Sometimes It Is Rocket Science

I stood awestruck at the base of a Delta IV Heavy Rocket. The Delta IV Heavy is one of the highest capacity rockets in the world. It was poised for launch inside the facility known as SLC (“Space Launch Complex”) 6 at Vandenberg Air Force Base. The size and sense of power associated with these big rockets is beyond description. To stand so close is a humbling experience. SLC 6 is probably the best known of the launch sites at Vandenberg. It was originally developed for the space shuttle. It is huge and was built to be able to completely enclose the shuttle and attached rockets while they were being prepared for launch.

There is an area of valuation that is little known even within the appraisal profession. That is valuation associated with property tax assessment of possessory interests. A possessory interest is somewhat like a leasehold interest. It is the interest of a private vendor operating on government owned property. These uses range from privately owned enterprises in national parks to vacation cabins in national forests to rocket launch sites on military bases. These for-profit undertakings have value associated with their right (their possessory interest) to occupy the space on government owned land. And this value is subject to property taxes.

Possessory interests are usually created by use permits. The use permit is a contract granting certain rights to the permittee for a specific period of time. It is similar to a lease. An example would be a use permit for a site on which to build a cabin in a national forest. (Think of the cabins up at Paradise.) As is often the case with new construction, until proven otherwise, the Assessor assumes that the amount spent on construction is equivalent to the value added as a result of the construction. So, if a person built a cabin on national forest land, the Assessor would assume that the cost to build the cabin was equivalent to the value of the possessory interest in the property.

If there is reason to question the value, the valuation process gets more complicated. The value of a possessory interest can be seen as a reflection of the difference between the fees paid to the government and market rent. For example, say the builder of the cabin pays a use fee of $500 per month to occupy the cabin site. Further, assume that market rent for the cabin would be $2,000 per month. The vendor therefore enjoys an advantage of $1,500 per month. The present value of this advantage for the remaining term of the agreement is an indication of the value of the possessory interest.

So, back to SLC 6 and why I was standing at the foot of the Delta IV Heavy. The operator of the facility was a private entity formed to launch rockets as a for-profit enterprise. When they took over SLC 6, they needed to adapt the facility for the launch of Delta rockets. Ideally, they would probably have scraped the site and constructed a modern state-of-the-art facility. However, the Air force considered the shuttle launch capability to be a “national asset”; something that needed to be preserved. Therefore, the operator had to work around the existing structures and systems so that they could be reconstituted at a later date. The total amount spent was hundreds of millions of dollars. A significant part of the cost was associated with adhering to the Air Force requirements. All of the expenditures were applied directly to the assessment for their possessory interest. The property tax ramifications were extraordinary.

A team was assembled to work on an assessment appeal. The team consisted of attorneys, economists, and appraisers. The appraisal issues included underlying values, functional obsolescence, and assessment procedures. The focus of our evaluations was the difference between cost and value. To say the least, the value of a rocket a lunch site is elusive. However, due to the inefficiencies in the construction and the rapidly changing industry (Space X is to the rocket launch industry what UBER is to public transportation), it was clear that the cost of construction was far more than the value added. By looking at regional land values, rents, and other value indicators along with current industry operating standards and construction indicators, we were able to develop alternate value indications that were persuasive. After several years of hearings, meetings, and communications, resolution was achieved. The process was a combination of formal appeal, negotiations, and working together with the Assessor’s team.

Maybe using the term “rocket science” is taking liberty but it does suggest the uniqueness of the valuation issues we encountered.

Mr. Arnold is a principal at Hammock, Arnold, Smith & Company. They are a general practice appraisal firm providing valuation and evaluation services to a variety of clients including corporations, government agencies, the legal community, financial institutions, private individuals and others.

Allocation of Value in Permanent Easement Situations

Like most aspects of property valuation, the valuing of easements is a blend of art and science. The science side of the equation is research which most often is data survey and analysis activity. The art side of the equation is professional judgement and is reflective of education, training, and experience. The first step in valuing an easement is heavily weighted to the science activity. Usually the value of the fee simple estate in the area to be encumbered by an easement is estimated by the data comparison approach. The value is often expressed in terms of value per square foot or value per acre. The easement area is not considered as a stand-alone entity but rather as a part of the larger property. Once the value of the fee interest in the area has been established, the value must be allocated between the dominant and servient parties to the easement. The benefits of real property ownership are described as being a “Bundle of Rights”. The concept comes to us from several centuries back and, in text books, is frequently illustrated as a bundle of twigs.

