Chicago’s So-Called “Anti-Gentrification” Ordinance Has Potential Impacts on Apartment Owners and Lenders on Chicago’s Northwest Side

Chicago enacted the “Northwest Side Housing Preservation Ordinance,” an ordinance that many are referring to as the “anti-gentrification” ordinance. Despite the grandiose moniker, the ordinance breaks down to two specific policies for a six-square-mile zone in the Logan Square, Avondale, and West Town neighborhoods (shown below). The Ordinance purports to reduce density on the northwest side and the scarcity of affordable housing (defined as being affordable for a tenant with an income of less than 60% of the median income in an area). First, the ordinance grants a right of first refusal (“ROFR”) to tenants in multi-family buildings to purchase their building prior to it entering the market for sale, and second, it imposes a demolition fee assessed against developers leveling existing multi-family structures.

The Right of First Refusal

The ordinance grants the tenants of a building a 60-day option to purchase a property in the affected zone before the owner can market the property for sale. Even after the 60-day period expires, if tenants need to form a tenant association to acquire the property, the tenants are granted an extra 30 days to do so.  After the exercise of the right (which cannot be conditioned on the financial capacity of the tenants), the tenants have 120 days to complete the purchase. The right of tenants to purchase under the ordinance is assignable to tenant associations or to independent third parties, provided that any purchaser under the ROFR covenants that the building be used for affordable housing for a period of 30 years. Any current or prospective owner of rental property in the zone should be aware that the ROFR creates a significant lag in the process of selling a property and further understand the potential consequences of holding a property for an extended period of time might run afoul of mortgage covenants or loan maturities.

Further, the policy has potential ramifications for banks and lenders with mortgages on properties in the affected zone. The ordinance specifically carves out that it does not apply to a bank foreclosing or acquiring a property by right of a deed-in-lieu of foreclosure; 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 potential closing, potentially causing a regulatory problem for a bank. The time period would be even longer if the tenants fail to acquire the property during the 210-day period. Any lender should talk to counsel when making decisions about loans in Chicago’s northwest side. In addition to the ROFR, a potential developer in the zone must deal with a new fee should it try to raze a building and develop the land.

The Demolition Fee

Chicago has imposed an additional demolition fee for razing a multi-family apartment building within the subject zone, with the fee equaling the greater of (i) $60,000 or (ii) $20,000 per unit. For example, a six-unit building would be assessed $120,000 to demolish. It remains to be seen whether the requirement would stand up to judicial scrutiny, particularly following the U.S. Supreme Court’s recent ruling under Sheetz v. County of El Dorado, California (601 U.S. 267, 2024), which restricts the abilities of local governments to impose broad fee structures as a permit condition. However, unless and until the ordinance is challenged, any developer that intends to demolish a property within the affected zone needs to be aware of the financial impact that the ordinance will have on any development.

The Northwest Side Housing Preservation Ordinance is one of a litany of Chicago-specific rules that developers and lenders should be aware of before entering the submarket. Clark Hill’s Chicago-based real estate attorneys provide assistance to developers, lenders, and investors as they navigate such rules.

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