Unlocking Affordable Housing in Chicago: Lessons from the ARO

Table of Contents

1. Introduction
2. Overview of Chicago's Affordable Requirements Ordinance (ARO)
3. Evolution of the ARO
   • 3.1 Updates and Overhauls in 2003, 2007, and 2015
   • 3.2 Future Overhauls and Changes
4. Functioning of the ARO
   • 4.1 Triggers for ARO
   • 4.2 Applicability and Requirements for Residential Developments
5. Variations in ARO Requirements
   • 5.1 Zones and Economic Factors
   • 5.2 In-Lieu Fees
     • 5.2.1 Adjustments based on Market Conditions
     • 5.2.2 Alternatives to In-Lieu Fees
6. Impact of Inclusionary Zoning on the Chicago Housing Market
   • 6.1 Rental Units vs. Homeownership Units
   • 6.2 Market Absorption of Costs
   • 6.3 Effects on Land Prices
7. Addressing Gentrification and Affordability Concerns
   • 7.1 Pilot Programs to Tackle Affordability
   • 7.2 Off-Site Units and Location Requirements
   • 7.3 Impact on Affordable Housing Units
8. Measurement of Success
   • 8.1 Number of Affordable Housing Units Produced
   • 8.2 In-Lieu Fee Collections and Distribution
9. Innovative Programs Funded by ARO In-Lieu Fees
   • 9.1 Opportunity Investment Fund
   • 9.2 Preserving Affordable Rental Program
   • 9.3 Neighborhood-Based Programs and Rental Subsidies
10. Lessons Learned and Challenges Faced
    • 10.1 Clear Articulation of Policy Goals
    • 10.2 Balancing In-Lieu Fees and Development Incentives
    • 10.3 Local Preferences and Fair Housing Laws
    • 10.4 Role and Perception of In-Lieu Fees
    • 10.5 Management Challenges of Off-Site Units
11. Conclusion

Introduction

The city of Chicago has implemented an Affordable Requirements Ordinance (ARO) to address the need for affordable housing and regulate residential developments. The ARO has undergone several updates and overhauls since its introduction in 2003. This article aims to provide an overview of the ARO, its functioning, and its impact on the Chicago housing market. It will also discuss the challenges faced and lessons learned in administering the ARO. Through this analysis, we can gain insights into the effectiveness of inclusionary zoning and identify areas for improvement in affordable housing policies.

Overview of Chicago's Affordable Requirements Ordinance (ARO)

The ARO is a program administered by the Department of Housing in Chicago. Its primary goal is to create more affordable housing units and generate additional funding for affordable housing projects. The ARO applies to residential developments that receive public benefits such as city-owned land, financial assistance, or zoning changes. The requirements vary depending on the type of development and its location.

Evolution of the ARO

Updates and Overhauls in 2003, 2007, and 2015

The ARO underwent major updates in 2003, 2007, and 2015 to enhance its effectiveness in creating affordable housing. In 2007, the affordability requirement was increased to 10% of units, and the in-lieu fee was adjusted to $100,000 per unit. In the 2015 overhaul, the ARO introduced three zones based on economic factors: downtown, higher income areas, and low/moderate areas. The requirements and in-lieu fees were adjusted accordingly.

Future Overhauls and Changes

Currently, Chicago is considering another overhaul of the ARO to further improve its outcomes. The new administration will review the existing policies and explore ways to address the evolving needs of affordable housing. This presents an opportunity to refine the ARO and make it more effective in achieving its goals.

Functioning of the ARO

Triggers for ARO

The ARO is triggered when a residential development receives certain public benefits, such as city land, financial assistance, or a zoning change. It applies to new residential projects with ten or more units. For developments receiving direct city financial assistance, the affordability requirement increases from 10% to 20% of units.

Applicability and Requirements for Residential Developments

The ARO applies citywide to all residential developments subject to its triggers. Developers must fulfill the affordability requirement by either providing affordable units on-site, building off-site units within two miles and the same income zone, or paying in-lieu fees. The ARO focuses on creating workforce housing, targeting income levels between 80% and 120% of the area median income.

Variations in ARO Requirements

Zones and Economic Factors

The ARO introduced three zones based on economic factors: downtown, higher income areas, and low/moderate areas. Each zone has different requirements, reflecting the diverse markets and affordability needs across Chicago. These variations allow for a more targeted approach to leverage hot markets and reverse patterns of segregation.

