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Residential Housing Developers: Play or Pay (More)
by Sierra Sterling
As Laurie & Brennan discussed in a blog post last December, the City of Chicago was considering amending its Affordable Housing Ordinance. On Wednesday, March 18, 2015, the Chicago City Council passed an ordinance that aims to increase the supply of affordable housing in Chicago through a combination of developers providing on-site units or paying higher in lieu fees than in the past. The City anticipates that the new Affordable Requirements Ordinance (ARO) will generate 1,200 new affordable housing units and raise $95 million in revenue over the next five years. In the wake of this ordinance, developers should be apprised of their new obligations and how to meet them. The law takes effect 180 days after the date of passage (September 14, 2015), and the steeper fees will be applicable beginning in September 2016.
Who and what does the ARO affect?
Generally speaking, the ARO affects residential development projects that: (1) received a zoning change; (2) include land purchased from the City; and/or (3) received City financial assistance.
Rezonings
Rezoning under the ARO specifies five changes in the zoning of property that will trigger the new affordability requirements. In the following circumstances, residential developers will have to meet ARO requirements:
- A change to permit a higher floor area ratio than would otherwise be permitted in the base district;
- A change to increase the overall number of housing units than would otherwise be allowed in an existing planned development (PD);
- A change to rezone a formerly non-residential area for residential use;
- A change to allow ground-floor residential use where it was previously forbidden; and
- A change from a downtown district to a planned development (even if the underlying base district from the property doesn’t change.
Municipal Code Section 2-45-115(B).
City Land Sales
ARO requirements are also triggered if the City sells property to a developer and that property is subsequently developed with a residential housing project or incorporated into a residential housing project site.
City Financial Assistance
Finally, ARO requirements are triggered if a developer receives financial assistance from the City in connection with the development of a residential housing project. “Financial assistance” includes grants, direct or indirect loans, or allocation of tax credits.
ARO Requirements — Nuts and Bolts
If a developer’s project falls within any of the categories described above, the developer has certain obligations that are a combination of providing affordable housing and/or paying in lieu fees. Before delving into the specific numbers (see table below), developers should make sure they understand some key definitions.
Affordable housing — “affordable” means a sales price or rent less than or equal to the amount at which total monthly housing costs would not total more than 30 percent of household income for a household whose income is the maximum allowable for an eligible household. For rental housing, this means housing that is “affordable” to households earning up to 60 percent of the area median income; for owner-occupied housing, this means housing that is “affordable” to households earning up to 100 percent of the area median income.
In lieu fee — an in lieu fee is a fee in lieu of the establishment of on-site or off-site (if applicable) affordable units, adjusted annually.
Requirements vary under the ARO depending on which triggering conditions the project meets and where the development is taking place. The ordinance carves the City into three “zones” that reflect different housing markets: downtown, higher-income areas, and low-moderate income areas.
Downtown zoning districts are the “D” zoning districts as designated in the Chicago Zoning Ordinance. Higher-income areas is any area that is not a low-moderate income area. However, if any portion of a higher-income area is located in a downtown district, that portion of the area will be treated as a downtown district. Low-moderate income areas are designated by the Commissioner of Planning and Development, using published data relating to median income, gentrification, and loss of affordable housing. The criteria for designating areas as low-moderate income is forthcoming, but the list will be updated at least every five years. Like higher-income areas, any portion of a low-moderate income area that is located in a downtown district will be treated as a downtown district.
The ARO requirements start from a basic premise of how many affordable housing units a developer must provide. Those percentages are summarized in the table below.
| Developer Receives | Percentage of Units That Must Be “Affordable Housing” |
| Rezoning | 10% |
| Rezoning + City financial assistance | 20% |
| City Land Sale | 10% |
| City Land Sale + City financial assistance | 20% |
| Financial Assistance | 20% |
Developers can satisfy the above requirements either by simply meeting them, or by using a combination of setting aside affordable housing units and paying in lieu fees. The methods of compliance vary by whether a developer is in a low-moderate income, higher income, or downtown area. Downtown, the requirements depend on whether the housing units are owner-occupied or rentals. These requirements are summarized below.
Low-Moderate Income Areas
|
|
Higher-Income Areas
|
|
Downtown Districts — Rental Units
|
|
Downtown Districts — Owner-Occupied Units
|
As an illustration, let’s assume that a developer is building a 100-unit residential housing project in a low-moderate income area and received both a zoning change and financial assistance from the City. This triggers the 20 percent affordable housing units requirement, so 20 units would have to be “affordable.” The developer can meet this requirement in several ways:
- At least 5 affordable housing units must be on-site.
- The remaining 15 affordable housing units can either be actual units on-site, or the developer can pay $50,000 per unit. The maximum ARO annual fees a developer would pay would be $750,000.
The in lieu fees are deposited in the “Affordable Housing Opportunity Fund.” This Fund is used to construct, rehabilitate, or preserve affordable housing. In addition, the Fund makes a contribution to the Chicago Low-Income Housing Trust Fund.
The future for developers and the City
The City has shifted from a “play or pay” model to a “play and/or pay more” model. In past years, most for-profit developers paid the $100,000 fee for every affordable unit that they were supposed to put in their buildings, rather than adding any affordable housing to the City’s supply. The ARO curbs this in two ways. First, it increases fees in higher-income and downtown areas, and it mandates that at least one-fourth of a project’s units actually be made affordable housing units. Second, the in lieu fees are now higher in higher-income and downtown districts. This means that developers cannot completely avoid adding to the City’s supply of affordable housing.
Understandably, many developers called foul and warned the City Council that such an ordinance could halt or significantly slow down development, particularly for downtown apartments and condominiums. The City Council heard developers’ concerns and do offer some ways to ease the introduction of this new ordinance. As mentioned previously, for downtown development, the in lieu fees will be phased in over a period of time. Additionally, the City has provided incentives to sell units to an authorized agency that furthers the goals of affordable housing opportunities in Chicago.
When considering a development that falls within the ambit of the new ordinance, developers should factor in these costs and consider seriously the option of working with the City to sell or lease some of the units to take advantage of the discounts the City offers.