• Commercial Real Estate
  • Why developers grumble about affordable housing rules

    Because a revamped Affordable Requirements Ordinance—which Lightfoot says she wants by midyear—could make new housing development less profitable. Here's how it pencils out.

    79彩票注册网址Related Midwest received approval in July 2018 for this 58-story tower with 370 apartments and 165 hotel rooms just west of the Kennedy Expressway in the West Loop. Under the developer's agreement with the city, the project will include 40 affordable units on-site.

    79彩票注册网址

    As a new task force formed by Mayor Lori Lightfoot explores ways to increase affordable housing in Chicago, developers have a warning: Beware of unintended consequences.

    Residential developers worry the panel is a first step in the city's push to strengthen a Chicago ordinance requiring them to include affordable apartments or condominiums in their projects. And they'll be relying heavily in the coming months on a familiar argument: that tougher regulations would be counterproductive, discouraging rather than encouraging the creation of housing in the city.

    City housing officials say there's not much data to support that conclusion. But many developers say the current rules, last revised in 2015, already have had a negative impact.

    79彩票注册网址"All they do is restrict development," says Jim Letchinger, founder and CEO of Chicago-based JDL Development.

    The debate over the city's Affordable Requirements Ordinance will require Lightfoot to perform a delicate balancing act as she tries to advance an ambitious housing agenda. On the left, a group of newly elected progressive aldermen, including Byron Sigcho-Lopez, 25th, a co-chair of the task force, is pushing hard to boost affordability requirements in private residential projects.

    But Lightfoot, who moved into City Hall in May, has tried to split the baby on development issues, this month backing a compromise over a proposal to combat gentrification near the 606 trail. With the ARO, her challenge is finding the regulatory sweet spot: the optimal level of regulation that produces more affordable housing without depressing development.

    Cities nationwide have adopted similar policies, known generally as inclusionary zoning. It's a way to produce more affordable housing without spending tax dollars by getting developers to subsidize it. Inclusionary zoning laws existed in 886 jurisdictions in 25 states and the District of Columbia at the end of 2016, according to a 2017 study by Grounded Solutions Network, a Portland, Ore.-based housing nonprofit.

    Developers have never been the most sympathetic bunch, and they certainly aren't these days. They've profited from one of the biggest apartment booms79彩票注册网址 in decades, charging high rents and selling projects for much more than they cost to build. But rising prices for construction materials and labor have cut into profit margins, and raising money for new projects is getting harder amid concerns about rising property taxes, they say.

    Developers also grumble about the ARO, which was created in 2003. After the city strengthened the ordinance in 2015, the Home Builders Association of Greater Chicago filed a lawsuit arguing it was unconstitutional. A judge dismissed the suit about a year later.

    For developers, the economics are simple: If the government makes something less profitable to produce, businesses will make less of it. Typically, government regulations reduce profits by imposing higher costs on businesses. But the ARO depresses profits by decreasing the rental revenue a building can generate, sometimes by so much that a developer won't move forward.

    79彩票注册网址A couple of years ago, Chicago developer David "Buzz" Ruttenberg was drawing up plans for a 40-plus-unit condo project on Orleans Street on the Near North Side. But Ald. Walter Burnett, 27th, who represents the neighborhood, wouldn't approve the plans unless 20 percent of the units were classified as affordable, Ruttenberg says.

    79彩票注册网址"We couldn't afford it, so we took a pass," says Ruttenberg, chairman emeritus of Belgravia Group.

    The ARO is complicated, with different rules for different neighborhoods. Under the ordinance, developers must charge below-market rents or prices in 10 percent of the units in a residential project. The ARO applies only if developers seek a zoning change allowing them to build a larger development or if they seek other assistance from the city.

    79彩票注册网址In some gentrifying neighborhoods, like Pilsen or Logan Square, the city has created ARO Pilot zones, where as many as 20 percent of the units in a project must be affordable. In many cases, the apartments or condos must be affordable to a household that makes 60 percent of the area median income, currently $53,460 for a family of four.

