In our January newsletter I said that we were going to cover the city’s new five year housing plan for 2019-2023, which was approved by the city council towards the end of last year. In last week’s article (which you guys seemed to like, thanks!) I said that we would be covering it today, and we are to an extent, but not directly. We’ll cover it directly next week. Because as I reviewed it, it became apparent that it is a promise and a plan, and like any promise its worth depends on the reputation of the person who makes it.
There are certain times when promises and proposals are so exciting that we don’t think about how trustworthy the source might be. When someone proposes marriage, we’re often swept off our feet with relief and joy without thinking about how many times our partner has been divorced. When a landlord offers us an apartment after getting denied a few times by others, we might leap to accept it without reading the lease.
The new five year plan was breathlessly covered by media outlets, mostly because of its leap from introduction to approval by the city council in less than a month. As it has been approved we will look at it. But my personal motto is “remember where you came from.”
This is not the first five year plan for housing that Chicago has had. It is the sixth consecutive five year plan, which means we’re now entering our 26th straight year of municipal five year housing plans. So first let’s take a look at how Chicago did in keeping its promises from the old one, which was in effect from January 2014 through December 2018.
Note that we will only be focusing on Housing Initiatives for Renters and Multifamily Development, which were allocated $1.04 billion of the $1.33 billion budget. There were also line items for homeowners and condominium owners, but they are beyond the scope of this blog.
Here’s the PDF of the old plan if you would like to follow along.Chicago_Housing_Plan_Web_Final 2014-2018
Where Were We in 2014?
To understand the motivation behind the old plan, we have to roll back mentally to the housing situation in 2014. We had been suffering from the fallout of the housing market crash of 2010. While a few north side neighborhoods were emerging from the disaster, most of Chicago’s real estate was plagued by short sales and foreclosures, new construction of apartments was at an all time low, sale prices were in the tank and so were the credit scores of a lot of the homeowners who’d been forced to default on their mortgages.
Condominium associations were struggling with empty units, and renters had a glut of rental condos to choose from as well as the standard stock of apartments. Former owners with blemished credit were inflating the pool of prospective tenants, driving rents upwards at alarming rates.
Meanwhile, Chicago was suffering from a substantial budget shortfall on their previous five year plan of 2009-2013. Created at the height of the bubble when federal funds for housing were abundant, it anticipated a budget of $1.98 billion, of which $530 million never materialized due to the nationwide crisis that would unfold a year after its approval by the council. By the end of 2013, the city had a budget overage of about $220 million, and an additional $317 million in one-time use funding sources was no longer available for the next five years.
Additionally, Chicago in 2009 was not aware of the results of the 2010 decennial census, which uncovered a massive population drop. Fewer residents means fewer taxpayers and less funding in general for use in fulfilling housing strategies.
Therefore the 2014-2019 plan was created with a much lower budget of $1.33 billion, and a main focus of rebuilding a city in crisis.
I’m going to toss in an image here that’s extracted from page 12 of the 2014-2018 Chicago housing plan. It lists the strategies and goals that 2013 Chicago politicians and housing experts deemed important enough to fund over the following five years.
To achieve their goals for renters, the City allocated funds for seven different programs within the category of initiatives for affordable rental properties, the “rental” section of the budget.
- Multifamily Rehab and New Construction. This umbrella category covers low income housing tax credits, mortgage revenue bonds, loans to multi-family owners and developers, the Illinois Affordable Housing Tax Credit, City Land grants, and MAUI capital funds.
- Rental Assistance. The Chicago Low Income Housing Trust Fund and Affordable Housing Opportunity Fund (MAUI) are sourced from this line item. Both provide assistance to renters who are at risk of eviction or homelessness.
- Creating and implementing a new Affordable Requirements Ordinance. In order to preserve an acceptable stock of affordable housing for low and middle income renters, Chicago needed to overhaul its laws to eliminate loopholes.
