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Carrot and Stick: How the Illinois Affordable Housing Special Assessment Program will mix with Chicago’s Affordable Requirements Ordinance

Did anyone catch the Crain’s article, “Developers Adapt to Affordable Housing” by Alby Gallun that got published on November 21, 2022? Well, Mike Glasser, RPBG President, did. And it got him to thinking.

After years of punishing legislation at all levels of state and local government, here, at last, was a piece of legislation that gave builders an incentive to provide housing at affordable rents.

“Steve,” he said to me (I’m paraphrasing), “Crain’s wrote a really interesting article about how downtown developers are able to build new apartment buildings in the West Loop with the new tax incentives passed by the State Legislature, even though the ARO requires a 20% affordable set-aside in most of these buildings. Can you do a little research and see how this might impact development in Rogers Park?”

Anyone who knows Mike knows that saying no to Mr. Glasser is not an easy thing to do. Besides, I knew he was on to something. After years of punishing legislation at all levels of state and local government – making it more onerous, more difficult and more expensive for housing providers to actually provide housing – here, at last, was a piece of legislation that gave builders an incentive to provide housing at affordable rents. Even better – the Crain’s article claimed that the new state legislation is strong enough to counteract the chilling effect of the ARO revisions that went into effect on October 1, 2021.

Although information on both these legislative efforts have appeared in past editions of this Newsletter, it’s worth reviewing the basics to see what they require and why housing providers and developers either love them or hate them. In simplest terms, you can think of the AHSAP as the carrot and the ARO as the stick.

The Carrot

The AHSAP (HB 2621), a state law passed in May 2021, takes a refreshingly different approach to the creation of affordable housing. Instead of mandating the inclusion of affordable units in new developments, the state proposed a set of tax incentives generous enough to entice developers to voluntarily include affordable units in their projects. These incentives vary, depending on the relative strength or weakness of the area in which the development occurs. Keep in mind that Illinois is a large and diverse state that runs the gamut from completely rural to intensely urban with just about everything in between.

The legislation includes three basic “buckets” of tax incentives that apply to any new construction or substantial rehabilitation of a multifamily building with seven or more units. These buckets include a 15% Tier intended for stronger economic areas, a 35% Tier intended for more economically challenged areas, and a special 20% Tier that is limited to “low-affordability” areas.

The AHSAP takes a refreshingly different approach to the creation of affordable housing.

Essentially, the AHSAP allows a development that sets aside 15% of its units as affordable to receive a 25% reduction in assessed value. If affordable units are increased to 35%, the reduction in assessed value rises to 35%. The affordability requirement must be maintained for a minimum ten-year period but can be renewed for two additional ten-year terms.

The highest benefits are reserved for the 20% Tier which requires a 20% set-aside of affordable units in exchange for very generous reductions in assessed value that start at 100% (essentially, the pre-development assessed value of the parcel), stepping down to 20% after 12 years, and 0% after 30. The 20% Tier requires that unit affordability be maintained for the full 30 years.

While the 15% and 35% Tiers can, theoretically, be used anywhere in the state where the local government has set up a program, the 20% Tier is more limited. In Chicago, this Tier has only been approved for the city’s Central Area, generally bounded by Division Street to the north, Lake Michigan to the east, I-55 to the south, and a jagged western boundary that roughly follows I-90/94 but juts westward to include hot areas west and northwest of the Loop. Some “low affordability” suburbs can also qualify for this Tier.

Given the very substantial tax benefits associated with this 20% Tier, it is not surprising that big developers are putting this program to use in new residential developments within the downtown core. For the full text of the legislation, click here. For an easier summary of the program Tiers, including incentives and requirements, click here instead.

The Stick

These revised requirements were universally opposed by the housing industry.

The ARO is a city of Chicago law that mandates a certain percentage of affordable units to be included in a new construction or substantial rehabilitation buildings. The most recent revision, passed in April 2021, applies to buildings with ten or more units that require a zoning change or receive any sort of city financial support. The percentage set-asides and affordability levels vary considerably, depending on the economic strength of the neighborhood. However, for all intents and purposes, the entire Central Area, North Side and Northwest Side, as well as a goodly handful of community areas on the South and Southwest Sides, are now required to provide a minimum of 20% of their units at rents affordable to households earning 40% to 60% of area median income (AMI). For the full text of the ordinance, click here.

These revised requirements were universally opposed by the housing industry which feared they would render many new development and substantial rehabilitation projects infeasible, leading to a reduction in supply and higher rents as competition among renters increased for a smaller pool of rental units.

What Mike Glasser Really Wants to Know!

