United States General Accounting Office

GAO Report to Congressional Committees

December 1998 FEDERAL LAND

MANAGEMENT

Appraisals of

Headwaters Forest

Properties

GAO/RCED-99-52

GAO United States

General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-281704 

December 24, 1998

Congressional Committees

In Public Law 105-83, passed on November 14, 1997, the Congress

authorized and appropriated up to $250 million to preserve and protect the

Headwaters Forest in Humboldt County, California, by acquiring the

approximately 4,500-acre Headwaters Forest and about 3,000 acres of

adjoining timberland. The 7,500 acres to be acquired include the

Headwaters Forest, owned by the Pacific Lumber Company (Pacific

Lumber),1

 and two adjoining properties: the Elk Head Springs Forest, also

owned by Pacific Lumber, and a portion of the Elk River property owned

by the Elk River Timber Company. After acquisition, these properties will

be combined as the Headwaters Forest. In September 1996, the federal

government, the state of California, MAXXAM, Inc. (Pacific Lumber’s

parent company), and Pacific Lumber signed an agreement for the federal

and California governments to acquire the properties in exchange for

$380 million in cash and assets from the United States and California. As

part of the acquisition agreement, California will contribute $130 million to

purchase the properties.

The law requires that the properties be purchased within approximately 16

months of the law’s passage, which would be by March 1, 1999. Before the

acquisition can occur, a number of statutory conditions must be met,

including the completion of an appraisal of the properties and a review by

the Comptroller General of the appraisal within 30 days of his receiving it.

Furthermore, the law requires the Secretary of the Interior to provide an

opinion of the value of the land to be acquired, which is to include the

total value of all compensation to be provided for the acquisition.2

 The

new Headwaters Forest will be managed by the Department of the

Interior’s Bureau of Land Management (BLM).3

 For this reason, BLM

arranged for and reviewed two appraisals of the properties involved in the

acquisition: one appraisal of the combined Headwaters Forest and Elk

Head Springs Forest properties (from here on referred to as the

Headwaters property) and a second appraisal of the Elk River property.

1

As appropriate, we use the name Pacific Lumber to refer to the company and any of its wholly owned

subsidiaries.

2

Total compensation is to include tax benefits. The Secretary deferred to the Internal Revenue Service

and the California Franchise Tax Board as to the final amount of tax benefits.

3

A final decision on the coordination of federal and state management of the Headwaters Forest, once

it has been acquired, has not been made.

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We received the completed appraisals on November 25, 1998; this report

presents the results of our review. Specifically, we reviewed the appraisals

(1) to determine whether they complied with federal appraisal standards

and how the values of the appraisals were derived and (2) to assess key

assumptions used in the appraisals. To do this work, we reviewed federal

appraisal standards and instructions, peer reviews of the appraisals, and

the appraisals themselves. We discussed the key assumptions with the

appraisers, BLM officials, a Department of Justice official, officials from the

Department of the Interior’s Office of Solicitor, forestry and acquisition

officials from the state of California, and outside experts in government

land acquisition. In the limited time available to us, we reviewed only the

appraisal reports and the reports’ appendixes related to timber

inventories. We reviewed timber inventory data for the properties and

interviewed the timber experts who established the inventory levels used

in the appraisals. We did not review other technical appendixes,

proprietary data, or supporting analyses used in developing the appraisals.

Results in Brief We did not identify any areas in which the appraisals of the Headwaters

and Elk River properties deviated from federal appraisal standards.

Federal appraisal standards state that the government should appraise a

property to be acquired at its fair market value. The appraiser of the

Headwaters property produced a limited appraisal4

 with four market

values—one value for each of four timber harvest assumptions provided

by BLM. In calculating these four values, the appraiser relied on two

approaches: (1) estimating the current cost of the land and the timber

from revenue and logging-cost estimates and (2) estimating the total net

income from future timber operations and adjusting this amount to the

present value of the standing trees. The appraiser of the Elk River property

relied on one approach to derive fair market value, the use of comparable

sale information to estimate value, and verified the result using a second

approach, estimating the total net income from future timber operations

and adjusting this amount to the present value of the standing trees.

Following these standards led the appraiser to estimate the value of the

Headwaters property at $135 million, $250 million, $350 million, or

$405 million, depending on the assumed harvest level. The Elk River

property was appraised at $78.4 million. The Secretary, in his opinion of

value, determined that the $380 million authorized for the combined

4

Under some circumstances, a limited appraisal can be performed, which means an appraiser can

perform an assignment that calls for something less than or different from work that would otherwise

be required by the guidelines.

