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.
Michael Neal Arnold, MAI, MRICS