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The Viability of Chicago’s Proposed ADU Ordinance and Improvement Through Public Private Partnership

31 July 2020
ADU Prototypes 1 01

In May of 2020, Mayor Lori Lightfoot and five Aldermen sponsors introduced an Ordinance to bring ADUs back to Chicago. ADU is traditionally an acronym for “Accessory Dwelling Unit”, but the proposed Ordinance appropriately calls them “Affordable Dwelling Units”, as they represent a potential new source of affordable housing to help combat the City’s current housing crisis.

The Zoning Code outlawed one type of ADU, the Coach House in 1957, mostly out of fear of overcrowding during a period of rapid population growth in the City following the second world war. While some existing coach houses were grandfathered in, many in the City’s north side communities were demolished. The proposed Ordinance would allow property owners to add one or more dwelling unit to their houses and vacant lots without needing a zoning change.

So why the push to bring back ADUs now?

The circumstances in Chicago today are the opposite of what was happening in the 1950s. Population growth is slow and in underserved neighborhoods, many residents are moving away entirely. Additionally, like many major US Cities, Chicago has a problem when it comes to affordable housing. Bringing back Coach House ADUs has the potential to help address both of these issues. By adding an additional unit or dwelling to a property, owners are able to increase the value of the property and collect rental income. This additional income helps to mitigate the effects of real estate tax increases and creates more financial stability for the property overall. This added value may also help to slow the demolition of Chicago’s supply of two and three-flat buildings, buildings that traditionally make up the majority of the City’s affordable housing stock.

The City has limited resources to subsidize housing, and ADUs are another tool in the toolbox that puts the creation of affordable housing in the hands of the private sector. A homeowner is incentivized by the additional rental income and what is created is a naturally occurring affordable housing option, one that doesn’t need a subsidy but is affordable just based on the type, size, and location of the unit.

Problem-Solving through Public Private Partnership

After its introduction in May, the Ordinance was set to be reviewed by the Joint Committee on Housing and Real Estate; Zoning, Landmarks and Building Standards on July 10. Many meetings between private industry leaders, community organizations and committee members were held before the official hearing. ULI Chicago, a multidisciplinary real estate forum focused on land use planning, long-term investment and sustainable development took part in the process and originally provided the 2019 “ADU Initiative” which provided a potential ADU model for Chicago to follow. Focus and bKL took this opportunity to participate and provide similar research which explores the viability of the proposed Ordinance based on aspects like conditions of the Chicago market, the cost of construction and the economics for property owners.

The team was able to share its findings in support of the Ordinance during the July 10th meeting along with others from the private sector. Ultimately, after a long public debate, the City Council’s vote on the Ordinance, originally scheduled for July 22nd, was postponed until September 2020.

The Ordinance is likely to see some changes based on some of the topics discussed during the July 10th meeting, but supporters are encouraged by the progress being made. Below, we have laid out our analysis of the current Ordinance including proposed, buildable ADU prototypes, an assessment of the potential impacts of the Ordinance, and ways to improve upon it. To begin, we performed an in-depth analysis of ADUs.

The benefits and limitations of ADUs

An ADU may take several forms and the City’s Ordinance outlines two types. The most commonly known is a detached ADU known locally as a Coach House, an additional free-standing dwelling typically located in the rear of the property. The other type allowed within the Ordinance would be the Conversion Unit, which encompasses an added unit within a principal residential building that was built no less than 20 years ago. Conversion Units most commonly appear as the building out of a basement where one or more garden units might be added but can also include other interior unit additions. Attached ADUs are not part of the draft Ordinance due to zoning bulk and setback controls, of which are not being relaxed as a part of the proposed ordinance in order to minimize the impact in existing residential neighborhoods. For the purpose of this study, Focus and bKL concentrated their efforts on the viability of Coach Houses.

Affordability through innovative construction

It was important for our team to conduct detailed construction studies to best understand the architectural, construction and financial implications of the Ordinance. Using innovative construction methods is one way the team sought to explore the feasibility of Coach House ADUs. For instance, using prefabrication and modular construction not only allows construction of ADUs to be faster and cheaper than the typical framed structures, but there is also less impact to the existing residence. Prefabrication allows contractors to build units at a faster rate, in a controlled environment, where weather and other unforeseen conditions will have limited effect. Overhead cost is also reduced through modular construction, as the majority of construction would fall under one subcontractor. Generally, we found that the overall cost of a full modular unit is roughly 10-15% less expensive than a unit built using typical construction methods.

Prefabrication, especially modular construction, has been a difficult process to establish in Chicago, given the extra layers of approvals and inspections involved. Together with the Department of Buildings, this Ordinance can help to facilitate the creation of modular builders with factories in Chicago. The jobs provided and support for the local community are additional benefits to the ADU movement.

Dweller ADU

Together the bKL design team and Focus’ development and construction teams, developed two prototypes that are both realistic economically and well designed. The prototypes feature a one- and a two-story Coach House which seeks to maximize onsite parking. The design of the prototypes considers site setbacks, interior layout, and various exterior finishes in addition to parking. We found that given the typical site constraints, the units can be built within a reasonable framework and have the potential to be a strong affordable housing option.

Exploring the Economic Incentives

The potential with ADUs is the relative low cost to build the units and the affordable rate at which they can be rented. The construction cost for the larger, 2-story prototype in our study is around $192,000 to build, including materials, labor, and various soft costs. This is significantly less than the cost of the typical new construction unit built in Chicago, and this pricing doesn’t assume any prefabrication, which would allow for a significant decrease in cost. If a homeowner sought to develop this unit type using a loan with no money down and rented the unit for $1,550 per month, they could achieve an annual cash flow of around $2,000.