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properties falls within these appraised values.5 The Secretary’s opinion of

value also found the acquisition to be in the best interests of the United

States because it represents an opportunity to set aside an irreplaceable

resource for the public.

Our work found that in both appraisals, the need to make key assumptions

during the appraisal process tended to increase uncertainty about the

appraised values. For the Headwaters property appraisal, these

assumptions are that (1) a past timber inventory was reliable, (2) certain

levels of harvest could be achieved, (3) the proper land use and

environmental permits would be in place and harvesting could begin after

1 year, and (4) the acquisition of the parcel had no effect on the value of

Pacific Lumber’s remaining holdings. The Elk River appraisal used an

increased timber harvest volume that was based on the assumption that

the timber volume should include anticipated timber growth through the

date of the expected acquisition. We did not estimate the specific

monetary impact of these assumptions. However, using different

assumptions would have changed the appraised values. For example, if

timber harvest permits had been delayed for a year, the present appraised

value of the Headwaters property would have been lower. On the other

hand, if for the lower harvest premises, the harvest levels had been more

heavily weighted toward the higher-value timber, then the appraisal values

would have been higher. Justice and BLM officials noted that the appraisals

could not have been completed by statutory deadlines without making

assumptions to address these issues. Although we note that using different

assumptions would have changed the appraisal values, we do not find the

use of the assumptions unreasonable.

Background The Headwaters Forest in Humboldt County, California, includes the

largest grove of virgin old-growth redwood timber in private U.S.

ownership. It is currently owned by Pacific Lumber, but has been the

focus of preservation efforts by the public for at least 10 years. Most

recently, it has been identified as habitat for the marbled murrelet—a

robin-sized seabird—which is listed as endangered under California law

and as threatened under the Endangered Species Act (ESA). Both

California and the United States provide protection for threatened and

endangered species, as well as provide for the protection of habitat for

listed species. Under ESA, it is unlawful for any person or entity to take any

threatened or endangered species. The term “take” includes actions that

5

In his opinion of value, the Secretary discusses several appraisals, completed in 1991 and 1993, which

indicate a range of values for portions of the Headwaters tract of $375 million to $705 million.

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harm, kill, capture, or collect such species. Furthermore, under Interior’s

regulations, the term “harm” is defined to include significant habitat

modification and degradation that kills or injures wildlife by impairing

essential behavior, such as breeding and sheltering. The Secretary of the

Interior may, under ESA, issue an incidental take permit for a threatened or

endangered species in line with a habitat conservation plan, which, among

other things, specifies the impacts that are likely to result from the taking

and measures to mitigate these impacts.

Additional protections of timberland exist under California law. Under the

California Forest Practice Rules, timber harvesters must operate under

approved timber harvest plans and be licensed. Additionally, large

harvesters may submit a sustained yield plan for long-term harvesting. In

1995 and 1996, when Pacific Lumber applied for a permit to conduct a

timber harvest operation on the Headwaters property, its application was

denied by the state. The state determined that Pacific Lumber cannot

harvest its timber without a habitat conservation plan and an incidental

take permit. The company has filed two takings lawsuits against the state

and federal governments claiming that the endangered species regulations

for the marbled murrelet do not allow it to harvest the timber.6

As a result of negotiation efforts to preserve the redwood trees, in

September 1996, Pacific Lumber, MAXXAM, Inc., the state of California,

and the federal government agreed to exchange the Headwaters property

for up to $380 million in state and federal assets. As part of the agreement,

the federal and state governments will acquire almost 7,500 acres,

including the Headwaters property, the Elk Head Springs property, and a

portion of the Elk River property. The portion of the Elk River property

that will remain with the Headwaters property is a wishbone-shaped

parcel of about 1,700 acres; it includes a buffer for the old-growth trees

and a 150-foot buffer on either side of the Elk River to protect the riparian

habitat. Pacific Lumber will receive about $300 million and the remaining

7,704 acres of the Elk River property, including an island of

land—essentially, an inholding 7

 —within the newly acquired Headwaters

property and buffer zone. To this exchange, the federal government will

contribute $250 million in funding and the state will contribute

$130 million. One of the conditions of the acquisition agreement is that

Pacific Lumber will develop, for the rest of its land, a habitat conservation

plan for the purposes of receiving an incidental take permit for the

6

A taking may occur when government regulation of land prevents the landowner from having any

beneficial use of his or her land.

7

An inholding is private property completely within the boundaries of public land.

