Under New Housing Ordinance, Chicago Should Expect Costs to Soar and Fewer Affordable Units Built
The single, greatest obstacle to more affordable housing is Democratic Socialist aldermen
Your correspondent is feeling guilty. Writing about the inanity of Chicago City Council actions just isn’t a fair fight, somewhat akin to shooting fish in a barrel. But to be charitable, perhaps we can borrow from moral theology the concept of invincible ignorance: That is, ignorance through no fault of one’s own. Most aldermen, while perhaps well-intentioned, have never worked in the private sector, and seem to have no idea how people respond to economic incentives. A classic example is the implicit assumption, sometimes seen in budget documents, that if the city increases a tax on a commodity — gasoline or cigarettes — consumption will not decrease. “If we double the tax on gasoline, we’ll double our revenue!” And yet every time, they are disappointed when economic reality hits them over the head.
For the latest, and one of the most extreme examples of well-intentioned laws with terrible results, look no further than the “Northwest Side Preservation Ordinance” passed in late September and effective October 6. The ordinance is intended to increase the stock of affordable housing and reduce gentrification in the six square miles in and around Logan Square.
The measure was sponsored by Alderman Carlos Ramirez-Rosa, our Democratic Socialist alderman who distinguished himself in November 2023 when he physically restrained Alderman Emma Mitts to prevent her from voting in favor of an anti-sanctuary city resolution that would have embarrassed himself and Mayor Brandon Johnson. For his disgraceful behavior, Rosa paid a price: He later apologized and resigned as the mayor’s Floor Leader.
Alderman Rosa’s preservation ordinance passed 44-3, with only the aldermen from the Near North Side and Lakeview — Conway (34), Hopkins (2), and Lawson (44) — dissenting. No doubt the damaging precedent set by the ordinance caused the three dissenters to break with the usual practice of “aldermanic privilege,” which gives aldermen nearly absolute control over development and zoning issues in their respective wards. The only surprise is that more aldermen in North Side neighborhoods — we’re looking at you Timmy Knudsen (43) — didn’t recognize the threat and follow suit.
The ordinance accomplishes two goals: First, it quadruples demolition fees, presumably with the intention to stop gentrification (and of course, to generate more revenue for the city). For single family homes and two-flats, the fee increases from $15,000 to $60,000, and for multi-family housing from $5,000 to $20,000 per unit. While the Council probably thinks that this will prevent gentrification and attendant demolition of housing, it will more likely simply cause developers to build even more expensive buildings that give them more profit margin to cover their higher costs, thus making housing even less affordable.
However, the disruptive effect of the demolition fee provision pales in comparison to that of the second provision — a byzantine regulatory scheme that gives a right of first refusal (i.e., a right to purchase) to rental tenants, regardless of their ability to pay.
Here is a timeline, with deadlines, of the scheme under the ordinance:
- 60 days before listing for sale: Owner must give notice of intent to sell to rental tenants
- 30 more days: Owner must produce a rent roll and a 12-month financial statement
- 90 more days: Tenants can form an association to buy the building
- 120 more days: Once the tenants or tenant association exercises its right of first refusal, it has 120 days to close the sale.
Altogether, this scheme will hold up a sale for as long as 300 days. In addition, tenants can assign their rights to any third party who may then buy the building. Insanely, the ordinance states that the property owner cannot require the tenants or third parties who want to buy the building to demonstrate financial ability to pay for the building. The ordinance further caps the deposit required of the seller at five percent of the purchase price and must be refunded if the sale doesn’t close. This gives even more leverage to tenants to extract payments from building owners, since they risk nothing by holding up the sale as long as possible, even if they cannot possibly buy the building.
By far, the biggest problem is that the ordinance is so poorly written, no one can know how it will be applied. The most important concept in the law — “right of first refusal” — is never defined. Does this refer only to price? Or does a tenant’s offer, subject to financing contingencies and other conditions, trump an immediate cash offer of the same price from a developer? No one knows because the law is completely silent about its most essential provision.
Alderman Rosa stated at the time of passage that an immediate effective date was needed in order to prevent a rush of sales from taking place before the new ordinance became effective on October 6. But now Chicago, realizing the enormous problem created by the ordinance, announced a few days ago that it simply will not enforce the law for any sale contracts made by November 29. The city’s forbearance may be cold comfort to lenders and purchasers, however, because the law (which is passed and on the books) gives any affected party the right to sue in court and enforce the ordinance, including draconian fines and penalties. Therefore, the forbearance by the City may prove to be of little benefit, since private parties are still able to sue.
Aside from the obvious delays, the law will make it much more difficult for buyers to borrow money to purchase the buildings. Lenders will be reluctant to make loans to purchasers due to the legal uncertainties created by the ordinance, the details of which are poorly drafted and unclear. And residents will have the ability to holdup a sale for almost a year, at no cost to them and with no money at risk. The possibilities for abuse are endless.
Ultimately, when all the kinks are worked out, this ordinance will simply make housing more expensive by raising the costs and risks of development, thus achieving exactly the opposite of its stated purpose. Misguided and ill-conceived restrictions like this will push Chicago closer to the model of San Francisco, where development restrictions have priced all but the most affluent out of the residential real estate market.
