Preservation Compact
The Preservation Compact drives intentional, coordinated strategies that preserve affordable rental housing. The Compact and its partners have created real preservation solutions and a lasting policy framework.
Preservation keeps the affordable housing stock strong to serve our low and moderate-income families into the future, and rehabbing units is dramatically more cost efficient than new construction – and much friendlier to the environment. Preservation strategies help Naturally Occurring Affordable Housing (NOAH) as well as government assisted properties.
The MacArthur Foundation launched The Preservation Compact in 2008. While some of the inaugural activities are still underway, recent initiatives are forging new paths, and producing tangible results. We don’t just think big thoughts, we build real policies and programs.
Few would argue that the Chicago area needs affordable housing. With new construction numbers topping $300,000 per unit, we cannot afford to lose the precious units we have.
Yet developing concrete and lasting housing policy strategies takes time, and meaningful impact can only occur with partners.
The following case studies below provide a glimpse into the collective impact of the Compact and the partners who help bring them to life.
Rescuing NOAH in Strengthening Markets
Efficiently Creating Affordability in High Cost Markets
Recommending Building Code Relief
Expanding Energy Efficiency Resources
Property Tax Incentive
Coordinating Public Agencies
While this report has highlighted specific Preservation Compact tools, sometimes new issues arise unexpectedly and we coordinate partners to help tackle unforeseen challenges.
In recent years, attracted by comparatively low prices and the potential for high returns, several out-of-state investors targeted Chicago’s low and moderate-income neighborhoods. Three large investors alone acquired an estimated 600 buildings with more than 3,600 units.
Unfortunately, many buildings in these three portfolios have suffered building code violations and widespread vacancies. The investors paid above market prices with inadequate provisions for rehab. The conditions were so pervasive that the Cook County Circuit Court established dedicated Housing Court calls just for these three owners.
When CIC’s Troubled Buildings Initiative and the City of Chicago initially identified the problem, they aggressively pursued code compliance issues. Meanwhile, The Preservation Compact joined the effort to address root causes. The Compact convened partners to develop policy strategies, including mapping properties to identify concentrations of buildings, understanding state property tax exemptions, and working with the Attorney General and other state agencies to discourage similar activity in the future.
One of these portfolios was financed with tax-exempt bonds issued by the Illinois Finance Authority. Within the bond issuance, there were very limited funds provided for rehab, and the operating budgets wrongly presumed that the buildings would be exempt from property taxes.
On another portfolio, a U.S. District Court issued a permanent injunction barring the solicitation of any new investors after the Securities and Exchange Commission charged the company with operating a Ponzi scheme, promising unrealistically high returns to investors. Under court order, a receiver is selling the buildings in this portfolio.
Cook County lost many affordable rental units to deterioration and demolition in weak markets in the wake of the housing crash. In some lower cost markets, rents increased a modest amount, finally stabilizing after the crash. Meanwhile the most expensive markets recovered quickly - thus shrinking the affordable supply in these areas and adding to housing cost burden.
Percent of cost-burdened renter households
(paying more than 30% of income for housing costs)
Source: Institute for Housing Studies at DePaul University
The Preservation Compact is led by Community Investment Corporation (CIC). CIC is a nonprofit, certified Community Development Financial Institution (CDFI) that provides financing to acquire, rehab, and preserve affordable rental housing in metropolitan Chicago.
Since 2008, the Compact has focused preservation efforts on the unsubsidized Naturally Occurring Affordable Housing stock, or what many call NOAH. According to Harvard’s Joint Center for Housing Studies, 75% of affordable rental units across the country do not receive any government subsidy. These unassisted rental buildings generally have lower rents because they are located in lower cost markets.
Naturally occurring affordable units are plentiful in low cost markets, which often suffer from disinvestment and a lack of local resources. These neighborhoods need investment to revitalize their local economies and improve conditions.
On the flip side, strengthening and strong markets attract investment and vital economic activity. Not surprisingly, recent research shows that where people live drives their life outcomes – which means that as affordable units disappear from strengthening neighborhoods, so do economic opportunities for low income households.
