Inclusionary Housing Task Force Issues Report

When the Inclusionary Housing Task Force first began their work in December 2019, no one could have guessed how profoundly the city and the world were about to change. The Task Force had just barely gotten started when the pandemic hit.

Cardiac arrest probably best describes what happened to the economy in the immediate aftermath of the shelter-in-place order that went into effect in mid-March. Downtown Chicago – the region’s employment nerve center – was especially hard hit. Seemingly overnight, the Central Area was transformed from a first-choice location to a place best avoided.

Adding to the city’s challenges was the murder of George Floyd and the worldwide reaction that followed. In Chicago, the initial protests and demonstrations were peaceful. But, as anger mounted, these protests were followed by not one but two rounds of severe looting and destruction. Once again, it was the Central Area that seemed to suffer the most, both physically and to its reputation. Predictably, these upheavals gave both businesses and residents a reason to leave. They continue to do so in rising numbers.

The Task Force is a group of 20 people, representing community advocates, developers from both the non-profit and for-profit world, and policy experts.

None of this was lost on at least some members of the Task Force whose mission it was to examine Inclusionary Zoning in Chicago and recommend ways to make it work better and create more affordable housing in higher-priced neighborhoods.

It is a credit to the Task Force that they were able to keep more or less to their schedule and release their Inclusionary Housing Task Force Staff Report this past September. True, they did a lot of their work by Zoom meetings instead of in person. But the end result is an impressive, 51-page report that looks at the larger affordable housing problems and issues, and comes up with a list of recommendations that would change the way Inclusionary Zoning works in Chicago.

New Mayor, New Priorities

It is important to keep in mind who the members of the Task Force are, and why it was formed in the first place. When Lori Lightfoot won the 2019 Mayoral election, she brought with her a more progressive agenda for the city than that of her predecessor. Fairly or not, Rahm Emanuel gained the derisive reputation as “Mayor 1%,” a reference to his prioritization of downtown and North Side interests, and a criticism of his perceived indifference to the South and West Sides. Lightfoot won, in no small part, for her promise to refocus the City’s attention on the neighborhoods, particularly the South and West Sides, to try to undo some of the divisions that have long plagued Chicago.

Putting her money where her mouth was, the Mayor reestablished the Department of Housing (DOH) as a stand-alone department and hired Marisa Novara to head it up. Novara’s background was as a community activist. She brings these values and priorities with her to her new job. Novara hired Daniel Hertz as Director of Policy and put him in charge of creating a Task Force to look at Inclusionary Zoning.

Task Force

The Task Force itself is a group of 20 people, representing community advocates, developers from both the non-profit and for-profit world, and policy experts. The progressive tilt of the Lightfoot Administration and Marisa Novara are apparent from both the list of Task Force members, and the findings and recommendations that are included in their September report.

While there is plenty in the report for property owners and developers not to like, it would be a mistake to write it off as just another assault on our industry by the far-left. Yes, the influence of tenant activists and the Democratic Socialists is readily apparent. But it is equally clear that DOH has made a real effort to get a wide range of opinions, to consider the perspective of all interest groups, and to try to find commonalities and best practices wherever they could.

The end result is a series of findings and recommendations that reflect the diverse membership of the Task Force and the compromises they were able to settle upon after months of difficult discussions. Whatever the political and policy views of Task Force members, it is probably fair to say that, at the end of the day, they all want a fairer, more equitable and more inclusive Chicago. That’s a good place to start.

Recommendations

So, let’s look at a few of the Staff Report recommendations. There are many. This article will focus on the handful that seem most promising and that our industry can likely support.

Task Force members all want a fairer, more equitable and more inclusive Chicago. That’s a good place to start.

One of the biggest complaints about the current ARO is its lack of uniformity and its constantly changing requirements. In recent years, the addition of “Pilot Areas” has both complicated the ARO rules and made it more expensive. Aldermanic Prerogative is yet another wild card whereby local Alderman create their own rules, intended to extract the maximum benefit from developers or simply thwart new development entirely.

The Staff Report recognizes these problems and recommends a more uniform and enforceable application of inclusionary zoning policies across the city. The Staff Report recommends expanding on the current classification of neighborhood areas that currently distinguish between three basic areas: the greater downtown; “higher-income” neighborhoods; and “low-moderate income” neighborhoods.

The Staff Report would add a “gentrifying areas” category, requiring more on-site units in these areas to preserve housing for local residents who are being displaced by gentrification activity. The Staff Report also suggests adding a “significant redevelopment area” category where development activity is most intense.

The significance of this recommendation is that it would codify geographies and what regulations apply to each, and reduce the uncertainty developers currently face with ever-changing Pilot Areas and Aldermanic interference. The Staff Report says, “The ARO should replace expiring Pilot Areas with predictable requirements based on these neighborhood typologies that can respond over time to changing market conditions.” This is a recommendation that our industry can probably support, depending on what those requirements are and how they are enforced.

Another important finding of the Staff Report responds to tenant activists who insist that a new ARO should mandate a larger percentage of affordable units in new buildings (up to 40% in some cases); larger units (more “family-sized” units with two or more bedrooms); and deeper subsidies (rents that are affordable to households earning as little as 15% of area median income, or AMI). Current ARO regulations call for a maximum of 20% affordable units in new developments with minimum household incomes at 60% of AMI.

There is only so much money a developer can afford to contribute to inclusionary housing before the entire development becomes economically unfeasible.

The Staff Report has two recommendations for how tenant activist demands can be met while still maintaining the economic feasibility of new development and not overburdening developers with back-breaking costs.