In-Lieu Fees

Developers have the option to pay in-lieu fees instead of building affordable units. The amount of in-lieu fees varies based on the market conditions and the zone in which the development is located. Fees are adjusted annually using the Consumer Price Index (CPI). The ARO in-lieu fee collections contribute to the Affordable Housing Opportunity Fund (AHOF) and the Low-Income Housing Trust Fund.

Adjustments based on Market Conditions

In low/moderate areas, the in-lieu fees are reduced to encourage development and affordability. However, in higher income areas and downtown districts, the fees are increased to ensure the creation of affordable units in these markets.

Alternatives to In-Lieu Fees

To leverage in-lieu fees effectively, Chicago has implemented innovative programs funded by these fees. These programs include the Opportunity Investment Fund, Preserving Affordable Rental Program, neighborhood-based initiatives, and rental subsidies for individuals transitioning out of homelessness. These initiatives provide alternatives to traditional affordable housing development and maximize the impact of in-lieu fees.

Impact of Inclusionary Zoning on the Chicago Housing Market

Rental Units vs. Homeownership Units

The majority of affordable units created under the ARO are rental units. Chicago has a robust rental market that has outpaced the homeownership market in recent decades. The city has also utilized programs such as the Chicago Community Land Trust to secure long-term affordability for newly developed homeownership units.

Market Absorption of Costs

Developers in the Chicago housing market have been able to absorb the costs associated with the ARO. The high rents they can command in strong markets enable them to absorb the affordability requirements without additional subsidies or incentives. This indicates the strength of the market and the lack of demand for further assistance from the city.

Effects on Land Prices

Contrary to expectations, the cost of land in Chicago's strong markets has not reflected the ARO requirements. Land prices have remained stable and affordable compared to other large cities like San Francisco and New York. This suggests that the market can sustain the costs associated with affordable housing without passing them on to buyers or developers.

Addressing Gentrification and Affordability Concerns

Pilot Programs to Tackle Affordability

Chicago has implemented pilot programs in response to affordability concerns and gentrification in targeted neighborhoods. These programs increased the affordability requirement and eliminated in-lieu fee options to ensure the creation of affordable units. The pilots have been successful in producing a significant number of affordable housing units and mitigating the effects of gentrification in these markets.

Off-Site Units and Location Requirements

The ARO allows developers in higher income areas and downtown districts to build off-site units within two miles and the same income zone. These off-site units must be comparable in size and quality to the triggering project and must be constructed concurrently. The inclusion of off-site units provides flexibility and allows for the production of affordable housing where it is most needed.

Impact on Affordable Housing Units

The ARO, combined with pilot programs and off-site units, has led to the production of affordable housing units across Chicago. The Affordable Housing Opportunity Fund has collected significant in-lieu fees, with a portion allocated to the Low-Income Housing Trust Fund. These funds have supported the creation and preservation of affordable housing units, contributing to the overall success of the ARO.

Measurement of Success

The success of the ARO can be measured through the number of affordable housing units produced and the amount of in-lieu fee collections. Since 2007, Chicago has produced approximately 800 affordable housing units and collected about $94 million in in-lieu fees. These funds have been distributed to the Affordable Housing Opportunity Fund and the Low-Income Housing Trust Fund.

Innovative Programs Funded by ARO In-Lieu Fees

In addition to traditional affordable housing development, Chicago has used the in-lieu fees to fund innovative programs. The Opportunity Investment Fund provides low-cost lending capital to developers purchasing existing market-rate developments, resulting in a portion of units becoming affordable. The Preserving Affordable Rental Program allows the city to refinance private debt at low interest rates, ensuring the long-term affordability of rental units. Other neighborhood-based programs and rental subsidies have also been funded through in-lieu fees, expanding the reach and impact of affordable housing initiatives.

Lessons Learned and Challenges Faced

Administering the ARO has revealed several lessons learned and challenges faced by the city of Chicago. These include the need for clear articulation of policy goals, balancing in-lieu fees with development incentives, addressing local preferences within fair housing laws, managing the perception of in-lieu fees, and overcoming the challenges associated with managing off-site units. These experiences provide valuable insights into the functioning and improvement of the ARO.

Conclusion

The Affordable Requirements Ordinance in Chicago has been successful in creating affordable housing units and generating funds for affordable housing initiatives. The ARO has evolved over the years through updates, pilot programs, and adjustments to in-lieu fees. By leveraging hot markets and innovative programs, Chicago has been able to address affordability concerns and mitigate the effects of gentrification. However, ongoing challenges and the need for continuous improvement highlight the importance of periodically reviewing and refining inclusionary zoning policies to meet the changing needs of the housing market.