To combat these damaging consequences, the Compact launched a $34 million fund to preserve NOAH units in strengthening and high cost communities. The Opportunity Investment Fund provides low cost mezzanine debt to developers who buy buildings and preserve at least 20% of their units for affordable housing.
The fund breaks new ground with a loan structure instead of grants, pioneering an exceptionally efficient way to create affordable units in higher cost markets. Preservation also avoids competition for scarce public subsidies, and zoning challenges that come with new construction.
The principals at Round Square Equity liked the new Fund’s low interest rate and streamlined process. Familiar with different sources of rental subsidy, They knew they could meet affordability requirements without affecting the financial performance of the 18-unit property.
They received a $275,000 OIF second mortgage, reducing their equity requirement by nearly half, and freeing those funds for future acquisitions. The Evanston community gained four high-quality units guaranteed to be affordable to low-income tenants for at least 15 years.
“Evanston gained four high-quality units guaranteed to be affordable for at least 15 years.”
Private, social impact, and government investors in the Fund benefitted, too – rather than depleting scarce grant funds and capital subsidies, the loan structure means that the funds will be repaid, and available to use again in the future.
The Pacults came to CIC to finance the rehab of a three story office building in Hyde Park. The commercial building will be developed into a mixed use building with 24 residential units on the second and third floors. This extensive rehab requires all new plumbing, which would have cost them over $250,000 under the current Chicago Plumbing Code.
“PVC instead of cast iron will save over $150,000 in rehab costs in one project.”
By utilizing the Alternative Plumbing Materials Pilot Program, the Pacults are able to use PVC instead of cast iron for above ground drainage, vent piping, and fittings – saving them over $150,000 in rehab costs.
In May 2018, Marcia Ellis took on management of her father’s 6-flat on the southwest side of Chicago. The building had considerable deferred maintenance and Ms. Ellis was new to property management. To educate herself, she attended CIC’s property management training to gain the necessary tools to be successful.
CIC staff also encouraged Ms. Ellis to undertake a free energy assessment by CIC’s partner, Elevate Energy. She applied and got several recommendations, the most substantial being a boiler replacement.
“These modest upgrades led to a savings of $2,400 annually in energy costs.”
Ms. Ellis received almost $45,000 in upgrades, including insulation, LED lighting, and boiler replacement, leading to a savings of $2,400 annually in energy costs.
Because the incentives available for the energy efficiency measures were so generous, she was able to devote loan proceeds to deferred maintenance and keep her monthly payments affordable.
When the long-term owner of a 58 unit building in Uptown decided to sell, the property was quickly purchased by new owners who made a significant investment in upgrading the condition of the building.
Before the rehab work, the property was in poor condition, but rents were affordable to low-income tenants. When the work was complete, the property’s assessed value tripled, increasing the property tax bill from $14,000 per year to more than $53,000, and rents became unaffordable.
“If the new incentive were in place, a $13,000 tax reduction would have offset the lower rents on the affordable units.”
If The Preservation Compact’s proposal had been in place, the property’s post-rehab assessed value would have been reduced by 25% in return for keeping 15% of units affordable. The $13,000 tax reduction would have covered lower rents on the affordable units.
The best part? The proposal requires rehabilitation or new construction, which would increase assessed value for participating properties. As a result, even with the tax relief, no tax burden would shift to other property classes.
Since 1987, a 320 unit apartment complex, complete with a swimming pool and community facilities, housed 110 low income families in the Village of Palatine. When the owner declined to renew the project-based Section 8 contract, these low-income families faced displacement out of this thriving northwest suburb, with 110 project-based units at risk of permanent loss.
Chicago’s HUD office had already pioneered HUD’s 8bb program, which allows the transfer of project-based contracts. The trick: finding a new site that offered similar opportunities, and persuading the current owner to participate in the transfer process.
Enter the Preservation Compact Interagency Council. The Compact identified and approached an owner interested in an 8bb transfer in a neighboring suburb. Once both owners were on board, government partners supported the effort, and tenant advocacy partners effectively pressed all sides to ensure tenants benefitted from a smooth transfer process.
Advocates, HUD, the Housing Authority of Cook County, and both owners worked hand-in-hand to move the 8bb transfer forward, preserving this valuable contract in one of the strongest regions in the Chicago metropolitan area.
