GAO-01-292

Report to the Honorable Don Young,

House of Representatives

United States General Accounting Office

GAO

March 2001 NATIONAL PARK

SERVICE

Federal Taxpayers

Could Have Benefited

More From Potomac

Yard Land Exchange
Page i GAO-01-292 Potomac Yard Land Exchange

Letter 1

Results in Brief 2

Background 3

Appraisals Did Not Appropriately Value the Land Interests

Exchanged 8

Conclusions 15

Agency Comments and Our Evaluation 15

Appendix I Scope and Methodology 19

Appendix II Summary of Exchange Figures and GAO’s Adjusted

Figures 20

Appendix III Comments From the Department of the Interior 21

Appendix IV GAO Contacts and Staff Acknowledgments 23

GAO Contacts 23

Staff Acknowledgments 23

Tables

Table 1: Estimated Figures 20

Table 2: GAO’s Adjusted Figures 20

Figures

Figure 1: Location of Potomac Yard and the Exchange Parcels 5

Contents
Page 1 GAO-01-292 Potomac Yard Land Exchange

March 15, 2001

The Honorable Don Young

House of Representatives

Dear Mr. Young:

Settling 30 years of sometimes acrimonious dispute, in March 2000 the

Department of the Interior’s National Park Service and a private

developer1 completed an exchange of land interests on two vacant parcels

of land in Potomac Yard, an approximately 380-acre former rail yard

adjacent to the Park Service’s George Washington Memorial Parkway near

Washington, D.C. Although the developer owned both parcels, the Park

Service also had an interest in them. On one parcel—referred to as the

Alexandria parcel—the Park Service held a commitment from the

developer to build an interchange on the Parkway; on the other parcel—

referred to as the Arlington parcel—it held a development restriction

known as an indenture. In the exchange, the Park Service allowed the

developer to buy out its interchange commitment, lifted the indenture on

the Arlington parcel, and acquired specific development restrictions on

both parcels to protect the Parkway’s scenic qualities.

To estimate the fair market values of the interests being exchanged, the

developer contracted with a private appraisal firm to prepare two

appraisals (one for each parcel), which the Park Service reviewed and

approved as conforming to federal appraisal standards. The appraisals

reported that on balance the Park Service owed the developer $14 million.

This represented the difference between the estimated value of potential

development opportunities the developer gave up under the Park Service’s

restrictions (totaling $29 million) and the estimated values of the indenture

and interchange (totaling $15 million) given up by the Park Service. The

developer waived the difference of $14 million.

 1

The private party involved in this exchange originated as the railroad company that owned

and operated Potomac Yard for railroad purposes; it became a real estate investment trust

in 1994, and its current management was put in place in 1997. This report uses the phrase

“the developer” whether referring to the company’s current management or its

predecessor.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-292 Potomac Yard Land Exchange

Aware of Potomac Yard’s significant development potential, you

expressed concern about the appraisals and whether the Park Service had

received appropriate value in the exchange. Accordingly, we examined the

appraisals to determine whether the interests exchanged were

appropriately valued—and if not, why not.

We contracted with an independent certified appraiser to conduct a desk

review of both appraisals. His review included his professional opinion on

whether the appraisals appropriately valued the land interests that were

exchanged and conformed to federal appraisal standards; he did not

reappraise the properties and did not visually inspect them. Shortly after

we began our work, we learned that lawyers representing the Park Service

and the developer had advised them not to meet with us because of a

pending lawsuit filed by a competing developer protesting the exchange.

However, the Park Service did give us a tour of the parcels and copies of

documents in the official administrative record filed in the lawsuit. The

developer initiated a meeting with us in October, after certain documents

pertaining to the lawsuit had been filed. The developer’s appraiser spoke

with our review appraiser and with us during our review. The U.S. District

Court for the District of Columbia dismissed the lawsuit for lack of

standing in February 2001. Details of our scope and methodology are

discussed in appendix I.

In our view, the appraisals incorrectly valued the land interests that were

exchanged because of flawed assumptions about one parcel and an

inadequate assessment of the other. Our assessment of the exchange

indicates that the Park Service could have received more than $15 million

rather than owing the developer $14 million, if the exchanged interests had

been appropriately valued; however, the transaction is now fully executed

and it is unlikely that the Park Service can recover any funds. For the

Alexandria parcel, the Park Service and the developer instructed the

appraiser to value the development restriction—which limited

development to primarily residential uses—by assuming a high level of

commercial development in its absence. Using this assumption, the

appraiser estimated the amount owed to the developer for the loss the

developer would have incurred as a result of the restriction was $26.6

million. However, the developer would not have incurred such a loss

because zoning ordinances already restricted development to residential

uses. Instead of determining a value owed to the Park Service for the

interchange, the Park Service and the developer instructed the appraiser

to use a cost figure they had earlier agreed to ($8.5 million) rather than

appraise it. Our review appraiser determined that the Alexandria appraisal

Results in Brief
Page 3 GAO-01-292 Potomac Yard Land Exchange

did not conform to federal appraisal standards, because it did not show

the assumed high level of commercial development to be reasonably

probable.