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marbled murrelet and other species. At the same time, Pacific Lumber will

submit a sustained yield plan for timber harvesting to the state of

California. Yet another condition of the agreement is that Pacific Lumber

will dismiss its takings lawsuits filed in 1996 against the state and federal

governments. The acquisition will not proceed if any of these conditions

are not met. BLM and Justice officials stated that negotiations on these

issues have been difficult and have threatened the completion of the

agreement, which, if it falls through, could cause Pacific Lumber to

continue its takings suits.

The Congress, in its fiscal year 1998 appropriation for the Department of

the Interior and related agencies, authorized and appropriated up to

$250 million for Pacific Lumber’s Headwaters Forest. We noted in a report

last year that there was uncertainty about the property’s fair market value,

and the Congress subsequently required that the property be appraised

before being acquired. 8

 According to the law’s conference report, the

appraisal had to be done in compliance with federal appraisal standards

and other applicable laws and regulations governing federal land

acquisitions. Furthermore, according to the legislation, the appraisal had

to be reviewed by the Comptroller General within 30 days of his receiving

the appraisal and had to be provided to the House Committees on

Resources and Appropriations and the Senate Committees on Energy and

Natural Resources and Appropriations. The Chairmen of the House and

Senate Appropriations Subcommittees on Interior and Related Agencies

also requested that we do this work. Further legislative conditions for the

use of federal funds to acquire the properties include the issuance to

Pacific Lumber of an incidental take permit based on a habitat

conservation plan for the remaining Pacific Lumber land, and approval by

the state of California of a sustained yield plan for the remaining Pacific

Lumber property.

Originally, the federal side of the acquisition was being managed jointly by

BLM and the Department of Agriculture’s Forest Service. In 1997, the Forest

Service entered into a contract with an appraiser to determine the value of

the Elk River property. BLM entered into a contract in 1997 with an

appraiser to determine the value of the combined Headwaters and Elk

Head Springs properties. Subsequently, in late 1997, BLM was made

responsible for managing the entire Headwaters acquisition, including the

Elk River appraisal process. The appraisals were to be completed in

mid-March 1998; however, they were not completed until September 1998.

8

Federal Land Management: Estimates of Timber Value and Economic Effects of Harvesting the

Headwaters Forest (GAO/RCED-97-241R, Sept. 24, 1997).

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During the summer of 1998, BLM contracted for peer reviews of the

appraisals. After the peer reviews were completed, BLM reviewed and

approved the appraisals, determined that they met federal appraisal

standards, accepted the appraised values, and forwarded them to the

Secretary of the Interior. The appraisals and the Secretary’s opinion of

value were made available for our review on November 25, 1998.

Appraisal Standards

and Results of the

Headwaters and Elk

River Property

Appraisals

In its instructions for the Headwaters and the Elk River property

appraisals, BLM instructed the appraisers to follow federal appraisal

standards in valuing the properties. These standards state that the

government should appraise a property to be acquired at the fair market

value. According to the standards, fair market value is the amount for

which a property would be sold—for cash or its equivalent—by a willing

and knowledgeable seller who is not obligated to sell to a willing and

knowledgeable buyer with no obligation to buy.

Federal appraisal standards provide for several methods of determining

fair market value, including analyzing prior sales of comparable properties

or of the identical property. While the standards indicate that the use of a

sales comparison approach is normally the most accurate method, other

methods, such as the income approach or cost approach, may be used

when comparable sales data are not available. The income approach

involves estimating the value of a resource on the basis of the present

value of the anticipated future income from production. Generally, the

income method values the estimated future income stream from a project

and adjusts the value of this income stream to its value today by using a

discount rate.9

 The cost approach also involves estimating the value of a

resource but is based on the current costs to reproduce or replace the

existing resource in addition to the value of the bare land.

In cases where existing land use regulations could affect the value of an

appraised property, professional standards require the appraiser to

consider the effect of regulations on the use and value of the property. The

harvesting of timber on the Headwaters property has been affected

because the property contains habitat for the threatened marbled

murrelet, as well as other species; harvesting has also been affected by

state forest practice statutes and regulations. For the purposes of

appraising the Headwaters property, BLM instructed the appraiser to

assume that all land use plans and permits were in place to allow for the

9

A discount rate reflects the earning power of money over time and the risk associated with this

earning power. The choice of a discount rate is a key factor in determining the net present value; in

effect, the lower the discount rate, the higher the net present value of an asset.

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harvesting of the property. Although the Elk River property has identified

threatened and endangered species, it does not have old-growth redwood

stands, which provide a unique habitat for some threatened and

endangered species.