This additional income is likely not enough of an incentive for a typical Chicago homeowner to pursue ADUs on their own. There are too many substantial barriers of entry which make the process to build an ADU complicated and time intensive, like permitting, design and construction. Generally, what other cities with successful ADU programs have in common is a streamlined approval process with substantial financial incentives, and a clear path to follow. For instance, a database that guides homeowners through the entire process and matches them with architects, contractors, lenders, and financial resources would go a long way. Added uncertainty will limit the participation of already risk adverse homeowners. Below are examples of effective incentives implemented in cities like Austin, Los Angeles, Portland, and Denver:

ChallengesSolutions
Permit/Approval Process
  • Streamline & expedite permit and inspection processes
  • Permit and application fee reduction
  • Self-Cert Permitting allowed for Coach Houses
  • Pre-approved plans available to homeowner to accelerate approval process
  • Additional benefits offered for sustainable or affordable development
Financing
  • Real estate tax guidance
  • Real estate tax relief (Cook County)
  • Pre-approved lenders
Property Management
  • Assistance/training from other agencies in the City
  • Tenant screening assistance
Finding Homeowners to Participate
  • Database for potential homeowners to become more familiar with the process
  • System can also match homeowners with architects and contractors

Recognizing that financing and construction management are substantial hurdles for a typical homeowner, we analyzed a scenario where a real estate developer finances and builds the unit on behalf of a homeowner. The unit would be associated with another project of the developers and would be aimed at achieving the off-site unit requirements outlined within Chicago’s Affordable Requirements Ordinance (ARO). Here we found that the rental income would be less, as dictated by the ARO, but the homeowner would receive 2-3x the income at the end of the year as they are no longer responsible for servicing the loan. They also gain possession of a free asset that they can rent at a market rate after the 30-year requirement for the ARO has been met, all without financing or pursuing the construction themselves.

The ADU Ordinance and the ARO Requirement naturally complement each other. With a few tweaks to the ADU Ordinance, like changes to the required size of the unit or the required parking, the total number of units built via this path greatly increases. The ARO expires this year and the timing is ideal to make sure the language in both allow for this collaboration.

Other Proposed improvements for the ADU Ordinance

The proposed Ordinance is a great first step to making Coach House ADUs a reality in Chicago. There are many components that go a long way to making the Ordinance more attainable, for example, one item we support as critical to success is the reduction of required off-street parking for the primary residence. The current Zoning Code for residential single unit districts requires 2 parking spots per unit, or 1.5 per unit for two-flats in RS3 zones. We found it impractical to fit a single-story Coach House and 2 parking spots when a single primary unit exists. When the primary residence has more than one unit, the property must accommodate 4+ vehicles (3 for two-flats in RS3 zones), making it impossible to build a Coach House on a typical lot. The proposed Ordinance changes the parking requirement for all districts to 1 parking stall per unit and no additional stalls for the Coach House, effectively removing parking from the list of obstacles.

Another component of the proposed Ordinance that greatly improves the desirability of the property is the required distance between the principal building and the Coach House. This allows for privacy, natural light, and air between buildings, effectively creating additional units with minimal impact to the site.

ADU Prototypes 2 01

Our findings also indicated additional steps that could be taken to improve the viability of Coach House ADUs. Specifically:

  • As written, the proposed Ordinance allows for Coach Houses as a permitted use in all residential zoning districts except RS-1 and RS-2, where they would require a special use permit. Our team believes this needs to be reevaluated due to the fact that roughly 54% of the City’s single-family residences fall within these zones. The need for a special use permit places a large swath of the City at a disadvantage. Particularly communities that the City has identified as priority investment areas within “Invest South/West”, the City’s program aimed at bringing economic development to the South and West sides of Chicago. The experience of financing and building the units are difficult enough for someone unfamiliar with the process, adding a special use permit to the approval process is just another barrier that will prevent homeowners from pursuing ADUs for their properties.
  • The Ordinance calls for a maximum Coach House size of 700 SF. We think this needs to be larger for three reasons:
    • 700 SF is not enough space to comfortably fit more than 1 bedroom within a unit. An increase would allow at least 2 bedrooms, increasing the renter pool and subsequently the possible benefit to the City as a whole.
    • The Ordinance contemplates building a Coach House before a principal building. This is a great option for a starter home for a lower-income household, but it is difficult to lay out the proper home size for a small family with the guidelines as proposed.
    • The current ARO minimum requirement for an off-site 2-bedroom unit is 750 SF and while this is a good starting point, the requirement could be a little larger to provide more options.

What could Chicagoans expect to see if the Ordinance passes?

The process to build or renovate is foreign to the typical homeowner so we don’t see a significant number of units generated immediately, especially without the incentives noted above. This is consistent with the progress of ADU construction seen in other cities. Our team estimates that Chicago would build more Conversion Units than Coach Houses initially, as they are less costly to add and less restrictive. Without affordability restrictions for Coach Houses, we are likely to see these built in the wealthier neighborhoods where access to capital is not as much of an issue. There they can be rented or used as guest houses on the property for other family members.

Many have questioned how affordable the units are and whether the Ordinance does enough to target Chicago’s most vulnerable citizens. While the current language may not fix the entire problem, it will certainly create more affordable units in Chicago. A single ordinance could not possibly solve the affordable housing crisis on its own, but the proposed ADU Ordinance has the potential to be a much-needed tool in the City’s arsenal. More incentives would be helpful to make this an attractive option for a typical homeowner in the low- and middle-income communities of the City, and therefore make a larger impact on the affordable housing stock.

If you would like to learn more about the ADU Ordinance, Chicago’s affordable housing efforts or the studies completed by bKL and Focus, reach out today.

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