forest service humboldt-toiyabe national … · fiscal years 1990 to 1997 sparks, nevada ... the...

FOREST SERVICEHUMBOLDT-TOIYABE NATIONAL FOREST

LAND ADJUSTMENT PROGRAMFISCAL YEARS 1990 TO 1997

SPARKS, NEVADAAUDIT REPORT NO. 08003-02-SF

AUGUST 1998

NOTICE - THIS REPORT RESTRICTED TO OFFICIAL USE

This report is provided to program officials solely for theirofficial use. Further distribution or release of this informationis not authorized.

UNITED STATES DEPARTMENT OF AGRICULTUREOFFICE OF INSPECTOR GENERAL - AUDIT

WESTERN REGION600 HARRISON STREET, SUITE 225

SAN FRANCISCO, CA 94107

UNITED STATES DEPARTMENT OF AGRICULTURE

OFFICE OF INSPECTOR GENERAL

Washington D.C. 20250

DATE: September 11, 1998

REPLY TOATTN OF: 08003-02-SF

SUBJECT: Humboldt-Toiyabe National Forest Land Adjustment Program

TO: Mike DombeckChiefForest Service

This report presents the results of our audit of the land adjustment program on the Humboldt-Toiyabe National Forest. The audit stresses the need for greater accountability in all phases ofthe lands program area. We appreciate the high level of support from both the Departmentand Forest Service management in quickly initiating corrective actions to address theconditions noted in this report.

We previously released this report on August 5, 1998, in redacted form because of a pendinglaw enforcement proceeding. Release of this audit report will no longer interfere with thepending law enforcement proceeding. Therefore, we are providing you copies of the report inits entirety, including the previously withheld information.

Your written response to the draft report is included in its entirety as exhibit D. Based onyour response, we have reached management decision for 33 of the 37 auditrecommendations. Management decision has not been reached on Recommendations Nos. 1a,8f, 9b, and 9c. In order to reach management decision on these recommendations, pleaseprovide the information identified in the Office of Inspector General position section of thereport.

In accordance with Departmental Regulations 1720-1, please furnish a reply byOctober 5, 1998, describing the corrective action taken or planned, and the timeframes forimplementation for those recommendations for which a management decision has not beenreached. Please note that the regulation requires a management decision to be reached on allfindings and recommendations within a maximum of 6 months from the date of reportissuance.

Mike Dombeck 2

The Office of the Chief Financial Officer (OCFO), U.S. Department of Agriculture, has theresponsibility for monitoring and tracking final action for the findings and recommendations.Please note that final action on the findings and recommendations should be completed within1 year to preclude listing in the Semiannual Report to Congress. Please follow your agency’sinternal procedures for forwarding final action correspondence to the OCFO.

ROGER C. VIADEROInspector General

Enclosure

EXECUTIVE SUMMARY

FOREST SERVICEHUMBOLDT-TOIYABE NATIONAL FOREST

LAND ADJUSTMENT PROGRAMFISCAL YEARS 1990 TO 1997

SPARKS, NEVADAAUDIT REPORT NO. 08003-02-SF

This report presents the results of

PURPOSEour audit of the land adjustmentprogram of the Humboldt-ToiyabeNational Forest located in theState of Nevada. The audit was

performed as a result of a whistleblower complaint allegingimpropriety by Forest Service (FS) employees in a landexchange transaction with a third party who assisted theexchange. We coordinated our audit with the Department ofthe Interior, which was concurrently performing an audit ofland exchange activities involving the Bureau of LandManagement (BLM) in the State of Nevada.

Under the land adjustment program, the FS acquires land forthe National Forest System by exchanging public land forprivate land it regards as more desirable. A basicrequirement for any exchange is that the values of the FSand private lands be equal, as determined by an FS-approvedappraisal. Although the FS normally deals with privatelandowners to effect an exchange, some exchanges arenegotiated through third parties who act as facilitators.

We identified a serious breakdown

RESULTS IN BRIEFof controls in all phases of theHumboldt-Toiyabe National Forestland adjustment program.Management allowed private parties

(landowners and third-party facilitators) to exert undueinfluence over the direction and outcome of almost alllarge-value land exchanges in the forest. We questionedaccomplished and proposed land exchange transactions for7,029 acres of Federal and non-Federal lands, valued at$27.9 million, that were conducted without properauthorization or without adequate protection of theGovernment’s interest.

Controls were notably absent in the FS bargaining anddealings with private parties, and in the forest’s planningof land acquisitions.

• The FS bargaining team disregarded the Forest ServiceWashington Office’s (FSWO) guidelines and Office of theGeneral Counsel’s advice during their bargaining processwith private parties. The FS bargaining team allowed theprivate parties to control the bargaining process. Theteam excluded the participation of Federal appraisers and

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accepted uncorroborated valuations by an appraiserrecommended by the private party. The valuationsresulted in a loss of $5.9 million to the Government.None of the bargaining team members could adequatelyexplain why they had disregarded the guidelines andadvice.

• The forest entered into an improper agreement that gave aprivate party exclusive marketing rights to 850 acres offorest lands near Reno, Nevada, valued at $6.5 million,but did not require the private party to identify anyprivate lands that would be offered in exchange.

• Rather than institute a plan to prioritize land exchangeproposals from private parties, the FS allowed theprivate parties to control the selection of lands theforest would take. Our audit questioned three proposedexchanges that were initiated by private parties and weretaken under consideration by the FS even though the land,1,065 acres valued at $10.5 million, was of little or nodiscernable use to the FS.

Controls were also absent in the appraisal process. FSlands staff let private parties override the safeguardsagainst excessive valuations.

• The FS acquired private lands whose appraised values werenot based on credible evidence. We questioned the FS’acceptance of three land appraisals that were based onspeculative assumptions that overvalued non-Federal landby $8.8 million.

• FS regional and forest lands staff compromised theindependence of FS appraisers by allowing private partiesto repeatedly challenge their valuations and bycriticizing the appraisers’ work.

Our audit also questioned the integrity of FS lands staff indealing with private parties. We identified the improperconduct of one FS management employee who received gifts,gratuities, and entertainment from private parties doingbusiness with the FS. We also noted that the region did nottrack the outside interests of key FS lands personnelinvolved in approving multimillion-dollar exchanges.

Controls over the coordination of land transactions with BLMwere generally weak. Our review of one land exchangedisclosed that the forest acquired $2.1 million in waterrights that it may lose because it either has no plans touse the water or cannot use it in accordance with State law.In this exchange, BLM accepted title to $19.8 million worthof land on behalf of the forest but did not notify theforest of its actions. The land was not properly cleared ofencumbrances, and the forest was not provided with ownershipdocumentation until 3 years later.

During the audit, we notified the FS of deficiencies we feltneeded immediate corrective action. These deficienciespertained to the improper agreement with a private party,the questioned appraisal used in a bargaining agreement, theimproper conduct of an FS management employee, and thepotential loss of water rights. In response, regionalmanagement has taken the corrective actions we recommended.

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In May 1997, the FSWO assembled an internal review team toreview the forest lands program. Our audit resultsconfirmed most of the weaknesses cited in that internalreview and identified additional areas that neededcorrective action.

We recommend that the FSWO

KEY RECOMMENDATIONS(1) provide additional directionfor the bargaining process and fordealing with third-partyfacilitators; (2) ensure that

exchanges proposed by private parties include data that iscredible; (3) protect the independence of FS appraisers;(4) consider conducting competitive land exchanges tomaximize the value obtained for Federal lands; (5) develop asystem to track the status of acquired water rights; (6)improve the planning process to ensure that land exchangesare in the best interest of the Government; (7) improvecoordination with BLM; and (8) ensure that financialdisclosure statements are submitted by the required FSpersonnel.

In its written response, the FS

AGENCY POSITIONstates that it believes that theaudit was beneficial and concurswith the vast majority of therecommendations. The response

further states that the audit highlights the need forincreased accountability in the Lands Program area to ensurethat the landownership adjustment activities are focused tosupport and enhance forest plan resource managementobjectives while meeting the obligation to ensure that theAmerican public gets full value for the Federal assetsinvolved in these transactions. The complete text of the FSresponse is shown in exhibit D.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . i

ACRONYMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

GLOSSARY OF TERMS. . . . . . . . . . . . . . . . . . . . . . . . viii

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

OBJECTIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

METHODOLOGY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

FINDINGS AND RECOMMENDATIONS. . . . . . . . . . . . . . . . . . . 6

I. CONTROLS NEEDED FOR BARGAINING AND DEALING WITH PROPONENTSAND THIRD-PARTY FACILITATORS ON LAND TRANSACTIONS. . . . . . . . . 6

Finding No . 1 - Improper Bargaining With Proponent andThird-Party Facilitator Resulted in a Loss of $5.9 Million . . . . 6

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . 14

Finding No . 2 - Guidelines Needed in Dealings With Third-PartyFacilitators . . . . . . . . . . . . . . . . . . . . . . . . . . 16


II. CONTROLS OVER THE APPRAISAL PROCESS WERE NOT ADEQUATE TO ENSURETHAT THE GOVERNMENT OBTAINED FAIR VALUE IN LAND EXCHANGES. . . . 19

Finding No . 3 - Valuations of Non-Federal Land Were Not Basedon Credible Evidence . . . . . . . . . . . . . . . . . . . . . . 19


Finding No . 4 - Integrity and Independence of Federal AppraisersCompromised in Land Transactions . . . . . . . . . . . . . . . . 28

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . 33III. PROCESSING OF LAND TRANSACTIONS DID NOT COMPLY WITH REGULATIONS

AND COULD RESULT IN POTENTIAL LOSSES. . . . . . . . . . . . . . 35

Finding No . 5 - Improper Land Agreement With Third-PartyFacilitator Could Result in Potential Loss . . . . . . . . . . . 35

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TABLE OF CONTENTS


Finding No . 6 - Land Donation Did Not Comply With FSRegulation s . . . . . . . . . . . . . . . . . . . . . . . . . . . 40


Finding No . 7 - Water Rights Acquired in a Land Exchange WereNot Protected From Potential Loss . . . . . . . . . . . . . . . . 45


IV. INADEQUATE LAND ACQUISITION PLANNING AND PRIORITIZATION HAVE LEDTO QUESTIONABLE LAND TRANSACTION PROPOSALS. . . . . . . . . . . 50

Finding No . 8 . . . . . . . . . . . . . . . . . . . . . . . . . . 50


V. LACK OF COORDINATION WITH BLM HAS RESULTED IN QUESTIONABLE LANDEXCHANGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Finding No . 9 . . . . . . . . . . . . . . . . . . . . . . . . . . 57


VI. IMPROVEMENTS NEEDED IN ENSURING THE INTEGRITY OF LANDS STAFF ANDASSESSING THE IMPACT OF STAFF REDUCTIONS ON CURRENT WORKLOAD. 62

Finding No. 10 - Improper Conduct by FS Management EmployeeWith Proponents and Third-Party Facilitators . . . . . . . . . . 62

Finding No. 11 - Lands Staff Did Not Comply With ReportingRequirements for Financial Disclosure and Outside Interests . . . 63

Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . 64

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TABLE OF CONTENTS

Finding No. 12 - Management Needs to Assess the RegionalLand Staff’s Workload and Competence . . . . . . . . . . . . . . 65

Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . 66

EXHIBITS

A - SUMMARY OF MONETARY RESULTS. . . . . . . . . . . . . . . . 67

B - LOCATIONS VISITED OR CONTACTED. . . . . . . . . . . . . . . 68

C - LAND TRANSACTIONS REVIEWED. . . . . . . . . . . . . . . . . 69

D - FS RESPONSE . . . . . . . . . . . . . . . . . . . . . . . . 72

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ACRONYMS

BLM Bureau of Land Management

FLEFA Federal Land Exchange Facilitation Act

FS Forest Service

FSH Forest Service Handbook

FSM Forest Service Manual

FSWO Forest Service Washington Office

OGC Office of the General Counsel

OIG Office of Inspector General

SMNRA Spring Mountain National Recreation Area

UASFLA Uniform Appraisal Standards for Federal Land Acquisition

WO Washington Office

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GLOSSARY OF TERMS

APPRAISAL STANDARDS- Also known as uniform appraisal standards forFederal land acquisitions. These standardspromote uniformity in the appraisal of realproperty among the agencies acquiring propertyon behalf of the United States.

COMPETITIVE LAND EXCHANGE- The Prospectus method of land exchange inwhich a Federal agency solicits bids for theFederal lands offered. Bids would be in theform of non-Federal lands and would beevaluated based on criteria established by theFederal agency.

FEE APPRAISER - A private appraiser hired to appraise eitherthe Federal or non-Federal lands for a fee.

INHOLDING - Private land parcel surrounded by Federallands such as national forests.

OPTION - A bilateral contract in which one party (forexample, a third-party facilitator in Federalland exchanges) is given the right to buy theproperty within a period of time for aconsideration paid to the seller.

POOLING AGREEMENT- An assembled land exchange agreement wheremultiple parcels of Federal and/or non-Federallands are consolidated into a package for thepurpose of completing more than one exchangetransaction over a period of time.

PROPONENT- As used in Federal land exchanges, this termusually refers to a non-Federal party, alandowner or third-party facilitator, who isoffering land in a Federal land exchange.

THIRD-PARTY FACILITATOR - An organization (profit or not-for-profitentity) that is working as a representative ofthe non-Federal landowner in a landtransaction with a Federal agency. The not-for-profit organizations typically enter intoan option to purchase the land with the intentof acquiring the land for public ownership andpreservation. Occasionally the organizationpurchases the land and therefore becomes theproponent in the exchange.

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INTRODUCTION

Land exchanges between the national

BACKGROUNDforests and other landowners areneeded to protect key resources,eliminate conflicting uses, andimprove management efficiency. The

Forest Service (FS) land adjustment program emphasizes theacquisition of the highest priority lands based on FS plansthat consider the threat of development, recreationopportunity, resource values, and management efficiency. Infiscal year 1995, land area approved for exchange totaled98,407 acres. The FS exchanged 92,000 acres of NationalForest System land for 83,000 acres of non-Federal land infiscal year 1995.

An underlying requirement for any exchange involving Federalland is that the values for the Federal and private lands beequal, as determined by a Government-approved appraisal. Insome cases, small cash payments can be made to equalizeindividual transactions. The appraisal is a key requirementin the exchange process since it establishes values for theproperties being exchanged. The appraisal ensures that theGovernment obtains fair market value for the land itexchanges. Private parties and/or the FS may use feeappraisers to conduct the appraisal; however, each appraisalhas to be reviewed and approved by a qualified reviewappraiser to ensure that it meets Federal appraisal standards.Only when a value is approved by a qualified review appraiserdoes it become an agency-approved value. This value is thenused as a basis for the exchange.

Land exchanges can be initiated by a private landowner, anon-Federal public agency, or the FS. Usually a privatelandowner or a non-Federal public agency, called a proponent,makes a proposal directly to the district ranger where theland is located. Once the district ranger is notified, theforest lands staff are contacted and the proposal isprioritized and scheduled for processing.

In some land exchanges, third-party facilitators play a keyrole in the exchanges. The third-party facilitator can be anindividual or a company that is not necessarily the owner ofthe private land but serves as an intermediary between theprivate landowner (proponent) and the Federal agency. In someinstances, the third-party may purchase the land, thereforebecoming the proponent in the exchange. These facilitatorshandle many of the administrative functions, such as promptlyclearing all encumbrances on the non-Federal land and payingfor the appraisal of the land. They can also assemble severalparcels of private property for a specific exchange byobtaining options on the property and obtaining an agreementwith several parties to exchange their lands for specifiedFederal lands or payments.

Currently there are a large number of third-party facilitatorswho are involved in brokering exchanges with Federal land

USDA/OIG-A/08003-02-SF Page 1

agencies such as the Bureau of Land Management (BLM), Fish andWildlife Service, Corps of Engineers, and the FS. While thesefacilitators serve as a valuable resource for land exchanges,it is critical that the FS maintain control of its landadjustment program to ensure that exchanges are accomplishedin the best interest of the Government and meet FS priorities.

HUMBOLDT-TOIYABE NATIONAL FOREST LANDS PROGRAM

The Humboldt-Toiyabe National Forest, located on the FSIntermountain Region (Region 4), administers all nationalforest lands in the State of Nevada, except those that are inthe Lake Tahoe Basin Management Unit. Both BLM and theHumboldt-Toiyabe NF have been cooperating since early 1980 toacquire lands in the State of Nevada. An informal agreementbetween BLM and the FS was established on September 9, 1993,to govern exchanges where the FS is the benefitting agency.The agreement delegated to Region 4’s regional appraiser theauthority to approve the appraisal of non-Federal lands thatwould be involved. Until a case is turned over to the FS, BLMis in control of the exchange, and any appraisals that areprepared are approved by BLM’s Chief State Appraiser. Priorto our audit, appraisals approved by either agency wererecognized as agency-approved values that could be used byboth agencies.