Professional appraisal standards permit limited departures from certain

guidelines, but only if an appraiser determines that the appraisal results

will not be confusing or misleading and if the report is clearly identified as

a limited appraisal. For the appraisal of the Headwaters property, because

it has been identified as threatened and endangered species habitat and no

comparable habitat conservation plans for the species exist, the amount of

timber harvest allowed is uncertain. Therefore, BLM instructed the

appraiser to assume specific timber harvest levels to avoid speculation on

the amount of timber that could be harvested. The appraiser was

instructed to assume that the owner could harvest 25 percent, 50 percent,

75 percent, and 95 percent of the merchantable timber on the property.10

The appraiser determined that relying on this set of critical assumptions

would result in a limited appraisal but would not confuse or mislead. BLM

did not include specific instructions on the levels of harvest to be used in

the Elk River appraisal.

In cases in which the government does not acquire an entire property, but

acquires only a piece of it, federal appraisal standards state that the

preferred way to value the partial property is to use a “before and after”

method. This method occurs when the government acquires property by

condemnation or negotiated settlement.11 In the before and after method,

the appraiser estimates the value of the whole property before the

transaction and reduces it by the value of the property remaining in

private ownership after the transaction is completed. Although Pacific

Lumber owns approximately 200,000 acres of timberland in northern

California, BLM’s instructions directed the appraiser to estimate the value

of the Headwaters property as if it were not part of the larger Pacific

Lumber holdings (i.e., a stand-alone property). The appraisal instructions

included this direction because, according to a Justice official, the

Headwaters agreement is not a negotiated settlement of the company’s

lawsuits, but is an agreement to acquire land for which discussions have

been ongoing for almost a decade. According to this official, if the

property is acquired, an additional provision of the agreement is for the

10Merchantable timber refers to trees with a minimum diameter, measured at breast height, of 10

inches.

11Under condemnation, a government acquires property in the public interest and pays just

compensation to the property owner.

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dismissal of the company’s two takings lawsuits against the state and

federal governments. The Elk River property was also appraised as a

stand-alone property.

Estimate of Headwaters

Property’s Value

The Headwaters property appraisal covers the 4,500-acre Headwaters

Forest and the 1,125-acre Elk Head Springs Forest, both of which are

old-growth forests owned by Pacific Lumber. The appraiser estimated four

values for the Headwaters property—one for each harvest premise

provided by BLM in its instructions. In establishing these values, the

appraiser used two approaches—the cost approach and a discounted cash

flow approach, which is an income method. According to the appraiser,

there are no timber properties or sales of properties like the Headwaters

property—that is, large properties with both old-growth trees and marbled

murrelet populations—which makes the sales comparison approach

impossible.

For both methods, the appraiser estimated the total amount of timber

available for harvest, the time needed to harvest the timber under each

premise, and the costs of logging the timber, which include the costs for

transportation. Using timber inventory data provided by an outside

consultant, the appraiser estimated that the property contains about

670 million board feet (mmbf) of timber.12 He then estimated that it would

take 5 years to harvest 25 percent of the timber, 8 years to harvest

50 percent of the timber, 11 years to harvest 75 percent of the timber, and

15 years to harvest 95 percent of the timber on the property. The appraiser

estimated that logging costs would be the same under each premise, about

$90 per thousand board feet (mbf).13

The appraiser relied on the discounted cash flow analysis to establish the

four premise values and used four values established using the cost

approach to verify the discounted cash flow values. He then reconciled the

two sets of values. In the discounted cash flow method, the appraiser

estimated the net annual income under each harvest premise—for

example, 25 percent over 5 years—and calculated the present value of the

total net income stream. To this, he added the present value of the

remaining land and trees as if they were sold at the end of the harvest

period. For each premise, the appraiser used a discount rate of 9 percent

12One million board feet (mmbf) is a measure of timber volume equal to 1 million boards measuring 1

foot wide by 1 foot long by 1 inch thick.

13One thousand board feet (mbf) refers to a measure of timber volume equal to 1,000 boards measuring

1 foot wide by 1 foot long by 1 inch thick.

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B-281704 

and used appreciation rates for timber values of 1 to 4 percent, depending

on the type of tree. In the cost approach, the appraiser estimated that the

immediate harvest value of the land and timber would be $590 million; he

then multiplied the four premise percentages—for example,

25 percent—to get the value of the timber harvested under each premise.

Because the timber on the property could not be harvested in 1 year, the

appraiser discounted the values using a rate of 8 percent. For the cost

approach, the appraiser used a 3.5-percent appreciation rate.