Each twig is labeled with a property right. Things like “Possession”, “Occupy and Use”. “Control”, “Exclusion”, “Disposition”, etc. When considering an easement, the valuer must consider how the bundle is diminished by the granting of the easement. In a theoretical situation where the property rights are evenly enjoyed (a shared driveway, perhaps) by the dominant and servient parties, the allocation of the fee value might be pretty close to 50/50. In most cases the situation is weighted to one side or the other. Elements that must be evaluated include; the use of the easement, the location of the easement, the situation of the easement, the exclusivity of the easement, the size of the easement, and the size of the larger property. The Use of the easement can vary from view corridors to roads to utility lines to pipelines. In some cases, the use can be pretty benign and have little impact on the encumbered area. In other situations, there could be visual impact, noise, odors, or exposure to danger that could cause a significant impairment of the servient party’s use. The Location of the easement has to do with the location within the encumbered parcel and the relationship of the easement to other uses on the parcel. Common utility easements are often located close to property lines so as to have as little impact on the larger parcel as is possible. A water pipeline running across an area of natural vegetation away from any structures would generally be considered low impact. High voltage power lines running close to a dwelling would be considered relatively high impact. The Situation of the easement refers to where it is; surface, underground, or in the air. All other things being equal, underground easements are less intrusive than surface or in the air. Underground telephone or power lines probably have minimal impact on the encumbered property where as a canal could cause significant detrimental impacts. Exclusivity of the easement has to do with shared, or not shared, use. An example of an exclusive easement would be a road or driveway that is not accessible or available to the servient party. Some easements, while not exclusive, do inhibit the use by the servient party. An underground pipeline easement often includes restrictions on the rights to use by the servient party. Typically, structures are not allowed in the easement area. The Size of the easement, the size of the larger parcel, and the relationship between the two all come into play. A small easement on a large parcel generally has less impact than a large easement on a smaller parcel. A forty or fifty foot wide road across a 500 acre property is much less significant than if it crossed a half acre parcel. The consideration of these elements, and more, are critical in the assessment made by the experienced professional when estimating value allocation on permanent easements. It is a professional judgment, not casual guess or application of a rule of thumb.

Mr. Arnold is a principal at Hammock, Arnold, Smith & Company. They are a general practice appraisal firm providing valuation and evaluation services to a variety of clients including corporations, government agencies, the legal community, financial institutions, private individuals and others.

The Royal Institution of Chartered Surveyors

We're the global professional body promoting and enforcing the highest international standards in the valuation, management and development of land, real estate, construction and infrastructure.

We can trace our history right back to 1792 when the Surveyors Club was formed. However, the foundations of the current organization started to properly take shape when 20 surveyors met at the Westminster Palace Hotel. Under the chairmanship of John Clutton, they appointed a sub-committee to draw up resolutions, bye-laws and regulations. This was done in order to establish a professional association to represent surveyors and the growing property profession.

This group, which had expanded to 49 members by 1868, met again at the Westminster Palace Hotel on 15 June 1868 to approve the resolutions and elect the first Council. John Clutton was elected the first president of the Institution of Surveyors. Offices were then leased at 12 Great George Street , which we still use as our headquarters today.

The requirement for such an organization was driven by the rapid development and expansion of the industrialized world; as infrastructure, housing and transport links grew, so did the need for more stringent checks and balances.

For 150 years, our professionals have worked to ensure that, while unlocking the inherent value held within the world's physical assets and developing its potential, we don't spoil the planet for future generations.

Even in parts of the world where the term 'chartered surveyor' means very little, the high standards of our professionals speak volumes. They are viewed by major financial institutions and world governments as the 'gold standard' when it comes to professional regulation in the property sector.

Professional groups provide technical advice across the organization. They contribute to our public policy agenda, and develop and maintain strategic alliances with other professional bodies and industry organizations and groupings. Most groups are also responsible for maintaining alternative designations (e.g. chartered valuation surveyor; chartered facilities management surveyor).

Our Valuation Professional Group is the professional specialism across the valuation sector.

Our Professional Groups focus on four main areas:

• Standards

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Our Valuation Professional Group Board is made up of our volunteer members, led by our staff working in partnership across the following sectors:

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