April 4, 2022
By Liz Butler
On Friday April 1, 2022, the Illinois General Assembly passed Senate Bill 3895 (the “2022 Amendment”), an important and closely watched clean-up amendment to Section 15-178 of the Property Tax Code (35 ILCS 200/15-175). The 2022 Amendment provides significant technical fixes to the State’s affordable housing property tax incentive program by redefining the “base year”, “maximum rent”, and “maximum income levels”, as further discussed below. Next, the bill will be presented to Governor Pritzker for signature and, if signed, will become effective immediately.
Overview of Affordable Housing Property Tax Incentive Program
On July 29, 2021, Governor Pritzker signed into law Public Act 102-0175, an amendment to the Property Tax Code that implemented a special assessment program to establish property tax incentives to create and preserve greater numbers of affordable rental housing. The program is effective in each of the State’s counties unless opted out by County Board action. Cook County is expressly prohibited from opting out of the program.
The 2021 law established three tiers of incentives that vary in affordability requirements and reductions in assessed property value:
Tier 1 – 15% Affordability: New construction or rehab rental multi-unit housing developments that provide at least 15 percent of units as affordable units are eligible for a 25 percent reduction in assessed value for a period of 10 years, with two renewable 10-year terms.
Tier 2 – 35% Affordability: New construction or rehab rental multi-unit housing developments that provide at least 35 percent of units as affordable units are eligible for a 35 percent reduction in assessed value for a period of 10 years, with two renewable 10-year terms.
Tier 3 – 20% Affordability: New construction or rehab rental multi-unit housing developments that provide 20 percent of units as affordable (and have a project labor agreement) are eligible for a phased reduction in assessed valuation for a period of 30 years, starting with a three-year freeze and stepping down over time, as follows: a 100 percent reduction in the assessed value (AV) of the property for taxable years one through three; 80 percent reduction in AV for years four through six; 60 percent reduction in AV for years seven through nine; 40 percent reduction in AV for years 10 through 12; and 20 percent reduction in AV for years 13 through 30. During each phase of the incentive, the reduction in assessed value is calculated using the following formula:
Reduction in AV = Applicable Percent Reduction * [Then Current AV – Base Year AV].
For example, during the first taxable year of the incentive, the property receives a reduction in its AV in an amount equal to 100 percent of the difference between the value of the property in year one of the incentive and the AV of the property in the “base year.”
Addressing the Question: What is the Base Year?
Critically, the value of the Tier 3 incentive depends heavily on a property’s base year AV. The 2021 law initially defined the base year value as:
“ […]the value in effect at the end of the taxable year prior to the latter of: (1) the date of initial application; or (2) the date on which 20% of the total number of units in the property are occupied by eligible tenants paying eligible rent.”
This definition of the “base year” has been criticized by both regulators and practitioners as being so vague, unpredictable, and ambiguous as to render the Tier 3 incentive totally unworkable. To function as a policy tool to incentivize affordable housing development, property tax incentive programs must provide developers and their investors with predictability and certainty. The legislation failed to provide clear guidance needed for the program to succeed.
The 2022 Amendment provides the necessary fix to the legislation by clarifying what is the “base year.” The amendment modifies the meaning of “assessed value for the residential real property in the base year” to mean:
“[…] the assessed value used to calculate the tax bill, as certified by the board of review, for the tax year immediately prior to the tax year in which the building permit [for the qualifying project] is issued. For property assessed as other than residential property, the “assessed value for the residential real property in the base year” means the assessed value that would have been obtained had the property been classified as residential as derived from the board of review’s certified market value.”
A property tax incentive program must be predictable and must allow developers to model the value of the incentive and incorporate it into a development pro forma. Absent this feature, a property tax incentive will not effectively attract the investment needed to increase the supply of affordable rental housing. This revised “base year” definition should help clean up the confusing language in the law, clarifying and providing predictability and clear guidance to developers and local officials charged with implementing the new special assessment program.
Change to Calculation of Affordability Levels/Maximum Income Limits
The 2021 law initially defined “affordable units” as units occupied by households with incomes at or below 60 percent of the area median income (AMI) for the geographic area in which the multi-family building is located. To qualify for any tier of the property tax incentive, all of the affordable units must be leased at rental rates affordable to those earning 60 percent of AMI or below.
In 2021, the City of Chicago amended its Affordable Requirements Ordinance (ARO) to allow affordable units to be rented at a weighted average of 60 percent of AMI. The ARO’s income averaging provisions require some units to be leased at rates as low as 40 percent of AMI, while allowing other units to be leased at a range of income levels up to 80 percent of AMI. While providing a range of affordability levels is required in Chicago, under Public Act 102-0175 currently in effect, any units leased at rates higher than 60 percent of the AMI will not be counted towards the affordability requirements of the property tax incentive program.
To more closely align the property tax incentive program with local affordable housing ordinances, the 2022 Amendment adopted by the General Assembly modifies the definition of “Maximum Income Limits” and “Maximum Rent” by clarifying that a project may satisfy the maximum income limits and maximum rent for affordable units with a weighted average of income levels if required by a municipal, state, or federal law.
This revision corrects what had been perceived as a disconnect between Chicago’s ARO and the property tax incentive program by promoting the “income averaging” concept – thereby allowing developers to balance deeper levels of affordability with a broader range of AMI levels in affordable units.
Effective Date and Availability of Special Assessment Programs
The 2021 law directed each Chief County Assessment Officer to implement the special affordable housing assessment programs. The Cook County Assessor’s Office launched its Affordable Housing Special Assessment Program in early 2022. Eligibility application materials for the program are available here.
If signed by the Governor, the revisions to the program made by the 2022 Amendment will go into effect immediately.
Contact Liz Butler at email@example.com or any Elrod Friedman LLP attorney with questions or for additional information.