For the Arlington parcel, the appraiser valued the amount owed to the

Park Service for the indenture at $6.5 million by estimating some of the

costs that the developer avoided when the indenture was lifted. However,

the appraiser did not include all of the developer’s costs or additional

development opportunities; as a result, the indenture was undervalued—

although the appraisal did not provide enough information for us to

reliably estimate its value. In addition, the appraiser valued the amount

owed to the developer for the development restriction—which limited the

amount and type of development—by determining that the developer

would incur a loss of $2.4 million. However, the developer would not have

incurred a loss because zoning ordinances already limited development.

Our review appraiser determined that while the Arlington appraisal

conformed to federal appraisal standards, it did not consider all the

relevant costs in valuing the indenture.

In commenting on a draft of this report, Interior expressed its views that

the report discussed issues that are the subject of ongoing litigation and

that GAO’s policy is to avoid addressing matters pending in litigation; that

the report should have recognized the overwhelming public and local

support received by the exchange; and that the report’s reliability was

questionable because it relied exclusively on the work of a review

appraiser who in effect reappraised the property without having the

required license. While we are aware of the sensitivity of addressing issues

in litigation, we proceeded with our review consistent with our authorities

and responsibilities to support the Congress and with the flexibility that is

inherent in our policies. The lawsuit was dismissed in February 2001.

While we acknowledge that the exchange settled years of dispute, our

review focused on the appraised values of the exchanged land interests.

We believe our analyses and conclusions are sound; our review

incorporates the work of a licensed appraiser who conducted a desk

review of the appraisals—not a reappraisal of the properties.

Land exchanges—trading federal lands for lands owned by corporations,

individuals, or state or local governments that are willing to trade—are

used by federal land management agencies, such as the Park Service, as a

Background
Page 4 GAO-01-292 Potomac Yard Land Exchange

tool for acquiring nonfederal land and disposing of federal land. The

Potomac Yard exchange was conducted under the Park Service’s land

exchange authority.2

 Under this authority, the Park Service may convey

federal land (or interests therein) over which it has jurisdiction and that it

deems suitable for exchange or other disposal, and the agency may

acquire nonfederal land (or interests therein) that lies within park

boundaries or areas under park jurisdiction. Exchanged lands must be

located in the same state and be approximately equal in value; if their

values are not approximately equal, then the difference may be eliminated

with a cash payment.

Potomac Yard lies in northern Virginia near Ronald Reagan Washington

National Airport. According to the appraisals, it covers about 380 total

acres: about 290 acres in the city of Alexandria and about 90 acres in

Arlington County. Figure 1 identifies the location of Potomac Yard and the

parcels involved in the exchange.

 2

16 U.S.C. 460l-22(b).

Location and Development

of Potomac Yard
Page 5 GAO-01-292 Potomac Yard Land Exchange

Figure 1: Location of Potomac Yard and the Exchange Parcels

0 500 1000

Potomac River

Ronald Reagan 

Washington

National Airport

Arlington Parcel

Alexandria Parcel

George Wash ni gton Memor ai l Parkway

Washington, D.C.

Proposed 

interchange

395

1

Potomac Yard

Exchange parcels

N
Page 6 GAO-01-292 Potomac Yard Land Exchange

The Park Service’s involvement with Potomac Yard began with the

establishment of the Parkway in 1930. In 1938, the Department of the

Interior and the developer agreed to exchange interests in several

Potomac Yard parcels that both parties claimed to own, including the

Arlington parcel.3

 As part of this agreement, the developer retained title to

the Arlington parcel while Interior obtained a legal restriction—referred to

as an indenture—that prohibited the developer from using the parcel for

any purpose other than a rail yard.

In 1970, Interior’s Park Service and the developer agreed to exchange

interests in land adjacent to the Parkway, including the Alexandria parcel.

As part of this agreement, the Park Service gave the developer the right to

access the Alexandria parcel from the Parkway; without this access right,

the parcel’s potential development would have been limited by the access

provided by existing roads. In return, the developer gave the Park Service

a commitment to build an interchange—bridge, ramps, and connections—

on the Parkway that would provide this access.

Since then, the developer has proposed several redevelopment options for

Potomac Yard, which have at times been contentious. For example, in

1987 the developer filed a development plan for the Alexandria parcel

consisting of about 2.5 million square feet (mmsf) of commercial

development—office and retail space. When the city did not approve the

plan, the developer filed a lawsuit and in 1991 obtained a court order

directing the Alexandria City Council to approve the plan (with slight

modification).

