ADUs: City-Wide Expansion of Pilot Program Proposed

Newly elected Alderman Bennett Lawson (44th Ward) ran on a Value Statement that included three basic goals:

After winning the election, the Alderman wasted no time acting on these goals. His very first action at his inaugural City Council meeting on May 24, 2023 was the introduction of an ADU Ordinance that would greatly expand the geographic reach of the pilot program currently in effect.

A quick review of the proposed Ordinance reveals a surprisingly simple proposal. The Ordinance is basically one page of mostly deleted text that describes the pilot program and the pilot target areas. The crux of the revisions, taken directly from the proposed Ordinance, reads as follows:

“Section 17-7-0572 of the Municipal Code of Chicago is hereby amended … by inserting the language underscored, as follows:

Additional Dwelling Units are allowed in all RS2, RS3, RM and RT districts outside the Central Business District…”

Pretty simple, huh? Just get rid of the pilot restrictions and open up large parts of the city outside of the downtown core.

A quick review of the proposed Ordinance reveals a surprisingly simple proposal. But, it is not what is in this text that raises concerns for our industry – it is what has been left out.

There is a lot to like in this proposal. And, make no mistake, we are grateful that Alderman Lawson is pushing for it. But there is more to ADU expansion than meets the eye and some important questions left unanswered. In short, it is not what is in this text that raises concerns for our industry – it is what has been left out. For more on that, keep reading.

A Look-Back at ADUs in Chicago:

This Newsletter took an in-depth look at the issue of ADUs in Chicago back in 2020 (Summer edition). A follow-up article that appeared in the 2021 Winter edition discussed the ADU pilot program that went into effect on May 1, 2022.

No one needs to be reminded that these were difficult years for reasons that had nothing to do with zoning and housing policy in Chicago. The summer of 2020 was a particularly challenging moment. We were still struggling to adapt to the shock that followed the first wave of the pandemic-induced economic crisis when a second crisis hit following the murder of George Floyd with the massive social upheaval that erupted in its wake.

Given all that was going on at that time, you will be forgiven for not remembering that this was also a time when the Urban Land Institute (ULI) had completed a massive review of ADU policy in Chicago and how a re-legalization of ADUs could be an important tool in Chicago’s arsenal of tools to address the city’s growing affordable housing crisis.

As a brief recap of findings, the ULI report noted that ADUs had been banned in 1957, effectively removing this source of new housing from the Chicago market after that year. The report also noted that most of the zoning changes over the past 50 years have reduced density in the residential areas of the city. Thus, most development within city limits is currently restricted to low-density, single family housing even as the cost of this housing type is increasingly out of reach for most Chicago area households. It is estimated that 79% of the land within city limits is currently zoned for nothing denser than a single family house!

What did Chicago do when it put its ADU pilot program into place? Just the opposite of what the ULI study recommended.

The disconnect between the housing that can be legally built in Chicago, and the housing that is actually needed to satisfy market demand, prompted ULI to undertake a comprehensive review of ADUs in Chicago.

ULI found that ADUs are an effective tool to increase the supply of affordable housing for the very reason that they are typically less expensive than other rental housing options. This is due to the fact that these units typically occupy less desirable spaces. These typically include lower-level areas and tight attic spaces in residential buildings or garages. ADUs could even include vacant, ground-level commercial spaces along commercial corridors with high commercial vacancies. The advantage of ground-level ADUs is that they can be made accessible to persons with disabilities at lower cost than spaces not already located at ground level. We call these types of units “naturally occurring affordable housing” (NOAH) where the affordability is due, not to legally binding government restrictions, but to market forces.

Stacie Young, President and CEO of Community Investment Corp., estimates that 75% of the country’s affordable housing is of the NOAH variety, three times the amount of units from all of the subsidized housing programs combined. In Chicago, we can look to a study commissioned by the City’s Department of Planning and Development which found that just over 150,000 of the city’s 580,000 housing units are NOAH, compared to just under 60,000 units with government-mandated rent restrictions or assistance. This is about 72% of all affordable units within city limits – not much different than the national figures.

The ULI study found that ADUs would be most effective in increasing the supply of affordable units if these units were broadly allowed as an as-of-right program. The ULI study was clear that constraints on the development of these units, including affordable restrictions, would reduce the effectiveness of an ADU program in Chicago.

These recommendations were based on ULI’s survey of other US cities and their ADU policies. ULI found that cities with the most permissive policies and the fewest government-imposed affordability requirements saw the greatest increase in total ADU units. It was these same cities that derived the most benefit from this new production and experienced the greatest positive impact on housing supply and overall affordability.

So, what did Chicago do when it put its ADU pilot program into place? Just the opposite of what the ULI study recommended. As reported in the Winter 2021 Newsletter, Chicago chose to restrict ADU development to just five areas. Worse, in its infinite wisdom, the City Council required that 50% of newly created ADU units be subject to rent restrictions at levels affordable to households earning no more than 60% of area median income (AMI), and that these restrictions be recorded as legally binding and recorded Land Use Agreements that would be enforced for a period of 30 years!

