The Housing Squeeze Hits The Middle In Chicago: One Solution

As rents continue to rise in most markets and multifamily development isn't supplying as much product at the lower end of the scale as needed, the lack of affordable housing is a problem creeping up the income scale. What to do?

Bisnow interviewed Habitat Affordable Group Senior Vice President Charlton Hamer about the challenges of affordable housing in a market like Chicago and a possible solution. He recently served on Mayor Rahm Emanuel's steering committee to formulate a five-year housing plan that will be introduced to the City Council in September or October.

In advance of a discussion of affordable housing at Bisnow's Multifamily Annual Conference Oct. 24, Hamer discussed a possible tool that could ease the challenges to building affordable housing.

Bisnow: Is affordable housing becoming a working-class issue in Chicago?

Hamer: The city of Chicago has focused the majority of its housing-related resources for the creation and preservation of affordable housing for individuals and families below 60% of the area median income. Those who are at the low, very low and extremely low-income levels are obviously the most affected by housing affordability. 

However, the lack of affordable housing is becoming more acute for families at an income level higher than 60% of [area median income] or those in workforce housing. According to the Institute for Housing Studies at DePaul University, Chicago has seen significant demographic shifts besides the loss in overall population. Among the changes within the past five to 10 years are changes in household composition by income. 

Namely, the city has experienced a significant increase in households making $100K and more, and decreases for those making less than $99K — with the most critical decreases for those making $50K and less. That means the city is becoming more hospitable for higher-income professionals but less affordable for the working class. That isn't sustainable. Where will our teachers, firemen, policemen and those working in the service sector reside? 

Bisnow: If you could make one change to the local approach to affordable housing, what would it be and why?

Hamer: One aspect of our advocacy to the city of Chicago is to focus resources on developing and preserving affordable housing for those who are between 60% and 120% AMI. Resources from the federal, state and municipal levels are scarce and thus enacting a real estate tax incentive for "certainty" could be useful in preserving and providing more affordable housing. 

Bisnow: Why is that?

Hamer: The lack of certainty related to real estate taxes creates both underwriting and operating challenges for developers and lenders. It would be a significant advantage if the city could work with the county and state to enact a policy to reduce property tax risk for affordable and mixed-income housing owners who make long-term commitments to affordability.

Bisnow: How would that work?

Hamer: In exchange for use restrictions, the assessor could cap real estate taxes on affordable housing at a specific percentage of gross income, thus protecting tenants, owners, lenders and investors against rising assessed values and assessments that outpace operating expense increases. Within this scenario, taxes could still rise with rent/revenue increases, but the taxed percentage of gross income would not change. That would provide greater certainty for investors in affordable housing.

For projects financed by low-income housing tax credits, or in which at least 50% of the controlling interest is held by a tax-exempt 501(c)(3), complete or partial exemption from real estate taxes — or imposition of a payment in lieu of taxes (PILOT) — could be employed. An example of that is New York City's 420-c Tax Incentive Program.

A real estate tax exemption is on the assessed value of the building (excluding land) for rehabilitation or new construction of affordable housing of formerly city or county owned land. The sites would also need to be in Opportunity Zones and Opportunity Areas as determined by the city of Chicago and HUD.

Bisnow: To which kinds of development would such a program apply?

Hamer: Development projects containing at least 20% affordable units within multi-dwellings on lots which were vacant or predominantly vacant or improved with a non-conforming use three years before the start of construction. Those would be eligible for an exemption. 

This exemption could entail construction period exemption (up to three years) plus 10-year, 15-year, 20-year or 25-year post-construction exemptions from the increase in real estate taxes resulting from the work.

Find out more about affordable housing in Chicago at Bisnow's Multifamily Annual Conference Oct. 24.