In 1992, the city created its own plan for Potomac Yard, specifying

residential development as the Alexandria parcel’s sole use. Over the next

few years, the developer discussed options with Alexandria and others and

did not proceed with the court-ordered development. In 1997, the Park

Service and the developer informally agreed to the general framework of

the Potomac Yard exchange—that is, they agreed to the interests that

would be exchanged but not the values of those interests—and at about

the same time, the city and the developer agreed to a predominantly

residential development on the Alexandria parcel. After these agreements

were reached, the developer asked the court to vacate the 1991 order,

stating that it preferred the development allowed by the city to that

 3

In 1938, the parcel consisted of 38 acres; 9 acres were subsequently removed as a result of

road and subway construction.
Page 7 GAO-01-292 Potomac Yard Land Exchange

allowed under the order. In 1998, the Park Service and the developer

signed the preliminary exchange agreement; however, the two sides did

not reach agreement on the values of the land interests until after the

exchange appraisals were completed in 1999.

Federal appraisal standards were established in 1973 to promote

uniformity in the appraisal of real property among the various agencies

acquiring property—both by direct purchase and condemnation—on

behalf of the federal government.4

 The standards require that land (or land

interests) acquired by the federal government be appraised at fair market

value. According to the standards, fair market value is defined as the

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

by a willing and knowledgeable seller with no obligation to sell, to a

willing and knowledgeable buyer with no obligation to buy. Determining

the fair market value requires an appraiser to first identify the property’s

“highest and best use,” which is defined as the use that is physically

possible, legally permissible, financially feasible, and maximally profitable

for the owner.

When the federal government acquires a partial or restrictive land

interest—such as an indenture or building restrictions—federal appraisal

standards show preference for using a “before and after” method to value

the interest. In this method, an 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. The

resulting value becomes the interest’s estimated fair market value.

The standards explicitly allow for the application of professional judgment

in the development of a fair market value estimate. According to the

standards: “The appraiser should not hesitate to acknowledge that

appraising is not an exact science and that reasonable men may differ

somewhat in arriving at an estimate of the fair market value.” The

 4

There are two sets of standards that apply to appraisals of federal land: (1) the Uniform

Appraisal Standards for Federal Land Acquisitions, revised in 1992 by the Interagency

Land Acquisition Conference, a voluntary organization established in 1968, chaired through

the Department of Justice, and composed of representatives of federal agencies that

acquire land; and (2) the Uniform Standards of Professional Appraisal Practice,

developed in 1986 and 1987 and annually updated by the Appraisal Standards Board of The

Appraisal Foundation, a not-for-profit educational organization established in 1987 and

directed by a board of trustees.

Federal Appraisal

Standards
Page 8 GAO-01-292 Potomac Yard Land Exchange

Congressional Budget Office reiterated this assessment in a 1998 study,

calling real estate appraisals “a mix of science and art.”

5

The Park Service has policies and procedures for land exchanges that

include obtaining appraisals to value all federal and nonfederal land

involved in an exchange. The Park Service’s policies for appraisals require

an agency appraiser to review the appraisals to ensure that the reported

value estimate is reasonable and based on sound valuation concepts.

The appraisals incorrectly valued the land interests that were exchanged

because they relied upon unrealistic assumptions when valuing one parcel

and provided an inadequate assessment of the other. Our analysis of the

appraisals indicates that the developer could have owed the Park Service

more than $15 million rather than the Park Service owing the developer

$14 million, as summarized in appendix II. For the Alexandria parcel, the

appraiser was instructed to assume a high level of commercial

development in assessing the impact of the development restriction

imposed by the Park Service; as a result, the appraiser determined that the

developer would incur a loss of $26.6 million. In addition, the appraiser

was instructed to use a cost of $8.5 million for the interchange—a figure

agreed to by the Park Service and the developer—rather than appraise it.

Because this appraisal assumed a level of development that was not

shown to be reasonably probable, our review appraiser determined that it

did not conform to federal appraisal standards. For the Arlington parcel,

the appraiser did not consider all of the additional costs the developer

would have faced, had the indenture stayed in place, or the additional

development opportunities that would have resulted from the indenture’s

removal. As a result, he undervalued the indenture at $6.5 million;

however, the appraisal did not provide enough information for us to

reliably estimate the indenture’s value. Furthermore, the appraiser

determined that the restrictions would have caused a $2.4 million loss to

the developer, even though zoning ordinances already restricted

development. Despite these problems, our review appraiser determined

that the Arlington appraisal conformed to federal appraisal standards.

 5

Regulatory Takings and Proposals for Change, (Washington, D.C.: Congressional Budget

Office, Dec. 1998).

Appraisals Did Not

Appropriately Value

the Land Interests

Exchanged
Page 9 GAO-01-292 Potomac Yard Land Exchange

The Park Service and the developer jointly instructed the appraiser to

reach an appraised value of the Park Service’s development restriction6

—

which limited development to residences and neighborhood retail uses—

by (1) estimating the value of the parcel without the restriction and

assuming a high level of development (the “before” value), (2) estimating

the value of the parcel with the restriction and assuming a lower level of

development (the “after” value), and (3) calculating the difference. The

instructions also provided the appraiser specific levels of development to

use in this calculation: the directed high level of development was 1.5

mmsf of office space, 25,000 square feet of retail space, and 232

townhomes; the directed low level of development was no office space,

10,000 square feet of retail space, and 200 townhomes.7

According to federal appraisal standards, an appraiser must develop an

opinion of the best use for the property being appraised in each scenario.