- Heat Receivership Program. This allows the city to appoint their own receiver (property manager) to repair and restore apartment buildings where the landlord is failing to repair broken heating and hot water systems.
- Troubled Building Initiative. This program seeks to identify problem apartment buildings throughout the city and works with owners and investors to save them through sale or renovation.
- TIF Purchase and Rehab Multi-Family Program. This program funds and distributes grants to owners who want to purchase vacant foreclosed apartment buildings with five or more units in TIF districts, with some restrictions.
- Neighborhood Stabilization Program, renamed to “Preserving Communities Together Initative” in 2007. This is a passthrough fund to Mercy Portfolio Services, allowing them to purchase and renovate vacant and foreclosed apartment buildings in certain target areas of the city.
Additionally, there are a few programs that focus on buildings with between one and four dwelling units, which are included in the category of initiatives for housing production, the “homeowners” section budget.
- Emergency Heating Repair Program. Grants for owners of small buildings to repair or replace broken heating, electrical or plumbing systems.
- Neighborhood Lending Program. Does what it says on the tin for 1-4 unit buildings in target areas. Separate line items for purchase, foreclosure prevention and homeownership counseling.
- Roof and Porch Repairs Program. Grants for low income owners of 1-4 unit buildings to repair/replace porches and roofs that are in life-threatening condition.
- TIF Purchase and Rehab Single-Family Program. Same as the Multi-family version above, but for 1-4 unit buildings.
- Troubled Buildings Initative II. Ditto.
- Troubled Buildings Initiative Condo program. Allows for the purchase of vacant and troubled condominium projects for conversion to affordable rentals.
The Chicago Department of Planning and Development (DPD) was responsible for the implementation of the 2014-2018 housing plan. They have provided quarterly reports for each year on the city’s website. To see how well the city managed to accomplish its goals, I went through and compared the year-end reports against the actual costs and number of units served. My results, which I’ll summarize below, are available in a Google Spreadsheet for your review.
Before we get into the analysis, it’s important to remember that the city government was not entirely at fault for differences between the plan and reality. Planning five years in advance is always going to require a certain amount of guesswork. The planners could not have predicted the sudden influx of cash for developing new apartment buildings in the downtown area. They couldn’t have predicted Google’s plans to open up an office in Chicago, nor the speculation about Amazon doing the same. They couldn’t have predicted the current trend of private investors deconverting failed/failing condominium projects.
It’s also important to remember that for all the effort the city may make to promote different housing initiatives, sometimes a product simply fails to capture the interest of the public. Sometimes there is no need for it. Other times the restrictions imposed by the city on recipients of public funds are too severe for public to buy in with any enthusiasm.
The reports on the city website include a lot of narratives about which projects and neighborhoods got funding throughout the city. If you want to know about that, go read the reports. We’re focusing on the numbers here.
5+ Unit Multifamily Programs:
Multifamily Rehab and New Construction. This was a popular program, exceeding its budget by 130% and serving 105% of its target population. However, the funds allocated for the lowest income brackets were not used as intended, going instead to middle and upper income projects. Grade: B.
Rental Assistance. 100% of the budget was spent, but only 92% of the target audience received help. This indicates that rents inflated faster than the city could predict. Fewer residents in the lowest income bracket (0-15% of the median) were helped than anticipated, but more in the 16-30% income bracket received funds. Either way, this was a highly successful program, and probably underfunded. Grade: A.
Affordable Requirements Ordinance. Spent 138% of their budget by 2014. We presume that the entire budget went to the creation of the 2015 ARO rewrite. Buy-in was higher than anticipated. 243% of the projected affordable units were constructed. However, for reasons we will explain below, we don’t feel that this program was as successful as it could have been, and that some of those funds should have been saved in case the first shot didn’t work. Grade: C.
Heat Receivership. Completely underfunded. Spent 97.5% of their budget, but missed their quota by half. A lot of buildings housing middle income tenants were successfully placed into receivership, but at the expense of those housing low income tenants. Meanwhile, heating code violation hearings piled up in administrative court. Grade: A for Effort, C for Implementation.
