The 2015 ARO Promoting Affordable Homeownership in Chicago’s Neighborhoods

On October 13, 2015, Chicago Municipal Code, Chapter 2-45-115, the 2015 Affordable Requirements Ordinance (“2015 ARO”) became effective. Go to www.cityofchicago.org/ARO to find a copy of the 2015 ARO, the 2015 ARO Enhancements Summary published by the City of Chicago, and 2015 Affordable Requirements Ordinance Rules and Regulations issued by the City under the 2015 ARO (“2015 Regs”).

The 2015 ARO applies to multifamily projects approved after October 13, 2015. It differs in several significant respects from Chicago Municipal Code, Chapter 2-45-110, the 2007 Affordable Requirements Ordinance (“2007 ARO”) which was adopted before the housing crash, and which applies to projects approved before October 13, 2015.

Both the 2007 ARO and the 2015 ARO require that a designated percentage (generally 10% or 20%) of units built in a new housing development which receives zoning concessions from the City need to be “affordable”. Under the 2007 ARO, the builder could satisfy its obligation by either (1) providing the affordable units “on site” or (2) paying the City an “in lieu fee” of $100,000 for each unit that it does not build on site.

Although the 2015 ARO increased the “in lieu fee” significantly (it now could be as high as $225,000), it added a third option for builders of owner-occupied or rental developments in “Downtown” or “Higher Income” areas—the ability to “build, buy or rehab” the required units off site, subject to various restrictions and requirements as to investment, location and quality of construction.

Although there are numerous issues that need to be dealt with and details to be firmed up before the potential of this new approach can be fully realized, we believe that if properly administered the 2015 ARO could be an effective means to generate sustainable and affordable owner-occupied units in the neighborhoods. In particular, we believe that it can be used to make available to low and moderate income households affordable housing (rental or owner-occupied) in those neighborhoods where they would be comfortable living and raising their families, with safe streets, quality education opportunities, family friendly amenities and public transportation.

Although there are many facets to the 2015 ARO, this article focuses primarily on satisfying the 2015 ARO off-site requirement with respect owner-occupied developments proposed for the Downtown Area. We expect that the owner-occupied developments in the Downtown Area will primarily be condominium developments. Following is a summary of what we understand are the basic requirements for providing off site units to satisfy the 2015 ARO requirements applicable to owner-occupied condominium buildings to be constructed in the Downtown Area.

