The Washington PostDemocracy Dies in Darkness

What happens when housing for the poor is remodeled as luxury studios

‘It’s like a systematic taking over of where poor people live.’

The Lawrence House in the Uptown neighborhood of Chicago. The building long housed low-income residents, but will soon be converted into market-rate apartments. <br/> (Photo by Warren Skalski for the Washington Post)

CHICAGO — For years, this brown-brick building near Wrigley Field housed people who had nowhere else to go. It had peeling walls and broken smoke detectors. But its tiny one-room apartments offered homes to residents too poor for a one-bedroom, too risky to pass a credit check, too vulnerable — on the perpetual edge of homelessness — to sign a one-year lease.

Today, from the outside, the building looks the same: six stories, with tall windows and an elaborately carved entryway that still announces the property by its pre-World War II name, the “Hotel Carlos.” But it now contains studios remodeled with stainless steel appliances, granite countertops and hardwood floors. Rent reaches $1,125 a month. The ad in the window promises “vintage charm.”

In buildings like this one on Chicago’s North Side, the shrinking pool of affordable housing — a problem facing many thriving cities — is playing out in a particularly vivid way. Often, gentrification displaces the poor through less direct means: Wealthier residents move in, businesses catering to them follow, property values rise, the economics of a neighborhood change, and longtime residents are priced out. But here — and in other former “single room occupancy” hotels in Chicago — the displacement is much more literal.

It is one unit for one unit, one single, living alone, for another single, living alone. Young professionals are moving in to occupy the very same — and very small — spaces recently home to people living on less than $1,000 a month. In their remodeled homes, sometimes as small as 250 square feet, what was once deteriorating becomes “vintage.”

When the building near Wrigley was sold to a developer in 2011, the low-income residents in its 130 units had to move out. And then something similar happened at the Abbott Hotel on Belmont. And the Norman on Wilson, and the Chateau on Broadway, and the Lawrence House in Uptown.

“It’s like a systematic taking over of where poor people live,” says Adelaide Meyers, a soft-spoken 47-year-old woman who had to leave the Norman. She now lives in an apartment, where her father had to co-sign the lease, on the far north side of the city. The crime is worse in that part of town.

For Chicago, the debate over these buildings captures a larger tension that is simultaneously playing out in parts of Los Angeles and New York and Washington: The new owners and tenants moving in bring higher tax dollars, capital to revive old buildings and momentum to draw even more young professionals. But those benefits have come at a cost. Now Chicago is trying to save what amounts to 6,000 remaining SRO units, a small fraction of what once existed in the city as a housing stock of last resort for the poor.

The city council passed an ordinance today aimed at protecting the buildings and their residents. Developers and building owners have argued, though, that the new law will unfairly expect a few property owners in the city to take responsibility for a problem — Chicago's shortage of affordable housing — far beyond their control.

In an unfortunate twist of geography, many of the remaining SROs in Chicago happen to be located in lakefront neighborhoods on the North Side that are now in vogue. Since 2011, developers there have bought more than 2,000 low-income units for conversion into high-end apartments where the rent costs twice as much.

The properties aren’t simply demolished, cleared for wholesales redevelopment, because while they may be crumbling on the inside, they are often beautiful from the street, wrapped in art deco details or stone filigree. For new residents, these places embody an alternative to yuppie Chicago: historic architecture instead of cookie-cutter construction, authentic neighborhoods instead of ritzy ones.

“They want the grit that they’re seeing in Brooklyn and Harlem,” says Jay Michael, a managing partner at Cedar Street, one of two companies, alongside BJB Properties, that have been buying up the bulk of these distressed buildings. “What’s sexy today isn’t to be in a totally gentrified, really glossy neighborhood. That’s not what people want any more.”

Housing advocates worry, though, that as the poor are displaced for people who don’t want to live among the rich, they will likely move to the south and west sides, where Chicago’s poverty is heavily concentrated.

“That only further segregates an already segregated city,” says Mary Tarullo, a housing organizer with ONE Northside, which worked with the city on its ordinance.

The first draft of the city proposal, introduced in early September, called for significant restrictions on turning the hotels into luxury rentals. Some of the SROs in the city are owned and operated by non-profits that pair housing with services targeted at the obstacles — mental illness, joblessness, criminal records — that force people to live in places like this in the first place. Most SROs, though, are for-profit businesses, where the most profitable plan may entail minimal repairs and zero investment. Many residents pay the rent, from $350 to $500 a month, with social security disability payments that amount to little more than that.

Under the original city ordinance, an owner who wanted to sell one of these buildings had to give non-profits or developers working with tenants six months to put together their own offer. If they couldn’t reach a deal, owners had two options: Sell to someone willing to preserve at least a fifth of the affordable units, or to someone willing to pay the city hefty fines instead.

An owner could also bypass negotiations with nonprofits and sell straight to a developer — the fees for doing that, though, in a 100-unit building, would amount to $6 million.

Eric Rubenstein, the executive director of the Single Room Housing Assistance Corporation, and the owner of three for-profit SROs himself, called the city’s first proposal “mandated mayhem.” Housing advocates, however, saw it as a fair burden on the very players driving up the cost of living on the North Side.