The Headwaters property appraisal established four values based on four

separate harvest premises. These four values are displayed in table 1.

Table 1: Headwaters Property

Appraised Values Dollars in millions

Assumption about

future timber

harvest amount

Conclusion

about

property value

25-percent harvest $135

50-percent harvest 250

75-percent harvest 350

95-percent harvest 405

Estimate of Elk River

Property’s Value

The Elk River property appraisal covers the 9,468 acres of second-growth

timber commonly referred to as the Elk River Timber Company property,

even though the owner of record is L.E.T., a joint venture.14 Over 1,700

acres of this property, which adjoins the north side of the Headwaters

property, will be retained by the government to act as a buffer for the

old-growth forest. The remaining acreage will be part of the exchange with

Pacific Lumber for its Headwaters properties.

The appraiser responsible for the Elk River property appraisal relied on a

sales comparison approach and verified the value using a discounted cash

flow approach.15 For both approaches, the appraiser estimated the total

amount of timber available for harvest and the costs of logging the timber,

which include the costs for transportation. Using timber inventory data

provided by an outside consultant, the appraiser estimated that the

property contains about 207 mmbf of timber. The appraiser estimated that

14A memorandum of agreement signed by the Elk River Timber Company indicates it will acquire title

to the Elk River property.

15The appraisers for these two properties each used data based on other timber sales. Each appraiser

used a hybrid of the sales comparison and cost approaches that utilizes practices from both

approaches.

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logging costs would be the same under each approach, about $132 per

mbf.

Using the sales comparison approach, the appraiser gathered data on the

price of logs delivered to mills and the sale price of standing timber. He

calculated a price per thousand board feet for each type of timber—for

example, redwood—and multiplied these prices by the amount of timber,

according to type, that could immediately be logged. The appraiser

estimated that about 109 mmbf of the timber on the property could be

logged immediately. To this value, the appraiser added the present value

for the remaining land and trees.

The appraiser used a discounted cash flow analysis to verify the value

established by the sales comparison approach. In the discounted cash flow

analysis, the appraiser assumed that 12.5 mmbf of timber would be cut

each year for 10 years and calculated the discounted value of the related

net income stream. To do this, he used an 11-percent discount rate and an

annual price appreciation rate of 3.5 percent.16 Finally, he added the net

present value of the property as if sold at the end of the 10-year harvest.

In an addendum to the appraisal, the appraiser allocated the timber assets

and the associated value between the government’s and Pacific Lumber’s

parcels. To do this, he estimated the volume of loggable timber on each

parcel and multiplied this volume by the estimated price paid by lumber

mills, adjusted for logging costs. The appraisal established a value of

$78.4 million for the property. The appraiser then allocated $51.8 million of

this value to the portion of the property to be given to Pacific Lumber and

$26.6 million to the portion of the property to be retained by the

government.

Secretary of the Interior’s

Opinion of Value

The Secretary wrote an opinion of value that summarized the purpose of

the Headwaters agreement and acquisition. This document also

summarized the results of the two appraisals and concluded that the

authorized public expenditure of $380 million is within the range of

appraised values; the values range from $135 million to $405 million for the

Headwaters property and include an additional $26.6 million for the

portion of the Elk River property to be retained by the government. The

opinion also found the acquisition to be in the best interests of the United

16The discount rates used in the two appraisals are different because they are based on the

independent judgments of the two appraisers. According to BLM officials, the market for old-growth

redwood is less risky than the market for young-growth timber.

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States because it represents an opportunity to set aside an irreplaceable

resource for the public.

Key Assumptions

Used in the

Headwaters and Elk

River Appraisals

The Headwaters and Elk River property appraisals relied on several key

assumptions. The need to make key assumptions during the appraisal

process tended to increase uncertainty about the appraised values. In

general, the need to make assumptions about key unknown factors

increases the uncertainty associated with any estimate of appraised value.

Although we have not determined the cumulative effect of relying on these

assumptions, it appears that some of these assumptions tended to increase

the appraised value of the property while others tended to decrease the

appraised value. Although we note that using different assumptions would

have resulted in different appraised values, we do not find the use of the

assumptions unreasonable.

