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 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. 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 —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 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. 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. 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. 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. 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 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.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. 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).