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Friday, January 11, 2008

State Audit of Parkland Purchases Says the state may be paying too much for the properties that it is acquiring

For Full 25 page report, click here

released 10/2007

Land acquisitions by state resource agencies are a widely used tool for resource conservation. Although appraisals can play a key role in determining the purchase price and ensuring that taxpayers are not overcharged, the quality and objectivity /of state resource–related appraisals are impeded by a lack of comprehensive standards and insufficient independence of the appraisal function. Limits on the public disclosure of appraisal–related information make public and legislative oversight of resource acquisitions difficult. In this report, we make several recommendations to establish a sound process to guide the appraisal function for resource acquisitions.

Executive Summary

Over the years, the state has spent billions of dollars in public funds to acquire land for resource conservation and currently substantial amounts of new bond funds are available for the same purpose. However, the state lacks a process to facilitate good quality appraisals to support the purchase price of these acquisitions. The absence of a sound process is problematic as there are a number of factors that often make determining the value of property in resource acquisitions particularly challenging. These factors include limited or nonexistent comparable sale properties and technically complex issues in determining a property’s development potential (relevant to assessing a property’s market value).

The absence of a sound appraisal process manifests itself in a number of ways. Our review, for example, found that appraisal–related practices vary significantly among the state’s resource agencies, reflecting the lack of a consistent, comprehensive set of standards to guide them. We also found that the appraisal function is often too closely linked to the acquisition process of the land–acquiring agency—a party that has a strong interest in the outcome of the acquisition. This brings into question the objectivity of the appraisal process. Finally, the general lack of appraisal–related information that is made public before resource acquisitions are completed limits opportunities for public or legislative oversight of these acquisitions.

Without a sound process in place to guide the appraisal function for these acquisitions, the state may be paying too much for the resources properties that it is acquiring. We have a number of recommendations to establish such a process. First, we recommend the enactment of legislation requiring the development of a specified set of appraisal standards for resource conservation acquisitions. These standards should serve as the basis for state–funded resource acquisitions, regardless of the type of acquisition (grant or direct purchase), or the resource agency funding the acquisition. Second, to improve the independence of the appraisal process, we recommend that the appraisal function for these acquisitions be focused in the Department of General Services. Next, we recommend that existing requirements to publicly disclose appraisal–related information be expanded, and that improvements be made to the legislative notification process for these acquisitions. Finally, we recommend that steps be taken to avoid unwarranted tax benefits in connection with these acquisitions, by improving the flow of information between the state’s resource agencies and its tax agencies.

Large State-Funded Resources Land Acquisitions Since 2002

Ahmanson Ranch (Ventura County)—$150 million acquisition of over 2,900 acres by the Santa Monica Mountains Conservancy (SMMC), for purposes of wildlife habitat conservation and public recreation. The acquisition was funded by the Wildlife Conservation Board (WCB), the State Coastal Conservancy (SCC), and SMMC.

Ballona Wetlands (Los Angeles County)—a $140 million acquisition of 193 acres by WCB, for purposes of wildlife habitat conservation. The acquisition was funded by WCB and SCC.

Hearst Ranch (San Luis Obispo County)—a $92 million acquisition of over 1,500 acres in fee title (acquired by the Department of Parks and Recreation [DPR]) and 80,000 acres under easement, for purposes of conservation of wildlife habitat, farmland, and public recreation along the coast. The acquisition was funded by SCC, WCB, and the California Department of Transportation (Caltrans).

Bolsa Chica Ecological Reserve (Orange County)—a $65 million acquisition of 103 acres of vacant land to expand the Department of Fish and Game’s Bolsa Chica Ecological Reserve, for purposes of open space preservation and plant and wildlife habitat. The acquisition was funded
by WCB.

Mendocino Headlands State Park Big River Unit (Mendocino County)—a $30 million acquisition of over 7,300 acres by DPR, for purposes of creating a wildlife corridor and providing public recreational opportunities. The acquisition was funded by DPR, WCB, SCC, Caltrans, and a number of federal and nonprofit entities.


A Case Study Highlighting Potential Problems With the Appraisal Process: The Cargill Salt Ponds Acquisition

An example of the problems that can arise from the current appraisal process comes from the state and federal government’s 2003 purchase of 16,500 acres of the Cargill salt ponds in the San Francisco Bay Area. In the Cargill transaction, the state paid $72 million towards a $100 million purchase price of the salt ponds, with the goal of converting the salt ponds to wetlands for fish and wildlife habitat. The state and federal resource agencies involved in the transaction relied on a 28–month old appraisal conducted at the request of the U.S. Fish and Wildlife Service by two private appraisers. (The difference between the selling price and the $243 million appraisal value used by the seller for tax purposes—$143 million—was later claimed by the seller as a charitable contribution for a federal tax deduction.)

The Cargill salt ponds acquisition reveals a number of issues and problems with the appraisal process for purchasing resources lands, as discussed in the following sections.

