, which could also impact the future growth in property tax revenues that the city desperately needs to address future estimated budgetary shortfalls.