Troubled Buildings Initiative. I think the city underestimated how quickly the multifamily sector would bounce back from the housing crash once private funds started flowing again. In the first year this program saw a lot of activity, spending 105% of its budget and serving 105% of its target audience. After that the number barely scraped 70%. A waste of earmarked funds in my opinion. Grade: D.
TIF Purchase + Rehab. The Troubled Buildings Initiative saw mediocre performance, but the similar program for TIF zones completely flopped. Used only 2.75% of the available funds and served only 4.57% of their quota, despite being allocated more than the previous three initiatives combined. Grade: F.
Neighborhood Stabilization Program. This initiative was funded by a one-time grant received from HUD in 2009, and was only included in the five year plan because some projects had not yet been completed. The last of the funds were spent in one final push in 2015. All told the project contributed 6121 units of affordable housing to the city’s stock. Grade: A.
1-4 Unit Homeowner Initiatives
Emergency Heating Repair. They might have overestimated the repair costs of broken heating systems by just a wee bit. 15.3% of the budget was spent, but they served 153% of their quota of homes. Buy-in was far higher than anticipated across all income groups. I suspect that they weren’t necessarily checking the credentials of some of the repair contractors, but either way, they need to keep this one going and expand it. Grade: A.
Neighborhood Lending Program. Note that in the spreadsheet I’ve bundled together the costs and quotas for five separate programs under the NLP umbrella. These guys used far less than their allocated budget but also missed their quota by half. This means that either their restrictions were too severe or their marketing was insufficient. The program got less interest from the upper income brackets than anticipated, and far more interest from the lowest income brackets. I suspect this is mostly because the Neighborhood Lending Service appears on the surface to be just another Mortgage Broker. Looking at their website it is not clear at all that they are different from your standard Fannie/Freddie mortgages. Realtors tend to have their own pet mortgage brokers to whom they refer all of their business. Mortgage brokers make serious effort to inform brokers of available sources of funding for home purchases. NLS needs to step up its game lest its funds continue to be horribly underutilized. Grade: C.
Roof and Porch Repairs. Much like the heating repair initiative, these guys hit their target quota of homes at well under budget. Also like the heating repairs, they saw a lot more interest from the lowest income brackets than expected. A popular and necessary program and well-managed. Grade: A.
TIF Purchase and Rehab. Just like its twin serving the larger buildings, this program flopped. They spent just 25% of their budget and met 37% of their quota. Grade: F.
Troubled Buildings Initiative: Single family homes. This project was not too successful for larger buildings, but the homeowners and small private landlords ate it up. Spending just 63% of their budget, they served 133% of their quota. Yet even so, this initiative is problematic. This is where the money would have come from to save the city’s vanishing 2-4 unit buildings. They had the money to do more. This is one case where seeing that unspent money breaks my heart. Aim higher next time please. Grade: C.
Troubled Buildings Initiative: Condos. This is one failure that they simply could not have predicted. They used only 58% of their budget and served only 17% of their quota. But this was probably not due to lack of trying, but due to those same funds that flowed into the private multifamily commercial sector. Landlords had the money to buy condo buildings and deconvert them. Very little public assistance was necessary to get the job done. Grade: B.
What the Numbers Don’t Reveal
A few major hot-button topics arose over the past four years that were included in the narrative of the five year plan, but are not reflected in the tallies. However, DePaul’s Institute of Housing Studies provided most of the data that informed both the old housing plan and the new one, and their data can provide us with more insight into the effect of the city’s efforts as they intersect with the private housing market.
The preservation of 2-4 unit apartment buildings was listed as a priority, and housing advocates across the city have spent much of the past five years decrying the trend of converting these buildings to single family homes. From 2007 to 2014 the city had lost 3.9% of its 2-4 unit properties, a rate of 0.975% loss per year. Between 2014 and 2015 the pace accelerated, dropping 1.4%. Between 2015 and 2016 it grew slightly by 0.4%, but this was not due to their preservation, but the removal of some larger apartment buildings from the market instead.