Headwaters Appraisal In estimating the four fair market values of the Headwaters property, the

appraisal relied on several key assumptions. The key assumptions made in

the appraisal that we address are that (1) a past timber inventory was

reliable for the purposes of the appraisal, (2) certain levels of harvest

could be achieved, (3) the proper land use and environmental permits

would be in place and harvesting could begin after 1 year, and (4) the

acquisition of the parcel had no effect on the value of Pacific Lumber’s

remaining holdings. According to Justice and BLM officials, with more time

to do the appraisals, some of the assumptions might not have been

necessary because more information might have been available. Under

such circumstances, the habitat conservation plan, the sustained yield

plan, and the incidental take permit for the remaining Pacific Lumber

property could have been nearer completion, if not completed, before the

appraisal occurred. These documents could have served as guidance to

make some of the appraisal assumptions more precise. Although we note

that using different assumptions in each of these four cases would have

resulted in different appraised values, we do not find the use of the

assumptions unreasonable.

Government Assumed the 1992

Timber Inventory to Be

Acceptable for Appraisal

Purposes

The Headwaters appraisal relied on a timber inventory for the Headwaters

property (not including the Elk Head Springs property) performed in 1992.

The 1992 inventory involved measuring trees in specific plots on the

property; as a result of this sampling, the timber was categorized into

seven types, or strata. In 1997, BLM hired a consulting firm to perform a

verification sample of the property to determine whether the 1992 timber

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inventory would still be a reliable estimate of timber volume. The

consultants sampled the four main old-growth timber types, and that

sample yielded a timber volume estimate that was 9 percent less than the

1992 estimate. Statistical tests of the samples showed that the 9-percent

difference was within the sampling error acceptable to BLM and that the

two volume estimates were not significantly different.17 As a result, BLM

used the 1992 timber inventory as the basis for determining volume in the

appraisal. According to BLM officials and the forestry consultants who

performed the work, the old-growth timber would not be expected to have

much net growth, and for this reason, it would be appropriate to use the

1992 volume. However, in the young-growth strata of timber, which was

not included in the sample, growth would occur. A new inventory might

have led to a different estimate of timber volume, which, in turn, could

have affected the appraised value.

Government Assumed Levels of

Harvest

Because of marbled murrelet and forestry restrictions on the Headwaters

property and the lack of comparable habitat conservation plans on other

properties, the government instructed the appraiser to assume four levels

of harvestability for the appraisal: 25 percent, 50 percent, 75 percent, and

95 percent. While the appraiser developed different time lines for each

harvest premise, he used the same harvest scenario for each premise. This

scenario included estimated discount rates, logging costs per thousand

board feet, and price appreciation. However, a larger harvest—under the

95-percent premise, for example—might be delayed because of longer time

frames for cutting and the possibility that harvest plans might be delayed

or disapproved. Consequently, there is greater risk associated with a larger

harvest. The appraiser did a sensitivity analysis for each harvest premise;

however, he used the same range of discount values for both the large and

small harvest levels. Given the higher risks that may be associated with

larger harvest premises, a higher range of discount rates might be applied,

resulting in lower appraised values for these premises.

Furthermore, the appraiser assumed, on the basis of his interpretation of

BLM’s instructions, that an even mix of timber types would be cut under

each premise, regardless of the type or value of the timber. For example,

under the 25-percent premise, 25 percent of each timber type would be

cut, as opposed to cutting an equivalent volume consisting solely of

old-growth redwood, the most valuable type. In reality, a purchaser

interested in maximizing the profit of the property would likely harvest the

most valuable timber first. As a result of this assumption, the lower

harvest premises may be undervalued. The effect on the higher harvest

17The statistical tests used confidence levels of 95 percent.

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premises would be less severe because more timber would be cut under

these premises.

Government and Appraiser

Assumed That Permits Would

Be Issued

The appraisal relied on the assumption that a harvester would have

received the required governmental permits and would have been able to

commence harvesting in a timely manner. For each premise, the appraiser

assumed harvesting would begin after 1 year, during which all harvest

plans and permits would be finalized. Prior to harvesting, timber operators

are required to be licensed, and in addition, operators must submit timber

harvest plans for the state’s approval. Furthermore, when threatened and

endangered species habitat is involved, a habitat conservation plan may

need to be approved before timber harvest plans can be approved. At the

time of the agreement for the acquisition of Headwaters, the company had

submitted at least one timber harvest plan for this area but had not

developed a habitat conservation plan. According to both state and BLM

officials, although a timber harvest plan can be approved in about 10

weeks, there is less experience with processing a habitat conservation

plan and this could take years to finalize. We believe the net present value

of future income from the timber would have been lower if delays had

occurred. 18 If the appraiser had assumed, for example, a 2- to 3-year delay

in obtaining permits, he would have obtained a lower appraised value

under each premise.