    LOOPHOLES

    Housing advocates criticize the program because it contains big loopholes. Developers can reduce the number of required affordable units in their projects by paying into a city housing fund or building some of the units at a different location.

    Some critics, including Sigcho-Lopez, want to boost the affordable housing requirement as high as 30 percent in some places. The alderman recently rejected a proposed apartment project in Pilsen, which he represents, because he wants its developer to set aside 30 percent of units as affordable, more than the 20 percent currently required under ARO Pilot rules.

    7072彩票开户 7073彩票地址 963彩票开户 7073彩票网址 689彩票邀请码 7073彩票注册 8炫彩彩票app 677彩票开户 7073彩票登录 66顺彩票app


    79彩票注册网址

    79彩票注册网址Housing advocates say the ordinance doesn't do enough to provide low-cost housing in high-cost neighborhoods that have good schools, low crime and a higher quality of life. Lightfoot sees the ARO as a tool to reduce segregation in Chicago, one reason she formed her Inclusionary Housing Task Force last fall.

    79彩票注册网址But developers contend a revised ordinance will only distort the market more than it already has. An analysis by Cushman & Wakefield shows how the ARO can push a project's profit down so much that a developer will decide not to build it.

    79彩票注册网址The brokerage examined several scenarios for a hypothetical 224-unit apartment building on the Near North Side and found that a 20 percent affordability requirement pushed the project's return as low as 4.2 percent, below the minimum 6 percent to justify it. If the developer were able to buy the site at a lower price, $4 million versus the $14 million assumed under the original scenario, the deal would make sense, according to the analysis. But land prices haven't fallen much, making it hard for many deals to work.

    7072彩票开户 7073彩票地址 963彩票开户 7073彩票网址 689彩票邀请码 7073彩票注册 8炫彩彩票app 677彩票开户 7073彩票登录 66顺彩票app

    One Chicago, a two-tower, 869-unit residential project that JDL Development is building in River North. As part of the approval process, JDL agreed to include 22 affordable units and pay $11.4 million into a city housing trust fund under the city's Affordable Requirements Ordinance.

    79彩票注册网址

    79彩票注册网址Developers are adapting in different ways. 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 stricter 2015 ARO, says Ron DeVries, senior managing director in the Chicago office of Integra Realty Resources, a consulting firm.

    Other developers are moving into lower-rent neighborhoods where the disparity between market rents and affordable rents is narrower, he says. They still give up some profit but not as much as they would in a high-rent project.

    79彩票注册网址The ARO "is chasing people out of the downtown market and into the neighborhoods, where the penalty isn't as great," DeVries says.

    While developers say there's no question that inclusionary zoning curbs development, the evidence is murky. Even under the more restrictive 2015 ARO, many downtown developers have been willing to make the trade-off, agreeing to its affordability requirements in exchange for more generous zoning. DeVries forecasts developers will complete nearly 13,000 apartments downtown from 2018 through 2022.

    79彩票注册网址"With a hot housing market, developers view the inclusionary housing requirement as a cost of doing business in a desirable location," says from Business & Professional People in the Public Interest.

    Academics and research firms have churned out dozens of studies on inclusionary zoning over the last decade. While some show a negative impact on development, others don't.

    "Most studies show that well-designed inclusionary zoning policies don't have substantial effects on new development," says a statement from the Chicago Department of Housing.

    Though construction has fallen in Chicago over the past few years, most of the decline has been outside ARO Pilot areas, suggesting that other forces are at work, the department says.

    79彩票注册网址Don't expect Lightfoot to wait for a resolution to the debate before acting. She wants a revised ARO by midyear.

    7072彩票开户 7073彩票地址 963彩票开户 7073彩票网址 689彩票邀请码 7073彩票注册 8炫彩彩票app 677彩票开户 7073彩票登录 66顺彩票app
    Letter
    to the
    Editor

    Have something to get off your chest? You can?send us an email.?Or tell us on our page or on? @CrainsChicago.