Promoting affordable home ownership in the city
Affordability is a major issue for moderate income households, particularly in urban areas. In many communities, the monthly cost to own a home is less than rent on a comparable home, but moderate income buyers have difficulty qualifying for a mortgage, especially for a condominium unit.
The housing crash hit condominiums particularly hard, due to systemic flaws in the condominium concept that emerged in spades after the crash. Many units in failed or stalled condominiums, some of which were newly built or have been substantially rehabbed, are currently owned by banks or investors and can be acquired in bulk at a reasonable price.
The city of Chicago recently changed its Affordable Requirements Ordinance (2015 ARO) to promote affordable housing in the neighborhoods. This article focuses on the owner-occupied aspect of the 2015 ARO.
Under the 2015 ARO, at least 10 percent of units built in a new housing development of 10 or more units which receives zoning concessions from the City need to be "affordable." A builder can satisfy this obligation by either (1) providing affordable units "on-site", (2) building, buying or rehabbing units "off-site" and/or (3) paying the City an "in lieu" fee for each unit that it does not build on-site or off-site, although at least ¼ of the required units must be built on-site or off-site.
Without going into detail, suffice it to say that a builder of a high end condominium in the downtown area of Chicago which is required to provide affordable owner-occupied units is strongly incentivized to build, acquire and/or rehab condominium units in the neighborhoods and sell them at "affordable" prices.
I believe that there is a way for a builder to provide off-site affordable units using an approach which will permit households to become successful owner-occupants with monthly payments less than rent and the opportunity to build up equity without being exposed to financial disaster if the bread winner suffers a financial setback or the housing market crashes again.
Following is an example of how this plan can work.
1. Assumptions. Assume a builder which proposes to build a 100 unit condominium in the downtown area of Chicago is required to provide at least 10 affordable units and to invest at least $175,000 times 10, or $1,750,000 to provide the units.
2. Investment. The builder invests the $1,750,000 to build, acquire and/or rehab 10 or more qualifying units off-site, without the need for financing. The units will most likely be condominium units.
3. Qualifying Units. Qualifying units can be located anywhere in the City, must have the same number of bedrooms as those that would have been required on-site (although square footage may differ), and must be "comparable" to the "market rate" units in the off-site location in terms of unit type, exterior appearance, energy efficiency and overall quality of construction.
4. Sale of Units. The off-site units would be sold to owner-occupant buyers with seller financing which would permit a buyer to cancel the financing and give the unit back to the seller without liability if the buyer cannot continue to be an owner. In early 2016, the maximum price for an off-site unit could be as much as $200,000 and would be affordable by a household of four with an annual income of up to $91,200. It may take a few years, but when the buyers refinance into conventional mortgages, the seller should be able to recover its investment and then some.
5. Condominium Structure. The condominium in which the off-site units are located will be equipped with safeguards and controls designed to avoid many of the critical flaws which damaged condominiums after the crash.
The 2015 ARO has set the table for the creation of quality affordable units in the neighborhoods by giving builders an incentive to invest the funds necessary to build, acquire and/or rehab and sell the units. Hopefully using the approach suggested above will result in significantly more affordable units in stable, successful condominiums in the neighborhoods. For a more detailed treatment of the issues discussed in this article, go to www.mpslaw.com.
• Brian Meltzer is with Meltzer, Purtill & Stelle LLC in Schaumburg.