At the behest of several progressive aldermen, including Carlos Ramírez-Rosa, 35th; Daniel La Spata, 1st; Jessie Fuentes, 26th; Byron Sigcho-Lopez, 25th; Ruth Cruz, 30th; Felix Cardona, 31st; and Rossana Rodríguez-Sánchez, 33rd, the Chicago City Council quietly (but overwhelmingly) passed something called the Northwest Side Housing Preservation Ordinance last week. As with so many of these initiatives with Orwellian names, it’s likely to result in unintended consequences that bring about the opposite of what it intends.
The ordinance, which centers on the neighborhoods of Logan Square, Avondale, Hermosa, West Town and Humboldt Park, had been sold as an anti-gentrification measure intended to prevent longtime renters from losing their homes to renovation, redevelopment and sales, all part of what happens every day in a real estate market in a healthy city.
Its sponsors have argued that developers have to be stopped, or at least significantly impeded, in their attempts to take three- or four-flat buildings and turn them into “luxury” single-family homes, thus worsening the housing shortage. In theory, anyway.
Aside from adding various fees for developers, even if they are planning multifamily buildings, the ordinance gives tenants the right of first refusal to buy the building in which they live.
As we read it, renters will have 90 days to decide if they want to exercise this right (which are assignable to other parties) and then another 120 days to see if they can get financing. We’re not talking here about buying a single unit but the whole shebang, presumably doing so as a collective. Add those two numbers together and you get to 210 days or more than 6 months.
Now imagine you are someone who has a three-flat in one of these areas, maybe something left to you by a family member, and want to exercise your right to sell something you personally own and upon which you dutifully pay your taxes every year. You could easily have to wait over six months to even put it on the market.
Now let’s say that you want to sell your three-flat and buy a different one elsewhere, perhaps a broken-down building you’d like to fix up and rent out to tenants, thus improving Chicago’s housing situation. If you’d sold your old building for more than you paid, you’d normally be able to defer tax on that capital gain by investing the proceeds into a new building under an IRS tax code provision called a 1031 “like-kind” exchange. But you’d have to do that within 180 days, a time frame that won’t work under this new ordinance.
And what happens when developers know that a building is subject to this kind of restrictive ordinance socking them with a tax bill? Simple. They don’t buy it in the first place. And what happens then? The value of all the properties go down. Drastically. And what happens then? Property tax revenues fall. Property tax rates then go up. Rent then goes up to match. And on, and on.
And buildings go unrenovated as there is no longer any motivation for owners to do so.
To these aldermen, of course, developers are all like Uncle Moneybags, capitalist robber barons to be stopped. But this is not true in many of these neighborhoods where regular folks own many buildings and in some cases just want to be able to afford their retirement after a lifetime of taking care of their tenants. In addition, anyone who owns such a property and has a mortgage might well find they are at least technically in default of their current mortgage, since banks typically insist on the right to be first in line when it comes to any kind of default. They do not enjoy waiting for six months under this kind of restriction. So what happens then? Mortgages for small landlords become even harder to acquire in these neighborhoods, which makes the American Dream of maybe owning an apartment and renting the ones above and below all the less attainable. Ironically, the only people who will be able to afford to buy will be the big developers who don’t need financing.
Moreover, who do these aldermen think is going to renovate these rental buildings if not property developers? Many of them (not all, but many) want to find a way to keep rents affordable in middle-class neighborhoods while also putting some money into derelict buildings so a tenant can raise a family.
We’ve no problem with imposing purchase or permit fees on big developers to go into affordable housing funds, as was done in the blocks around the 606. We’re fine with nonprofits buying buildings on the open market and renting apartments therein at affordable rates. We also believe that tenants should be given reasonable notice of a building’s pending sale. But that’s why we have rental leases.
Unlike these aldermen, though, we also believe in property rights.
Tenants don’t own where they live, sometimes by dint of personal preference, sometimes because they are hoping to save money to buy their own home. Someone who owns a piece of property and then falls ill, or retires, or just wants to make a change should not be unreasonably restricted from selling their building or be forced by government to sell to a particular party. That’s not right and might even open the city to litigation.
Even if you disagree with all of that, Chicago’s progressive alders have once again forgotten that Americans have choices. When restrictions become egregious, capital seeking to build new housing stock looks for friendlier places, and both neighborhoods and cities stagnate.
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