All this development downtown is great, but not really top-of-mind for Mike Glasser. What Mike really wanted me to find out was:

  • How is this new legislative landscape going to impact development outside of Fulton Market and the greater downtown Chicago area?
  • And, specifically, how will it impact development in Rogers Park, a great place to live, but where rents top out at levels well below what you can charge downtown?
Fortunately, RPBG is a veritable brain-trust when it comes to building in the neighborhoods.

To answer these questions, Mike asked me to reach out to RPBG members who know development from all sides, and other RPBG stake-holders who are intimately familiar with these laws and how they are likely to play out across the city.

Fortunately, RPBG is a veritable brain-trust when it comes to building in the neighborhoods. Our members include developers, lenders and trusted community partners in government and the non-profit world. I owe a big thank-you to Dave Gassman, Sam Goldman, Ibrahim Shihadeh and Mike Drew on the development side; Daniel Hertz with the City of Chicago Department of Housing; and lenders Stacie Young, Executive Director of CIC; Dan Starzyk, VP at Brookfield Bank, and Jerry Lumpkins, First VP at Valley National Bank. Here's what they had to say.

Dave Gassman, DLG Management:

The first person I spoke with was Dave Gassman who called me back almost as soon as I had hit the “send” button on my email request for information. As it turns out, Dave has worked closely with legislators on the state’s tax incentive program, something near and dear to his heart, given his prolific development expertise in Chicago over the past several decades.

Dave was the first one to highlight the very substantial benefits provided to developers working within the 20% Tier program. Dave’s biggest complaint about this program is that it is limited to the downtown area. In Dave’s opinion, there is no reason why the Chicago City Council couldn’t expand the 20% Tier benefits across the entire city which they have the legal authority to do. If this were to happen, Dave believes, these generous benefits would prompt even more development and greater creation of affordable units across the entire city instead of just in the downtown core.

Sam Goldman, Arbor Investment Management:

Sam, like Dave, is an experienced developer of multifamily properties. Sam was more circumspect about his views of the 20% Tier benefits. Both agreed that these incentives are powerful and are driving development of new multifamily in the downtown area. But Sam feared that these benefits might be too generous, giving tremendous tax breaks to developers of downtown apartments that must be recouped from all the other tax-payers in Chicago. If these benefits were extended city-wide, this burden would fall even more heavily on everyone else who is not able to qualify for these generous tax abatements.

Sam said that, even if the current 15% or 35% Tier benefits had been available when he was first trying to get approval for his Heartland property on Lunt Avenue in Rogers Park, it still would not have been sufficient to change project feasibility or tip the balance in favor of including affordable units. He sent me a spreadsheet model to back up his conclusions, stating rents in Rogers Park would have to go a lot higher before the existing 15% or 35% Tier benefits would give him the financial incentive he would need to including affordable units in his Heartland development.

Ibrahim Shihadeh, Creative Designs:

Ibrahim said the AHSAP was a positive step in helping developers get more buildings built and countering the negative aspects of the ARO. But he raised the very real issue of Aldermanic prerogative where Aldermen (and women) add additional requirements over and above what the ARO mandates before they will agree to a zoning change or other necessary building approvals.

This was Ibrahim’s experience with his proposal to develop Pratt Avenue in Rogers Park where, he tells me, the goal posts kept moving during negotiations. Ibrahim said it’s hard to operate in a political environment where there are both written and unwritten rules that must be accommodated.

Mike Drew, Structured Development:

Mike is another experienced developer of multifamily product and knows a lot about affordable housing. Mike acknowledges the positive impact of the new tax incentive program and said it was the first example he could think of in many years where the government made any attempt to incentivize developers to include affordable units in their buildings, rather than penalizing them for not doing so. He contrasted the incredible track record of CIC in financing the preservation of 167,000 units of “naturally occurring” affordable housing across the Chicago region at low cost and high efficiency with the ARO’s rather dismal record of just 1,000 affordable units since it was first adopted in 2007, and at a very high cost per unit due to program requirements.

Mike is less experienced in Rogers Park or other far North Side areas. He did say that as long as the gap between construction costs and potential rental income remains as wide as it is today, affordable mandates like the ARO will simply not work due to basic project economics. Most buildings are built by raising institutional and other equity which will not invest in these developments without sufficient financial incentive to do so. In a neighborhood like Rogers Park, the ARO is likely to continue to make development difficult, if not impossible, with or without the AHSAP incentives.

Daniel Hertz, DOH:

Daniel was one of the architects of the revised ARO and says that he does not know of any specific proposals that got delayed or cancelled due to the new and more stringent ARO requirements. He added that DOH has worked with developers to “figure out ways to move projects forward” and still comply with these new rules.