The first recommendation is to implement “income averaging,” similar to what is already being done with the development of new Low Income Housing Tax Credit (LIHTC) housing. Income averaging basically allows a developer to offer housing to households with a range of incomes, say, between 30% and 80% of AMI, so long as the overall average of these households is not greater than 60% of AMI.

Even more intriguing is the Staff Report’s second recommendation. Pointing to the Los Angeles “Transit Oriented Communities” model, the Staff Report recommends allowing developers to provide larger units to lower-income households in exchange for a reduction in the total number of affordable units. The Staff Report states,

The Staff Report recommends providing “meaningful incentives” to developers to help them meet affordable unit requirements.

“Under TOC, developers in some areas [of Los Angeles] may choose between providing 8% of their units at 30% AMI, 11% at 50% AMI, or 20% at 80% AMI. In 2019, 926 or 52% of the affordable units approved in TOC developments [in Los Angeles] were at 30% AMI.”

This recommendation is something our industry should fully embrace. It recognizes a fundamental fact of development – there is only so much money a developer can afford to contribute to inclusionary housing before the entire development becomes economically unfeasible.

The LA model is a real-world recognition of these realities. If tenant activists want larger units at lower cost for the tenants living there, they must recognize that this “subsidy” will significantly impact the financial feasibility of the development. If larger units at lower cost are a priority, then allow the developer to build fewer total affordable units so that the total “affordable contribution” does not destroy project feasibility.

The LA model, in particular, looks to hold great promise if adopted in Chicago.

Finally, the Staff Report recommends providing “meaningful incentives” to developers to help them meet affordable unit requirements. This is a further recognition that higher affordable requirement costs will necessarily mean fewer feasible development projects. If developers are going to be required to provide more affordable housing under a new or revamped ARO, the Staff Report recognizes that some government subsidy or contribution should be made to help defray these costs.

Specifically, the Staff Report recommends “providing a credit for unit count and floor area for affordable units” or allowing “developers who do not receive a zoning change to “opt in” to smaller bonuses in exchange for providing a portion of their units as affordable.”

This is the “carrot versus the stick” approach. Rather than penalize developers with unrealistic financial burdens that only result in failed development proposals and a further reduction in housing production in Chicago, give developers benefits sufficient to improve development economics that will also result in new affordable units for the city.

Every time a new building breaks ground, huge sums of debt and equity are put at risk.

Yes, this means governments may need to provide some financial support to these developments, or allow denser developments with more total units to make the inclusion of affordable units feasible. But why shouldn’t governments and our collective tax dollars be contributed to something which is essentially a public good? Or, put differently, why should developers be expected to bear the full burden of providing affordable housing in market rate buildings?

There are many other findings and recommendations in the Staff Report. Many will be viewed unfavorably by our industry, and will be opposed if they find their way into future inclusionary zoning Ordinances. For one particularly egregious example, read the related article in this Newsletter about Alderman Byron Sigcho-Lopez’s proposed DFA Ordinance.

Other recommendations are more neutral and may be proposals we can live with. The recommendations discussed earlier are those that our industry should view as acceptable and even desirable as the city looks for ways to make inclusionary zoning work better in Chicago. The LA model, in particular, looks to hold great promise if adopted in Chicago.

Where Do We Go From Here?

If we have learned anything in 2020, it is that the future cannot be predicted, and the risk in real estate investment and development is real. Every time a new building breaks ground, huge sums of debt and equity are put at risk. We need look no further than the devastation facing hotel and retail owners in the wake of what has been one of the most difficult years for the real estate industry in many years to know that real estate risk is more than just a concept. It is a fact of life.

The far-left makes a terrible miscalculation when they presume that real estate development always produces windfall profits, and that there is a bottomless pot of gold to be plundered in every new apartment building.

Chicago’s future has rarely looked more precarious than it does right now. The city’s greatest asset: its world-beating CBD – vibrant gathering place of business and industry – has been depopulated, its shopping districts pillaged. Unlike our Coastal and Sun-Belt competitors, we lack many of the draws these other cities offer, including an appealing climate, strong industry sectors (technology, finance and entertainment), and consistent Millennial appeal.

What we have is a central location and a diverse economy, combined with a lot of smart, innovative and hard-working people. But those people have choices about where they want to live. California will always be warmer and more glamorous. New York will always be bigger and more important. Boston, Seattle, Austin, Denver and many others will continue to out-draw the Millennial generation.

One of Chicago’s advantages in this highly competitive landscape of appealing American cities is its relatively low cost. The far-left makes a terrible miscalculation when they presume that real estate development always produces windfall profits, and that there is a bottomless pot of gold to be plundered in every new apartment building that rises up from the Midwestern prairie.

Make no mistake, 2020 has put a serious dent in Chicago’s reputation and competitive position. We fully acknowledge the pain and suffering caused by the pandemic, and the disproportionate impact of the pandemic on lower-income households, many of whom rent rather than own their residence.

But, if we really care about keeping the city strong, and making it a fairer and more equitable place, then we cannot lose sight of the fact that the builders and investors who put their capital at risk can put their capital to work in many places besides Chicago. Make that development too difficult or expensive and they will invest elsewhere. This is already happening.

An over-the-top revamping of the ARO, similar to what Sigcho-Lopez and his allies propose, may delight tenant activists and allow the Democratic Socialists to claim another political win over the “evil” real estate industry. But after the champagne bottles have popped and the fizz has gone flat, these same activists and politicians will watch the damage they have created as the laws of economics kick in, new housing development dries up, and a damaged city is brought even lower. In the end, everyone will lose, especially those low and moderate-income households who can least afford it.