To the surprise of no one, few new ADU units have been created under this pilot program. The Chicago Cityscape website lists just 185 ADU permits that have been approved since the pilot program went into effect – a vanishingly small percentage of the roughly 1.2 million housing units in Chicago. A quick scan of these 185 permits reveals that a high percentage are for single units in small buildings. This is a pretty clear indication that the affordable requirements are preventing many owners of larger buildings from adding ADU units to their buildings

And who can blame them? Few owners of these buildings want to spend money to create multiple units in lower-level space, knowing that half of the new inventory of ADU units would be rent-constrained for such a lengthy period of time. Since larger buildings have the most potential to add significant inventory to the overall supply of apartment units, these restrictions mean that only a trickle of new units have been created, mostly one-offs in two and three-flat buildings.

Just 185 ADU permits that have been approved since the pilot program went into effect – a vanishingly small percentage of the roughly 1.2 million housing units in Chicago.

Industry groups fought hard to remove these restrictions entirely – arguing that the program would be far more effective and create many more units if left to market forces. As a back-up, the industry argued that a significantly shorter enforcement period could accomplish part of this goal since investors are more likely to risk investment capital for a ten or 15 year period than they would be for the three decades the city ultimately required.

As usual, these arguments all fell on deaf ears. Dogma and ideology won out over common sense.

Where do we go from here?

Alderman Larson’s proposal to extend the ADU program from just a few pilot areas to much of the rest of the city is a great first step. This plan, if adopted, will increase the potential for this program to create additional, much needed rental units in all parts of Chicago where there is unmet demand. But simply expanding the footprint of the ADU pilot program will not produce the desired results if the existing program is left unchanged.

Standing in the way of a more effective and impactful ADU implementation is the far left wing of the Chicago City Council and, in particular, Alderman Carlos Ramirez-Rosa, 35th Ward. Although Alderman Ramirez-Rosa is no longer the City Council Floor Leader and Zoning Committee Chair – having recently resigned from these positions after his physical altercation with Alderperson Emma Mitts at a City Council meeting – he still exerts considerable influence within the powerful and growing Democratic Socialist and Progressive blocks of the Chicago City Council. It is this group of Alderpeople who will almost certainly insist on keeping the current 60% of AMI restrictions on a citywide expansion of the current ADU pilot program.

If Chicago is serious in its desire to create more affordable housing, it must rethink its affordable mandate and be less suspicious of market forces. In the current political environment, this is probably too much to expect.

I spoke to Alderman Lawson on Tuesday, September 26 about his plans to broaden the ADU program across the city, and about industry concerns regarding the current pilot program and its affordable housing restrictions.

ULI found that ADUs are an effective tool to increase the supply of affordable housing for the very reason that they are typically less expensive than other rental housing options.

The Alderman stated that the City Council is currently focused on the difficult and challenging task of approving a new City Budget, currently hundreds of millions of dollars in the red even before the Mayor’s proposed $800 million in new taxes to fund his Progressive agenda.

Alderman Larson anticipates that the City Council will have little time for any initiative other than the budget for the next few months, but notes that the Council must produce a budget before the Thanksgiving holiday. With that issue resolved, the City Council can then turn its attention to other matters. He would like to see the City Council take up his ADU proposal and get a new ADU Ordinance passed before the current pilot program expires in May 2024.

Alderman Larson says he will advocate for an ADU program that yields the best result for the city and its people. Alderman Larson has extensive background in housing and strongly believes that policies that support the creation of additional NOAH will best serve Chicago and meet its affordable housing needs. But he acknowledges the influence of the Progressive block and cannot predict what an expanded ADU program will look like when, or if, it is ultimately approved by the full City Council.

If, as expected, the Democratic Socialist and Progressive blocks of the Chicago City Council maintain the current affordable restrictions of the ADU pilot program in a city-wide expansion, then the production of ADU units will continue to lag.

The housing industry and ULI agree that the current version of the ADU program will never be as effective as any of the alternatives that leverage the power of market forces. The current affordability restriction is especially problematic given that many of the new ADU units would be priced at affordable levels even without these restrictions.

Of all the program’s current provisions, it is the 30-year enforcement period that is the real deal killer. It is just too long to be palatable to most developers who need to know that restricted rents can be brought to market within a shorter time-frame to make development worth the cost and hassle.

If Alderman Larson is able to convince his colleagues to remove or modify these provisions, there is hope that a city-wide ADU program can make a real dent in the yawning gap between the existing stock of affordable housing and the demand for such units.

But if, as expected, the Democratic Socialist and Progressive blocks of the Chicago City Council maintain the current affordable restrictions of the ADU pilot program in a city-wide expansion, then the production of ADU units will continue to lag. This would be a missed opportunity for the city and another instance where ideology wins out over common sense.

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