DEMAND FOR BLM LANDS IN LAS VEGAS SPURS LAND EXCHANGES AT THEFOREST

The U.S. Bureau of Census has identified the Las Vegas Valleyof Southern Nevada as the fastest growing metropolitan area ofthe United States in recent years. The rapid growth hasresulted in an intense demand by developers to acquire Federallands in the Las Vegas Valley area. BLM has identified about70,000 acres of Federal land for disposal in the Las Vegasarea. With certain exceptions provided by specific statutes 1,BLM is not authorized by Congress to competitively sell theFederal lands in the open market. The only way privateparties can acquire these lands is to offer for exchangeprivate lands of equal value in the State of Nevada. InAugust 1993, the Spring Mountain National Recreation Area(SMNRA) was created by Congress to provide recreation areasclose to Las Vegas. Since that time Congress has targetedSMNRA as an area for Federal agencies to acquire and preserve.This has created a sellers market for landowners in theseareas, especially those with "inholdings," or private landssurrounded by FS or BLM lands. Third-party facilitators whowish to acquire Federal lands in Las Vegas have bid up theprices of large parcel inholdings in those targeted areas.

According to an appraisal report, prices on "inholdings" haveescalated well beyond values that are financially feasible fordevelopment. Third-party facilitators are willing to pay thehigher values because profits made on the resale of Federalland in Las Vegas Valley more than offset the cost ofacquiring "inholdings." The report showed examples of aproperty in the Spring Mountains with no water rights, limitedor no access, and minimal development potential being optionedby third-party facilitators at over 765 percent of the

1 Santini-Burton Act (PL 96-586)


original purchase price simply because the land would beconveyed to the FS in exchange for Las Vegas lands acquiredfrom BLM.

The Humboldt-Toiyabe National Forest has been a significantbeneficiary of non-Federal lands acquired from third-partyfacilitators completing Las Vegas land exchanges with BLM.

On May 10, 1996, the Office of Inspector General (OIG)received an anonymous whistleblower complaint concerningimproprieties by FS staff concerning a land exchangetransaction with a third-party facilitator. On December 9,1996, OIG notified the FS concerning the issues identified inthe whistleblower complaint.

FS WASHINGTON OFFICE REVIEW OF FOREST OPERATIONS

During our audit, the Forest Service Washington Office (FSWO)assembled an internal review team in May 1997 to perform aquick review of ongoing land transactions at the forest and toprovide regional management with recommendations to improvetheir lands program. The review found deficiencies relatingto coordination with BLM, land acquisition priorities, landappraisals, and lands staffing and training. The reviewrecommended that as an interim measure, the region suspend thelands approval authority at the forest until the expertiselevel at the forest is improved. OIG auditors participated asobservers with the review team. Our audit not only confirmedthe deficiencies noted in the FSWO internal review, butidentified additional issues and findings which requirecorrective action by the FS.

Our audit objective was to determine

OBJECTIVESwhether the land exchange program onthe Humboldt-Toiyabe National Forestensured that land exchangetransactions met the priority

requirements established by the forest plan and that thetransactions were in the best interest of the Government.Specifically, our objectives were to determine whether theforest ensured that (1) land exchanges were processed inaccordance with applicable laws, regulations, and agencypolicies; (2) appraisals of both Federal and non-Federal landswere reviewed and approved by the appropriate FS employee;(3) the public had adequate notice of the exchange; and(4) the Government received acceptable title to thenon-Federal lands.

Our audit covered the land

SCOPEadjustment program on the Humboldt-Toiyabe National Forest for fiscalyears 1990 to 1997. The forest hasthe largest lands program in the

Intermountain Region. We reviewed 37 land transactions whichhad been completed or were currently being processed at theforest (see exhibit C). Figure 1 shows the locations of keyland transactions discussed in this report.


Figure 1

A u d i twork wasperformedat theFSWO; theRegionalOffice inO g d e n ,Utah; theF o r e s tSupervisor ’ s

Office in Sparks, Nevada; and other locations determined bythe audit (see exhibit B).

The audit was conducted in accordance with generally acceptedGovernment auditing standards.

To accomplish our audit objectives

METHODOLOGYand support our findings, weperformed the following steps andprocedures.

• At the Washington Office (WO), we interviewed staff in theLands section to determine their concerns about the landexchange program on the Humboldt-Toiyabe National Forest.We identified and reviewed the WO directives, policy, andguidance that had been provided to the region and forest,and determined its adequacy. In addition, we obtained andanalyzed reviews performed on the land exchange program onRegion 4 and the Humboldt-Toiyabe National Forest toidentify problems found by the WO.

• At the FS Regional Office, we interviewed lands staffmembers to discuss: 1) the procedures for processing landexchanges; 2) interaction with third-party facilitators;3) development of the forest and landownership adjustmentplan; and 4) ongoing and planned reviews of the forest.These discussions were used to identify concerns FS staffhad about the land exchange program on the forest. Inaddition, we identified the completed and ongoing landexchange cases for fiscal years 1990 to 1997. For each of


the land exchanges identified, we reviewed the exchangecase files, discussed the exchange with lands staff, andobtained copies of the appraisals. This information wasused in the preparation of a proforma worksheet used toanalyze the processing of each exchange case.

• At the forest supervisor’s office, we met with forest staffto discuss: 1) general issues regarding the landadjustment program and any concerns they had regarding theprogram; 2) development of the forest plan and the processused to prioritize lands for acquisitions; and3) interaction with third-party facilitators. For each ofour identified land exchanges, we reviewed the exchangecase files and discussed the exchange with lands staff.With this information, we completed preparation of theproforma worksheets, analyzed the processing of eachexchange case, and determined whether the land exchangecomplied with policies and procedures and was in the bestinterest of the Government.

• We met with regional and Washington staff attorneys fromthe Office of the General Counsel (OGC) to discuss legalissues identified during the audit. In one instance, werequested a formal legal opinion on an issue involving acompleted land exchange transaction.

• We met with a fee appraiser who had appraised severalparcels of land involved in FS exchanges. The purpose ofthis meeting was to discuss general appraisal issues and toobtain information on specific appraisals.

• We interviewed selected proponents and third-partyfacilitators involved in land exchanges with the FS toobtain their comments regarding the FS land exchangeprocess.

• We interviewed BLM lands staff concerning their workinvolving land exchanges with the FS. We also reviewedland exchange case files at the BLM Nevada State Officeconcerning land exchange transactions involving the FS.

• We interviewed auditors at the Office of Inspector General,Department of the Interior, concerning their current andprior work involving Nevada land exchange activities by theBLM Nevada State Office.


FINDINGS AND RECOMMENDATIONS

In the only instance in which the FS initiated bargaining with a

I. CONTROLS NEEDED FOR BARGAINING AND DEALINGWITH PROPONENTS AND THIRD-PARTY FACILITATORSON LAND TRANSACTIONS

proponent and third-party facilitator, the regional bargainingteam violated the guidelines and legal advice of both the FSWOand OGC. The team let the facilitator control the bargainingsession and approved an uncorroborated value that was$5.9 million over the agency-approved value. In this case, whenlands staff dealt with a proponent and a facilitator, controlswere either not followed or were nonexistent. OGC concluded thatthe region’s bargaining process failed to comply with thegoverning statute.

Our audit also noted that there were no guidelines on evaluatingexchanges proposed by third-party facilitators. The forestformed an accommodating relationship with one facilitator, whoseproposed exchanges rose in priority with the forest when thefacilitator obtained options to buy the proposed land. Thisfacilitator was given information the forest did not share withother facilitators, and participated in the exchange of more land(83 percent of all acreage from 1993 to 1996) than was involvedin any transactions with other facilitators. Developers seekingan exchange with the forest were referred to the facilitator,even though FS policy prefers direct dealings with landowners.

Regional office lands staff violated

FINDING NO. 1

IMPROPER BARGAINING WITHPROPONENT AND THIRD-PARTY

FACILITATOR RESULTED IN ALOSS OF $5.9 MILLION

legal requirements and guidelines byengaging in a bargaining process inwhich it approved and accepteduncorroborated land values in aFederal land exchange transaction.By accepting these values, theGovernment relinquished $5.9 millionmore in Federal lands than shouldhave been legally provided to theexchange proponents.

The Federal Land Policy and Management Act of 1976 providesthe authority to dispose, by exchange, any tract of Federalland where the land managing agency determines that the publicinterest will be well served by making an exchange 2. Inexercising the exchange authority, Federal agencies maytransfer land out of Federal ownership and accept title tonon-Federal lands of equal value. The exchange of lands isbased on fair market value determined by appraisals meeting

2 43 USC § 1716 (a)


Federal appraisal standards. The Federal Land ExchangeFacilitation Act (FLEFA) of 1988 also provides for a processof bargaining as a means to settle disputes over the values ofproperties in the exchange process 3.

In August 1992, a real estate investment group purchased a524-acre parcel in the SMNRA for $2 million. The property,known as Deer Creek, was steep, mountainous terrain, rangingfrom 8,500 to 10,500 feet in elevation. It had no municipalwater, sewer service, electricity, or gas utilities. Therewas a single unimproved dirt road into the property thatallowed only seasonal access due to heavy winter snow. Theinvestment group converted water rights from seasonal to full-year use, subdivided about 25 percent of the property, andsold a small number of lots to private individuals.

In the fall of 1993, the investment group became an exchangeproponent when they began working with a third-partyfacilitator who proposed exchanging 459 acres of Deer Creekland to the FS for BLM properties in Las Vegas. The DeerCreek exchange was part of a larger pooling agreement betweenthe facilitator and BLM. In the agreement, BLM conveyed$46 million of Las Vegas land to the facilitator in exchangefor non-Federal land of equal value. The pooling agreementrequired the facilitator to locate and transfer non-Federalland totalling $46 million to BLM, the FS, or other Federalagencies by March 1996, or pay BLM the outstanding differencein cash. When the Deer Creek exchange was being processed,the facilitator still owed BLM about $8.5 million. Thefacilitator offered the Deer Creek land to the FS as a meansof settling their outstanding BLM debt.

The first appraiser, hired by the facilitator, appraised theDeer Creek lands at $12.5 million on August 2, 1994--a614-percent increase over the original purchase price.However, when FS appraisers reviewed the appraisal, theyrejected it because it did not meet Federal appraisalstandards. Over the next year, four additional valuationswere performed in an effort to find a market value acceptableto the proponent, the facilitator, and the FS.

In order to resolve the impasse over the Deer Creek values,the regional lands staff implemented a bargaining processreferred to in FLEFA. The process was recommended by theFSWO. The region formed a bargaining team, consisting of tworegional lands personnel and an assistant forest supervisor,to negotiate with the Deer Creek exchange proponents,consisting of representatives from the investment group andthe third-party facilitator. Since the FS had not usedbargaining before, the FSWO and a regional member of the FSbargaining team worked together and developed the followingbargaining guidelines:

1) Bargaining had to begin from the agency-approved value(for Deer Creek, the agency-approved value was$4.6 million).

3 43 USC § 1716 (d)


2) Any new information presented by the proponents had to bereviewed by the regional appraiser to ensure it wasapplicable to the bargaining.

3) Divergent values had to be reconciled by the regionalappraiser.

4) Any bargaining decision that changed the agency-approvedvalue had to be discussed with the regional appraiserbefore the new value was finalized.

The FS also solicited legal advice from OGC. In an opiniondated March 13, 1996, OGC reviewed FLEFA and identified thefollowing legal requirements for the bargaining process in aFederal land exchange:

• The FS must obtain lands of equal value in an exchange.

• Land values must be determined by appraisals meetingFederal appraisal standards.

• If the FS has appraisals for each exchange parcel that havebeen reviewed and meet Federal appraisal standards, theycan use bargaining to reconcile conflicting appraisals.

• Bargaining may only be used to objectively reconciledifferences in appraisal reports which meet Federalappraisal standards.

On March 13, 1996, the FS bargaining team and the exchangeproponents signed the Deer Creek bargaining agreement. Theagreement assigned a value of $10.5 million to the Deer Creekproperty--$5.9 million more than the agency-approved value.

Our audit found that the FS bargaining team violated thebargaining guidelines and legal requirements by using invalidappraisals, letting the proponent and third-party facilitatorcontrol the bargaining process, failing to reconcile thedifferences in the appraisals, and excluding the participationof qualified Federal appraisers to review the new valuationfor Deer Creek. As a result, based on a review by the FSChief Appraiser, the FS bargaining team accepted an appraisalthat did not meet Federal appraisal standards and should neverhave been relied upon in any Federal land transaction. Inaddition, we obtained an OGC opinion that concluded that theprocess instituted by the FS bargaining team did not complywith the legal requirements of FLEFA.

FS Bargaining Team Used Invalid Appraisals

By the time the region initiated the Deer Creek bargainingprocess in December 1995, only one of the previous fivevaluations still met Federal appraisal standards--the$4.6-million value determined by a team of BLM and FSappraisers one month earlier. All of the other values,ranging from $12.5 million to $4.7 million, had either beenpreviously reviewed and rejected by Federal appraisers asnot meeting the Uniform Appraisal Standards for FederalLand Acquisition (UASFLA), were outdated, and/or had becomevoid and unusable because the values were based on aproposed zoning change that had subsequently been denied by


the Board of County Commissioners (the District Courtupheld the denial).

Federal regulations allow bargaining to be used only whenthere are conflicts between appraisals meeting Federalappraisal standards. Each appraisal that is used in thebargaining process must meet Federal appraisal standardsand must be current and approved by a qualified reviewappraiser. The FS bargaining team ignored these legalrequirements and initiated bargaining using threeappraisals that did not meet Federal appraisal standards.These included a $12.5-million appraisal paid for by thefacilitator that had been rejected by Federal appraisersand was void and outdated; a $7.4-million appraisal paidfor by BLM that had not been reviewed by Federal reviewappraisers, and was also void and outdated; and a$4.7-million appraisal that had been paid for by the FS andwas also void and outdated. Disregarding the FSWObargaining guidelines, the senior member of the FSbargaining team approved the use of these invalidappraisals without consulting the regional appraiser.

In addition, the FS bargaining team did not comply with theFSWO bargaining guidelines that directed them to beginbargaining from the agency-approved appraisal of$4.6 million. This was the only appraisal that remainedvalid and met Federal appraisal standards at the time ofthe bargaining. However, the FS bargaining team excludedthe only valid appraisal from the bargaining processwithout justification.

FS Bargaining Team Improperly Allowed the ExchangeProponents to Control the Bargaining Process

FS bargaining team members told us that they did notprepare for the bargaining before they met with theproponent and the facilitator for the 1-day bargainingsession. The FS team brought no documentation to themeeting and had not discussed bargaining strategy amongstthemselves. The senior member of the FS bargaining teamtold us that he had glanced through the previous appraisalsand had only a vague understanding of the appraisal issues.The other two team members did not read any of theappraisals or reviews. FS team members did not consultwith Federal appraisers to obtain their perspective on theDeer Creek valuations or to increase their understanding ofthe Deer Creek appraisal process and issues beforebargaining.

In the bargaining meeting conducted on December 6, 1995,the exchange proponents claimed that the previous Federalappraisals had undervalued the Deer Creek property becausethe appraisers had used inappropriate financial data. Theproponents told the FS bargaining team that the non-Federalproperty was worth much more than the Federal appraisershad estimated and spent the day showing the FS team howchanging various appraisal assumptions would significantlyincrease the value of the Deer Creek land.

None of the FS bargaining team members had any knowledge ortraining on appraisal valuation methods and were notfamiliar with the financial terms being discussed by the


proponents. However, they ignored the FSWO bargainingguidelines and did not present the proponent’s financialdata to the regional appraiser for review. The FS teamalso did not seek advice from any Federal appraisers todetermine if the proponent’s assertions were valid.Instead, they simply accepted the proponent’s claims thatqualified Federal appraisers from both the FS and BLM hadundervalued the Deer Creek land.

During the bargaining session, both the FS bargaining teamand the proponents agreed to hire a private fee appraiserto review the proponent’s data and to determine a new valuefor the Deer Creek land. The FS bargaining team wanted touse an appraiser who had no previous knowledge of the DeerCreek property and would give them an objective opinion ofvalue. However, the FS team agreed to hire an appraiserspecifically recommended by the proponent, even though theFS bargaining team members had not heard of the appraiserand were not familiar with the quality of his work. Ourreview of FS documentation revealed that the proponent hadcontacted the same appraiser a few months before thebargaining session, to determine his opinion on DeerCreek’s values and therefore knew in advance how theappraiser would value the Deer Creek lands, unbeknownst tothe FS bargaining team members. The FS team and theproponents met with the appraiser the next day, December 7,1995.

The FS team prepared written instructions to the appraiserdirecting him to review documents provided by the proponentand to determine a new value for the Deer Creek land. TheFS team allowed the proponent to provide the appraiser withall of the documentation and financial analysis that wouldbe used in his valuation. The FS bargaining team did notprovide any input to the appraiser. The data was providedby the proponent to the appraiser in a cardboard box. TheFS bargaining team members did not review the contents ofthe box nor did they ask the proponent what documents wereprovided to the appraiser. The FS team told us that theyassumed the proponent provided the appraiser with allapplicable data, including all prior FS/BLM appraisalreviews and the agency-approved appraisal of $4.6 million.They did not ask the proponent or the appraiser if all theappraisals had been provided. Our audit later found thatthe proponent did not give the appraiser the only validFederal appraisal of the Deer Creek lands, which valued thelands at $4.6 million.

