A Chicago ordinance aimed at curbing gentrification by giving renters the chance to buy their buildings is facing early setbacks that could undermine its effectiveness.
The Northwest Side Housing Preservation Ordinance, which took effect March 1, grants tenants in parts of Humboldt Park, Logan Square, West Town, Avondale and Pilsen the right of first refusal, allowing them to purchase their building before outside buyers.
But mortgage financing and title insurance issues are complicating deals in the ordinance zone, just three months after rollout, Crain’s reported.
The new rule “left holes,” Tom Fishwick of Cross Country Mortgage told the outlet. He found that Fannie Mae will not back loans for properties encumbered by right-of-first-refusal provisions. That excludes many small investors who rely on Fannie Mae’s low down payment options. Fishwick said he confirmed the policy with a Fannie Mae risk manager who denied a request for exception.
“Minor impediments” to loans that are spelled out in Fannie’s title exceptions include rights of first refusal.
That restriction recently killed a $1 million deal for clients of broker Greg Nagel of Ask Nagel Realty, who called the experience “ridiculous.”
Compounding the problem, at least two title insurers — Chicago Title and Fidelity — have started tacking on extra fees for certifying that a building complies with the ordinance. The fees add hundreds or even thousands to the cost of a deal, real estate attorney Jim Erwin told the outlet. But the bigger problem is legal uncertainty, he said. The ordinance allows tenants or advocates to sue and block a sale if they weren’t properly notified, creating a potential cloud on title.
The city of Chicago said it is “working to identify a solution,” but did not confirm whether Fannie Mae’s policy will shift. For now, experts warn the unintended result could be a smaller pool of buyers, and a greater role for large institutional investors the ordinance was meant to deter.
“The Department of Housing is unaware of any statements that Fannie Mae will not lend to buildings that have a right of first refusal,” the city’s Law Department told the outlet. “However, we are actively looking at the ordinance to address the issues.”
—Rachel Stone
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