Chicago Landlords Face Long Sales Timelines, Hefty Demo Fees After Affordability Ordinance Takes Effect

An ordinance meant to combat gentrification on Chicago’s northwest side went into effect this week, with massive potential implications on housing affordability and the multifamily transaction environment. 

The Chicago City Council quietly approved the Northwest Side Housing Preservation Ordinance in September, and it became law on Wednesday. The ordinance offers a right of first refusal to tenants in multifamily buildings, allowing them to purchase their building before it goes to market for sale. It also imposes a sizable fee for developers that demolish existing multifamily buildings.

The measure aims to protect a six-square-mile zone in Hermosa, Logan Square, Avondale, West Town and Humboldt Park, where advocates say housing has become increasingly less affordable and Black and brown communities have been displaced. Developers are deconverting multifamily properties into expensive single-family homes, and more luxury towers have popped up.

Advocates paint the ordinance as a win for tenants and affordability.

But it is setting off a wave of opposition in the commercial real estate community amid claims it is unfair to longtime landlords that have maintained reasonable rents and risks unintended consequences that nullify its good intentions. 

“It is a massive infringement of private property rights to every size individual who owns in the impacted area,” said Karen Biazar, who owns brokerage The Biazar Group. “I don't see how this helps affordability. I truly don't.”

Under the ordinance, a right of first refusal gives tenants living in properties with five or more units up to 90 days to exercise the right and form a tenant association. They have an additional 120 days to secure financing. Tenants do not need to prove they have the financial ability to purchase the building before exercising their right of first refusal. 

The ordinance also includes demolition fees for developers that tear down multifamily properties in the area. The penalty is equal to the greater of $60K or $20K per unit razed, though law firm Clark Hill has raised questions about whether this requirement could withstand judicial scrutiny. 

Alderperson Carlos Ramirez-Rosa of the 35th Ward introduced the ordinance in July alongside co-sponsors Daniel La Spata, Jessie Fuentes, Byron Sigcho-Lopez, Ruth Cruz, Felix Cardona and Rossana Rodriguez-Sanchez.

Bisnow reached out to several aldermen who supported the ordinance but got no response to a request for comment. However, other advocates, like Palenque LSNA's Director Of Housing Christian Diaz, called the measure’s passage a major victory that builds on a pilot demolition law introduced in 2021. That law charged developers $5K per unit and $15K per building to tear down buildings in parts of Humboldt Park, Logan Square and Pilsen. 

“This ordinance didn't pass because any mayor or politician woke up one day and said, ‘Hey, we should do this,’” said Diaz, whose group worked with aldermen to develop the ordinance. “It passed because there was grassroots community involvement every step of the way from the very beginning. And so I think we have a lot of pride. We have a lot of joy.”

But the bid to preserve affordability angered some in the CRE community who believe the ordinance obstructs their ability to sell property they rightfully own and could be counterproductive.

Biazar, who lives in the area and has 32 units in her portfolio there, said most of the transactions in the area are between smaller landlords and don't involve major institutional players. The extensive timeline for the tenant’s right of first refusal is likely to quash deals that have expiration dates on rates and other financing terms, leaving sellers in a lurch, she said.

The lack of a requirement for tenants to prove they can qualify to buy the property before engaging in the process is “completely contradictory to a real estate transaction,” Biazar said.

Biazar said she thought the measure would actually hurt affordability in the area. And instead of navigating the right of first refusal process, landlords may choose to simply let leases on a building expire until it is fully vacated, she said.

The consequence could be less affordable housing, not more, defeating the intent of the legislation. 

“I see it as a trigger, like, ‘Hey, I want to sell my building in a year, I'm going to clear all my tenants out,” she said. 

Mike Zucker, managing partner at Peak Properties, said he believes there’s a “desperate need” for affordable housing, and he wants to be able to provide it.

Yet to make significant investments in buildings that are falling apart, he sometimes needs to raise rents to cover the work. 

Another concern is that multifamily building owners of all sizes will see their assets devalued due to the new restrictions put in place by the city. 

“The organic deal flow and the organic development will slow down,” Zucker said.

Tenant right of first refusal isn’t a novel concept within the city and in similar-sized metros. 

Woodlawn residents secured a right of first refusal in 2020 to protect them from being pushed out by gentrification sparked by the Obama Center. As of this month, no tenants had exercised that option and purchased a building.

In Philadelphia, the city council passed a bill in May 2023 creating a tenant opportunity to purchase act, which applied to rental properties of four or more units at the end of their affordability contracts.

“Call your lawyers,” Apartment and Office Building Association Vice President of Government Affairs Katalin Peter told Bisnow at the time. “Really, truly, call your lawyer or your lawyers, because they’re going to have their hands full figuring this out.”

In the long term, Diaz said he hopes the ordinance will keep people in the community from being displaced. 

“We will remain a community that is diverse, economically and racially, and I think that's what people in Chicago want,” Diaz said. “That's what draws people to move here in the first place.” 

But those in the CRE community said the measure brings consequences that don't achieve the goal of keeping housing affordable. Biazar said that the way the ordinance was drafted indicates there was no consultation or collaboration with the real estate community. 

The ordinance aims to protect “naturally occurring affordable housing,” which is housing not legally required to be affordable.

A larger percentage of Chicago’s affordable housing stock is in “naturally occurring affordable housing,” at 26% of all units, compared to  “legally restricted affordable housing,” which makes up 10% of all units, according to city data. Some of the communities that the ordinance impacts have even larger percentages of naturally occurring affordable housing, with 31% in Avondale, 39% in Humboldt Park, 45% in Hermosa and 54% in Lower West Side.