Complex Issues; Rife With Uncertainty; Making and Disclosing Assumptions.

First, this case shows the potential complexity and inherent uncertainty of issues faced by appraisers in resources–related acquisitions. In the case of this transaction, these issues relate particularly to two matters—an assessment of the property’s economic development potential and an assessment of its value if it were purchased by parties seeking an environmental restoration project. (We discuss below the tie between a property’s “restoration potential” and its market value.) Evaluating these issues requires the appraiser to make a number of assumptions. Accordingly, the credibility of the appraisal is fundamentally affected by how the appraiser makes the assumptions, uses them in arriving at a property’s appraisal value, and discloses them in the appraisal document.

As in other resources–related acquisitions, the property being acquired in the Cargill transaction consisted of large tracts of mainly open space (mostly wetlands) that, in light of past environmental degradation, would require restoration. The restoration potential of the land is particularly relevant in this case because, pursuant to federal requirements concerning wetlands, lands such as the Cargill salt ponds are potentially purchased and restored by developers who are legally required to mitigate (offset) the adverse environmental impacts on wetlands of their development projects elsewhere.

The calculation of this so–called “mitigation value” of the salt ponds, however, was rife with uncertainty and required a number of assumptions. In this particular case, the appraisers assumed that the salt ponds could generate substantial revenue by being bought and restored as wetlands by the San Francisco International Airport Authority. Specifically, this assumed that the airport authority would: (1) approve and begin construction on a project to extend the airport’s runways into the San Francisco Bay and (2) chose to meet most of its mitigation requirements for such development by restoring the Cargill lands as wetlands, as opposed to performing mitigation at competing sites. However, as a matter of fact, the airport authority had effectively terminated any such expansion project well before the Cargill transaction was finalized. The appraisal used by the state and federal resource agencies to finalize the Cargill transaction—then 28 months old—was not updated to reflect this. Nor did the appraisal state the impact on the property’s value should any of the multiple assumptions about the property’s mitigation value fail to materialize.

Regarding the Cargill property’s development potential, the appraisers concluded that the highest and best use of a particular portion of the property was a major yet–to–be approved mixed–use development with houses, retail, and office space. Such a development would not only have required future local land use approvals, but also the future regulatory approvals of several state and federal resource agencies, including the Department of Fish and Game, the Regional Water Quality Control Board, the San Francisco Bay Conservation and Development Commission, the United States Environmental Protection Agency, the Army Corps of Engineers, and the National Marine Fisheries and Wildlife Service.

In this particular case, the appraisers assumed that all of these agencies would provide the necessary approvals for such a development. In disciplinary hearings concerning one of the two appraisers who jointly conducted the appraisal relied upon by the state for the Cargill acquisition, the administrative law judge found that the appraiser’s assessment of the property’s value was “based largely upon unstated extraordinary assumptions and hypothetical conditions.” In other words, the judge found that the appraiser, in assessing the property’s mitigation value and its development potential, presumed as fact information that was uncertain, and consequently failed to disclose in the appraisal document that there was such uncertainty and how the assessed value would change should any of the assumptions upon which it was based prove to be false. The judge also found that there was no evidence reasonably supporting the appraiser’s assumption that all of the required government approvals would be granted to permit the mixed–use development that the appraiser assumed could be developed on the property.

Problems When Independence Lacking Between the Resource Acquisition Agencies and the Appraisers.

Second, the Cargill case shows the potential problems that can arise when the appraisal process is not conducted sufficiently independent of the resource agency’s acquisition process. In this particular case, the appraisers were chosen by, and given their instructions by, the federal resource agency (the U.S. Fish and Wildlife Service) intending to purchase the property. In a misconduct complaint brought against the appraisers by the state Attorney General’s Office in 2005, it was alleged that the appraisal was not conducted independently and objectively. In the subsequent administrative law proceeding, the judge made findings raising similar concerns. For example, the judge found that the U.S. Fish and Wildlife Service instructed the appraisers to assume as fact circumstances related to Cargill’s salt making rights that were not true, and that the appraisal did not disclose that its valuation of these rights was based on a hypothetical condition.

Third, the Cargill case reveals how oversight (legislative and otherwise) of resources–related transactions can be made difficult by constraints on the public disclosure of appraisal–related documents. During negotiations on the Cargill transaction, the state and federal resource agencies were asked by numerous parties, including legislators and taxpayer groups, to publicly disclose the appraisal, but the resource agencies refused (as they had the legal right at that time to do so). When the appraisal documents were ultimately made public subsequent to the transaction being completed, information came to light that lead the state Attorney’s General Office to bring a misconduct complaint against the appraisers, as noted above. The complaint alleged that numerous errors were made by the appraisers in valuing the salt ponds, bringing into question the appraisal’s credibility as a necessary information tool used by the state and federal resource agencies in making their acquisition decision.

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