Bargaining Team Did Not Reconcile Differences in AppraisalsMeeting Federal Standards

Federal regulations specify that bargaining can only beused to objectively reconcile differences in appraisalreports which meet Federal appraisal standards.Conflicting appraisals that meet standards establish theupper and lower limits for the bargained value.Additionally, the FSWO bargaining guidelines requiredbargaining to begin from the agency-approved value of$4.6 million. The FS bargaining team violated both ofthese requirements when they hired the fee appraiser todetermine a bargained value for Deer Creek.


The fee appraiser, hired by the FS bargaining team, wasprovided with the proponent’s financial information andthree appraisals that did not meet Federal appraisalstandards: the $12.5-million value that had been rejectedby Federal appraisers was void and outdated; the$7.4-million appraisal that had not been reviewed byFederal appraisers was void and outdated; and the$4.7-million appraisal that was void and outdated. The feeappraiser was not provided with a copy of the agency-approved value of $4.6 million, which was also the onlyappraisal that still met UASFLA. Using the invalidappraisals and information supplied by the proponent andthird-party facilitator, the appraiser calculated a newvalue of $10,520,000 for the Deer Creek lands, with aneffective date of December 8, 1995. This process did notcomply with Federal regulations because it was not areconciliation of appraisals meeting Federal appraisalstandards.

The FS bargaining team received copies of the appraisers’valuation reports approximately 2 weeks after thebargaining meeting. The reports clearly indicated that thenew value did not incorporate any data from the agency-approved appraisal, but was based solely on the proponentsfinancial data, information from void and/or rejectedappraisals, and new assumptions made by the fee appraiser.Each member of the FS bargaining team read the reports andaccepted this new value even though they knew it was basedon appraisals that did not comply with Federal appraisalstandards and did not include the agency-approved value of$4.6 million.

FS Bargaining Team Improperly Excluded Qualified FederalAppraisers From Reviewing the Deer Creek Valuation

The new $10.5-million value exceeded the agency-approvedvalue by about $5.9 million. At the request of the FSbargaining team, the fee appraisers wrote a letter statingthat his valuation work had been an appraisal "review."However, the scope and methodology of his work met thecriteria of an appraisal, as defined by UASFLA and FSdirectives. Under Federal regulations 4, all appraisalsused in a land exchange must be reviewed by a qualifiedreview appraiser to determine whether they comply withFederal appraisal standards and can be relied upon in aFederal land transaction. The guidelines established bythe FSWO also required the FS bargaining team to submit anynew values to the regional appraiser for his review andapproval.

In January 1996, the FS bargaining team provided the FSWOand BLM with a description of the bargaining process andthe basis of the new value. The WO lands staff told the FSbargaining team members that the bargaining process theydescribed was seriously flawed. They told the seniormember of the FS bargaining team that the bargainingprocess did not comply with FS regulations and WOinstructions and that there was no evidence of bargainingby the FS members. The FS Chief Appraiser told regional

4 36 CFR 254.9 (a)


staff that the new $10.5-million value met the criteria ofan appraisal and that it had to be reviewed for compliancewith Federal appraisal standards. WO staff told the regionthey wanted to be advised of all regional actions prior tosigning the agreement. The WO directions were disregardedby the FS bargaining team members when they signed thebargaining agreement.

The FS bargaining team, with no training in appraisalstandards, refuted the opinion of the FS Chief Appraiserand insisted that the new value was not an appraisal andthat it did not have to be reviewed for compliance withUASFLA. One of the FS bargaining team members told us thatshe had concerns about the values determined by theappraiser but her concerns were overruled by the seniormember of the FS bargaining team. The senior member toldus that he did not think it was necessary to submit the newvalue to a qualified Federal appraiser for review. Hemaintained that the bargaining process was outside thenormal scope of FS activities and, consequently, FSpolicies and procedures did not apply to the bargainedvalue.

The BLM Nevada Deputy State Director also expressedconcerns about the new value and told the senior member ofthe FS bargaining team that BLM wanted the $10.5-millionvalue reviewed by a qualified Federal appraiser before itwas accepted by the bargaining team. Even though BLM wasofficially in charge of the Deer Creek exchange, the seniorteam member dismissed the BLM State Director’s concerns anddid not submit the new value to a Federal appraiser forreview and approval.

The FS bargaining team signed the agreement on March 13,1996, and officially accepted the $10.5-million valuewithout subjecting it to a Federal review. The FS teammembers signed the document at the Regional Office inOgden, Utah, and then sent it via overnight mail to theexchange proponents for their original signatures. Thisprocess took a couple of days, because the proponents andfacilitator were located in Las Vegas and San Francisco.

We reviewed electronic mail messages in the Deer Creek fileand noted that the FS Chief Appraiser communicated with oneof the FS bargaining team members several times on March 13and 14 to discuss the upcoming Federal review of thebargained value. Yet she did not tell the Chief Appraiserthat the FS bargaining team had already signed theagreement and was in the process of having the bargainingagreement signed by the proponent and third-partyfacilitator. She also failed to tell the FS ChiefAppraiser that the FS bargaining team had already decidedthat there would be no Federal appraisal review of the newDeer Creek valuation. The FSWO was not notified of thesigned bargaining agreement until March 15, 1996, after allof the required signatures had been obtained and theagreement finalized.

Members of the FS bargaining team told us that they did notthink it was necessary to tell the FSWO that they hadsigned the bargaining agreement on March 13, 1996. Theyclaimed that the regional OGC counsel and the Acting WO


Director of Lands had already been notified and had giventhem approval to proceed with the agreement during theirmeeting at the regional office on March 13. However, ouraudit found that the OGC counsel and the Acting WO Directorof Lands had emphatically denied giving the FS bargainingteam the approval to proceed with the bargaining and wereunaware of the FS bargaining team’s intention to sign thebargaining agreement that same day. Both the OGC counseland the Acting WO Director of Lands left the regionaloffice on March 13 under the impression that the FS teamwas not going to sign the bargaining agreement until theyhad provided additional evidence that the legalrequirements provided by OGC had been met.

Final Deer Creek Appraisal Did Not Meet Federal Standards

We formally requested that the FS Chief Appraiser conducta peer review of the $10.5-million Deer Creek valuation.He determined that it was indeed a new appraisal and not areview as represented by the private fee appraiser. Hethen reviewed the new appraisal and pronounced it unusable.He determined that the appraisal did not meet Federalappraisal standards and stated that the report’s valueshould never have been relied upon in a Federal landexchange. The Chief Appraiser commented that the feeappraiser hired by the FS bargaining team appeared to haveknowingly provided a report that did not comply withFederal appraisal standards. It was his professionalopinion that the FS bargaining team had overvalued the DeerCreek land by at least $5 million.

OGC Confirms Bargaining Did Not Meet Legal Requirements

On August 25, 1997, we requested a legal opinion from OGCconcerning the propriety of the bargaining agreemententered into by the FS bargaining team and the exchangeproponents. We also requested their opinion on whether theFS bargaining team had complied with the legal criteriaprovided by OGC on March 13, 1996, to ensure that thebargaining process complied with Federal regulations.

OGC reviewed the facts surrounding the FS bargainingprocess that we presented and, in an opinion datedNovember 14, 1997, confirmed that the FS regional staff didnot comply with the legal criteria OGC had presented tothem on March 13, 1996. OGC counsel told us that the legalrequirements of bargaining had been clearly explained andshould not have been subject to interpretation. Eventhough the facts indicated that the FS bargaining team hadagreed to a land exchange of unequal value, OGC counsel didnot believe the Federal Government would be able to reclaimthe lost property or receive a cash equalization paymentfrom the proponents. They said that the FS had amanagement issue rather than a legal issue to address.

The FS bargaining team did not act prudently or in theGovernment’s best interest when they signed the Deer Creekbargaining agreement. Although they were provided with ampleguidance before and during the Deer Creek bargaining process,they chose to ignore it, without any reasonable justificationfor their actions. They did not comply with the FLEFAregulations identified by OGC, the FSWO bargaining guidelines,


or existing Forest Service Manual (FSM) and Forest ServiceHandbook (FSH) directives. They ignored valid concernsexpressed by the FSWO and the BLM State Office and refused tohave the bargained value reviewed by a Federal appraiser asrequired by regulations. The bargaining team then rushed tofinalize the Deer Creek bargaining agreement without advisingthe FSWO of their intended actions. None of the bargainingteam members could adequately explain why they had disregardedthe guidelines and advice expressed by OGC and FS and BLMlands management.

As a result of the FS bargaining team’s actions, the DeerCreek property was overvalued by $5.9 million and the FederalGovernment exchanged public resources which were more valuablethan those they received in return. In addition, the improperexchange allowed the third-party facilitator to extinguish an$8.5 million debt to BLM and resulted in the FederalGovernment owing the third-party facilitator an additional$2 million for future Federal land exchanges. Finally, theexcessive values derived in the Deer Creek exchange may beused by proponents and third-party facilitators to inflatevalues of similar properties in future Federal land exchangetransactions with the FS and BLM.

RECOMMENDATION NO. 1a

Refer the improper actions of the FS employees involved in theDeer Creek bargaining agreement to the Human ResourcesManagement Division for the appropriate action. (Holdpersonnel action pending completion of investigation andnotification from OIG to proceed.) Ensure that theseemployees do not participate in future negotiations withproponents and third-party facilitators involving landexchanges including bargaining sessions. (See alsoRecommendation No. 12.)

FS Response

The FS concurs with the first part of the recommendation.Taking action on the first portion of the recommendation willbe delayed until it is given the go-ahead from OIG andprovided access to the complete investigatory information.Regarding ensuring that "these employees do not participate infuture negotiations with proponents and third-partyfacilitators involving land exchanges including bargainingsessions," the FS understands that the intent of thisrecommendation was to preclude participation in all landexchanges whether or not bargaining was involved. Pendingreview of the complete investigatory file, the FS has takensteps to ensure that the employees involved in the Deer Creekbargaining agreement are not involved in further land exchangeactivities and have been detailed to other duties. If, afterreview of the complete information, it is determined thatpersonnel actions are warranted, the FS will consider variousoptions including disciplinary actions, reassignments,training, a period of increased oversight, and/or supplementedstaff expertise.


Regarding the use of bargaining in land exchange, the FS hasalready taken action to ensure oversight on future use ofbargaining in land exchanges. Interim Directive No. 5400-96-2issued in 1996 in the FSM and reissued in Interim DirectiveNo. 5400-98-1, provides for WO oversight relative to use ofbargaining or arbitration in land exchanges prior tofinalization of an exchange agreement, decision notice, orconsummation of the exchange.

OIG Position

In order to reach management decision, the FS needs to providethe timeframe for completing the recommended action subject toclearance with OIG Investigations.

RECOMMENDATION NO. 1b

Permanently incorporate the Interim Directive on Bargaininginto the FS Manual System. Provide additional direction inthe FSM and FSH relating to the bargaining process byincorporating OGC’s nine legal criteria and FSWO guidelines.

FS Response

The FS generally concurs. Interim Directive No. 5400-98-1 toFSM 5400 zero code, which addresses responsibility andapproval for bargaining proceedings in land exchanges, expireson August 26, 1999. Prior to the expiration date, thisdirection will be permanently incorporated into the FSM.

On December 4, 1996, then Deputy Chief, National ForestSystem, Gray Reynolds issued a policy letter which providesinterim guidelines and policy on the use of bargaining andarbitration. This policy letter is consistent with FSWOguidelines and OGC criteria, which were developed specificallyfor the Deer Creek transaction. The direction contained inthe December 4, 1996, policy letter will remain in effectuntil incorporated into the FS Land Acquisition Handbook,which is scheduled for revision in fiscal years 1998 and 1999.

OIG Position

We accept management decision on this recommendation.

RECOMMENDATION NO. 1c

Require the region to submit, for WO Chief Appraiser review,any land exchanges involving conflicting appraisals of over$1 million or appraisals using methods other than comparablesales approach, or establish alternative controls to ensurethat appraisals of large land transactions meet Federalappraisal standards.


FS Response

The FS does not concur with the first approach in thisrecommendation. Full review and approval authority inFSM 5410 has been delegated to only fully-qualified appraisersas defined in FSM 5410.6. As such, regional appraisers arecertified and licensed to make such determinations in theirprofessional capacity. The WO Chief Appraiser will continueto do oversight and compliance reviews, as required inFSM 5410.41b, to insure qualifications and competency of FSappraisers as well as compliance with standards ofprofessional practice as prescribed in FSM 5410.3. Thesereviews will focus on both technical and managerialcompetencies associated with this function.

OIG Position


RECOMMENDATION NO. 1d

Instruct FS lands and appraisal staff not to rely on values ofthe Deer Creek exchange in future Federal land exchanges.

FS Response

Current FS appraisal instructions and Uniform AppraisalStandards do not allow use of agency transactions indetermining indications of value for other properties. Allevidence must be "arms length" market transactions from theprivate sector as reflected in UASFLA, Section A4. The FSappraisers working in Nevada are aware of this matter and theappraisal standard which prohibits the use of this transactionas market evidence in future agency appraisals.

OIG Position


Over 83 percent of all acreage

FINDING NO. 2

GUIDELINES NEEDED INDEALINGS WITH THIRD-PARTY

FACILITATORS

acquired in land exchanges by theforest, valued at over $30 million,was negotiated with a single third-party facilitator during fiscalyears 1993 to 1996. There are noguidelines on how third parties areselected to process land exchangetransactions and how to evaluate thebenefits of third-party-initiatedland transactions. By dealing

almost exclusively with a single third-party facilitator onland exchange transactions at the forest, the forest had noassurances that the Government’s interests were protected inthe processing of land exchange transactions.

FSH 5409.13, Section 31.8, states that if possible, the FSshould work directly with the landowner to negotiate for landssuitable for acquisition. Third-party facilitators should be


used when a direct exchange with the landowner is notpossible. The guidelines do not cover how to select a third-party facilitator to negotiate with the landowner or how toevaluate the benefits of transactions initiated by third-partyfacilitators.

Our interviews with forest staff disclosed that individualswishing to exchange lands directly with the forest werereferred to a third-party facilitator contrary to the aboveguidelines. We also noted that this third-party facilitatorfrequently proposed land transactions to the forest before thelands had been identified as suitable to the forest. Forestand regional staff told us that lands proposed by thisparticular third-party facilitator were elevated in thepriority listing to ensure that processing of the transactionswas expedited. Our review of the actual land transactions atthe forest showed that land exchange proposals by this third-party facilitator were elevated in the priority lists becausethe facilitator had obtained options on the private lands forexchanges. Six of the top seven exchanges on the prioritylist are with this facilitator (see Finding No. 8). We alsonoted that forest and regional staff improperly accommodatedthis third-party facilitator by spending staff time and effortin pursuing land transactions that had been previouslydetermined to have no benefit to the FS (see Finding No. 6).

Our interview with the representative of the third-partyfacilitator also disclosed that the third-party facilitatorwould get direct contacts from forest staff wishing to acquireparticular parcels of private land for the forest withoutcontacting the landowners directly concerning their interestin an exchange.

Dealing with third-party facilitators provides advantages tothe FS since third parties are usually knowledgeable of theprocess involved in Federal land exchanges and have thefinancial resources to weather the time-consuming process ofcompleting land exchange transactions with the FS.

The extremely high demand for Federal lands owned by BLM inthe Las Vegas Valley area has motivated third-partyfacilitators to aggressively exchange non-Federal lands inNevada to the FS for Las Vegas lands managed by BLM. It istherefore important for the FS to maintain an impartial andbusinesslike relationship with facilitators involved in theseexchanges. Developing specific guidelines on dealing withthese facilitators and instructing FS lands staff about theguidelines is a key step in ensuring that land transactionsare carried out in an impartial and consistent manner.


Develop guidelines on land transactions that limit theauthority of FS staff dealing with third-party facilitators tokey personnel with the expertise and training in FS policiesand procedures on land acquisitions, and that ensure FS landstaffs: 1) deal primarily with landowners directly for landexchange transactions, when appropriate; 2) document when


direct exchanges are not possible, and institute a referralprocess to ensure that all potentially interested third-partyfacilitators are contacted; and 3) accept or reject landtransactions proposed by third-party facilitators according tothe FS priority list of land exchanges, and document alldecisions relating to these transactions in writing to thethird-party facilitator.

FS Response

The FS concurs with the need for formal guidelines on the useof third-party facilitators in land transactions and hasalready taken action to respond to this recommendation. In aletter dated May 21, 1998, Under Secretary James Lyonsdirected the FS to immediately address this matter and clearlydefine the appropriate use of third-party facilitators. Toaccomplish this a taskforce has been formed that will, in thenext 60 days (on or before October 1, 1998) develop draftguidelines which will define the procedures and appropriateroles of FS officials and third parties in land transaction.The FS will provide an opportunity for key third-partyfacilitators to review and comment on these guidelines as partof this effort. In addition, the FS will also hold jointworkshops with FS land adjustment personnel and third-partyfacilitators to develop common understanding of use of theseguidelines. When finalized, which is anticipated thiscalendar year, they will be incorporated into the FS directivesystem.

