ARO Revised Again
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It’s not the disaster it might have been had the Democratic Socialists gotten what they wanted. But the newly revised ARO, which was passed into law by the Chicago City Council on April 21, will make a number of changes that will have the cumulative effect of making new multifamily development more expensive to build.
As basic economics tells us, when something becomes more expensive to create, feasibility declines and supply will fall. And when there is less of something that people want and need, the price goes up.
No one should claim to be surprised by these basic economic realities. And yet the political establishment either doesn’t understand them, or simply doesn’t care.
The newly revised ARO will make a number of changes that will have the cumulative effect of making new multifamily development more expensive to build.
What is surprising is that the Mayor, the Department of Housing (DOH) and a majority of Chicago City Council members saw fit to adopt these ARO changes, making development even more difficult and expensive at a time when the downtown real estate market is still reeling from the double-whammy of the global pandemic and social unrest of the past year. It is a fair question to ask how these leaders of the community could justify such action while businesses and residents continue to flee the Central Area and residential vacancies remain at levels not seen since the Great Recession.
But first, we need to start with a summary of what got passed, and what changes we can expect from the 2015 version of the ARO now that this new legislation has been adopted. The following is a list of the most significant changes to the ARO:
- The affordable requirement will increase from 10% to 20% of total units in properties located in downtown Chicago and other high-cost community areas or areas in which displacement is deemed to be a significant risk. Practically speaking, these areas comprise close to 100% of the locations where new, unsubsidized multifamily buildings can be feasibly developed.
- In the former version of the ARO, developers could build 25% of the affordable units on-site in most locations and pay an in-lieu fee for the other 75%. In the current version, the on-site requirement will increase to 50%.
- In an effort to increase affordability for low-income households, income averaging at 30%, 40%, 50% or 60% of AMI tiers will be implemented – the affordable requirement at the 60% tier will remain at 20% of total units; at 50%, 40% and 30% tiers, the affordable requirements will fall to 16%, 13% and 10%, respectively.
- In certain cases, income averaging will allow 100% of AMI to be paired with very low-income households.
- Incentives have been added to create family-sized units and to reach lower income households most in need of housing assistance.
- 25% of all affordable units must also be “accessible” to persons with disabilities and must be preferentially marketed to the disabled.
- Affordable “for-sale” units must be kept affordable for a compliance period of 30 years.
The DOH website argues that these changes will address long-standing issues of housing discrimination and segregation and will create new housing opportunities in the most affluent and desirable areas of the city for populations who have long been denied housing in these same areas. In so doing, the ARO will begin to rectify the unequal housing system in the city, and decrease the extreme segregation that has defined Chicago for so many years.
The affordable requirement will increase from 10% to 20% of total units in properties located in downtown Chicago and other high-cost community areas or areas in which displacement is deemed to be a significant risk.
But this can only be true if the program works. As currently structured, and at a time when the downtown rental housing market is already under such duress, it is far from clear that the program can accomplish these goals.
Even if the program does work, the cost of non-subsidized housing units will need to increase to support the greater subsidy that will be needed to support more and deeper support for the affordable unit set-asides. This is another way of saying the large majority of non-subsidized renters will ultimately pay the price for their low-income neighbors to live in these new buildings. Perhaps this is a reasonable cost to impose on market-rate renters. But it is a cost, and it must be acknowledged.
Make no mistake. It is not the developers who will pay these costs, but the market rate renters whose rents will need to increase to make such development feasible again. The sad truth is that this inconvenient fact is something that the Mayor, the DOH and your local Alderman know only too well, and hope that the rest of us never find out.
