Owners of defense and secure facilities face unique valuation challenges because their assets are just that – unique. A hardened munitions plant, for example, has no real match on the open market to compare to. Assessors still need a number, though, and they often default to whatever the facility cost to build. That logic results in overpayment exposure for property owners every year.
In this article, we break down why standard valuation methods struggle with secure government facilities. We also explain the argument that keeps taxable values grounded in market reality instead of construction invoices.
Why Two of the Three Approaches to Value Fall Apart with Defense Assets
Property tax valuation normally rests on three approaches: sales comparison, income, and cost. For most commercial property, at least one of the first two produces a reliable answer. Defense facility valuation is rarely that straightforward.
The sales comparison approach has no data to compare.
The sales comparison approach relies on real transactions involving similar properties. According to the Texas Comptroller’s guidance on valuing property, the sales comparison approach works best when adequate sales data exists. The challenge is that a secure munitions plant, a classified research facility, or a hardened production site almost never sells on the open market. When one does trade, the buyer pool is so narrow that the price does not reflect normal market behavior. Defense and secure facilities simply do not generate enough data for the sales approach to be reliable.
The income approach has no market rent to capitalize.
The income approach depends on a market rent stream. The IRS Real Property Valuation Guidelines explain that this approach relies on income and expense data, vacancy rates, and lease terms drawn from the market. Secure defense facilities are not leased on any open market, so there is no comparable rent to capitalize. Without sales data and without market rent, assessors lean on the one method left standing.
That leaves the cost approach, and that’s the problem.
The Arkansas Department of Finance and Administration describes the cost approach as an estimate of what it would take to build a similar structure today, adjusted for depreciation. This approach carries a dangerous assumption: what you spent to build something equals what it is worth. For secure defense facilities, that assumption breaks down fast.
Where the Cost Approach Overstates Value
A large share of construction cost in a defense facility buys features that satisfy federal requirements, not market demand. No third-party buyer would pay for them, because no third-party buyer could use them. That gap between cost and market value is exponentially greater for this asset class, leading to costly tax overpayments.
Security and classification features add cost, not value.
Security features like SCIF build-outs, TEMPTEST shielding, perimeter hardening, and redundant secure power all have enormous price tags. The Office of the Director of National Intelligence’s technical specifications for SCIF construction lay out strict requirements for wall construction, RF shielding, and penetration controls. These standards exist to protect classified information, not to increase resale value. A typical commercial buyer would never build these features and would not pay extra for them either.
Facilities that must meet these standards also require formal accreditation from The Center for Development of Security Excellence. That layer of compliance drives cost upward while doing nothing to increase property value or expand the pool of potential buyers.
Specialized single-purpose infrastructure limits alternative use.
A facility built specifically for one defense program often has no alternative use. The more specialized the build, the wider the gap between cost and market value grows. A production line engineered for a single defense contract, for example, cannot easily convert to commercial manufacturing. That mismatch adds a challenge to defense facility valuation, because market value reflects what a typical buyer would pay for the property as it exists.
Superadequacy inflates cost without adding value.
Superadequacy happens when a building goes far beyond what any market participant would need. This includes redundant systems, oversized infrastructure, and mission-driven design choices. When assessors calculate replacement cost new (RCN), they often price out every system exactly as built. Few adjust for the fact that no rational buyer would replicate features that exceed normal market need.
The Case for Functional and Economic Obsolescence
The key to an accurate valuation argument for defense facilities lies in functional and economic obsolescence. This concept describes the difference between what a facility cost to construct and what it is actually worth as real property. The California State Board of Equalization explains that a single property can carry physical deterioration alongside both functional and economic obsolescence at the same time. New Mexico’s Taxation and Revenue Department draws the same distinction, treating economic obsolescence as value lost to outside forces beyond an owner’s control. In practice, this means stripping out the cost tied to features that serve mission and compliance rather than market utility.
What This Means for Defense Property Owners
An assessor who defaults to cost-as-value is very likely overstating the taxable base, which then translates into an inflated tax bill. Owners of secure and classified facilities should review their assessments carefully every year. They should also document which features serve federal compliance rather than market value.
This complex protest process requires a clear technical explanation of why certain construction costs do not translate into market value. It also requires familiarity with how appraisal districts apply the cost approach to unique, no-comparable property types.
How KE Andrews Approaches Defense Facility Valuation
Our valuation and appraisal team works with property owners who face the challenge of separating market value from mission-driven cost.
Defense and secure facilities are not like other commercial property, and they should not be valued as if they were. If your facility carries security features that add cost, but not market value, we’d love to take a second look.
Contact our team to discuss a defense facility valuation review and identify where your taxable value may be overstated.