Currently, delegations for most activities associated withland purchases and exchanges, including dealing with third-party transactions (FSM 5404.14), are delegated to regionalforesters, deputy regional foresters, or directors of lands.As a general rule, each regional office has experienced staffto provide technical support at this level. Theseresponsibilities can only be delegated further by the regionalforester to the forest supervisors if the forest has staffwith sufficient skills, knowledge, and training to perform therequired landownership adjustment duties. This level ofdelegation has been appropriate for many years, and the FSstill believes it is applicable. However, with recentdownsizing, as many highly-skilled and experiencedindividuals in the regions and at the forest level haveretired, the FS recognizes the need to develop new landsspecialists in most regions. To ensure that they havequalified people in the various lands jobs, the WO lands staffis developing competency standards which will identify thetraining and experience needed for all positions involved withFS lands program work. Completion is anticipated in calendaryear 1999. These standards will be the basis for futuredelegations and position requirements.

OIG Position




Instruct all FS lands staff members on the developedguidelines.

FS Response

The FS concurs. Once the third-party transaction guidelinesare finalized, in addition to the workshops noted above, theywill be incorporated into lands training opportunities and inthe FS directive system.

OIG Position


Controls over the Federal appraisal process were not adequate

II. CONTROLS OVER THE APPRAISAL PROCESS WERENOT ADEQUATE TO ENSURE THAT THE GOVERNMENTOBTAINED FAIR VALUE IN LAND EXCHANGES

to ensure that the Government was obtaining fair value on landexchange transactions with proponents and third-partyfacilitators. FS appraisers accepted appraisals of non-Federal land that were based on potential events andcircumstances, such as local approval for development, whoseprobability of occurring as planned was highly speculative.As a result, we determined that on three appraisals, the FSaccepted appraisal values that were potentially overstated by$8.9 million because the values were not based on credibleevidence.

We also identified instances in which regional and lands staffcompromised the integrity and independence of FS appraiserswhen dealing with proponents and third-party facilitators onland exchanges. The region placed the appraisers in asubordinate position to the lands staff, who openly criticizedthe appraisers in front of the proponents and facilitators.By compromising the integrity and independence of Federalappraisers, the FS weakened a primary control in ensuring thatthe Government was obtaining fair value on land exchangetransactions with proponents and third-party facilitators.

FS appraisers and lands staff

FINDING NO. 3

VALUATIONS OF NON-FEDERALLAND WERE NOT BASED ON

CREDIBLE EVIDENCE

accepted appraisals of non-Federalland used in land exchanges based onevents and circumstances that werenot supported by credible evidence.As a result, exchange proponents andthird-party facilitators receivedexcessive values for their land andthe Government relinquished moreFederal lands in Las Vegas than wasnecessary. Our review of three land

exchange appraisals disclosed that the FS accepted appraisalvalues that were potentially overstated by $8.8 million.Appraisers reporting the higher values did not document thereasons for the difference or supply credible evidence insupport of it.


UASFLAs were prepared to promote uniformity in the appraisalof real property acquired by the United States. Appraisersmust comply with these standards when valuing lands involvedin a Federal land exchange. UASFLA allows the landowner fairmarket value for his property but states that the value cannotbe based on potential uses that are speculative andconjectural. The Supreme Court has said that if a land’svalue depends on conditions that are possible, but not shownto be reasonably probable, those elements should be excludedfrom consideration, for that would allow speculation andconjecture to become a guide for the determination of value.

The Spring Mountain National Recreation Area (SMNRA), aportion of which consists of a congressionally-designatedwilderness, was established in August 1993. Since that time,Congress has targeted SMNRA as an area for Federal agencies toacquire and preserve. There is currently intense pressure toacquire "inholdings," or a private parcel surrounded by publicland, and transfer them to public ownership. Nearly all ofthe private inholdings within the forest boundaries have beeninvestigated for possible acquisition and/or exchange. Theremaining privately owned parcels in SMNRA bring a premiumprice, due in part to BLM’s policy that Federal lands in LasVegas can only be acquired by developers in the form of a landexchange. One appraisal report concluded that "there is nowtoo much money chasing too few properties."

The typical method of obtaining the rights to the privateproperty without purchasing the property is through the use ofoptions, where a proponent or a third-party facilitator entersinto an agreement with the landowner to buy the property at acertain price within a specific period of time for a fee. Ifthe proponent or third-party facilitator does not exercise theoption to purchase by the expiration date, then the optionexpires and the rights to the property revert to thelandowner. The only loss to the proponent or third-partyfacilitator is the option fee. By using options, real estatespeculators can obtain the rights to millions of dollars inreal estate with little capital and minimum risk shouldmarket prices decline.

Private landowners, exchange proponents, and third-partyfacilitators are strongly motivated to increase the appraisedvalue of private lands because the higher the value, the moreFederal lands in Las Vegas they can obtain in the exchange.We reviewed the land exchange transactions involving theexchange of non-Federal land in the Mt. Charleston area,located in the SMNRA, for Federal land in Las Vegasadministered by BLM. We found that the following appraisalsof non-Federal land were improperly based on speculativeevents and circumstances and not on credible evidence:


Cashman Exchange Appraisal

On June 14, 1993, a proponent optioned a 1,300-acre parcelof land in the Mt. Charleston area known as the Cashmanproperty for $8.9 million. Fourteen days later, the sameproponent approached BLM with an exchange proposal to givethe Cashman property to the FS in exchange for 2,705 acresof BLM land in Las Vegas. On August 23, 1993, theproponent agreed to reduce the Federal Las Vegas acreage to1,615 acres. On September 9, 1993, the FS wrote to theproponent stating that the exchange proposal was notfeasible since there was a wide discrepancy between thevalues of the BLM Las Vegas properties and the values ofthe Cashman property. Two weeks later, a third-partyfacilitator representing the proponent warned the FS thatif the Las Vegas exchange was not consummated, theproponent would sell the property to developers for a650-unit residential subdivision, contrary to publicinterest and congressional intent on preserving the landsfor public recreation. In early December 1993, the BLMNevada State Director formally agreed to accommodate theproponent in proceeding with the Cashman exchange.

Questions soon arose over the fair market value of theCashman property. On August 5, 1994, the FS appraisaldetermined the value of the Cashman property to be$4 million. The proponent hired his own appraiser, whoissued a appraisal value of $9.7 million on August 24,1994. On February 13, 1995, FS and BLM lands staff and theproponent agreed to jointly hire another appraiser to comeup with a value acceptable to all parties. However, theproponent gave this appraiser specific instructions withoutthe FS’ knowledge or concurrence. The proponent directedthe appraiser to make the following questionableassumptions about the Cashman property that were notsupported by credible evidence and greatly increased theland’s value.

• The new appraisal assumed that approvals were in placefor a 650-lot Planned Unit Development; however, thisassumption was highly speculative and not based on theevidence. The proponent had not requested approval fromthe county, which had already denied a similar proposeddevelopment on an adjacent private parcel due to concernsabout firefighting access and water availability.Moreover, in spite of a zoning restriction of 1 dwellingper 2 acres, the proponent designed all 650 units to beclustered in a small portion of the total acreage because75 percent of the Cashman property was considered toosteep to be developed. Local residents strongly opposedthis type of development in the area.

• The proposed Cashman development was to be located on aportion of the property where the existing slope of theland was far in excess of county requirements.Development of the units required changing the entireshape of the area being developed and resulted in massivecuts and fills. The proponent’s engineering firmoriginally estimated that site development would involvemoving 9.6 million cubic yards of earth at an estimatedcost of $5 million. However, when the FS engineerreviewed the firm’s development figures, he estimated the


cost at $23 million, making the project unfeasible. Theengineering firm then claimed that the cubic yardrequirements were incorrect, that only 1.3 million cubicyards of earthwork would be required to develop thesubject property and that the cost of $5 million wasaccurate. This explanation was accepted and the$5-million cost was used in the appraisal report. FSstaff did not obtain documentation from the engineeringfirm to support this 80-percent reduction in thedevelopment figures or analyze whether the project wasfeasible given the drastic change in the proposeddevelopment.

• The appraisal assumed that there was water available for650 homes. However, the Cashman property had no legalwater rights at the time of the appraisal and had notfiled for water rights with the county. The appraiserdid not calculate the cost of obtaining water or theeffect that not having water would have on the sale ofthe 650 lots.

• The appraisal assumed that prospective buyers of the650 lots would pay for the cost of individual septicsystems. However, documentation from the State ofNevada, sent to the FS appraiser, stated that the Cashmansite was unsuitable for individual sewage disposalsystems. The only legal alternative was a communitysewage system. The cost of installing an expensivesewage system was not part of the appraiser’s analysis.

Using these and other assumptions, the appraiser concludeda fair market value of $8.5 million for the Cashmanproperty on April 27, 1995. Coincidentally, several weeksearlier, BLM issued an appraisal dated April 3, 1995, whichvalued the Federal Las Vegas properties selected by theproponent for the Cashman exchange at exactly $8.5 million.The appraisers stated in their Cashman appraisal reportthat essentially the [Cashman] Mt. Charleston property isthe "trading stock or currency" necessary to acquiredevelopable lands adjacent to Las Vegas administered byBLM.

FS and BLM appraisers initially rejected the Cashmanproperty appraisal as too speculative and not based ondocumented, credible evidence. They revalued the Cashmanproperty using evidence they considered reasonably probableand concluded a reduced value of $6 million inSeptember 1995. However, the proponent would not acceptthe lower value. The Federal appraisers deliberated overthe risks associated with allowing the proponent to proceedwith the development of the Cashman property and inNovember 1995 reversed their position and approved the$8.5 million value. By relying on the speculativeassumptions instead of credible evidence, we determinedthat the Cashman exchange was overvalued by at least$2.5 million.

Deer Creek Exchange Appraisal (See Finding No. 1)

In August 1992 a realty corporation purchased a 524-acreproperty in the Mt. Charleston area, known as Deer Creek,for $2 million. The majority of the property’s terrain was


steep and mountainous. The property was located withinSMNRA, which is one of the areas targeted by the FS and BLMfor land acquisition. The corporation began negotiationswith a third-party facilitator who optioned the Deer Creekproperty for 95 percent of a fair market value appraisal.The corporation and the facilitator then approached the FSand proposed exchanging the Deer Creek land for BLM land inLas Vegas.

Six separate valuations were performed for the Deer Creekexchange, ranging from $4.6 million, determined by FS andBLM appraisers, to $12.5 million, concluded by theproponent’s appraiser. The excessive range in values wasdue to the use of an appraisal method that is regarded ashighly speculative and prone to error. Known as the"developmental method," this type of appraisal is allowedby UASFLA but is considered so subjective that UASFLA urgesthat in the absence of credible evidence, the method not berelied upon in any Federal land exchange transaction.

The sixth appraisal valued the Deer Creek land at$10.5 million and was used to finalize the land exchange.We reviewed this appraisal and noted assertions that werespeculative and lacked credible evidence:

• The appraiser determined that the property’s highest andbest use was a 197-unit subdivision. Although the DeerCreek land was in extremely steep, mountainous terrain,the appraiser estimated the number of buildable lots bysimply dividing the total acreage into 2-acre parcels.He did not include any site evaluation or engineeringstudies to support his claim. One of the previousappraisals had noted the steep terrain and the presenceof avalanche chutes and estimated only 159 buildablelots. Figure 2 shows a picture of the Deer Creekproperty with avalanche chutes on the slopes of theproperty.

Figure 2

Another previous appraisal noted that selling 2-acre lotswas completely unfeasible because the costs associated


with water, sewer, power, slope, and access to the lotswould make the project too expensive.

• The appraiser assumed that the property had sufficientwater for 197 homesites. The available evidence showedthat the property had enough water for only 167 homes.Although the corporation had filed for additional waterrights, the FS already owned the water rights and hadfiled protests with the State of Nevada. A State waterengineer told us that he had seen many developersinvolved in Federal land exchanges apply for waterpermits so that they could claim their land wasdevelopable and would command higher appraisal values.

• The appraiser used urban view lots in other parts ofNevada to determine a value for the remote Deer Creeklots. The "comparable" urban lots used in the appraisalwere served by year-round paved streets and full utilityservices, including electricity, water, sewer, andnatural gas. Conversely, the Deer Creek lots had noaccess roads, no water, no power, no sewer, and couldonly be accessed part of the year due to heavy snow. Theappraiser did not provide any evidence to justify why heused the urban lots as comparable sales to appraise theundeveloped Deer Creek lots.

FS lands staff, who were not qualified appraisers, did notquestion any of the assumptions made by the contractedappraiser and improperly approved the $10.5-million valuewithout having it reviewed by Federal appraisers forcompliance with appraisal standards. We asked the FS ChiefAppraiser to review the appraisal, and he subsequentlydetermined that the appraisal failed to meet UASFLAstandards and should not have been relied upon in anyFederal land exchange transaction. The unacceptableappraisal overstated the value of the Deer Creek land by$5.9 million.

Red Rock II Exchange Appraisal

This FS/BLM exchange included a 160-acre parcel in upperLovell Canyon within SMNRA. The property, known as theBecker property, had no water rights, no access, andminimal development potential. The property had beeninitially purchased for potential development inFebruary 1987 for $185,000, or $1,156 per acre. Due to thephysical conditions of the property, it was not developedas planned. In March 1994, the property was purchased ata price of $10,000 per acre by a third-party facilitatorfor the primary purpose of exchanging the property forFederal land in Las Vegas.

The parcel was appraised by the FS in June 1994. Theappraiser determined the property’s highest and best usewas as a speculative investment. He noted that there wasno legal access to the property and that the water rightapplications had been previously denied by the Stateengineer. The appraiser did not discuss the financialconsequences of buying a landlocked parcel or show evidencehow a prospective buyer could get legal access to theproperty. He also did not discuss the status of the deniedwater applications or the amount of water that was


potentially available to the property, nor did he projectany costs for obtaining water for future development. TheFS appraiser concluded a value of $2 million, or $12,500per acre. To obtain this value, the appraiser used a"comparable" property that had superior access with a pavedroad to its boundary, a developed water system, utilitieslocated on site, and an installed microwave telephonesystem. The appraiser deducted only 9 percent from thecomparable’s value of $13,750 per acre since the subjectproperty had no access, no water, no utilities, and notelephone lines.

The FS appraisal showed a $400,000 increase over thepurchase price paid by the third-party facilitator just3 months earlier and a 981-percent increase over theproperty’s original value, even though the parcel had notbeen improved since its original purchase 6 years earlier.

Federal appraisal standards state that prior sales of thesame property, reasonably recent and not forced, areextremely probative evidence of market value and that theprior sale of the land under appraisement could very wellbe the most "comparable" of all the comparable sales. Eventhough the property had recently been purchased for$1.6 million, the FS appraiser did not include that sale inhis analysis or his reconciliation and final valueestimate. Instead, he used a comparable sale he describedas "significantly superior" to the property being appraisedto justify his $2-million value. We determined that the FSappraiser potentially overstated the Becker property valueby at least $400,000 because he did not use the mostcomparable sale and did not provide any justification forincreasing the property’s appraised value 25 percent overthe recent purchase price of $1.6 million.

The availability of Federal lands in Las Vegas has created anunprecedented demand for non-Federal exchange properties,resulting in exorbitantly high appraisal values. It isimportant that FS lands staff and Federal appraisers beespecially vigilant and ensure that the values assigned tonon-Federal properties are based on actual and credibleevidence. Appraisers should rely solely on the physical andlegal conditions of the property at the time of the appraisalrather than on speculative and conjectural uses proposed byproponents and third-party facilitators. Appraisalassumptions must be based solely on credible evidence and, ifused, must be shown to be reasonably probable.


Ensure that conceptual developments include data thataccurately supports the costs and feasibility of the project.This data should be prepared by various experts in theirfields, such as engineers and geologists. Detailedinformation, supporting all of the proposed costs, should beincluded in the appraisal or in a supplemental report. Anychanges in the proposed development, such as the amount ofanticipated road work, septic designs, water sources, etc.,


must also be fully supported. If disputes arise over thefeasibility of a project, an objective outside expert shouldbe consulted.

FS Response

The FS concurs. Undocumented development proposals take theform of speculative evidence and fail to conform with therequirements of UASFLA, Section A9. All appraisals preparedand/or submitted for agency use must conform to therequirements reflected in UASFLA. Periodic compliance andoversight reviews of regional appraisal activity by the FSChief Appraiser shall focus on this type of unsupportedsupposition. At the annual review of FS appraisal policy,practices, and procedures, we will review current policy anddirection and incorporate appropriate policy and procedures toproperly reflect fair market value under circumstances asdescribed in Recommendation No. 3a above.

OIG Position



Ensure that presumed zoning changes are supported by1) evidence that the landowner has filed the appropriateapplications; 2) documentation from the approving State orcounty agency supporting the proposed change; and 3) ananalysis of the local environment, including residentattitudes, recent zoning changes, etc., to support theappraiser’s assumption that the change is reasonably probable,not just possible.

