(Above) Buildings in the Pilsen Historic District on Chicago’s Lower West Side.

By Don DeBat

22-Oct-24 – Apartment owners apparently don’t like Chicago Mayor Brandon Johnson and his band of extreme left-wing aldermen sticking their noses into landlord private property rights.

Chicago’s small, “Ma and Pa” apartment building owners in six rapidly appreciating Northwest and West Side neighborhoods say the mayor – an avowed Democratic Socialist – and left-wing Chicago City Council have launched an attack on their property rights. And experts say that could cost owners money and loss of control over their real property.

The Northwest Side Housing Preservation Ordinance – allegedly designed to protect housing in the rapidly gentrifying neighborhoods of Avondale, Hermosa, Humboldt Park, Logan Square, West Town, and a large section of Pilsen – went into effect on October 9, granting rare powers to renters.

Veteran real estate investors believe gentrification is a natural process that renews inner-city neighborhoods and helps build middle-class family wealth, while expanding the real estate tax base.

The new legislation seeks to protect renters in two-flats, three-flats, four-flats, and apartment buildings with five units or more from being priced out by higher rents and/or displaced by gentrification by giving tenants a first right to buy the building.

Landlords and real estate managers say the ordinance was rushed through the city council with no input from owners and real estate investors.

The ordinance purports to “preserve naturally occurring affordable housing” by requiring owners of rental apartments who wish to sell their buildings to give tenants a right-of-first-refusal to buy.

The sweeping ordinance covers a geographic area (above) spanning more than six square miles in the heart of Chicago’s Northwest and West sides and an undetermined number of miles within Pilsen.

Mike Glasser, president of the Neighborhood Building Owners Alliance (NBOA), which represents 11 real estate organizations, noted that the restrictive ordinance also significantly increases the demolition surcharge on multifamily buildings to $60,000 for a two-flat from $15,000, providing a disincentive for developers or property owners to replace an aging building with a new single-family home or condominium.

The aldermen who pushed through the ordinance say dollars from the demolition surcharge will go to the Chicago Housing Trust and the Here-To-Stay Land Trust to build and preserve affordable housing.

“The right-of-first-refusal requirement is the most egregious provision of the ordinance,” said Glasser (left). “Under the ordinance, a landlord intending to sell must first provide the tenants with the option to purchase the building at the same price as they offer it on the open market.”

The ordinance also encourages apartment renters who exercise their right-of-first-refusal to form tenant organizations and work together to place a five percent down payment and buy buildings.

The ordinance also allows tenants to assign this right to third parties, and if the entity purchasing the rental property uses any public funds, they must adhere to a 30-year covenant keeping the rents at or below 60 percent of the Area Median Income (AMI).

2nd Ward Alderman Brian Hopkins, one of only three city council members who voted against the ordinance, said he had concerns about the challenges that will be placed on owners of buildings, particularly smaller buildings owned by middle-class families.

“Many of these buildings have been owned by the same families for generations,” said Hopkins (right). “At least some of the increase in property values is the result of the buildings being meticulously maintained by those families for decades, and they should not be penalized when it is time to sell.”

Hopkins noted that “the greatly lengthened runway now needed to sell a multifamily building in the pilot area, without a requirement of any tenant organization to show evidence of financing to purchase the building, is fundamentally not fair and is government overreach.”

A North Side real estate broker – and resident owner of his renovated three-flat family home in the Avondale neighborhood – had a strong reaction to the ordinance.

“The anti-gentrification ordinance is a political ploy by Mayor Johnson and his gang of super-liberal alderpeople to appeal to their voting base, and keep them in office,” the Avondale resident surmised. “The ordinance may slow down demolition of aging frame two-flat buildings because of the sharply higher demolition fees. However, any new replacement housing will carry higher rents and will generate much more real estate tax dollars for the city.”

Many real estate professionals and attorneys worry about how the ordinance will significantly complicate and delay sales of properties for both owners and lenders. Veteran real estate brokers say no seller in his or her right mind would take an offer from a prospective buyer who did not provide a pre-approval letter from a lender.

Timothy Carew, a retired banking and real estate professional, said: “Overturning zoning laws or appending by ordinance the Municipal Code of Chicago that restricts property rights is a seriously flawed approach to providing housing for the middle class.”

Attorneys Thomas Ball and Chad Poznansky of Clark Hill PLC, a Chicago-based real estate law firm that advises developers and lenders, noted that any current or prospective owner of rental property in the anti-gentrification zone should be aware that the right-of-first-refusal not only creates a significant lag in the process of selling a property, but they should understand the potential consequences of holding a property for an extended period of time might run afoul of mortgage covenants or loan maturities.

“The policy has potential ramifications for banks and lenders with mortgages on properties in the affected zone,” warned the Clark Hill attorneys. Ball (left) and Poznansky (right)

“The ordinance specifically says it does not apply to a bank foreclosing or acquiring a property by right of a deed-in-lieu of foreclosure,” they said.

However, in the post-pandemic era, many lenders have foregone formal repossession, instead requiring an owner covenant to sell a property to a third party.

“This strategy now includes a potential 210-day delay between a borrower opting to sell the property and a closing, causing a regulatory problem for a bank,” the attorneys warned.

“The time period would be even longer if the tenants fail to acquire the property during the 210-day period,” said Ball and Poznansky. “Any lender should talk to counsel when making decisions about loans on Chicago’s Northwest Side.”

NBOA noted that apartment building sellers planning to utilize federal 1031 “like-kind” tax-deferred property exchanges would be hard pressed to get deals done within the required 180 days because of the 210-day requirement.

In addition, attorneys Ball and Poznansky warn potential developers in the zone must deal with expensive new fees should they try to raze a building and develop the land. For example, a developer seeking to demolish a six-flat would be assessed a demolition surcharge of $20,000 per unit, or a whopping $120,000.

The Clark Hill attorneys also note: “It remains to be seen whether the restrictive ordinance would stand up to judicial scrutiny, particularly following the United States Supreme Court’s recent ruling in California, which restricts the abilities of local governments to impose broad fee structures as a permit condition.”

After the passage of the anti-gentrification ordinance, many small apartment owners feel like local government is controlling their lives.

So, why not fight back and dig in your heels? Hold on to your property for two years until the next mayoral election. Maintain your properties and raise rents when your real estate taxes inevitably rise. Then vote the rascals out. Elect a new mayor and city council that will equally represent all Chicagoans.

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