Government Assumed No Value

Added to Remaining Pacific

Lumber Holdings

The Headwaters property makes up about 5,600 acres of the 200,000 acres

owned by Pacific Lumber in Humboldt County. Because the government is

acquiring only part of the property, BLM instructed the appraiser to

estimate the value of the 5,600 acres without considering the fact that the

property is part of a larger ownership. Justice officials and officials from

Interior’s Office of the Solicitor believe the Headwaters acquisition is an

independent transaction begun before the lawsuits and the negotiated

agreement to dismiss the company’s takings lawsuits. Because of this

view, BLM, Justice, and Interior’s Office of Solicitor officials instructed the

appraiser to value the Headwaters property as if it were a stand-alone

property and as if it were sold voluntarily.

However, the company views the acquisition as part of a negotiated

settlement of the company’s lawsuits. When the government acquires

property through a negotiated settlement, the rules of appraisal are

generally structured to measure what the property owner will lose. If only

a portion of the property is acquired by a negotiated settlement,

18Although there would be real appreciation in the timber value during the delay, the delay would

cause future income to be more heavily discounted. Because the discount rate exceeds the

appreciation rate, the net effect of the delay would be to reduce the net present value.

Page 13 GAO/RCED-99-52 Appraisals of Headwaters Forest Properties
B-281704 

consideration is given to the damages and/or benefits that may accrue to

the property owner’s remaining property. This is accomplished by

estimating the market value of the entire ownership (larger parcel) before

the government’s acquisition and then estimating the market value of the

property remaining after the acquisition. The difference between the two

values is the value the owner has lost, which is equal to the value of the

acquired property.

According to BLM officials, it would have been difficult to value the 200,000

acres owned by Pacific Lumber, because of both the time and work

involved. Nevertheless, Pacific Lumber may benefit from the sale of the

Headwaters property because the company may be able to harvest a

significant portion of its remaining property under the habitat

conservation plan developed as part of the Headwaters agreement.

Because the appraisal instructions reflected the view that the company’s

sale of the property was voluntary, the appraiser did not make an

adjustment to the appraised value to account for possible increases in the

value to the remaining property. As a result, each of the four values may be

overstated.

Elk River Appraisal In estimating the fair market value of the Elk River property, the appraisal

relied on one key assumption. The appraisal assumed that the property to

be valued includes the anticipated net timber growth occurring between

the date of value and the date of the acquisition. As stated earlier, in

general, the need to make assumptions about key unknown factors

increases the uncertainty associated with any estimate of appraised value.

Reliance on this assumption increased the appraised value of the property,

although we have not determined the specific amount of increase. While

we note that using different assumptions would have resulted in different

appraised values, we do not find the use of the assumption unreasonable.

Government Agreed to a

Projected Increase in Timber

Volume

The timber volume upon which the Elk River property appraisal is based

includes anticipated timber growth through the date of the expected

acquisition. BLM instructed the appraiser to include the estimated growth

on the basis of a memorandum of agreement among the state of California,

the United States, Pacific Lumber, and the Elk River Timber Company.

This memorandum stipulated that in exchange for including an estimate of

timber growth, the Elk River Timber Company would forgo any timber

harvests or other economic use of the property until the acquisition. Elk

River had an approved timber harvest plan for portions of the property

and could have harvested timber in those areas.

Page 14 GAO/RCED-99-52 Appraisals of Headwaters Forest Properties
B-281704 

The date of value for the appraisal is June 15, 1998, yet the timber volume

used in the appraisal is projected to February 28, 1999-—more than 8

months later. This projection, which was calculated by forestry services

consultants for BLM, relied on a 7-percent annual growth estimate. The

consultants based the growth estimate on data from the Elk River Timber

Company, tree core samples they took from the property, and historical

growth data for the site. While the estimate is statistically based and BLM

accepted the estimated increase in volume, the amount of growth is a

projection and could be more or less than estimated. As a result, the

appraised value reflects additional value based on projected growth.

Observations In our review of the Headwaters and the Elk River property appraisals, we

did not identify areas in which the appraisals deviated from federal

appraisal standards. We also did not find that the use of assumptions in the

appraisal was unreasonable given the imprecision involved in appraising

timber properties and the unique circumstances of this property.

The Secretary of the Interior recognized, in his opinion of value, the

intrinsic worth of the irreplaceable natural resources of the Headwaters

property, whereas the appraisals simply estimated the value of the

properties on the basis of their use as timberlands. In the event that the

Headwaters acquisition is not completed by March 1999, Pacific Lumber

will have various alternatives for dealing with the limitations placed on

harvesting timber on this property. One of these alternatives is the revival

of its takings lawsuits. Alternatively, Pacific Lumber might seek to

negotiate a habitat conservation plan, an incidental take permit, and state

timber harvest plans for the Headwaters property in order to harvest

timber.