FS Response

The FS concurs. Undocumented reflections of potential zonechanges are unacceptable as they are speculative andconjectural in character, and fail to meet the requirements asdefined in UASFLA, Section A9. Periodic compliance andoversight reviews of regional appraisal activity by the FSChief Appraiser shall focus on the potential for type ofunsupported supposition. If repeated deficiencies are noted,the delegated appraisal approval authority can be rescinded.That would result in WO approval requirements for allappraisals prepared in the region. As part of the annualreview of FS appraisal policy, practices, and procedures, theFS will review current policy and direction and incorporateappropriate policy and procedures to properly reflect fairmarket value under circumstances as described inRecommendation No. 3b above.

OIG Position




Ensure that appraisal claims about water rights, access,septic designs, etc., are supported by documentation from theapproving State or county agency. Special attention should begiven to the status of water applications and whether theyhave been protested. If no documentation is available, theassertions should be considered speculative and excluded fromconsideration.

FS Response

The FS concurs. Undocumented assertions concerning waterrights, access, septic designs, etc., are unacceptable as theyare speculative and conjectural in character, and fail to meetthe requirements as defined in UASFLA, Section A9 and,further, fail to properly support the requirements associatedwith a properly documented highest and best use analysis asreflected in UASFLA, Section A3. Periodic compliance andoversight reviews of regional appraisal activity by the FSChief Appraiser shall focus on the potential for this type ofunsupported supposition. At the annual review of FS appraisalpolicy, practices, and procedures, the FS will review currentpolicy and direction and incorporate appropriate policy andprocedures to properly reflect fair market value undercircumstances as described in Recommendation No. 3c above.

OIG Position



Require that all appraisals and valuations of non-Federal landbe reviewed and evaluated by qualified FS review appraisers.

FS Response

The FS generally concurs. All appraisals prepared for FSlands activities are required by law and regulation to bereviewed by a qualified agency review appraiser asprerequisite to their acceptance for agency use. The onlysituation where this standard does not apply is if the land inquestion consist of small parcels, low-value properties, wherethe cost of appraisal and review approaches or exceeds thevalue of the property under consideration. This exception mayonly be applied where the case is non-controversial and simplein character. Periodic compliance and oversight reviews ofregional appraisal activity by the FS Chief Appraiser shallfocus on this compliance, and program managers will be heldaccountable if this situation is found to occur.


OIG Position


Our audit found several conditions

FINDING NO. 4

INTEGRITY AND INDEPENDENCEOF FEDERAL APPRAISERS

COMPROMISED IN LANDTRANSACTIONS

which undermined the integrity andindependence of the Federalappraisal process. FS regionallands staff allowed exchangeproponents to repeatedly challengeFederal appraisals until theyobtained the values they desired fortheir properties. In some cases, FSappraisers did not approve their ownappraisals because they knew theirappraisals would be rejected by the

proponent. Finally, FS regional management reorganized theirappraisers to have them report directly to the regional realtyofficer, even though she had no training in or knowledge ofFederal appraisal standards and was primarily motivated tocomplete land exchanges with proponents and third-partyfacilitators. Undermining the independence and integrity ofappraisers weakens the only control to ensure that theGovernment obtains fair value in land exchange transactionswith proponents and third-party facilitators.

FSH 5409.12, effective August 3, 1992, states that the FSappraisal review is designed to protect the appraiser, theline officer, and the public by providing an independent,technical analysis of the adequacy of the value conclusions.The appraisal review system is designed to approve reasonableand accurate value estimates supported by facts and analysesfor use in land exchanges and acquisitions. The appraisalreview maintains the desired quality of appraisal reports byensuring that the appraisal process follows recognizedappraisal practices and standards and complies with Federallaw, Departmental regulations, and FS directives.

As the real property valuation expert for all FSadministrative levels, the review appraiser provides technicalleadership in the interpretation of applicable law and policyand in the sound and consistent application of appraisalconcepts, principles, procedures, and techniques. The reviewappraiser must provide an independent, unbiased, professionalopinion of the technical adequacy of the appraisal report andthe value estimate. Title 36 CFR 254.9(d) states that theauthority to review appraisals is specifically delegated bythe Secretary to the Chief Appraiser, instead of to theauthorized officer, to maintain the independence of thevaluation process from the exchange negotiation process.

During our review we found several conditions that haveundermined the integrity and independence of the appraisalprocess in the region. Forest and regional management allowedexchange proponents and third-party facilitators to repeatedlychallenge the accuracy of Federally-approved appraisals. Insome cases FS appraisers did not approve their own appraisalsbecause they knew the proponents and third-party facilitatorswould not approve their appraised values. In addition,regional and forest lands staff did not support theirappraisers when the appraisers approved values that were lowerthan the values estimated by the proponent and the third-party


facilitator. They openly questioned the objectivity andcompetence of their appraisers in front of the proponent andthird-party facilitators. Finally regional managementreorganized their appraisers under the direct control of theregional realty officer to ensure that their work would nothinder the processing of land exchange transactions withproponents and third-party facilitators.

Appraiser Reorganization Reduced Independence

When the deputy regional forester began working at theregional office he noticed problems between FS appraisersand the lands staff. In two high-profile land exchanges,FS appraisers and exchange proponents could not agree onvalues for the non-Federal land. Regional lands staffthought FS appraisers were biased against exchangeproponents and uncooperative in land exchanges. Inconsultation with the FSWO, the deputy regional foresterasked a former regional director of lands, since retired,to do an informal, undocumented review of the two exchangecases to determine the source of the impasse.

The retired employee interviewed the exchange proponentsand FS staff, then verbally presented the results of hisreview to the deputy regional forester and regional landsstaff. He noted that while lands staff were obliged tomeet land acquisition targets, FS appraisers were not. Hetold lands staff that the appraisers "worked for them" andsuggested reorganizing the appraisers so that they weredirectly supervised and evaluated by lands staff, ratherthan the regional appraiser. He thought this change wouldput more pressure on FS appraisers to approve exchangevalues in a timely manner. The deputy regional foresterproceeded with the reorganization even though the regionalrealty officer, who supervised and evaluated theappraisers, did not have the qualifications, training, andexperience in Federal appraisals.

This reorganization created an impediment to theappraisers’ independence and objectivity because thequality of their work was evaluated by lands staffunfamiliar with appraisal work and motivated by landacquisition targets. Regional lands management told usthat they had not considered the reorganization’s effect onthe appraiser’s autonomy. They maintained that thereorganization occurred because the regional appraiser wasarrogant and a barrier to completing land exchanges.

During our audit, regional management reversed thequestionable reorganization. Currently, FS appraisers aresupervised and evaluated by the regional appraiser whoreports to the regional director of lands.

FS Lands Staff Allowed Proponents to Repeatedly ChallengeFederal Appraisals

FS management allowed exchange proponents to repeatedlychallenge the Federal appraisal process. For example, inthe Deer Creek exchange, the FS and BLM appraisers hadperformed four separate appraisals of the same property inabout a year, all of which were rejected by the proponentas follows:


CHRONOLOGY OF DEER CREEK APPRAISALS

Date Valuation Event

August 1992 $ 2 million Proponent purchases land.

August 1994 $12.5 million Proponent values land to exchange toFS. FS appraisers reject appraisal astoo speculative.

October 1994 $ 4.7 million FS contracted appraisal value.Rejected by proponent.

June 1995 $ 7.4 million BLM contracted appraisal value.Rejected by proponent.

September 1995 $ 6.7 million FS/BLM appraisal value. Rejected byproponent.

November 1995 $ 4.6 million FS/BLM appraisal value after countyplanning commission denied proponent’sresidential development plans for theland. Previous appraisals had valuedthe land based on the potentialdevelopment of the property. Rejectedby proponent.

March 1996 $10.5 million FS improperly bargains with proponentbased on value determined by appraiserrecommended by proponent.

In the Cashman exchange, there were five differentvaluations done of the same property over the course of ayear due to disagreements by the proponent over thevaluations. The final value was accepted by the FS and BLMafter the proponent threatened to develop the property ifthe exchange was not consummated:


CHRONOLOGY OF CASHMAN APPRAISALS

Date Valuation Event

August 1994 $9.8 million Proponent appraised optioned propertyto be exchanged to the FS for FederalLas Vegas properties. FS rejectedappraisal as speculative.

August 1994 $4 million FS appraisal of property. Rejected byproponent.

April 1995 $8.5 million Contracted appraisal performed byappraiser instructed by proponent.Value exactly equalled the appraisedvalue of Federal Las Vegas propertiesdesired by the proponent. FS and BLMappraisers reject appraisal asspeculative.

September 1995 $6 million FS and BLM appraisal value ofproperty. Rejected by proponent.

November 1995 $8.5 million FS and BLM appraised value afterproponent threatened to develop theproperty if the exchange was notconsummated.

Continuing to reappraise properties due to objections byproponents and third-party facilitators creates theappearance that Federal appraisers and their appraisals canbe manipulated by proponents and third-party facilitators.

FS Lands Staff Questioned Professionalism of FS Appraisers

Regional and forest lands staff openly questioned theprofessionalism of Federal appraisers when they would notapprove the values desired by proponents and third-partyfacilitators. In one exchange, a proponent instructed hisappraiser to use speculative assumptions in order toincrease the appraised value of his non-Federal land. TheFS review appraiser properly concluded that the valuationwas too speculative and would not approve the high value.The forest supervisor, who had no appraisal background ortraining, described the appraiser’s concerns as"embarrassing" and said the appraiser did not understandcomplicated real estate valuations. Under time pressurefrom the regional director of lands, the review appraisereventually approved the value.

In another exchange, the proponents claimed that fourseparate Federal appraisals had all undervalued theirproperties. They told regional lands staff that theFederal appraisers had ignored or misinterpreted criticalmarket information. The appraisers, in question, includedthe FS regional appraiser and two chief appraisers fromBLM. Each of these individuals was a senior Federalappraiser with unlimited approval authority. The regionaldirector of lands, who had no appraisal experience and onlya limited knowledge of the properties being appraised,agreed that the proponents’ complaints were valid. Hecharacterized the Federal appraisers as "roadblocks in the


way" and "people kicking over every stone." He told theproponents that regional management had done an internalreview and put things in order (referring to thereorganization of appraisers). The same person wasappointed by regional management as senior member of the FSbargaining team and "bargained" a value with the proponentsand third-party facilitator that exceeded theFederally-approved values by $5.9 million (See FindingNo. 1).

By openly criticizing the work of their own appraisers,regional and forest land staff has raised significantdoubts about the integrity of their Federal appraisers withproponents and third-party facilitators.

Appraisals Unacceptable to Proponents Were Not Approved

We noted two cases in which appraisals acceptable to the FSand meeting Federal appraisal standards were not approvedby FS appraisers because the values did not meet proponentexpectations. In the first case, a FS appraiser completeda full appraisal of non-Federal property being offered byan exchange proponent. The work was reviewed by theregional appraiser and determined to be acceptable.However, the FS appraisers decided not to sign theappraisal. If the appraisal had been signed and approved,it would have established the agency-approved value at$4 million, which was less than half the price desired bythe proponent. In order to avoid a controversy over thenon-Federal land’s value, the FS appraisers decided toleave the FS appraisal unsigned and unapproved and let afee appraiser value the land.

In the second case, a fee appraiser hired by the FScompleted an appraisal of non-Federal land identified forexchange. This appraisal was reviewed by a qualified FSappraiser who determined that it met Federal appraisalstandards and recommended it’s approval for agency use.However, the final approval was withheld at the request ofthe third-party facilitator. The facilitator thought theappraised value was too low and had specific questions shewanted the appraiser to answer before the FS approved thevalue. FS appraisers complied with this request and didnot formally approve the appraisal. Even though the feeappraiser subsequently addressed all of the facilitator’squestions, the appraisal was never approved. The WO ChiefAppraiser told us that the regional appraiser committed aprocedural error by not formally accepting the appraisedvalue. As a result, the FS did not have a value approvedfor agency use and the facilitator was allowed to pursueother valuations of the non-Federal land.

The conditions noted above seriously compromised theeffectiveness of the Federal appraisal function in the region.The independence and objectivity of FS appraisers is essentialin establishing values that are fair to both the landownerwhose property is being acquired and to the public who paysfor it. Without an effective appraisal function, theintegrity of the entire land exchange program is compromised,and the interests of the public are not protected.



Discontinue the practice of conducting another Federalappraisal if the proponent or third-party facilitator objectsto the Federal appraisal on hand. If another appraisal iswarranted, it should be at the expense of the proponent and/orthird-party facilitator but under the direction of a Federalappraiser, and the final appraisal should be reviewed foradherence to Federal appraisal standards.

FS Response

The FS concurs. There may only be one agency-approvedappraisal on any given property at any time. Any proponentmay submit an appraisal prepared at their own expense forconsideration on any pending agency action to which they area participant. All such submissions must be reviewed by aqualified agency review appraiser for compliance with UASFLA.If the submission by the proponent meets UASFLA standards, itis considered in context with any existing current appraisalthat has been approved for agency use. "Appraisal shopping"is inappropriate. At the annual review of FS appraisalpolicy, practices, and procedures, the FS will review currentpolicy and direction and incorporate appropriate policy andprocedures to address this situation.

OIG Position



Elevate any allegations relating to the competence of FSappraisers to the WO Chief Appraiser, who can review theproponents allegations and determine whether valid concernsrelating to the appraiser exist.

FS Response

The FS generally concurs. A formal process is in place forsuch reviews and is reflected in FSH 5409.12, 7.35 and 7.4.Annually, all FS appraisers’ credentials and production arereviewed as a portion of the ongoing quality control andannual re-delegation of appraisal/review authority carried outby the regional appraiser (FSM 5410.6). Further, periodicreviews of regional appraisal activity carried out by the FSChief Appraiser already focuses on this issue. FSM 5410.42crequires the regional appraiser to manage the appraisalfunction within the region and to notify the Chief Appraiserof any valuation problem that might attract congressional ormedia attention.

OIG Position




Ensure that the technical performance of the regionalappraiser is prepared by the WO Chief Appraiser and is givengreater consideration in the evaluation prepared by theregional director of lands.

FS Response

The FS concurs with this recommendation. The delegation ofappraisal responsibility to the regional appraiser is a namedelegation from the Chief Appraiser to a well-qualified namedincumbent. Periodic compliance reviews by the Chief Appraiserprovides oversight as to the function and performance of theregional appraiser and regional appraisal capability. Ifrepeated deficiencies are found, the delegated appraisalapproval authority can be rescinded. The Chief Appraisercurrently provides input on the performance of regionalappraisers to the regional director of lands throughcompliance reviews. Continued use of the periodic compliancereviews with emphasis on regulatory and statutory requirementswill provide ample oversight.

OIG Position



Approve each appraisal as soon as it is determined that theappraisal meets Federal appraisal standards.

FS Response

The FS concurs. A timely and prompt closure on all appraisalssubmitted for agency consideration is a requirement of goodprofessional practice. Currently, there is no specifiedtimeframe, as each appraisal is considered on its own merit.Due to the maximum age-life of one year from the date ofvalue, prompt closure of the appraisal process is essential totimely closure of the case. At the annual review of FSappraisal policy, practices, and procedures, the FS willreview current policy and direction and incorporateappropriate policy and procedures to properly address thesituation.

OIG Position



FS regional and forest lands staff processed land transactions

III. PROCESSING OF LAND TRANSACTIONS DID NOTCOMPLY WITH REGULATIONS AND COULD RESULT INPOTENTIAL LOSSES

with third-party facilitators that did not comply withregulations and could have exposed the FS to potential losses.In one instance, the forest entered into an improper agreementwith a third-party facilitator which gave the facilitatorexclusive marketing rights to over 850 acres of forest landsvalued at over $6.5 million, without requiring the facilitatorto identify non-Federal lands to give to the forest inexchange. The same transaction allowed the third-partyfacilitator to incur costs on the forest lands. The potentialliability for these costs could have reached $1.9 million.

In another case the forest supervisor improperly signed alegal document which allowed a facilitator to transfer aparcel of land to the FS without its knowledge and consent.This resulted in the FS having title to the land for nearly2 years without realizing that the FS was liable for anyinjuries or claims against the land.

Finally, we found that water rights on a non-Federal propertypurchased by the FS in a land exchange were not adequatelyaccounted for and protected by FS lands staff. Our review ofthe completed exchange disclosed that the FS could potentiallylose over $2 million in surface and ground water rights unlessimmediate action is taken to secure the rights.