Daniel says DOH has not taken a position regarding what areas of the city should or should not benefit from the 20% Tier and confirms that it is the Chicago City Council that decides which areas get access to these enhanced tax reduction benefits at least within city limits. Interestingly, Daniel told me that two projects within the city, but outside of the downtown core, have applied for and received these benefits. A few other non-downtown projects are also currently trying to get approval for these 20% Tier benefits. This is an indication that the geographical constraints on the 20% Tier may be more flexible than they seem.

DOH has worked with developers to “figure out ways to move projects forward” and still comply with these new rules.

When asked about the impact of the revised ARO on neighborhoods like Rogers Park, Daniel observes that there may be a lot of other influences on feasibility, like rising interest rates and soaring construction costs. However, he did want to emphasizes that DOH will work with any developer to find ways to make projects work. While the ARO may have made that job harder, the Connected Communities Ordinance (offering expanded Transit Oriented Development bonuses) may help to counter some of those negatives and is at least one example of city legislation that offers carrots over sticks.

Stacie Young, Community Investment Corporation:

Speaking of CIC, I also got to talk to Stacie Young, the bank’s CEO. She said she was not as familiar with the impact of the new AHSAP on new construction but thought that the 15% or 35% Tier benefits for substantial rehabilitation were substantive, tipping the balance in any rational developer’s cash flow model in favor of including affordable units in sub-rehab projects in a wide range of locations all across the state.

Stacie pointed out that it is possible to have your cake and eat it too for developers willing to incorporate Housing Choice Vouchers in a 15% or 35% Tier property, or project-based voucher units in new buildings that must comply with the ARO. To do this, the developer must team up with the Chicago Housing Authority to procure a HAP contract covering 20% of a building’s total units.

In this “best of all worlds” scenario, a developer can receive generous tax reduction benefits while collecting full market rents on all building units. The only real downside is that the CHA has a limited number of HAP contract units it can support in any given year, and working with CHA to obtain these contracts can be time-consuming and administratively difficult.

Dan Starzyk, Brookfield Bank:

Dan raised another important issue with the new AHSAP legislation, and that is the lack of public awareness that it even exists. Dan says most of his city-based clients are simply unaware of the AHSAP benefits and have not considered them when contemplating new development or substantial rehabilitation. Dan’s experience suggests that there has not been adequate marketing of the new legislation to smaller, neighborhood-based developers.

Dan also sees the lower rent ceiling in Rogers Park as being a deterrent to the widespread adoption of AHSAP in non-core neighborhoods where the benefit may not be sufficient to outweigh the costs of the ARO’s affordable unit mandate.

Jerry Lumpkins, Valley National Bank:

Like Dan, Jerry has not yet done any transactions with clients who have used the state’s new tax incentive program. But Jerry hopes that this may change now that the program is up and running. He’s been saying for years that, without tax relief, the requirements of the revised ARO are just too onerous for many developers to overcome. This is especially true in neighborhoods like Rogers Park where rents are a lot lower than they are downtown.

Jerry would like the city to consider water and other utility expense relief. Water, especially, has become a huge operating expense and further reduces the cash flow required to service bank debt or provide investors with a reasonable return on their investments. Without these expense reductions, more and more development projects will not pencil out and will never get built.


There is no doubt that developers of new, high-rise, luxury apartment buildings in downtown Chicago are benefiting from the new AHSAP legislation and, in so doing, adding more affordable units to the city center.

There is probably more that needs to be done to make these new incentives as impactful as originally hoped, at least beyond the limited confines of the downtown core.

But, for new construction in most other locations, the consensus appears to be that the current benefits of the AHSAP are not sufficient to materially impact the feasibility of new apartment development. Without this new construction, the city’s goal of creating more affordable units outside of downtown Chicago and the strongest sub-markets like the near North Side and the Milwaukee Corridor is more wishful thinking that real.

For Rogers Park and other neighborhoods with lower rent ceilings, none of the developers who commented for this article seemed to believe that these benefits, as they currently exist, will make much of a difference in building feasibility, at least for new construction.

The new AHSAP legislation also faces problems with a general lack of familiarity and the impact of Aldermanic prerogative which can be quite arbitrary and further complicate project feasibility.

A surprise to me was the revelation that at least a few projects have been approved under the 20% Tier, despite their location outside of the downtown core. Perhaps this might become more common as the City Council seeks to use this tool to expand affordability more generally across the city.

Still, the consensus is that the new AHSAP will not be the game-changer in Rogers Park. For now, at least, it is probably unrealistic to expect a significant increase in new multifamily construction in Rogers Park, or the increase in affordable units that would result.

So, Mike, I think that’s your answer. There is a lot to like about the AHSAP, perhaps most of all that our state government finally decided to offer us a carrot instead of beat us with a stick (generally not the case in Chicago or Cook County). But there is probably more that needs to be done to make these new incentives as impactful as originally hoped, at least beyond the limited confines of the downtown core.




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