Agency Comments We provided the Department of the Interior with a draft of this report for

review and comment. In its comments, Interior generally agreed with the

information in the report. The Department also provided technical

comments about the Secretary’s opinion of value, the requirements and

application of the Endangered Species Act, and the memorandum of

agreement among Pacific Lumber, the state of California, the United

States, and the Elk River Timber Company, among other things. We

incorporated Interior’s recommended changes or clarified the report’s

language as appropriate. (Interior’s comments are reproduced in app. I.)

Page 15 GAO/RCED-99-52 Appraisals of Headwaters Forest Properties
B-281704 

Scope and

Methodology

We reviewed the Uniform Appraisal Standards for Federal Land

Acquisitions, issued in 1992 by the Interagency Land Acquisition

Conference, as well as the Uniform Standards of Professional Appraisal

Practice issued in 1998, to become familiar with federal appraisal

standards. We reviewed the appraisals themselves, Appraisal of

Headwaters and Elk Head Springs, signed September 28, 1998, and

Appraisal Report: The Elk River Timber Company, signed September 28,

1998, to become familiar with their methodology and data. We discussed

both the standards and the appraisals with the Chief Appraiser and State

Forester for BLM’s California State Office and the contract appraisers who

conducted the appraisals. We interviewed an outside appraisal expert,

officials with the state of California, and other experts in government land

acquisition. We also met with officials from Justice and Interior’s Office of

the Solicitor. Both these agencies provided BLM with legal advice on the

appraisal process.

In a December 1997 letter to the Secretary of the Interior, the Committee

and Subcommittee Chairmen who requested our work recommended that

the Interior coordinate the appraisal process with us before we received

the final appraisal. While BLM officials did apprise us of the status of the

appraisal process before we received the final appraisal on November 25,

1998, they declined to provide us with any analyses or drafts of the

appraisal before that date because this information was subject to review

and change.

After doing some preliminary work in January and February 1998, we

performed the bulk of our review in November and December 1998. Our

work was conducted in accordance with generally accepted government

auditing standards.

Page 16 GAO/RCED-99-52 Appraisals of Headwaters Forest Properties
B-281704 

We are sending copies of this report to the appropriate congressional

committees and will make copies available to the Secretary of the Interior

and other interested parties. We will make copies available to others upon

request.

If you or your staff have any questions, please call me on (202) 512-3841.

Major contributors to this report were Jay Cherlow, Tim Guinane, Susan

Iott, Diane Lund, Dick Kasdan, Sue Naiberk, and Victor Rezendes.

Barry T. Hill

Associate Director, Energy,

 Resources, and Science Issues

Page 17 GAO/RCED-99-52 Appraisals of Headwaters Forest Properties
B-281704 

List of Congressional Committees

The Honorable Ted Stevens

Chairman

The Honorable Robert Byrd

Ranking Minority Member

Committee on Appropriations

United States Senate

The Honorable Frank H. Murkowski

Chairman

The Honorable Dale Bumpers

Ranking Minority Member

Committee on Energy

 and Natural Resources

United States Senate

The Honorable Slade Gorton

Chairman

The Honorable Robert Byrd

Ranking Minority Member

Subcommittee on Interior

 and Related Agencies

Committee on Appropriations

United States Senate

The Honorable Bob Livingston

Chairman

The Honorable David Obey

Ranking Minority Member

Committee on Appropriations

House of Representatives

The Honorable Don Young

Chairman

The Honorable George Miller

Ranking Minority Member

Committee on Resources

House of Representatives

The Honorable Ralph Regula

Chairman

The Honorable Sidney R. Yates

Page 18 GAO/RCED-99-52 Appraisals of Headwaters Forest Properties
B-281704 

Ranking Minority Member

Subcommittee on Interior

 and Related Agencies

Committee on Appropriations

House of Representatives

Page 19 GAO/RCED-99-52 Appraisals of Headwaters Forest Properties
Appendix I 

Comments From the Department of Interior

Page 20 GAO/RCED-99-52 Appraisals of Headwaters Forest Properties
Appendix I 

Comments From the Department of Interior

Page 21 GAO/RCED-99-52 Appraisals of Headwaters Forest Properties
Appendix I 

Comments From the Department of Interior

(141272) Page 22 GAO/RCED-99-52 Appraisals of Headwaters Forest Properties
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