Forest lands staff entered into an

FINDING NO. 5

IMPROPER LAND AGREEMENTWITH THIRD-PARTY FACILITATOR

COULD RESULT IN POTENTIALLOSS

invalid statement of intent with athird-party facilitator to exchangespecific FS lands, known asMt. Rose, for unspecified privateland. The statement also gave theappearance of a pooling agreement,which is not allowed under FSregulations. The forest initiatedthe improper exchange agreementbecause the forest wanted to disposeof the Mt. Rose lands but did not

have the funding necessary to clear the archeological sites onthe land. The forest originated a plan to have the third-party facilitator clear the archeological sites from Mt. Roseand, in return, the forest would exchange the lands to thethird-party facilitator. Essentially the forest abrogated itsresponsibility for management of forest lands to the third-party facilitator. This exposed the Government to potentialliability for the cost of clearing the archeological sites.It also gave the third-party facilitator the exclusivemarketing rights to valuable forest lands with archeologicalsites valued at about $ 6.5 million without having to identifynon-Federal land of equal value for exchange. The forest wasin the position of having to take whatever non-Federal landsthe third-party facilitator offered later in the exchangeprocess, regardless of their resource value.


The forest had identified the Mt. Rose lands for disposalbecause they were isolated parcels surrounded by private landsand developed subdivisions. However, these parcels were foundto contain archeological sites and the forest could notdispose of them without first clearing artifacts from thesites. The forest began working on the archeological sitesbut soon realized that it did not have the funding necessaryto clear them. The forest contacted a third-party facilitatorand asked it to clear the archeological sites at the thirdparty’s expense.

FS regional lands staff were aware of the arrangement andendorsed it. The regional staff wanted an official agreementand instructed the forest to sign a statement of intent withthe third-party facilitator. The agreement, signed onJuly 14, 1993, called for the forest to give about 850 acresof Mt. Rose forest lands to the third-party facilitator inexchange for unspecified private lands.

We determined that the statement of intent was invalid becausethe third party had not secured any non-Federal lands toexchange to the FS. FSH 5409.13 states that the third partydoes not sign the letter of intent until the non-Federal landis secured for conveyance. This provision had clearly notbeen met because the private lands to be conveyed to the FS inthis exchange had not been identified by the third-partyfacilitator 3 years after the agreement had been signed. Inaddition, the statement of intent was signed by a forestemployee who did not have the delegated authority to sign theagreement. The FS forest supervisor was not aware that theemployee did not have the delegated authority to sign theagreement.

In addition to being invalid, the statement of intent gave theappearance of being a pooling agreement, which is not allowedunder FS regulations. An OGC attorney agreed that thisagreement had the appearance of being close to a poolingagreement. Pooling agreements allow title to Federal lands tobe transferred to a third-party facilitator without receivingnon-Federal lands of equal value in exchange. The third-partyfacilitator can then sell the Federal land and use theproceeds to acquire non-Federal lands for transfer to theFederal Government at a later date. Such an agreement exposesthe Federal Government to a loss if the third party does notperform under the agreement. At the time of our audit, titleto the Mt. Rose lands had not been transferred to the third-party facilitator; however, the third-party facilitator hadasked the forest to allow it to pre-sell some of the parcelsin order to offset costs incurred in the process of clearingthe archeological sites.

Our audit also found the following conditions related to theMt. Rose land exchange transaction:

• Assembling the numerous FS-owned Mt. Rose parcels into onetransaction reduced the land’s total value because itallows a discount. An appraisal paid for by the third-party facilitator, without the knowledge and consent of theFS, showed the value of the FS lands at approximately$6.5 million when appraised as separate parcels. However,by assembling these parcels as one transaction, the valuewas discounted to $3.2 million. The appraisal had not been


reviewed or approved by FS appraisers and therefore is notofficial. However, it does give an indication of thereduced value, called a "bulk discount" ($3.3 million),that could occur if Mt. Rose lands are grouped as onetransaction. It is clearly in the best interest of theGovernment to repackage these lands to maximize theirvalue.

• The Mt. Rose statement of intent gives the third-partyfacilitator the privilege of dealing with private partiesconcerning the FS-owned lands, even though the facilitatorhad not provided due consideration to the FS. The lands inquestion are located in a highly desirable area, on or neardeveloped housing subdivisions and a proposed country club.Our review of the files disclosed numerous inquiries fromprivate individuals and developers who had expressedinterest in owning the lands. Because of the statement ofintent, the FS had been referring all inquiries about theFS-owned lands to the third-party facilitator.

In the only completed exchange of Mt. Rose land, a realestate developer wanted a 20-acre easement on FS-owned landand was told by FS staff to deal with the third-partyfacilitator before any formal exchange could be processed.The third-party facilitator then coordinated the exchangebetween the developer, Washoe County, and the FS. Ourreview of the closing documents for the transaction showedthe developer paid $2,805 to cover closing costs plus anadditional $42,000 to the facilitator for undisclosedreasons.

• The forest allowed the third-party facilitator to incurexpenses on FS-owned lands without restrictions, puttingthe FS at potential risk for a claim of unspecified futureliabilities to the third party. To date, the third partyhas claimed expenses between $100,000 and $200,000 for anarcheological report, yet has not provided the FS with anaccounting of the actual expenditures or documents tosupport the claimed costs. The total cost of clearing thearcheological resources on the Mt. Rose lands has beenestimated by the facilitator at $1,552,419.

The statement of intent clearly allows either the third-partyfacilitator or the FS to withdraw from the agreement at anytime before a formal exchange agreement is completed. Itstates, "It is understood that prior to the exchangeagreement, or issuance of a patent or deed by the UnitedStates, no action shall create or establish a contractual orother obligation against [the third party] or the UnitedStates. Either [the third-party facilitator] or the FS maywithdraw from the exchange at any time prior to the agreementor conveyance from the United States."

To ensure that the Government maximizes the value of theMt. Rose lands and minimizes future liabilities to the third-party facilitator, the FS must immediately withdraw from theMt. Rose statement of intent. Due to the high marketabilityof these FS-owned lands, the FS should repackage the Federalland to maximize its value and consider marketing the propertythrough a competitive land exchange. By competitivelyexchanging individual parcels, the FS should be able to obtainthe best value for these lands. This would also mean that to


complete the exchange the private party must come up with landof equivalently higher value to the FS to complete theexchange. Finally, the FS should advise the third-partyfacilitator to terminate any further work on FS-owned landsand request an OGC opinion on the FS liability to the thirdparty for any work that has been completed so far.

This finding was referred to the Chief of the FS on April 17,1997. The FS response was submitted to OIG in a letter datedApril 25, 1997. Following are the recommendations made to theFS and their response.


Withdraw from the Mt. Rose Statement of Intent. Ensure thatfuture agreements with third parties provide for mutualidentification of lands that are proposed to be exchanged anda reasonable timeframe for completing the exchange.

FS Response

The FS has taken appropriate action on this matter. By aletter dated April 15, 1997, the regional forester directedthe Humboldt and Toiyabe Forest Supervisor to withdraw fromboth the Mt. Rose and Hunter land exchanges due primarily todeficiencies noted in the statements of intent. On April 17,1997, a certified letter was sent by the forest supervisor tothe third-party facilitator, advising it that the FS waswithdrawing from these two land exchange proposals.

Additionally, the regional forester suspended all delegationsin lands and landownership adjustment cases of the Humboldtand Toiyabe Forest Supervisor. The regional forester agreedthat any subsequent Agreement to Initiate involving theHumboldt and Toiyabe National Forest would comply with 36 CFRPart 254.4, and identify a reasonable timeframe for completingthe proposed exchange.

OIG Position



Repackage the Federal lands in the Mt. Rose exchange tomaximize their value and consider conducting competitive landexchanges for these lands.

FS Response


As noted in Recommendation No. 5a, the FS has withdrawn fromthe Mt. Rose exchange. Prior to entering into any subsequentexchange proposal involving these lands, the regional foresterwill review various assembled packages and consider thepossibility of offering all or a portion of these lands undera competitive proposal.

OIG Position



Advise the third-party facilitator to cease any further workon FS-owned lands in the Mt. Rose exchange and obtain legaladvice from OGC on liabilities that may arise from expensesalready incurred by the third party.

FS Response

The FS has already taken the recommended action on thismatter. The Humboldt and Toiyabe Forest Supervisor’sApril 17, 1997, letter advised the third-party facilitatorthat as a result of the withdrawal, the third-partyfacilitator was not to take any further action that wouldinvolve the Federal properties.

In addition, the regional forester has requested an opinionfrom OGC as to potential FS liability for any expenses alreadyincurred by the third party on the Mt. Rose exchange case.

An opinion was obtained from OGC which determined that the FSwas not liable for the expenses incurred by the third party.

OIG Position



Minimize future liabilities and maintain adequate controlsover land exchange activities to ensure that any futureagreement to initiate an exchange clearly documents theresponsibilities and cost to be incurred for each party in theexchange.

FS Response

All land adjustment activities on the Humboldt-ToiyabeNational Forest are being handled by the Ogden RegionalOffice. This authority will not be re-delegated to the forestuntil they have a qualified individual on staff to manage thelands program. The region will be filling this position inthe near future. Until this occurs, the regional forester


will ensure that any subsequent Agreement to Initiate on theHumboldt-Toiyabe will comply with 36 CFR 254.4 and contain anassignment of responsibility for the performance of requiredfunctions and costs associated with processing the exchange.

OIG Position

We accept management decision on this recommendation

The forest supervisor improperly

FINDING NO. 6

LAND DONATION DID NOTCOMPLY WITH FS REGULATIONS

signed the warranty deed on a third-party facilitator’s donation ofland, called the Durkee Donation,without the delegated authority todo so, and without informing FSregional and lands personnel. Bysigning the exclusive jurisdictionclause on the warranty deed, thetitle company then recorded the

transfer of title at the Washoe County Courthouse. Thisoccurred because the third-party facilitator had a deadlinefor making the donation, and the forest supervisor believed hehad the authority to sign the documents. As a result, titleto the Durkee land had been transferred to the FS without theknowledge and consent of the appropriate FS lands staff andwithout the required review and approval procedures. Althoughthe property, valued at $375,000, was conveyed to the FS inDecember 1995, the regional and forest lands staffs wereunaware of the transfer until we discovered the conveyanceduring our audit fieldwork in December 1997. As a result ofthe donation, the FS is liable for additional administrativecosts for accessing and maintaining the property and ensuringthat all title encumbrances to the property are cleared. Inaddition, it is liable for any injuries and claims on thelands.

When the Durkee Donation documentation was originallysubmitted to the regional office, the regional lands staffquestioned the forest to determine if they really wanted theland. The regional lands staff told the forest supervisorthey might never be able to clear up all the unacceptablerestrictions and easements to the land title in order to makeit acceptable for the FS. There were also concerns about theproperty’s limited access and its impact on increasing FS landboundaries and management costs. The district ranger thoughtthat the FS should accept the donation because he had promisedthe facilitator that the FS would accept it. Even though theregional office told the forest not to accept the land, thedistrict ranger said that the FS should take it. The forestsupervisor agreed with the district ranger and instructed theforest lands staff to accept the donation.

We determined that the forest supervisor signed the warrantydeed on January 1996, which the title company used to recordthe title transfer to the U.S. Government for approximately 32acres of private land adjoining a private subdivision nearReno, Nevada. The Durkee land was conveyed by a third-partyfacilitator as part of its agreement with the originallandowner. The facilitator signed an agreement with thelandowner to convey the property to the U.S. Government for acommission of $5,000. The facilitator had to consummate thedonation by December 1995, because the landowner, which was a


development corporation, was terminating operations anddissolving the corporation at the end of 1995. The FSsupervisor signed the warranty deed to the property eventhough the property had not been inspected and the titledocuments had not been reviewed by FS lands staff and OGC forlegal acceptability. In fact, both regional and forest staffwere completely unaware of the title conveyance until ouraudit discovered the transaction while reviewing the third-party facilitator’s 1996 report of land transactions with theState of California Attorney General.

We immediately questioned regional office managementconcerning the propriety of the donation since they had notapproved the donation and had previously questioned thebenefits of the donation. From our review of the maps anddocuments relating to the donation, we believe the donationmay increase administrative costs and potential risks andliabilities as follows:

• The property would increase FS boundaries resulting inadditional costs to mark and maintain the enlargedboundaries. One side of property directly borders aprivate housing subdivision and the other side fronts otherdeveloped properties. An industrial park is locatednearby. The picture in Figure 3 shows the steep slope ofthe Durkee property adjacent to houses in the Juniper Ridgesubdivision.


Figure 3

• Access to the property is severely limited. The onlyaccess to the property is an easement 15 feet wide andabout 590 feet long on private property owned by theJuniper Ridge Homeowners Association. Over 40 feet of thiseasement trespasses another easement called the Last ChanceDitch. It is unclear if the owner of the Last Chance Ditcheasement was consulted, but the grant of easement specifiesthat the grantee of the easement must not, in any manner,block, interfere, damage, or affect the Last Chance Ditcheasement. There is also no documentation that the accesseasement has been recorded with the county. Because thereis no record of a grant, and because the originallandowner, a development company, was dissolved in 1995,the right to use the easement rests with the Juniper RidgeHomeowners Association.

• The easement is steep in some locations and is described asundeveloped and unimproved. It may be difficult to improvethe easement with trails or footpaths. The grant ofeasement limits access to pedestrian traffic only,specifically excluding motorized vehicles of every type ordescription.

• The grant of easement states that the grantee of theeasement (potentially the FS) would be responsible torepair and maintain the easement in a proper, substantial,and workmanlike manner at the grantee’s sole cost andexpense. It also requires the grantee to assumeresponsibility for personal injury and property damagewhich may arise from the use, improvement, maintenance, orrepair of the easement on private property.

• There are protective covenants of the Juniper RidgeHomeowners Association which would restrict the use of theland donated to the FS. In addition there are easements


and rights-of-way that further restrict the use of theproperty. FSM 5404.14 states that a donation subject tooutstanding rights or reservations that could precludepublic use of the land for a period of time must be sent tothe WO Director of Lands for review and concurrence. Theseitems must be resolved for the FS to manage the landsefficiently.

The FS determined that the subject property did not benefitthe National Forest System. On December 16, 1997, theregional forester signed a document which disclaims allrights, title, or interest to the land described in thewarranty deed from the third-party facilitator. Despite theregional office’s rejection of the land donation, the third-party facilitator has continued efforts to convey the propertyto the FS, claiming that the donation provides neededrecreation and fire access to forest lands and containsarchaeological and historical sites. We found nodocumentation to substantiate the facilitator’s claims ofarcheological or historical significance. Given the severelylimited access to the property, we are also questioning thefacilitator’s claims of recreation and firefightingaccessibility. We determined that there are two parcelsproviding better access which have been proposed for exchange.

The third-party facilitator convened a meeting on January 28,1998, at the regional office involving FS regional and forestlands staff to discuss the Durkee donation. As a result ofthis meeting, the FS lands staff has allowed the third-partyfacilitator to again provide additional information relatingto property access, even though the FS had informed thefacilitator numerous times that this land did not provide anybenefits to the FS.

Since the FS has already determined that the land does notprovide a benefit, it should formally reject the donation. Ifthe FS reconsiders the donation and decides to accept it, thedecision should be documented to show that the actual benefitsoutweigh the liabilities and costs of accepting it.Acceptance of the land would also require the FS to complywith the required procedures in the processing of thedonation. Because of the problems associated with thisdonation, we believe that it would be beneficial to have itreviewed and approved by OGC and the FSWO.


Formally reject the Durkee donation unless the third-partyfacilitator can provide verification of the actual benefitsand the region determines that the benefits outweigh the costsand liabilities associated with the donation.

FS Response

This action has been taken. The proposed Durkee donation hasbeen reviewed by a team of FS specialists and it wasdetermined that the acquisition of this parcel was not in thebest interest of the National Forest System. By a letter


dated June 10, 1998, the regional forester advised thethird-party facilitator of this finding and rejected theproposal.

OIG Position



If the region accepts the donation, ensure that all requiredsteps of a donation are completed prior to acceptance,including the review and prior approval by OGC and the FSWO ofthe terms of the donation.

FS Response

The regional forester rejected the donation. See the responseto Recommendation No. 6a.

OIG Position



Ensure that all lands staff are aware of the delegations ofauthority relating to land donations and the proceduresrequired to be met prior to the acceptance of a donation.

FS Response

The FS concurs. The regional forester will be directed toformally remind Region 4 forest supervisors of the delegationsof authority and proper procedures (FSM 5404.14) whenconsidering donations. These procedures will also beincorporated into annual FS national training for lineofficers and program managers.

OIG Position



The FS paid $2.1 million for water

FINDING NO. 7

WATER RIGHTS ACQUIRED IN ALAND EXCHANGE WERE NOT

PROTECTED FROM POTENTIALLOSS

rights in a land exchange withoutfirst determining if the waterrights could be used by the FS.This occurred because the FS did nothave guidelines relating to theacquisition of water rights andstaff did not consult with an FShydrologist to determine the water’sutility to the FS. Consequently,the FS could lose about $345,000 inground water rights and another $1.8

million in surface water rights to the State of Nevada unlessthe water rights are put to the permitted use or exchanged toanother user for something of value to the FS.

The FS does not have guidelines relating to the acquisitionand disposition of water rights in Federal land exchanges.Once these rights are in Federal ownership, the FS does nothave a system with which to track the amount, type, and statusof them. In addition, an OGC regional attorney told us thatwater rights acquired by the Federal Government are consideredan interest in real property and cannot be sold. The only wayto dispose of water rights that have no FS utility is toexchange them for other real property of equivalent value.

