What Multifamily Owners Need to Know About Chicago’s New Housing Ordinance

The recently enacted Northwest Housing Preservation Ordinance in Chicago brings new challenges for multifamily property owners, especially those looking to sell or redevelop properties in neighborhoods like Logan Square, Avondale, and Humboldt Park. This ordinance is aimed at curbing gentrification, and it introduces some complex requirements that could impact property values and transaction timelines.

Key Points:

High Demolition Fees

• Planning to demolish a building for redevelopment? The ordinance now imposes a demolition fee of $20,000 per unit.
• For larger buildings, these fees can go as high as $60,000.
• The purpose is to discourage demolitions and support affordable housing funds, but it could make some redevelopment plans, like converting multifamily units into single-family homes, less financially feasible.
• Additionally, zoning restrictions now limit converting multi-unit buildings into single-family homes on certain blocks, aiming to preserve density but potentially constraining redevelopment options.

Tenant “Right of First Refusal” for Sales

• The owner of a rental building with five or more units must notify tenants 60 days before listing.
• After accepting an offer, the building owner must provide the tenants a copy of the offer along with the building’s rent roll and financials.
• Tenants then have a 90-day period to organize and match the offer to buy the property.
• For buildings with fewer than five units, the notification and matching timeframes are generally shorter.
• If the tenants decide to match the offer, they get 120 days to complete due diligence, secure financing, and close on the property. Earnest money is capped at 5% for these transactions.
• If tenants waive their right, an owner can move forward with the original sale. However, if there are any material changes to price or terms before closing, the time periods reset at the contract must again be offered to the tenants.

These requirements add an extra layer of complexity that could impact your property’s market value. Here are a few considerations:

– Buyers might be deterred by the long and uncertain process of the tenant “right of first refusal,” especially those on tight timelines, such as 1031 exchange buyers.

– The costs associated with potential tenant buyouts and compliance could affect the attractiveness of your property to potential investors.

For multifamily owners, this ordinance underscores the need for early planning if you are thinking of selling. Expect added costs, longer timelines, and possibly less flexibility in negotiations. Working with a broker who knows these regulations well can help you strategize a sale that aligns with your goals, even with the new challenges.