Furthermore, in determining fair market value, appraisers must show that

the “before and after” scenarios are legally permissible and reasonably

probable. In other words, there must be good reason to assume that the

development could be built under current restrictions (such as zoning) or

a high probability that the restrictions would be changed. For the

Alexandria parcel, the instructions directed the appraiser to assume a high

level of development in the “before” scenario, stating: “Development

scenarios presented must be assumed by the appraiser to be physically

feasible and legally permitted.” However, as the developer stated in a letter

to the Park Service prior to issuance of the instructions, this high level of

development “is not . . . in compliance with existing zoning regulations,

and is not currently ‘legally permissible.’” The developer further noted that

during the course of negotiations with the Park Service, the developer

“made certain” of this by asking the court in 1997 to vacate the order

directing the city to approve about 2.5 mmsf of development.

 6

Although the appraisal instructions suggest that the land interest that was valued was the

right to access the Parkway, the final exchange agreement identifies the land interest that

was acquired as a restriction limiting development to residences and neighborhood retail

uses. These phrases both describe the same interest—that is, commercial development

could not have occurred without Parkway access, and the lack of such access effectively

restricted development to primarily residential uses. This report uses the phrase

“development restriction” to describe the land interest obtained by the Park Service on the

Alexandria parcel.

7

The appraiser used all of these figures but determined that only 190 townhomes (rather

than 200) were feasible for the low level of development.

Alexandria Appraisal

Contained Flawed

Assumptions About the

Park Service’s Restrictions
Page 10 GAO-01-292 Potomac Yard Land Exchange

Nevertheless, both the Park Service and the developer believed that the

assumed high level of commercial development was appropriate. The Park

Service, in a March 2000 letter responding to questions from the Chairman

of the House Committee on Resources, wrote that the developer’s right to

access the parcel from the Parkway provided a sound basis for the

assumption that the parcel could physically support intensive

development. In addition, the Park Service noted that the assumed high

level of development (about 1.5 mmsf) represented a significant reduction

from the court-ordered level (about 2.5 mmsf) and must be considered as a

viable alternative, even though the court order was no longer in effect. The

Park Service further noted that the potential availability of commuter rail

facilities to serve the parcel supported the conclusion that a high-density

development was the highest and best use. Similarly, the developer told us

that the assumed high level of development was reasonable because it was

less development than had been specified under the court order. The

developer indicated that both parties to the exchange stipulated the

assumed high development level as one of the primary principles of the

exchange framework.

Following the instructions to use the assumed development levels, the

appraiser did not evaluate whether the current zoning restrictions, which

allow only residential development, might be altered to allow the “before”

scenario’s high level of commercial development. The appraiser

determined that the value of the Park Service’s restriction on the parcel’s

development resulted in a loss of $26.6 million to the developer, which is

the difference in the value of the “before” development ($31.7 million) and

the “after” development ($5.1 million). However, our review appraiser

found that the appraisal did not show that the “before” development had a

reasonable probability of being built and concluded that the market would

not pay a premium for the possible increment if the probability of rezoning

were low. If the restriction did not diminish the development that would

have reasonably occurred on the parcel, it would have no market value

and the Park Service should not have given the developer any credit for it.

The Park Service also obtained a no-development restriction on a 15-acre

portion of the parcel adjacent to the Parkway. The appraiser determined—

and our review appraiser agreed—that the restriction had no market value

because a prior restriction under Virginia state law already precluded
Page 11 GAO-01-292 Potomac Yard Land Exchange

construction on the 15 acres.8 Therefore, the building restriction had no

material impact on the developer.

The Park Service’s chief appraiser determined that the appraiser’s

methodology was reasonable, concluded that the Alexandria appraisal met

the federal appraisal standards, and approved it for Park Service’s use.

However, our review appraiser determined that the appraisal did not

conform to all federal appraisal standards because it did not analyze the

reasonableness of the “before” level of development. Furthermore, the

appraisal did not clarify that a value based on an unrealistic level of

development might differ from the fair market value of the property. Our

review appraiser concluded that the instructions provided by the Park

Service and the developer for the “before” development scenario

ultimately led to the appraisal’s not conforming to federal appraisal

standards because of issues related to the reasonableness of the highest

and best use development level prescribed by the instructions.

As part of the exchange, the developer bought out its 1970 commitment to

the Park Service to construct an interchange on the Parkway, for $8.5

million. This figure is an estimate of the cost of constructing the

interchange—it is not an estimate of market value that was prepared by

the appraiser. The Federal Highway Administration was asked by the Park

Service to prepare an initial estimate of the construction costs and

determined them to be $12 million; an engineering firm hired by the

developer revised this estimate, using different assumptions, to $8.5

million. The Park Service and the developer agreed to use this figure in the

exchange before they sought the appraisals and then instructed the

appraiser to use this figure to calculate the total amount owed to the Park

Service in the exchange, by adding it to the appraised value of the

Arlington parcel’s indenture. Our analysis also includes this figure as an

amount owed to the Park Service.