In a 1978 court case, the U.S. Supreme Court has affirmedCongress’ longstanding policy that defers the administrationof water rights to States. This ruling means that the FederalGovernment must comply with the water use requirements of theStates in which the water resides. If the FS does not meetspecific State agency requirements, the State can revoke thewater rights and allow another party to claim them.

In 1991, the Federal Government began negotiations withlandowners and third-party facilitators to acquire a3,864-acre parcel of land known as the "Galena Resort." Theowners of the property had planned to build a destinationresort with ski lifts, golf courses, restaurants, hotels, andcondominiums. They had already applied for and receivedcounty approvals and permits, including significant waterrights. In order to prevent this development, FS and BLMlands staffs pursued the acquisition of the Galena property ina land exchange deal. In August 1994, the Galena property wasacquired by the FS at an exchange value of $19.8 million,which included about $2.1 million in surface and ground waterrights.

FS staff processing the Galena exchange knew little about thenature of the water rights or even if the FS could put thewater to use after it was acquired by the FS. They did notanalyze potential FS or other Federal uses or contact the FShydrologist for input during the exchange negotiations. Thereare currently no FS directives or policy requiring any type ofjustification or rationale for the acquisition of water rightsin a land exchange transaction. Our discussion with the OGCregional attorney also disclosed that the FS has lost waterrights in the past and needs to develop a system to accountfor these rights in any land exchange transaction.

The water permits originally issued to the Galena Resortspecified certain uses for the surface and ground water and a


period of time to prove the water was being put to beneficialuse. Although the FS acquired the Galena property before theState’s conditions had been met, FS lands staff took no actionto meet the permit requirements and did not contact theNevada State Division of Water Resources to extend thedeadline. On January 12, 1996, the State agency cancelled thewater rights for the ground water because the FS had notproven beneficial use by the deadline date and had not filedfor an extension.

The FS did not realize they had lost the ground water rightsuntil a water attorney contacted the forest supervisor onJanuary 17, 1996, and told him that the FS no longer owned thewater rights previously owned by the Galena landowner. The FShydrologist quickly petitioned the State agency for a reviewof the cancelled permits and an extension of time for the FSto put the water to beneficial use. The State agencyreinstated the permits and allowed the FS one year (untilMay 1998) to identify a way to use the water and provebeneficial use.

In November 1997, we contacted the FS hydrologist to determinethe status of the ground water rights. He stated that the FSstill had found no use for the ground water rights, valued atabout $345,000, and would probably lose them by the May 1998deadline. He noted that private interest in obtaining thewater rights in Galena, which is situated in the Lake Tahoearea, was strong and that the FS could potentially exchangethe ground water for real property of equivalent value.

The FS also had not identified a use for the $1.8 million insurface water rights. At the recommendation of the Statewater engineers, the FS hydrologist allowed the surface waterpermit to revert back to its original use of irrigating landoutside FS boundaries. This allowed the FS to retainownership of the water rights even though they were not usingit. FS staff are considering converting the surface water toan "in-stream flow" which allows the waters to remain unusedin the Galena Creek outside the FS boundary. FS staffinformed us that these water rights may be subject toabandonment proceedings in the future if a request for changeis not made with the State. Although the FS will retainownership of the surface water, we questioned the benefits ofpaying $1.8 million for water that would only irrigate privatefarmlands or be available for other private uses beyond theforest boundaries.

FS staff told us that the FS bought a "pig in a poke" in theexchange for the Galena water rights. The hydrologistconcluded that FS lands staff and appraisers did notunderstand the type of water they were acquiring in the Galenaland exchange. He told us that he was never consulted by FSlands staff about the Galena water’s potential utility duringthe negotiation for Galena’s properties, and thought it didnot make sense for the FS to pay for water they had no plansto use.

If no beneficial uses are found for Galena’s waters, the FSshould immediately seek to exchange the Galena water rights toanother user for real property of equivalent value. Anyproposed exchange should determine how to achieve maximumvalue for the water right (e.g., attaching it to a parcel of


land or valuing it as a unique property). Given the shorttime period until the ground water rights are lost, the FShydrologist should petition the State agency for anotherextension of the ground water rights.

In future exchanges, FS lands staff and appraisers mustevaluate the types of water rights that may be included withthe non-Federal land being exchanged to the FS to ensure thatthe water rights will be used by the FS or another Federalland agency. If the utility of a water right is in question,appraisers of the non-Federal land should explore all optionsregarding the Federal use of the water, including contactingFS staff such as hydrologists, as well as staffs from BLM andthe Fish and Wildlife Service. If the FS determines that nopotential Federal use of the water exists, it should separatethe value attributable to the water rights from the appraisedvalue of the non-Federal lands and require the landowner todispose of the rights as part of the land exchange process.

The FS should also develop a system to account for acquiredwater rights. The status of all water rights should berecorded and updated periodically. If certain actions arenecessary to retain the water rights, such as proof ofbeneficial use or completion, those pertinent dates should benoted and the appropriate action completed before therevocation date.

We notified the FS on February 24, 1998, of the potential lossof the water rights and recommended that actions be taken toprotect the value of the Galena water rights estimated atabout $2.1 million. The response by the FS is indicated below(see Recommendation No. 7a).


Explore all options to use the water rights in the publicinterest or, if it is determined that these rights are excessto public needs, exchange the water rights for properties orservices that would be of equal value to the FS.

FS Response

Surface Water Rights: The FS was unable the meet the waterrights change-of-use permit conditions which prior to Federalacquisition were tied to the proposed private development.Therefore, a request was made to the State engineer towithdraw the appropriate applications for the rights to revertto their initial decreed status. Unlike non-decreed waterrights, failure to meet conditions of these permits simplycauses the point of diversion, manner, and use to revert tothe base rights adjudicated in the 1944 Ore Ditch Decree.These water rights remain in Federal ownership and are not inany current jeopardy. It is anticipated that "use" of thewater for national forest management purposes can be best metby changing the purpose to non-consumptive "in situ" use forprotection of instream flows and streamside vegetation ofGalena Creek. The FS will take appropriate action byrequesting a change of use, which is permitted under State


law. The change of use will be accomplished as soon as allpossible options have been evaluated.

Ground Water Rights: The FS does not desire to develop thepermitted use. Due to deed transfer delays and failure tofile Proofs of Completion of Work and Beneficial Use, thesepermits were cancelled on January 12, 1996. The FS didpetition the State for review of the cancellation and thenapplied for a time extension. The State granted a 1-yearextension which expires May 20, 1998.

The forest is attempting to develop a land exchange proposalthat will involve land and the 190-acre feet of undevelopedground water. By including these rights in a land exchangethe United States would receive equal value in the form ofland or interest in land. A meeting was held with the Stateengineer on April 8, 1998, to discuss the proposal and torequest a further extension of time to pursue the landexchange. The State engineer indicated that an extensioncould be granted to complete the exchange. An extensionrequest was file with the State engineer on May 19, 1998. Theforest is continuing to work on the exchange proposal whilewaiting for the formal response from the State engineer.

OIG Position



Review the utility of water rights attached to non-Federallands proposed for exchange. Determine if the water haspotential Federal uses by consulting the FS hydrologist orinterested staffs from other Federal agencies. If no uses aredetermined, separate the value attributable to the rights andhave the landowner dispose of those rights prior to the landexchange.

FS Response

The FS concurs. The regional forester will insure that ananalysis of water rights will be completed on the non-Federalland in considering future exchange or purchase transactions.This analysis will address:

1. Contributory value of the water to the property to beacquired.

2. Necessary actions for use of the water afteracquisition, i.e., change of use, change of diversionpoint, issuance of special use permit, reconveyance,etc.

3. Identify cost, funding source, and programresponsibility to accomplish actions in No. 2 above.

4. Effects on highest and best use and value of the landif the water is severed from the estate it serves.


In some cases, acquisition of water rights will have no effecton the appraised value of the land. In other cases, severanceof water rights can reduce the value of the land to a muchgreater degree than the value of the severed rights. It isalso difficult for some entities, such as local governments orState agencies, to sever water rights and convey them inseparate transactions. Thus, it is not always appropriate orin national forest interest to take the recommended course ofaction. However, we agree that a short-term or intermediateuse of the water, such as authorizing the use of the waterunder a special use permit or reconveyance, should beidentified when long-term utility is unknown.

OIG Position



Develop a system to account for water rights in order to trackthe status of acquired water and the actions necessary toprotect water rights from loss.

FS Response

The FS concurs and is currently developing an integrated database (Water Uses Tracking System) for water rights. The database will store basic water rights data and will integrateState-by-State data needs as the system is completed. Aprototype of this system will be available in November 1998.In the meantime, water rights data bases are being obtainedfrom Utah, Nevada, California, Colorado, Wyoming, and Idaho.These data bases will contain water rights data such aslocation of water source, ownership, point of diversion,quantity of water, and other relevant information dealing withthe status of these water rights. We anticipate that thisdata will be in place in Region 4 by September 1998. Acquiredwater rights obtained through land exchange or purchase willbe added to the data base as soon as the transaction has beenfinalized.

OIG Position



The forest did not have a

IV. INADEQUATE LAND ACQUISITION PLANNING ANDPRIORITIZATION HAVE LED TO QUESTIONABLE LANDTRANSACTION PROPOSALS

FINDING NO. 8landownership adjustment plan, whichis essential in determining whetherland transactions proposed by third-party facilitators are acceptable

and meet forest management needs and objectives. The regionaloffice allowed the forest to operate without an approved plan.In the absence of a plan, the forest supervisor had instructedforest lands personnel to refer proponents to third-partyfacilitators and to prioritize those projects proposed bythird-party facilitators as top priority. Without a formalplan, the forest lands staff is vulnerable to considering andaccepting all land transactions proposed by third-partyfacilitators, even those that have no benefit to the FS andmay increase FS administrative costs. Our audit questionedthree land transaction proposals with an estimated value of$10.5 million, which provided little or no discernable benefitto the FS.

FSM 5407.1 states that each national forest shall prepare alandownership adjustment plan for incorporation into theforest plan. The landownership adjustment plan establishesthe criteria for acquisition of non-Federal lands.Consequently, without a landownership adjustment plan therewas no specific criteria with which to objectively evaluatethe merits of land transactions proposed by third-partyfacilitators.

During our audit we found that although a landownershipadjustment plan had been prepared for the Humboldt NationalForest and submitted to the regional office, it had not beenreviewed and approved by the regional forester, which isrequired by FS policy. The forest supervisor did not preparea landownership adjustment plan for the Toiyabe NationalForest because he did not want to identify lands foracquisition. He believed that if the forest identified landson the Toiyabe they wanted to acquire, it would result inhigher prices for the targeted lands.

The forest has become involved in numerous land exchangesinvolving BLM (see Background section). In these exchanges,BLM gives up Federal lands in exchange for non-Federal lands,which are placed under the administration of either BLM or theFS. In order to improve coordination of these joint agencyexchanges, BLM requested that the FS provide them with a listof lands that were a priority for acquisition. The firstpriority listing was completed in March 1996.

The priority listing was actually four separate listings, onefor each of the ecounits in Nevada. The four ecounits werethe Sierra, Central Nevada, Northeast Nevada, and SpringMountains National Recreation Area (SMNRA). According to the


deputy forest supervisor, among the four lists, SMNRA had toppriority for acquisitions.

Based on discussions with FS personnel, there were no clearinstructions on how to use the priority list and how toprioritize the land. After the original priority list wascompleted, FS staff revised the list several times. Parcelsproposed for exchange were moved from lower priority to higherpriority, and new parcels were placed on the list. Thepriorities changed because the forest supervisor directedforest employees to refer proponents to third-partyfacilitators (see Finding No. 2); when the facilitatorsbrought proposed exchanges to the FS, almost all proposalswere accepted and elevated to top priority. Because theforest had no planning documents and no procedure foreffectively prioritizing their desired acquisitions,facilitators were able to propose any inholding or landadjacent to the forest as a land exchange and have theexchange proceed. We found that the seven highest-rankedproperties on the priority listing were those exchanges withthird-party facilitators.

We reviewed high-priority acquisitions and found that severalhad questionable resource value to the FS. Following arethree pending forest land transaction proposals thatillustrate the problems that can arise in the absence of aproper landownership adjustment plan and an effective prioritylist.

GASPARI RANCH EXCHANGE PROPOSAL

The Gaspari was a 1000-acre ranch that included a houseand a barn. Located on the outskirts of Reno, this ranchhad three sides adjacent to development, including agated housing community, and fronted on a majorboulevard. Originally listed as 24th in priority by theSierra ecounit group responsible for the area, Gasparimoved to 7th position because it had been optioned by athird-party facilitator. An appraisal, hired and paidfor by the third-party facilitator, determined that thebest use for the land was residential development andvalued it at $8.5 million.

The assistant forest supervisor, who was responsible forprioritizing the area, did not know why the Gaspari Ranchwas listed at all as a forest priority since it did nothave any discernable benefits to the FS. The forestsupervisor wanted to acquire the property for use as anFS horse pasture, even though we were told by foreststaff that their horses were used on the other side ofthe district. The district office is located about30 miles from the ranch. Our review of the propertydescription disclosed that the property does not meet FSobjectives and is more likely a candidate for disposalrather than acquisition by the FS since such a propertywould increase FS administrative costs. We alsoquestioned the reasonableness of maintaining an FS horsepasture on property which has been determined by theappraiser to be better suited as a residentialdevelopment.

DURKEE DONATION PROPOSAL


The 32-acre Durkee parcel abutted a housing subdivisionon one side and another residential development onanother. This parcel of land was valued at $375,000.Numerous FS personnel questioned the acceptance of thisland because of the location and lack of access. Theforest supervisor felt that the FS should accept the landbecause an FS employee had promised that the FS wouldtake it. The FS had repeatedly informed the proponentthat they did not believe the land provided any benefitsto the FS. However, they are allowing the proponent toprovide additional information in an attempt to justifyFS acceptance of the land. One justification put forthby the proponent is that the Durkee land would providefire and recreation access to the forest. We questionedthe propriety of accepting the donation (see FindingNo. 6).

DEER CREEK LOTS EXCHANGE PROPOSAL

The FS created a checkerboard pattern of ownership whenit acquired 17 of 32 lots in the Deer Creek subdivision.This acquisition conflicted with the land disposal andacquisition objectives identified by the regional officein the FSM. These objectives would normally beincorporated into the forest’s Landownership AdjustmentPlan but, as mentioned earlier, the forest did not havesuch a plan. One of the objectives was to reduce themiles of property lines shared by the FS and privatelandowners. This would reduce the property lines thatneeded to be surveyed, posted, and maintained. Acquiringthe Deer Creek lots increased shared property lines withprivate landowners, resulted in additional administrativecosts to the FS, and increased the chances ofencroachment by the adjacent landowners.

The FS accepted the lots in the subdivision because thethird-party facilitator told the FS land staff that shemight be able to obtain the rest of the lots over time.However, 13 of the 15 remaining private lots weresubsequently subdivided, resulting in 28 additionalprivately owned lots. Many of the private landowners whosubdivided their lots are now willing to give up only oneof their two lots for exchange to the FS. The third-party facilitator has been able to obtain options on only13 of the 28 remaining lots. These 13 lots wereinitially appraised by the third-party facilitator at$1.8 million on August 6, 1996, but the appraisal wasrejected by the FS review appraiser for not meetingstandards. A second appraisal was performed on March 6,1997, which valued the lots at $1.6 million, but theappraisal had not been reviewed because the exchangeproposal was held up pending FSWO review.

On June 25, 1997, the FSWO review team questioned thepropriety of acquiring the Deer Creek lots for a landexchange and recommended that the forest withdraw fromthe exchange proposal citing that the exchange proposalwas not on the forest priority list for landacquisitions. The FSWO told the forest to concentrateits efforts on completing current land exchangetransactions and other exchange proposals that have ahigher priority. However, as of February 11, 1998, the


forest had not officially notified the third-partyfacilitator of the withdrawal. We were informed as lateas December 1997 that the third-party facilitator wasstill meeting with forest staff in trying to exchange theDeer Creek lots.

We recommend that the forest officially withdraw from theproposal and notify the third-party facilitator of thisdecision, as recommended by the FSWO. Unless all theprivate lots within the Deer Creek subdivision area areoptioned by the third-party facilitator for exchange,doing piecemeal exchanges of scattered private lots onlyadds to the FS administrative burden and does not provideany substantial benefits to the FS.

The absence of a landownership adjustment plan and anineffective priority list resulted in a forest land adjustmentprogram that was driven by proponents and third-partyfacilitators. Forest staff considered any optioned lands thatwere presented by the proponents and third-party facilitators;there was no criteria by which forest staff could determinethe resource value or benefits of the optioned land and otherpotential less costly alternatives to it. The forest needs toprepare a landownership adjustment plan and establish clearcriteria to identify and prioritize lands to be acquired.This will ensure that the FS controls the process bydetermining which lands are acceptable and meet FS objectives,rather than relegating this function to proponents and third-party facilitators. The forest should prioritize land basedon an analysis of resource values or access needs, rather thanon what is offered to them by third-party facilitators. Thiswill result in the forest concentrating its limited resourceson land exchange transactions that truly meet FS landmanagement objectives.


