Illinois property tax incentive could be a game-changer for affordable housing development
Chicago’s local development community has worried for years about the specter of higher property taxes and tougher city requirements to include additional affordable housing units in new multi-family projects.
But last year’s omnibus affordable housing bill, signed into law by Illinois Governor JB Pritzker in August, created a property tax relief package that could allay both fears while serving as a model for building affordable housing.
Developers and landlords of all sizes, who work in all kinds of communities — from low-to-moderate income neighborhoods on Chicago’s South Side to expensive downtown submarkets — will now be able to lower their assessed values and limit the amount of property taxes due if they reserve a set percentage of units for affordable housing after rehabilitation or construction of a new building.
The law came into force on January 1. And developers who had been wary of building in the city say it could be a game-changer.
Courtesy of Community Investment Corp.
A CIC-funded rehab in Chicago’s South End
“We’ve been looking at Chicago in a much more limited way for about three years,” said Lindsey Senn, executive vice president of Fifield Cos. “But based on the conversations we’re having today, we believe this incentive, if it materializes as the state intends, will once again make the deals financially feasible in the city of Chicago.”
“[This] is groundbreaking legislation that will fundamentally change the way developers approach affordable housing in this state,” Midwest President Curt Bailey said in a statement. “It creates affordability in areas where none existed before and leads to better quality housing.”
The related Midwest plans to seek such property tax relief for its 900 West Randolph, a 43-story, 300-unit mixed-use development for Fulton Market that began in November, Bailey added. It is part of a special district created by the omnibus bill that specifically covers downtown Chicago and surrounding neighborhoods
But the program spans the entire state and is designed to benefit everyone, from developers launching $100 million residential towers in hot markets like Fulton Market and the Gold Coast to rehabilitations of seven-storey buildings. units in low-to-moderate income neighborhoods such as Englewood or Pullman on the South Side, according to Stacie Young, president and CEO of Community Investment Corp., a nonprofit lender.
“Borrowers who come to CIC are generally looking to do rehabilitation work in neighborhoods that have historically seen divestment,” she said. “Hopefully having some predictability and transparency around property tax relief means these borrowers can responsibly buy more buildings and do more rehabilitations.”
The program has three levels of benefits, each designed to help a different type of developer or owner, said Young, who until last year led The Preservation Compact, a CIC program that for years has brought together landowners, community groups, affordable housing. advocates, developers and government agencies, including the office of Cook County Assessor Fritz Kaegi, to help design legislative solutions for property tax relief and to facilitate the construction of affordable units.
“We got all the voters together and said, ‘Let’s come up with something that helps everybody,'” Young said.
The strategy worked. Although disputes between developers and housing advocates can be contentious, the omnibus bill passed the state Senate by a 59-0 vote.
Anyone wishing to qualify for the first tier must reserve 35% of the units for affordable housing, which means they are rented to renters at 60% or less of the region’s median income, as well as invest at least 12 $.50 per SF in building. In return, these owners will obtain a 35% reduction in the taxable value of their properties for up to 30 years. It’ll likely work best in lower-income neighborhoods where rents are already low, making it easy for landlords to hit that benchmark, Young said.
The second tier calls for reserving 15% of a building’s units as affordable housing, along with new investments of at least $8 per SF, which allows homeowners a 25% reduction in their assessed values. This will work best for landlords in higher-cost markets such as Rogers Park or Lincoln Square on the north side, where it would be difficult to lower rents by 35% of units, Young said.
A key aspect of the program is that the investments made must be directed towards things that increase long-term value, which may include improvements in energy efficiency, accessibility or in other primary building systems. .
“Investments can’t be in marble countertops,” Young said.
Cook County Assessor Fritz Kaegi at the December 2019 Analyst Day
Young added that the program is not a way to simply reduce property taxes. Instead, it should encourage landlords to invest in their properties and create affordable housing. CIC did a few case studies on some of its renovated affordable multi-family properties and found that if owners did the same renovations under the new law, the projects would likely owe roughly the same tax despite the increased fees. values.