“For-profit developers make a living off of the fact that this is a world-class city,” says Carlos R. DeJesús Rivera, the managing director of housing for Heartland Human Care Services, which provides homeless services in Chicago. “It needs to be part of the social contract that some of their developments take into account the fact that the diversity of this city in many ways is what makes it world-class.”

The public began to pay more attention to what was happening in these buildings around the time that Cedar Street bought the 13-story Lawrence House last year for $7.5 million. The headline in Crain’s Chicago Business announcing the deal called it a “notorious” property. It was out of code, half-empty, and in foreclosure. By the time Cedar Street bought it, the building had been on the market for years, having racked up more than 100 municipal violations.

“We didn’t come in and swoop up all the property while no one was looking,” Michael says. “I didn’t make some secret deal with the owner at some coffee shop.”

If non-profits or other for-profit owners wanted to purchase and preserve these buildings as affordable housing, theoretically they could have. But none of them have been able to make the numbers work, Rubenstein says. The economics of the industry have made it all but impossible.

The cost of utilities, paid by owners, not tenants, has been rising. So have property taxes. These buildings are more expensive to operate than traditional apartments because they typically have on-site staff, and the greater tenant turnover causes more wear on units. They also often need costly repairs just to bring them up to code.

The only way to make many of these buildings work, Rubenstein says, is to turn them into market-rate apartments, to add private bathrooms and kitchens where previously there were communal ones. Cedar Street’s plan for the Lawrence House includes restoring a long-abandoned pool, and adding ground-floor retail that will sell bike gear and coffee.

Dustin Rigsby, who moved into one of Cedar Street’s other properties in the neighborhood in May, says he appreciates that the company has rescued these buildings from the crumbling state that previous owners allowed them to fall into.

“Now they’re at the point where somebody’s got to do something about it,” he says. “And it seems like Jay and his company are doing that.”

Rigsby, 39, lives in a one-bedroom that he loves. It has granite countertops, complimentary WiFi, and its own washer and dryer. For a space that he guesses is about 350 square feet — large for SRO standards — he pays $1,150 a month. He knows that his building had a very different previous life, his unit a low-income tenant before him.

“I wonder about that,” he says of the person who once occupied his home. “It does concern me that now I’m living in a space that was formerly probably occupied by somebody [for whom] that was the most of what they could afford. And I had my choice. And that’s where I picked.”

Cedar Street, unlike some of the other buyers, though, has made an effort to set up “transition” offices in its newly purchased buildings to help old tenants find new homes. Many of them, Michael says, have wound up in higher quality homes — not just thrown out.

The building Adelaide Meyers lived in was bought by Cedar Street, too. The company gave her boxes to pack with, and then moved her belongings to the new home she found on her own. But she says the effort felt like an empty gesture: boxes and a moving van in exchange for her home and the community she had found there.

“Yes, they were trying to relocate people,” Tarullo says. “But there’s nowhere to go. So the more buildings that Jay Michael buys, the harder it is for him to place people in the community.”

The city’s proposal started circulating this fall, after a push from the office of Mayor Rahm Emanuel. If the city could just slow down the sale of these buildings, it argued, it could create time for advocacy groups to put together the complex financing it would take to buy them.

“This is not about getting owners to solve the larger affordability issue,” says Michael Negron, the mayor’s chief of policy. “This is about the owners and operators of SROs solving the problems they’re creating, whether through buildings being poorly kept up, or through rapid sales to market-rate developers who then displace the residents.”

Developers and SRO owners quickly warned, though, that several of the city’s ideas would not hold up in court. The city wanted SRO owners to keep their buildings off the market for “good faith” negotiations with groups that would struggle to pull off these purchases anyway. And the fees were so costly — potentially more than the value of the buildings themselves — that market-rate developers like Cedar Street wouldn’t want to buy them, either.

“The city is telling an owner of a property who you can sell it to, and what you can do with your property,” Rubenstein says, “after you’ve already been operating it.”

That strategy did not work well for New York City in the 1980s, he points out, when that city tried to preserve its own SROs amid a similar redevelopment spree. New York put a moratorium on demolishing or converting the buildings, and it required their owners to rehab and rent out all of their units, under the threat of steep fines.

New York’s Court of Appeals struck down the law. It imposed on SRO owners, the court found, “more than their just share of such societal obligations.”

More recently, a 2013 Supreme Court case — Koontz vs. St. Johns River Water Management District has generated deep uncertainty among city officials about what they could ask of property owners in exchange for development rights. Widely applied, Koontz could hamper programs of many kinds that cities run requiring developers to create affordable housing or to pay into affordable housing funds.

And late last month, a district judge in California, citing Koontz, struck down a new San Francisco law that required property owners to pay legally evicted tenants as much as six-figure sums.

The city has spent much of the fall reworking the original ordinance to make it less objectionable to SRO owners and legally stronger. In the version adopted by the city council on Wednesday, SRO owners still must attempt six months of good-faith negotiations with a buyer on behalf of the tenants. If that falls through, though, owners then have a window of 120 days when they can try to find a buyer without any affordability restrictions.

If they want to opt out of the whole process, the fees are now smaller but still substantial: Developers who wants to turn a 100-unit SRO into 100 market-rate studios would owe the city $2 million. And they’d owe each displaced tenant relocation fees between $2,000-$10,600.

If the ordinance withstands any legal challenges, its success will hinge on whether buyers come forward to preserve these buildings when so few have been able to thus far.