Unintended Consequences: The Counselors Of Real Estate On Solving The Industry's Toughest Issues

Each year, The Counselors of Real Estate, an organization of carefully vetted commercial property advisers, identifies the top 10 issues expected to have the most significant impact on real estate. 

These issues are chosen through broad membership polling, discussion and debate, and the list is curated to provide insights to real estate professionals as they enter a new year. This year, the 72-year-old organization is launching a new initiative at its annual conference in Detroit, aimed at going beyond identifying problems to create pathways to solving them. 

“It’s one thing to identify problems. It’s entirely another to explore how to actually fix them,” said John Hentschel, global chair of The Counselors of Real Estate and owner and president of Hentschel Real Estate Services. “We are a global, multidisciplinary, broad-perspective organization that can look at issues from various perspectives and viewpoints that we can bring together to provide solutions.” 

The Counselors' inaugural Solutions Initiative subject will be “Public Policy – The Law of Unintended Consequences,” with a focus on property tax policy issues that will directly impact commercial real estate. The organization will be releasing a white paper detailing the problem, its evolution and the resources and information needed to develop potential solutions.

“Just about every jurisdiction has property taxes,” Hentschel said. “It's a universal issue that affects everybody from the payer of the taxes to the recipient of the taxes. Taxes influence the dynamics and economics of a market as well as its competitiveness in attracting both residents and businesses.” 

Tax Caps, Tax Exemptions And Special Districts

The white paper will, among other things, highlight well-intentioned tax policies that have had unintended consequences for commercial real estate. 

In Detroit, there is a 5% tax cap, meaning that a property’s tax assessment cannot go up more than 5% each year as long as owners retain that property, Hentschel said. Once they sell a property, however, a reassessment is triggered that could lead to significantly higher taxes. This policy impacts both the owner of the property and the local government’s ability to collect revenue, he said. 

“Tax caps are designed to keep taxes as low as possible for long-term residents, but they create distortions in the marketplace,” Hentschel said. “Let's suppose, for example, an owner has had a building for 25 years and has been subject to that cap. That person has a competitive advantage against the person who just bought the building across the street, who now has to charge higher rents to be able to pay the tax bill.” 

Meanwhile, Baltimore, where Hentschel served as the city's chief real estate officer, is full of tax-exempt, nonprofit organizations that, while they may bring jobs to the area, also come at a tangible cost because the city is providing services and not getting the revenue that is associated with property taxes, he said. 

Hentschel said special tax districts, which include tools like tax increment financing and are set up to promote investment and business development, may seem like a great way to attract companies and promote a location, but they also come with unintended consequences. 

The argument in favor of TIFs is that cities would attract businesses they wouldn’t normally get by building new infrastructure — the city or the developer will go out and float bonds to put in the infrastructure, and as the title implies, the increment in taxes will be used to help pay the cost of the bonds instead of going into the general fund of the local government. 

However, once the city has the infrastructure and the businesses and the new jobs, they also have these 30-year bonds and the tax revenue owed to the general fund, and the benefit to the city is delayed 30 years.

“You're creating value, but the value is 30 years away,” Hentschel said. “And the other services that need to be funded are then being paid by the people who aren't within the TIF district. What is somebody's benefit is somebody's burden.”

The Biggest Impacts Today

Aside from property tax policies, Hentschel said there is still a price expectation gap happening in real estate, where the difference between what people think something is worth and what people are willing to pay for it is significant. Additionally, while there has been an uptick in the return to the office, there remains uncertainty surrounding where the balance point is between remote work and in-office work. 

He added that other issues that are top of mind for real estate professionals include supply chain disruptions, particularly as new tariffs are implemented, and the trillions of dollars in commercial real estate loans that are set to mature before the end of 2026.

“Most of those properties were bought at a 3% or 4% cap rate,” Hentschel said. “If you got a 3% or 4% cap rate when you bought it, and cap rates now are 6% and 7%, you're upside down, and you're not going to be able to refinance that property.” 

Uncertainty is the biggest issue right now. 

“How do you make an informed real estate decision when the future is so uncertain that it's difficult to predict what's going to happen?” he said

The Counselors Give Back

What makes the Counselors organization uniquely qualified to tackle these unintended consequences is that it can look at issues from several perspectives, including as financiers, appraisers, lawyers, brokers, developers, architects and engineers. 

“The CRE designation is a badge of distinction reflecting the professional’s commitment to excellence — a veritable think tank, a brain trust of the world’s foremost real estate problem-solvers,” Hentschel said. “You can’t simply join the organization. You have to be invited after a vigorous vetting process, although self-initiated applications are considered. It’s a recognition of career accomplishments.”

This is why the group is so well positioned to take a look at a lot of these problems and try to fix things.

“We know what the issues are, and we hope to offer communities road maps to improve policies and overcome problems involving the physical and built environment,” he said. “It’s our way to help make the world a better place.”

This article was produced in collaboration between Studio B and the Counselors of Real Estate. Bisnow news staff was not involved in the production of this content.

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