“It’s not like it’s going to be a big change in the property tax burden,” she said. “It just means that if landlords keep affordable housing, they won’t have an unpredictable tax bill.”
According to Veronica Gonzalez, regional development director for the Midwest at the NHP Foundation, a nonprofit organization that seeks to preserve and create affordable housing.
Landlords could accept tenants with housing vouchers from their local housing authority, but many landlords fear becoming entangled in this bureaucracy, she added. And while low-income housing tax credits and other tools can also fund affordable housing, these typically involve complex, multi-tier financing, which often means bringing in a partner who knows how. set up such transactions, Gonzalez said. Some people just aren’t ready for it.
“It’s a niche of the commercial real estate market, and either you know it or you don’t, and that’s not how you make your money,” Gonzalez said.
Senn said she was optimistic that these changes would kickstart new deals.
“We won’t make any deals in Chicago, but they’re starting to make sense again,” she said.
Fifield Cos. has developed several West Loop apartment towers over the past decade, helping to transform it into an upscale residential neighborhood. Over the past three years, however, the company has been hit with a double whammy, Senn added.
Kaegi won the 2018 election on a promise to rebalance assessed values in favor of single-family homeowners, shifting some of the property tax burden to commercial landlords, who he said had received favorable treatment from the from its predecessor. Then, in 2021, the Chicago City Council updated the city’s Affordability Requirements Ordinance, which now requires downtown developers to set aside 20% of new units for affordable housing — or pay fees to the city’s affordable housing fund.
“That was pretty much the nail in the coffin,” according to Senn.
She added that Fifield Cos. hadn’t simply chosen to avoid new offers downtown. Its institutional partners and lenders were reviewing the potential results and they decided that the uncertainty surrounding property taxes, along with this 20% affordable requirement, made it impossible to advance new developments.
“We weren’t hitting the metrics they needed to get a deal done,” Senn said.
Courtesy of The Habitat Co.
The property tax relief program can help circumvent both of these obstacles, she added. Now, instead of just absorbing the costs of setting aside a portion of units as affordable, developers who meet the 20% accessibility threshold will get something back. During the first three years, they will get a 100% reduction in the difference in assessed values between the base year, one year before the affordable housing is occupied, and the post-construction values. The reduction drops to 20% in the 13th year and lasts until the property is 30 years old, as long as affordability is maintained.
An added benefit, Senn says, is that it will encourage builders to include affordable housing on-site rather than just contributing to the Affordable Housing Fund, helping the city achieve its goal of ensuring low-income tenants income have affordable housing. all communities, even expensive neighborhoods like downtown.
Although many details need to be ironed out with the appraiser’s office, potential lenders and investors are sending positive signals to Fifield Cos., Senn said.
“That’s really, for us, the only way projects work,” she said. “We don’t dictate that; debt and equity markets do.
Developers of large-scale affordable housing projects are also applauding the new program, according to Jeff Head, vice president of development for The Habitat Co’s affordable housing division. His company has several major projects underway, including the first phase of 91 units of 43 Green, a mixed-use development currently rising near the 43rd Street Green Line stop in Chicago’s Grand Boulevard neighborhood that will set aside 50% of its units for affordable housing. .
The company is also building Ogden Commons, a 10-acre, $200 million mixed-use development on Chicago’s Near West Side. He is also managing the redevelopment of LeClaire Courts, a former Chicago Housing Authority community on the southwest side. These two new developments will mainly offer affordable housing.
Unlike market-rate developers, Habitat cannot simply increase rent if rising property values increase the amount of tax owed, so the company plans to pursue the 35% reduction in values taxable for all three, according to Head. This will more than improve Habitat’s bottom line. Limiting the amount owed in property taxes means more funds that can be spent on building maintenance, and perhaps even allowing the company to set aside enough to start new projects.
“The stability and tax certainty that comes with it is the biggest win for us,” he said. “This is a great benefit to the entire affordable housing community and will make a significant difference in the future.