Transit-oriented design (TOD) projects were another talking point on the old plan. These are large-scale multifamily new construction projects with minimal to no parking situated close to public transit stations. The city created a special ordinance in 2013 that waived the normal parking space-to-resident ratios for TOD developments. Special focus was to be placed on TOD buildings in underserved communities in the south and west sides. But residents pushed back against the projects that emerged based on the new ordinance, as many of the units that would be created were too expensive for the current residents. At this time I could find no data on completed or nearly-complete TOD projects from the past five years (and believe us, I checked.) I’m including it mostly so you don’t think I skipped it. Hopefully I’ll be able to do a full article on the TOD concept later in the year.
The city also could not have predicted that the Affordable Requirements Ordinance (ARO) would be overhauled not once but twice in the five years to follow, once in 2015 (PDF) and again in 2018. A lot of time and effort has been spent on the ARO, but developer buy-in has been limited thus far, with only five developers creating the lion’s share of compliant projects. One of those five is a non-profit.
After 12 years of the ARO, the city still only lists 389 compliant projects in their data warehouse. It would be nice to see the data on contributions to the Affordable Housing Opportunity Fund, which receives fee in-lieu payments from developers who wish to skip out on creating affordable units, but once again, that information is not available for public review. We know that as of 2015 the fund had received $77 million in fees, which meant at least 700 units could have been earmarked as affordable housing but weren’t. We know that the 2007 version of the ARO did not work as intended. We can’t know yet if the 2015 version will work, as its full force is still only felt in five pilot districts, none of which are located in Chicago’s traditionally upscale neighborhoods like Lincoln Park or South Loop.
Success or Failure?
Did the city keep its promises from the last five year plan? While a few projects saw mediocre use and others died on the vine, on the whole I think they did the best that they could. The TIF Purchase and Rehab program was ill-advised to be sure. But the repair programs were very successful, as were the multifamily lending and rent assistance programs.
I do think that they need to make a more focused effort on reaching the lowest income demographic when it comes to their rental initiatives. I also think they underestimated how many very low income homeowners and small landlords remained in the market following the crash. But we have to remember that the plan was created before the 2010 census, and that there is a huge section of the very low income demographic that overlaps with the Hispanic immigrant population, traditionally one of the hardest groups to count.
I also think that they need to be willing to reassess and respond to changes in the market more often than once every five years. The deconversion trend and the resistance to the ARO rewrite were two big issues that they were totally unprepared for, and their commitment to the five year plan resulted in some wasted funds that could have been better used elsewhere.
It’s crucial that they stop lumping 2-4 unit buildings together with single family homes. I know that’s how the real estate industry views them, but as long as the city sees them that way, they are only giving lip service to their initiatives to save the city’s stock of smaller apartment buildings.
Looking back to my time in the real estate office, I am realizing that I didn’t know about any of these programs. Despite all the newsletters I got from the home office and continuing education classes I sat through, information about the city’s programs for renters and owners never crossed my desk. And I’m the person who went from that office to start a business that focuses on real estate research. I’m really, really into this sort of thing. If it missed me, it missed the majority of my colleagues. Renters and buyers in the middle and upper income brackets will find out about these programs from their agents. The city needs to be making a concerted effort to educate real estate agents and leasing agents about its housing initiatives.
A huge number of multifamily sales occur between owners with no agency representation. Cash transactions occurring on a for sale by owner, for rent by owner basis are very common in the multifamily industry. Participants in these sorts of transactions are not the sort to be receptive to concepts like “affordable housing” and “TIF zones.” If the city wants to make its initiatives known within these transactions they have to work very, very hard.
So that’s my analysis of the Chicago’s performance on the old five year housing plan. Next week we’ll look at the new plan for the next five years and see how the city council and its advisors have interpreted the same data, and how they plan to respond to the changes that have occurred within the housing market since 2014.
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