By: Mark Glennon*
Suppose we agree that something locally produced — anything, widgets let’s say — is unaffordable for many people. And suppose we want to make those widgets more affordable. How does this solution sound? Pass a law ordering local widget makers to sell 10% of their widgets at a lower price. If they don’t, make them pay a fee and give the fee to the government to make widgets.
Put it that way to an average 12-year-old and I think we could guess at some answers: Widget makers would just go somewhere else. It’s not fair that just widget makers would have to pay for this. A thoughtful 12-year old might even know it would backfire because the price of widgets not covered by the law would be pushed up.
Well, that’s just the approach Chicago has taken under its Affordable Requirements Ordinance. First passed in 2003, it currently applies to residential developments of 10 or more units. Ten percent of its units must meet affordable housing requirements. If, instead, the developer wants to allow for all units to be rented at the market rate, it must pay a fee of $100,000 per unit.
Most homebuilders have opted out by swallowing that $100,000 fee. So, starting next month, Chicago is toughening the ordinance. The opt-out fee will rise to $175,000 per unit downtown and $100,000 in other neighborhoods, though falling to $50,000 per unit in some lower-income areas.
Compliance, as you would expect, is a nightmare, because assuring units remain affordable is complex. Here’s a taste of that from the city’s website:
Some units will have recapture mortgages to regulate the long-term affordability. At the time of purchase, the City records a 30-year lien for the difference between the unit’s market price and its affordable price. Other units will be targeted for the Chicago Community Land Trust (CCLT). These units will have a 99-year restrictive covenant with a maximum resale price. The maximum resale price will be the original purchase price plus a percentage of the market appreciation, and in most cases will be a below market price.
Worst of all, the ordinance has only resulted in the creation of 187 units of affordable housing from 2007 to last year! All this for a lousy 187 units? Chicago has over 1.2 million housing units. Even the toughened ordinance has a goal of just 1,000 affordable units. Those are the city’s own numbers.
“This is a joke, right?” as one writer asked earlier.
It’s indeed unfair to single out developers for this burden. It’s a tough business and many are not wealthy. You probably know some, as I do. (Well, fewer than I used to. Some I know got fed up with the property taxes, bureaucracy and inspection nightmares they face in Chicago and are working elsewhere.) For every good year they have several bad ones and they take heavy risks — cash invested and personal guaranties on loans. Of course, if you ever fairly spread the cost of the ordinance instead of singling out one group to pay it, it would probably have no support.
Expect the ordinance to reduce construction of new housing and push up housing costs for everybody except the tiny number who get the designated affordable units. Housing affordability is already addressed by large programs through Federal and state government.
The Chicago Association of Homebuilders has finally gotten fed up. They have sued to invalidate the ordinance as an unconstitutional ‘taking’ under the Fifth Amendment. Good for them.
It took decades to convince Chicago to repeal its head tax. It took that long for a simple argument to sink in — if the city wants more jobs, don’t levy a tax based on how many jobs are provided. The head tax was repealed in 2011 but the mentality that kept it alive for so long lives on.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.