YL Small Group Discussion Series Launches with “Modern Trends in Affordable Housing”

ULI Chicago Young Leader’s kicked off August with the first of a three-part Small Group Discussion Series, “Modern Trends in Affordable Housing”.  Guest Speakers included: Dean Marks, Managing Principal, Sterling Bay; Paul Shadle, Partner, DLA Piper LLP (US); Jacques Sandberg, Vice President, Affordable Housing, Related Midwest; and Edgar Flagg, Regional Director of Real Estate, Mercy Housing.

In 2015, the City of Chicago adopted the current version of the Affordable Requirements Ordinance (ARO), Chicago’s inclusionary zoning law to promote the development of affordable housing in the City. Developments looking for increased project density, new residential uses, or city assistance are required to provide 10% of their units at affordable monthly rents or sale prices. Since the ARO’s implementation, the City has also created three Pilot Areas with increased requirements in Pilsen, the Near North/Near West, and the Milwaukee Corridor. The goal of inclusionary zoning, as implemented in many cities across the country, is to incentivize private investment in new affordable housing stock. It is also a way for affordable housing to be provided in rapidly gentrifying neighborhoods in need of affordable options and housing diversity.

Dean Marks, Managing Principal, Sterling Bay, led a discussion reflecting on the impact of the Chicago ARO and City’s ARO Pilot areas to date. From a development perspective, Marks and the other guest speakers discussed and explained the challenges in bringing affordable housing to market, starting with securing funding sources. For non-profits, tax credits and gap financing must be identified on a tight schedule for a project to occur. Even for-profit developments have a delicate balance to achieve when funding projects, and the addition of affordable units adds an extra dimension to these deals. Often, developers will choose to pay an in-lieu fee instead of providing affordable units, given that a flat fee is simple and often more profitable. In Chicago, and especially in the Pilot Areas, the panelists saw the ARO ordinance posing a barrier to growth and even halting real estate deals, and after 5 years, only 444 affordable units have been completed.

Given the barriers seen by the development community, the panel had some constructive ideas for the future of the Chicago ARO, and all looked forward to the continued evolution of this ordinance. Flexibility for the development of rehabbed units and energy requirements would expand the options at a prospective development site. An expedited city process would support collaborations and linkage deals between for-profit and non-profit developers. A property tax credit in Illinois would help make projects more attractive and feasible to builders. Increased incentives, such as reduced parking requirements and excluding affordable components of buildings from an FAR calculation, would further help developers come to workable solutions. As the sunset for the ARO Pilot areas occurs at the end of 2020, an affordable housing task force has been set up to suggest revisions to the ARO. This is a great opportunity for the City to work out the delicate balance that the ARO needs to strike: taking advantage of growth to increase affordable housing for Chicagoans, while maintaining a condition that encourages overall housing development supply.

Learn more about the Chicago ARO

Summary written by Julie O’Brochta, Associate, Skidmore, Owings & Merrill LLP