The appraiser faced two valuation determinations for the Arlington parcel.

He needed to determine (1) the value of a restriction (indenture) owned by

the Park Service that precluded office/retail/residential development on

the parcel and (2) the value of other development restrictions imposed by

 8

The 15 acres were included in a resource protection area because they were part of a

wetland and a flood plain.

Arlington Appraisal Did

Not Correctly Value the

Indenture
Page 12 GAO-01-292 Potomac Yard Land Exchange

the Park Service once the indenture was lifted. The appraiser applied the

“before and after” methodology when making these valuation calculations.

Unlike the Alexandria parcel, the appraisal instructions for the Arlington

parcel did not provide the appraiser levels of development to use in his

analysis of the indenture’s fair market value and the restrictions. Instead,

the appraiser relied on his professional judgment to estimate the levels of

development likely to occur with or without the indenture, and with or

without the other development restrictions.

In estimating the Arlington parcel’s “before” value—with the indenture

lifted—the appraiser determined that the developer could reasonably

obtain new zoning that would allow the construction of about 1.9 mmsf of

office space on the parcel. In estimating the “after” value—with the

indenture in place—the appraiser noted that Arlington County allows

developers to shift development density from one parcel to another. The

appraiser determined that, had the indenture remained in place, the

developer would have pursued this option and the county would have

allowed the shift of 1.9 mmsf from the Arlington parcel to a smaller

adjacent parcel (which was vacant and zoned for about 1.1 mmsf of office

space). This shift would have resulted in the development of 3.0 mmsf on

the adjacent parcel, and the appraiser determined that this parcel would

likely have been rezoned to accommodate the additional development.

Therefore, the appraiser found that the developer could have constructed

the 1.9 mmsf of development associated with the Arlington parcel with or

without the indenture in place.

The appraiser calculated the indenture’s value as the difference in the

estimated cost of (1) building the 1.9 mmsf of office space on the Arlington

parcel and (2) shifting this same square footage and combining it with 1.1

mmsf of office space on the adjacent parcel. The appraiser estimated that

the developer would have had to spend $6.5 million more to construct the

1.9 mmsf on the adjacent parcel than on the Arlington parcel, to provide

another level of underground parking to accommodate the additional

development on the smaller parcel.9

 9

The appraiser reported that the county’s zoning ordinance required 5,171 parking spaces

for 3.0 mmsf of development, which would in turn require about 1.8 mmsf of parking area.

Because the developer did not plan to provide surface parking, the appraiser determined

that the cost of building an underground parking garage was the critical element in valuing

the indenture.
Page 13 GAO-01-292 Potomac Yard Land Exchange

While our review appraiser agreed that the appraisal’s methodology was

reasonable, he disagreed with the appraiser’s conclusion that the

indenture’s value should be this single estimated cost. The developer

would have likely incurred additional costs had it shifted the 1.9 mmsf to

the adjacent parcel. We found three main reasons why the appraisal

understated the value of the indenture:

• According to the appraisal instructions, the adjacent parcel contained 17

acres; the appraiser assumed that all 17 acres were available for

development. Our review appraiser examined the developer’s site maps

and determined that only 10 acres of the adjacent parcel were available for

development, because 4 acres fell under railroad rights-of-way and another

3 acres were not contiguous. Shifting 1.9 mmsf of density to the remaining

10-acre site would have likely cost the developer more than the appraiser’s

$6.5 million estimate. For example, the appraiser determined that the

developer would have to build three levels of underground parking,

assuming that 98 percent of the 17-acre parcel were excavated; however,

information in the appraisal indicates that five levels of underground

parking would be needed if 98 percent of the 10-acre site were excavated.

The appraiser told us that each additional level of underground parking

increases the construction costs substantially over previous levels because

of the additional expenses associated with building and strengthening the

garage walls. Our review appraiser noted that—while the appraisal’s cost

concepts as applied to parking may exceed the detail the market would

know or care about—the more severe the excavation needs to be, the

more the market would consider it.

• The appraiser noted that the value of the 3.0 mmsf would likely decrease if

the developer were unable to build on the full 46 acres, because higherdensity projects generally take longer to sell and obtain lower prices per

square foot. He also noted that any deficit could be offset by the lower

costs of concentrating the infrastructure needed for the 3.0 mmsf on the

smaller site. However, because the area actually available to accept the

additional 1.9 mmsf is about 40 percent smaller than he assumed—10

acres rather than 17—the resulting development would have been

significantly more dense than he determined. Our review appraiser noted

that putting all of this density on the smaller site raises questions of

feasibility. At a minimum, we believe that the potential lower revenues

from such a dense development could eclipse any potential cost savings

that the developer might realize.