  1. Basic Requirement. Section F (4) of the 2015 ARO provides that a developer of owner-occupied units in the Downtown Area may satisfy its affordable housing requirement by: (a) building the units on site; (b) building, buying or rehabbing the units off-site; (c) pay an in lieu fee; or (d) any combination of (a), (b) or (c). The in lieu fee ranges from $115,000 to $225,000, and will increase as the Consumer Price Index increases. For purposes of this article, we assume that as long as the program is fairly and reasonably administered, the preferred option will be to provide off-site units.
  2. Location. Under Section F (4), the off-site units can be located anywhere in the City---subject to the Department’s approval. It is not clear yet what it will take to secure the Department’s approval. However, Section 6.2.1 of the 2015 Regs states the City’s goal for off-site units, in part, as follows:
    "Creating an off-site option, the Department is hoping to harness the expertise, experience, and ingenuity of the development community to create more affordable units off-site than would otherwise be created in the AROsubject property. Developers are encouraged to be creative in meeting their off-site obligation. In addition to creating more units than would be possible on-site, the expectation is that the off-site units could be larger and potentially more affordable than their on-site counterparts.” (emphasis not added)
  3. Size and Cost. Under Section 6.2.3 of the 2015 Regs, the off-site units must have the same number of bedrooms as those that would have been required on-site, although square footage may differ. The cost to construct, acquire or rehab the off-site units must equal or exceed the total amount of equivalent in lieu fees that would be required for the ARO development. These requirements, when read in conjunction with the language in 6.2.1 quoted above, suggest that as long as the developer invests at least the aggregate amount of money that would have been paid in lieu of building the ARO units, the developer could, and indeed is encouraged to, invest the necessary funds to generate more than the minimum number of off-site units required.
  4. Other Requirements . Section U of the 2015 ARO requires the affordable units to be “comparable” to the “market rate” units in the off-site location in terms of unit type, number of bedrooms per unit, quality of exterior appearance, energy efficiency and overall quality of construction. Section V of the 2015 ARO further provides that the off-site units must be C/O’d before the issuance of the first C/O for the on-site market-rate units, the off-site location must be appropriately zoned for the proposed project, and a fee of $5,000 per offsite unit will be charged.
  5. Pricing and Income Requirements. Each ARO unit, on-site or off-site, must be affordable to households earning up to 100% of the median family income, as determined by HUD. However, the buyer of an ARO unit may earn up to 120% of the median family income. Section 8.6 of the 2015 Regs lays out the formula for determining maximum sale prices based on various factors, including number of bedrooms, real estate taxes, condo assessments, and interest rates for a mortgage equal to 95% of the sales price. As for number of occupants, Section 8.6.1 of the 2015 Regs provides that there shall be assumed to be 1 occupant for a studio and 1.5 occupants per bedroom for units with one or more bedrooms. It is not clear if this number will change based on the actual household size, e.g. if the number of occupants will be 4 instead of 3 for a two bedroom unit which will be occupied by a household of 4. The maximum sale price will change annually. 100% of median family income for a family of 4 in Chicago is currently $76,000 (for family of 3 it is $68,400). 120% of median family income for a family of 4 in Chicago is currently $91,200 (for a family of 3 it is $82,080). See, http://www.cityofchicago.org/city/en/depts/dcd/supp_info/are a_median_incomeamichart.html. Per Section 8.7 of the 2015 Regs, an eligible purchaser may not spend more than 38% of their household income on housing. Based on these parameters, it appears that the maximum price for an ARO unit for a family of 4 would, as of early 2016, be as much as $200,000 and could easily be purchased by a household of 3 or 4 with a current annual income of not more than $82,080 or $91,200 respectively. (A unit costing $200,000, with a 95% 30 year mortgage at 5% interest, with 00.70% PMI, with 2% real estate taxes and assessments of $350/month, would have a monthly cost of ownership of less than $1,750) which, at 30% of gross income, would be affordable by a household with an annual income of $70,000 and at 38% of gross income would be affordable by a household earning $55,300.)
  6. Affordable Housing Agreement. Section K of the 2015 ARO requires that the off-site units be made subject of record to an Affordable Housing Agreement which must run for at least 30 years and will set forth maximum qualifying incomes and sale prices for the sale and resale of the units. It is not clear how the maximum qualifying incomes and sales prices will be determined under the agreement. A logical approach would be to apply the same standards and factors used to determine the initial maximum sale price and the initial qualifying income to determine the price and income limits at any point in time during the 30 year period. This approach would allow a buyer of an off-site unit to realize the build-up in equity through monthly payments of principal on the mortgage and a profit (like any other homeowner) if the value of the unit goes up, while still maintaining the unit as an affordable unit under the original formula (provided for in the 2015 Regs) applied to current data.

We believe that if effectively implemented, the 2015 ARO will stabilize those neighborhoods in which off-site units are located and enable moderate households in those neighborhoods to build up equity and wealth by paying down their mortgage and by the appreciation in value that inures to homes in stable communities. The 2015 ARO sets the table for this process to occur by providing incentives to developers of condos in the Downtown Area to invest funds to provide affordable homes in the neighborhoods that can be purchased by moderate income households. However, it will take more than merely providing incentives.

As stated in Section 6.2.1 of the 2015 Regs (quoted in 2 above) developers are encouraged to be creative and use their expertise, experience and ingenuity to meet their off-site obligations. See the article entitle Co-opdominium: A Vehicle for Affordable Ownership of 2015 ARO Off-Site Units on our website at mpslaw.com. That article suggests an innovative and unique proposed legal structure for buildings containing owner-occupied off-site units which (i) blends the positive attributes of condominiums and cooperatives, (ii) adds safeguards and tools to help avoid many of the flaws and shortcomings in the condominium concept which became glaringly evident after the crash and (iii) utilizes the concept of installment sales contracts, to create a vehicle whereby moderate income families can become owners of units in a well-run, successful condominium which we believe would permit them to build equity and help stabilize and enhance the surrounding neighborhood.

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