• The appraiser did not include the impact on the indenture’s value of the

developer’s shifting an additional 1.1 mmsf of development density to the
Page 14 GAO-01-292 Potomac Yard Land Exchange

Arlington parcel and the adjacent parcel. A 1993 agreement between the

developer and Arlington County allows this shift if the Park Service

indenture is lifted.10 The appraiser reviewed the agreement and found it to

be weak; interviewed the county’s planning director, who suggested that

the county was unlikely to approve this shift (which would result in a

mixed-use development of more than 4.0 mmsf) owing to traffic-related

issues; and reported finding no reliable evidence to conclude that this shift

would take place. In our view, the possibility of this density shift is at least

as strong as the possibility of shifting density from the Arlington parcel to

the adjacent acreage, because an existing legal agreement with the county

allows it. If the indenture remained in place, the developer would lose the

option of shifting the 1.1 mmsf. Because the developer cannot shift this

density without the removal of the indenture, the appraiser should have

assigned some additional value to the indenture.

Considering these factors, we agree with our review appraiser’s

conclusion that the indenture should have been assigned a higher value

than $6.5 million. However, the appraisal does not provide enough

information for us to reliably estimate the indenture’s value.

As a condition of having the indenture lifted, the developer agreed to

restrict its construction on six areas within or adjacent to the parcel by

one or more of the following factors: (1) building height; (2) proximity to

the Parkway; and (3) type of building (for example, office, retail, or

residential). In valuing these restrictions—land interests the Park Service

would acquire in the exchange—the appraiser determined that restrictions

in four areas would limit the amount and type of development that could

be built, and that restrictions in the other two areas would not affect the

developer since zoning already limited building heights. The appraiser

estimated the potential economic impact of the restrictions—that is,

reductions in market values—in each of these four areas, tallied these

reductions, and concluded that the restrictions would have caused a $2.4

million loss for the developer.

Our analysis shows that the appraisal overvalued the restrictions. The

appraiser valued the areas as if they were six separate parcels, rather than

analyzing the financial impact of the restrictions on the entire parcel’s

 10Under this agreement, the county receives title to a 25-acre parcel owned by the

developer, located north of the Arlington parcel, for community recreation and open space;

in return, the developer receives about 1.1 mmsf of development density to shift to the

Arlington parcel and the adjacent acres.
Page 15 GAO-01-292 Potomac Yard Land Exchange

value, as required by federal appraisal standards. Our review appraiser

further determined that the building restrictions on the Arlington parcel, in

aggregate, had no detrimental impact on the parcel’s value because zoning

and other building restrictions limiting development predated the Park

Service-imposed restrictions. Our review appraiser noted that the

restrictions had the potential to affect a project’s design or placement but

concluded that they would probably have no impact, in aggregate, on the

development. Thus, the building restrictions would not have resulted in a

loss for the developer because they did not diminish the development

opportunities available on the parcel and adjoining acres. Therefore, the

restrictions should have been assigned no value.

The Park Service’s chief appraiser determined that the appraiser applied a

reasonable methodology, concluded that the Arlington appraisal met the

federal appraisal standards, and approved it for Park Service’s use.

Although the appraisal understated the value of the indenture and

overstated the value of the Park Service’s restrictions, our review

appraiser agreed that the appraisal conformed to federal standards.

Although the Potomac Yard exchange helped to resolve years of dispute

when it was completed in March 2000, the Park Service could have

received more than $15 million from the developer—rather than owing the

developer $14 million—if the exchanged interests had been appropriately

valued. As a federal agency, the Park Service has a responsibility to

protect federal taxpayers’ interests when it acquires or conveys land

interests. However, the Park Service did not do so when it instructed the

appraiser to derive a value for development on the Alexandria parcel that

was not shown to be reasonably probable, or when it used an appraised

value on the Arlington parcel that understated the worth of the Park

Service’s interests. Consequently, the Park Service gave the developer

credit for losses that might not have realistically occurred and did not

receive enough credit for allowing the developer to develop the Arlington

parcel. However, the transaction is now fully executed and—as in similar

situations when a government agency pays too much for an item under a

contract—it is unlikely that the Park Service can recover any funds.

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

its review and comment and, in light of the then-pending lawsuit, also

provided a copy to the Department of Justice. Interior expressed three

main concerns in its response; Justice did not provide comments.

Conclusions

Agency Comments

and Our Evaluation
Page 16 GAO-01-292 Potomac Yard Land Exchange

First, Interior commented that the report discussed issues that were the

subject of ongoing litigation and that GAO’s policy is to avoid addressing

matters pending in litigation. Our report disclosed that a competing

developer filed a lawsuit protesting the exchange and, for this reason,

lawyers representing the Park Service and the developer advised

representatives from the agency and the developer not to meet with us

during our review. While GAO is aware of the sensitivity of addressing

issues in litigation, we decide whether to continue our involvement on a

case-by-case basis. In this case, the Chairman of a congressional

committee with jurisdiction expressed serious concerns about whether

the exchanged land interests had been appropriately valued, and we

proceeded with our review consistent with our authorities and

responsibilities to support the Congress and the flexibility inherent in our

policies. The court dismissed the lawsuit for lack of standing in February

2001.

Second, Interior disagreed that the taxpayers’ interest was not well

protected in the exchange and asserted the exchange received

overwhelming public and local support. We acknowledge that the

exchange helped to resolve long-standing and contentious community

development issues in Alexandria and Arlington, and that for this reason

the local governments and other parties supported the exchange.

However, our review focused on the appraised values of the exchanged

land interests. Our review found that the appraisals incorrectly valued the

exchanged interests, and we concluded that the Park Service could have

received more than $15 million in the exchange rather than owing the

developer $14 million. Had these funds been received, federal taxpayers

could have benefited more from the exchange than they did. We clarified

the report title to reflect our emphasis on federal rather than local

interests.

Third, Interior questioned the reliability of the report because, in Interior’s

view, it relies exclusively on the work of a review appraiser who in effect

conducted a reappraisal of the Alexandria parcel’s development restriction

even though he is not licensed in Virginia and did not inspect the property.

Interior stated that it firmly believes the Alexandria appraisal is sound

under applicable law and appraisal standards. We disagree with Interior’s

assertions. Our report is reliable and based on information that we verified

with the Park Service, the developer, the developer’s lawyers, and the

appraiser. Specific points follow:

• Our report incorporates the results of a desk review of the appraisals, but

it does not rely exclusively on these results. Our staff independently read
Page 17 GAO-01-292 Potomac Yard Land Exchange

and analyzed the appraisals, federal appraisal standards, and other

relevant documents, to develop this report; this review is the most recent

of several of our examinations of appraisals used in federal land

transactions.11 We clarified the report to better distinguish our review

appraiser’s work and our analysis.

• The appraiser we contracted with to conduct a desk review has over 40

years’ experience as a professional appraiser; he is affiliated with the

Appraisal Institute and other professional real estate associations; and he

is licensed as a certified general appraiser in the state of Colorado.

Although under Virginia law, persons who appraise properties within

Virginia must be licensed by the state, this law does not apply to those

who provide consulting services that are not appraisals.12 The appraiser we

contracted with conducted a desk review and did not reappraise either

parcel.

• Appraisers conducting a desk review are not expected to visit the property

that was appraised. In our review appraiser’s desk review of the Potomac

Yard appraisals, he checked the arithmetic, considered the

appropriateness of the methods and techniques used, and evaluated the

reasonableness of the conclusions reached. Regarding the Alexandria

parcel’s development restriction, our review appraiser found that the

appraised value was not based on a credible analysis because there was no

determination that a reasonable probability existed that the parcel would

be rezoned to accommodate the high level of commercial development

that was assumed in the “before” scenario. For this reason, our review

appraiser concluded that the Alexandria appraisal did not conform to all

federal appraisal standards and likely overstated the fair market value of

the development restriction.

 11BLM and the Forest Service: Land Exchanges Need to Reflect Appropriate Value and

Serve the Public Interest (GAO/RCED-00-73, June 22, 2000); Federal Land Management:

Land Acquisition Issues Related to the Baca Ranch Appraisal (GAO/RCED-00-76, Mar. 2,

2000); Federal Land Management: Appraisals of Headwaters Forest Properties

(GAO/RCED-99-52; Dec. 24, 1998); and Federal Land Management: Appraisal of Crown

Butte Mines’ New World Property (GAO/RCED-98-209, May 29, 1998).

12Va. Code Ann. 54.1-2009 through 2011 (2000).
Page 18 GAO-01-292 Potomac Yard Land Exchange

The full text of Interior’s letter is in appendix III.

We conducted our review from April 2000 through February 2001 in

accordance with generally accepted government auditing standards.

Details of our scope and methodology are discussed in appendix I.

As requested, unless you publicly announce its contents earlier, we plan

no further distribution of this report until 30 days from the date of this

letter. At that time we will send copies to the Honorable Gale A. Norton,

Secretary of the Interior, and the Honorable Denis Galvin, Acting Director

of the National Park Service. We will also send copies to other appropriate

congressional members and make copies available to others upon request.

If you or your staff have any questions about this report, please call me at

202-512-3841. Key contributors to this report are listed in appendix IV.

Sincerely yours,

Barry T. Hill

Director, Natural Resources

 and Environment
Appendix I: Scope and Methodology

Page 19 GAO-01-292 Potomac Yard Land Exchange

To examine whether the appraisals the National Park Service used for the

Potomac Yard land exchange appropriately valued the interests that were

exchanged, we reviewed (1) documents associated with the exchange, (2)

the Alexandria and Arlington appraisals, (3) the Park Service’s review of

those appraisals, and (4) federal appraisal standards. Because of a pending

lawsuit filed by another developer protesting this exchange, the U.S.

Attorney’s Office advised the Park Service in June 2000 that its personnel

should not agree to interviews with us. A Park Service representative did

give us a tour of the Alexandria and Arlington parcels and responded to

our questions about the sites; however, we were unable to interview

representatives from the Park Service during most of our review. Similarly,

representatives of the developer told us in June 2000 that they had also

been advised not to agree to interviews with us. However, after certain

documents had been filed in the lawsuit, the developer initiated a meeting

with us in October 2000. The appraiser hired by the developer agreed to

talk with us, and we met with him to better understand the appraisals and

his analyses. After we completed our fieldwork, we met with Park Service

officials, the developer, the developer’s lawyers, and the appraiser to

verify the factual accuracy of the data we obtained; we then provided the

Park Service and the Justice Department a draft of this report for review.

The court dismissed the lawsuit for lack of standing in February 2001.

Additionally, we contracted with Mr. Peter D. Bowes—an independent and

certified appraiser in Denver, Colorado, who has over 40 years of

experience in appraising properties such as vacant urban land and has

worked with various government entities—to conduct a desk review of the

appraisals. His review included his professional opinion on whether the

appraisals appropriately valued the land interests that were exchanged

and complied with federal appraisal standards. A desk review is not a

reappraisal, and he did not visually inspect either the Alexandria or the

Arlington parcel. In addition, he did not confirm details contained in the

appraisal reports, add new data, or talk with the Park Service or the

developer.

We performed our work from April 2000 through February 2001 in

accordance with generally accepted government auditing standards.

Appendix I: Scope and Methodology
Appendix II: Summary of Exchange Figures

and GAO’s Adjusted Figures

Page 20 GAO-01-292 Potomac Yard Land Exchange

In the Potomac Yard land exchange, the appraiser reported that the Park

Service owed the developer $14 million (which the developer waived). As

shown in table 1, this figure represented the difference between (1) the

appraised values of the development opportunities given up by the

developer (totaling $29 million) and (2) the estimated cost of the

interchange (a figure that was not appraised) and the appraised value of

the indenture given up by the Park Service (totaling $15 million).

Table 1: Estimated Figures (Dollars in millions)

Land interest

Owed to the

developer

Owed to the Park

Service

Net owed to the

developer

Alexandria parcel

Development restriction $26.6

Interchange $8.5

Arlington parcel

Indenture 6.5

Building restrictions 2.4

Total $29.0 $15.0 $14.0

In our view, the appraisals overestimated the value of the development

opportunities given up by the developer—by as much as the full appraised

values—and underestimated the value of the indenture—by an amount we

could not determine. As shown in table 2, the developer could have owed

the Park Service more than $15 million, including the $8.5 million

interchange figure.

Table 2: GAO’s Adjusted Figures (Dollars in millions)

Land interest

Owed to the

developer

Owed to the Park

Service

Net owed to the

Park Service

Alexandria parcel

Development restriction $0a

Interchange $8.5

Arlington parcel

Indenture >6.5b

Building restrictions 0

Total $0 >$15.0 >$15.0

a

The appraisal did not show that rezoning was reasonably probable, in which case the restriction

would not diminish the development that was likely to occur and would have no market value.

b

The indenture should have been assigned a higher value than $6.5 million, but the appraisal does

not provide enough information for us to reliably estimate the indenture’s value.

Appendix II: Summary of Exchange Figures

and GAO’s Adjusted Figures
Appendix III: Comments From the

Department of the Interior

Page 21 GAO-01-292 Potomac Yard Land Exchange

Appendix III: Comments From the

Department of the Interior

The developer apparently

obtained a copy of the draft

report from the Department

of the Interior. We provided

the draft report to Interior

and requested its comments

because Interior is the

agency affected by our

review. For this reason, we

did not include the

developer’s letter or

respond to it in our report.
Appendix III: Comments From the

Department of the Interior

Page 22 GAO-01-292 Potomac Yard Land Exchange
Page 23 GA0-01-292 Potomac Yard Exchange

Sue Ellen Naiberk, (303) 572-7357

In addition, Jay Cherlow, Doreen Feldman, Susan Irwin, Diane Lund,

Jonathan S. McMurray, Cheryl Pilatzke, Susan Poling, Carol Herrnstadt

Shulman, and Dan Williams made key contributions to this report.

Appendix IV: GAO Contacts and Staff

Acknowledgments

GAO Contacts

Staff

Acknowledgments

(141448)

The first copy of each GAO report is free. Additional copies of reports are

$2 each. A check or money order should be made out to the

Superintendent of Documents. VISA and MasterCard credit cards are also

accepted.

Orders for 100 or more copies to be mailed to a single address are

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

Orders by visiting:

Room 1100

700 4th St., NW (corner of 4th and G Sts. NW)

Washington, DC 20013

Orders by phone:

(202) 512-6000

fax: (202) 512-6061

TDD (202) 512-2537

Each day, GAO issues a list of newly available reports and testimony. To

receive facsimile copies of the daily list or any list from the past 30 days,

please call (202) 512-6000 using a touchtone phone. A recorded menu will

provide information on how to obtain these lists.

Orders by Internet

For information on how to access GAO reports on the Internet, send an email message with “info” in the body to:

Info@www.gao.gov

or visit GAO’s World Wide Web home page at:

http://www.gao.gov

Contact one:

• Web site: http://www.gao.gov/fraudnet/fraudnet.htm

• E-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)

Ordering Information

To Report Fraud,

Waste, and Abuse in

Federal Programs