Ensure that a landownership adjustment plan is prepared andapproved for both the Humboldt and Toiyabe National Forests.

FS Response

The FS concurs and the forest supervisor has been directed tocomplete a landownership adjustment plan. In May 1997, areview team which included WO and regional officerepresentatives met with forest officials to review their landadjustment program. The team made several recommendationsthat were presented to the regional forester. As a result, anaction plan was developed that included an action item toprepare a landownership adjustment plan that would beincorporated into the revised forest plan. The forest wasadvised to utilize the direction in Region 4 SupplementNo. 5400-92-2 as a guide in this effort. The regionalforester will ensure that the landownership adjustment plan iscompleted by September 1, 1998. In the interim, the foresthas to prioritize lands for acquisition based on theirassociated contribution toward meeting forest plan resourcemanagement objectives.


OIG Position



Improve the procedures used to identify and prioritize landsfor acquisition. These procedures should correspond to thelandownership adjustment plan.

FS Response

The FS concurs (see Recommendations Nos. 8a and 8c).

OIG Position



Direct FS staff at the forest level to initiate land exchangesinvolving private property targeted on priority listings.

FS Response

This action has already been taken. As a result of theMay 1997 review, the Humboldt-Toiyabe National ForestSupervisor was directed to and has developed a prioritylisting of available non-Federal lands that would be desirablefor acquisition. These lands were ranked based on theircontribution to meeting and enhancing the forest plan resourcemanagement objectives. This priority ranking is beingutilized as the basis in developing the Forests LandownershipAdjustment Program.

OIG Position



Reject any land exchange proposals that do not correspond tothe forest priority list.

FS Response


The FS generally concurs. As noted in Recommendation No. 8c,the priority ranking on non-Federal lands will be the basis toguide the development and processing of future landownershipadjustment transactions. The ranking of specific parcels willneed to be re-evaluated as new proposals or opportunities aremade available as noted in Recommendation No. 8e. The forestwill take action on proposals based on priority andavailability basis. Parcels that do not make the prioritizedlist will be rejected and the proponent notified in writing.

OIG Position


RECOMMENDATION NO. 8e

If land is offered that has not been identified as a highpriority, determine that the lands provide a benefit incompliance with the landownership adjustment plan and thegoals and objectives of the forest plan.

FS Response

The FS concurs. The forest land adjustment program needs tohave flexibility to be able to react to new proposals thatwere not previously available or considered in the prioritizedranking. If the offered non-Federal lands are not on theprioritized list, then the parcels will be evaluated based onoverall contributory value in meeting and enhancing resourcemanagement objectives of the forest plan. If appropriate, theparcels will be added to the prioritized list based oncontributing benefits, or formally rejected.

OIG Position


RECOMMENDATION NO. 8f

Officially notify the facilitator that the Gaspari Ranch isnot acceptable for exchange because it does not provide anybenefit to the FS.

FS Response

The FS concurs. The Gaspari Ranch was evaluated based on itspublic benefit and is not on the current prioritizedacquisition list. The third party who proposed thisacquisition has been verbally apprised of its status; however,the FS agrees that this determination needs to be formallydocumented. Accordingly, the forest supervisor will bedirected to advise the third-party facilitator in writing asto the FS’ interest in this property.


OIG Position

In order to reach management decision please provide the datewhen the written determination will be sent to the third-partyfacilitator.

RECOMMENDATION NO. 8g

Officially notify the third-party facilitator of the FS’decision to withdraw from the Deer Creek lots exchange, as itis currently configured by the third-party facilitator.

FS Response

This action has already been taken. The third-partyfacilitator had configured an exchange proposal known as theHunter case, which contained some of the Deer Creek lots. Ina letter dated April 17, 1997, the Humboldt-Toiyabe ForestSupervisor advised the third-party facilitator of ourwithdrawal from this exchange proposal. Since this action,the facilitator has been advised verbally by the regionalforester that the FS is not interested in the acquisition ofthese properties due to their low priority and public benefit.

OIG Position


RECOMMENDATION NO. 8h

If the Deer Creek lots are determined to provide benefit andare placed on the priority list, officially notify thethird-party facilitator of the position of the lots on thelist and establish a possible timeframe for acceptingproposals relating to the lots.

FS Response

See response for Recommendation No. 8g.

OIG Position



FS regional lands staff did not

V. LACK OF COORDINATION WITH BLM HAS RESULTEDIN QUESTIONABLE LAND EXCHANGES

FINDING NO. 9coordinate the processing of severalBLM- re la ted land exchangetransactions with BLM landspersonnel. Although there is an

informal agreement with BLM on appraisal responsibility forFederal lands owned by the two agencies, there is no formalagreement on the responsibility for the other critical aspectsof processing land exchange transactions involving the twoFederal land agencies. The lack of coordination has resultedin the processing of questionable land exchange transactionsinvolving the two agencies.

As noted in the Background section, there is a considerabledemand for acquiring BLM-owned lands in the Las Vegas Valleyarea of Nevada. The Federal Land Policy and Management Act of1976 (Public Law 94-579) authorizes the Secretary of theInterior to dispose of the BLM-owned lands by exchange. BLMhas identified about 70,000 acres of Federal land for disposalin the Las Vegas area. One of the primary beneficiaries ofthe BLM exchanges has been the FS, which has acquired over18,000 acres of private lands from proponents that haveentered into exchange agreements with BLM.

The Act requires that values of the lands exchanged must beequal or, if not equal, must be equalized by a cash payment byeither party. In addition, both the FS and BLM have agency-specific regulations pertaining to the processing of landexchange transactions with proponents.

To ensure that interagency land exchange transactions meetboth Federal and agency regulations, it is important that theagencies coordinate their efforts in dealing with proponents.Our audit has identified the following areas where the lack ofcoordination has resulted in questionable transactions:

LACK OF COORDINATION ON THE ACCEPTANCE OF NON-FEDERAL LANDSFOR EXCHANGES

Questionable land exchange proposals rejected by oneFederal agency were resubmitted by the proponent to theother Federal agency for acceptance. For example, in theCashman exchange, it was proposed that 1,300 acres ofprivate lands in the Mt. Charleston area would be given tothe FS in exchange for 1,615 acres of BLM lands near LasVegas. The proposal was rejected by the FS and BLM onSeptember 9, 1993, because of two concerns. The firstconcern related to the amount of BLM land the proponent wasasking for in the exchange proposal. The proponent hadrequested 1,615 acres, but the FS believed that 600 acresof Las Vegas land was more reasonable. The second concernwas related to the value of the offered Cashman lands.They were concerned that comparable sale information didnot support the optioned price of the Cashman lands.


The proponent met with FS and BLM staff on November 5,1993, to again discuss the proposed land exchange. Onceagain, FS and BLM officials rejected the proposal citingthat the FS and BLM could not justify the value of$9 million for which the proponent had optioned the non-Federal property. Therefore, they believed that anexchange at that value would not be in the public’s bestinterest.

Subsequent to the November 5, 1993, meeting, the proponentmet with BLM State Office officials, and they agreed toproceed with a proposed exchange of about 850 acres of BLMland for the 1,300 acres of Cashman land. Although thisagreement shows that the amount of BLM land to be includedin the exchange was reduced, which resolved the firstconcern, there was no documentation on file showing how thesecond concern of the value of the Cashman land wasresolved. It would appear that BLM ultimately allowed theoptioned price to be used as the estimated value in orderto allow the proposed exchange to proceed. There also wasno documentation to show that the FS had been consulted byBLM on the decision to proceed with the exchange.

LACK OF COORDINATION IN ACCEPTING AND REVIEWING LANDVALUATIONS

In the Deer Creek exchange, the FS bargaining team signedlegal documents for acceptance of uncorroborated landvalues without the concurrence of the BLM Nevada StateOffice Director, who had personally requested that thevalues be reviewed for adherence to Federal appraisalstandards. In addition, the BLM Nevada State Office wasnot consulted on the final acceptance of valuation, eventhough the exchange transaction resulted in BLM owing thethird party about $2 million in Federal lands. In theCashman Exchange, the BLM Chief Appraiser approved the landvaluation based on the incorrect assumption that the FSengineer had reviewed the feasibility of the project,whereas he had not.

We noted that there is no quality control system in placeto identify private appraisers performing substandard workand to debar these appraisers from performing appraisals onFederal land transactions. In discussions with FS and BLMappraisers, we found that both the FS and BLM did not havea system to track the quality of work performed by feeappraisers. They also were not sharing information aboutappraisers with each other.

LACK OF COORDINATION ON TITLE CLEARANCE AND PROPERTYCONDITION ON ACQUIRED LANDS

In the Galena Resort exchange, the FS inspection of theprivate lands on August 3, 1994, noted abandoned concretestructures and debris that needed to be removed from thesite before the property was conveyed to the FS. Alsoduring its preliminary title review, FS lands staff notednumerous title documentation deficiencies, such as tractswithout appraisals and erroneous acreages, in the propertydocuments. These deficiencies were reported to the BLMNevada State Office on August 9, 1994. BLM, however, hadalready accepted the title to the lands on behalf of the FS


on August 8, 1994, without consulting the FS. BLM did notconvey the pertinent property documents and titleinformation to the FS until almost 3 years later on May 20,1997. This information was obtained by the FS when OIGasked to review it as part of our audit.

As of February 5, 1998, the FS is still reworking thewarranty deeds to the properties due to the samedeficiencies it reported to BLM over 3 years ago.According to FS regulations, it is the responsibility ofthe third party to ensure that the condition of the privateproperty conveyed to the FS is acceptable to the FS andthat the title to the property is clear of allobjectionable encumbrances.

As noted above, third parties have taken advantage of the lackof coordination between the two agencies in consummatingquestionable land exchange transactions with the FS and BLM.This weakness was also identified by the FSWO during theirreview of the region’s lands program on May 20, 1997. At thattime the FSWO recommended that the region sign a Memorandum ofUnderstanding with BLM which will define how each operates inexchange proposals. We agree that developing a formalagreement with BLM on the above areas should strengthencontrols to ensure that acquired lands are properly valued,have clear title, and meet FS and BLM lands managementobjectives.


Develop and sign a Memorandum of Understanding with BLM on theareas relating to a) mutual decisions on the acceptance ofnon-Federal lands; b) review and approval of land valuations;and c) responsibilities relating to title acceptance,including the performance of property inspections andclearance of title.

FS Response

The FS concurs and the region has initiated action to finalizea Memorandum of Understanding. A draft Memorandum ofUnderstanding has been prepared and is currently beingreviewed by both the region and the BLM Nevada State Office.The draft specifically includes items a, b, and c above, aswell as defines responsibility for other procedures andrequirements associated with BLM/FS land exchanges. Weanticipate executing the Memorandum of Understanding byOctober 1, 1998. In the interim, both BLM and Region 4 havebeen operating under the provisions of the draft Memorandum ofUnderstanding.

OIG Position




In coordination with BLM, establish a system of tracking thequality of appraisals performed by private appraisers onFederal land exchanges, referring substandard appraisals tothe State Board and the Appraisal Institute, and debarringappraisers who continually provide substandard appraisals fromperforming appraisals on Federal land exchanges.

FS Response

The FS does not concur. The FS currently tracks successfulsources of appraisal services, and will respond to otheragency requests with a positive list of historicallysuccessful appraisal firms. The FS does not formally trackappraisers who have not provided successful appraisal productsas to do so can result in potential litigations involvingallegations of defamation of character, slander, andpossibility restraint of trade. Appraisers submitting reportsthat are in obvious violation of the Uniform Standards ofProfessional Appraisal Practice and or the code of ethics ofany professional appraisal organization to which they claimaffiliation are submitted to the appropriateagency/organization for review of their professionalpractices. It is inappropriate for a Federal agency to debaror "blackball" private appraisers, due to the potential forlitigation referred to above. It is the responsibility ofState licensing authorities and professional appraisalorganizations to police their licensee’s and designee’s. TheFS will continue to evaluate potential contract appraisersbased upon their demonstrated success with the agency andother public agencies used as references.

OIG Position

We recognize that it is the responsibility of professionalappraisal organizations and State boards to review allegationsof substandard appraisal products and professional practice,and not the Federal agency. However, it is the Federalagency’s responsibility to refer appraisers providingsubstandard work to the regulatory agency so the matter can beinvestigated and the appropriate corrective action taken.Similar systems for referring and debarring persons providingprofessional services, such as certified public accountants,are already in place in other Federal agencies. Debarmentoccurs only after a complete investigation is performed by theregulatory agency and official determination is rendered. Inorder to reach management decision, we recommend that the FSconfer with OGC on what legal steps are needed to enforceappraisal standards on contracts and to debar appraisers foundby regulatory agencies to have provided substandard work.



Suspend all current and future land exchange transactions withthe third-party facilitator on the Galena Resort exchangeuntil the FS lands staff have reworked all the warranty deedsto the properties.

FS Response

The FS does not think that suspension of all current andfuture land exchange transactions with the third-partyfacilitator involved with the Galena Resort exchange isappropriate. The FS acquired the Galena Resort propertythrough a BLM land exchange. Some of the title issues withthe property were not the result of or within the control ofthe third-party facilitator. BLM, the FS, and the third-partyfacilitator are working to resolve these title issues and todate the third-party facilitator has been cooperative andresponsive in this effort. Should this situation change inthe future, the FS will then consider appropriate actions.

OIG Position

In order to reach management decision, please provide us withthe timeframe for resolving the title issues relating to theGalena Resort exchange.


Integrity of staffing in the land exchange program is

VI. IMPROVEMENTS NEEDED IN ENSURING THEINTEGRITY OF LANDS STAFF AND ASSESSING THEIMPACT OF STAFF REDUCTIONS ON CURRENTWORKLOAD

important to ensure that the program is operated in anobjective and efficient manner. Our review found that an FSmanagement employee received gifts, gratuities, andentertainment from a third-party facilitator. As a result ofthe gifts and gratuities, a conflict of interest existed. Wealso found that two key FS management employees in the landssection had not filed financial disclosure statements for thelast 3 years. Financial disclosure statements are animportant control in ensuring the integrity of the FS landexchange program.

In addition, we found that because of attrition and a hiringfreeze, the regional lands section is experiencing a backlogof work relating to land exchange transactions which coulddelay the processing of transactions. In one case, regionallands staff are still clearing title to properties conveyed tothe FS over 3 years ago due to an administrative error by BLM.

During our audit, allegations

FINDING NO. 10

IMPROPER CONDUCT BY FSMANAGEMENT EMPLOYEE WITHPROPONENTS AND THIRD-PARTY

FACILITATORS

surfaced regarding the improperconduct of an FS management employeein his dealings with third-partyfacilitators involved in landtransactions at the forest. Theemployee provided a signed, swornstatement to the auditors admittingthe receipt of gifts, gratuities,and entertainment from third-partyfacilitators. A review of therecords at the forest revealed that

the same third-party facilitators were involved in landtransactions amounting to at least $45 million.

The Standards of Ethical Conduct for Federal Employees of theExecutive Branch (5 CFR 2635.201) prohibits an employee fromsoliciting or accepting any gift from a prohibited source. Agift includes any gratuity, favor, discount, entertainment,hospitality, or other item having monetary value. It includesservices, as well as training, transportation, local travel,lodging, and meals. Prohibited sources means any personand/or organization that does business or seeks to do businesswith the employee’s agency.

Representatives from third-party facilitators confirmed thatthey had provided the employee with gifts and gratuities. OnNovember 18, 1997, the FS employee provided a signed, swornstatement to OIG acknowledging the acceptance of gifts,gratuities, and entertainment from third-party facilitators asfollows:


• The employee and members of his family went pheasanthunting at the private property of a consultant employed bythe third-party facilitator. During the hunting trips, theemployee stayed at a private trailer owned by theconsultant.

• The employee and his wife spent 2 days in the San FranciscoBay Area as houseguests of the president of a third-partyfacilitator. The employee and his wife spent 4 to 5 hourssailing on the president’s private sailboat in SanFrancisco bay.

• The employee went fishing in Canada on the private yachtowned by a land exchange proponent. He was flown to thesite in the proponent’s private plane.

• The employee used the private Squaw Valley Condominiumowned by a consultant of a third-party facilitator for 3 to4 days during his Christmas vacation.

• The employee received wedding gifts from the consultant andthe president of a third-party facilitator.

We notified the FS on January 15, 1998, of these conditionsand recommended that the employee be reassigned to anotherposition that does not involve transactions with third-partyfacilitators. The employee decided to retire from hisposition effective April 30, 1998.

OIG is continuing its investigation of this matter incoordination with the Department of Justice.

FS personnel involved in decisions

FINDING NO. 11

LANDS STAFF DID NOT COMPLYWITH REPORTING

REQUIREMENTS FOR FINANCIALDISCLOSURE AND OUTSIDE

INTERESTS

regarding land exchange transactionsdid not file financial disclosurestatements as required byregulations. The region has alisting of who should be filingfinancial disclosure statements, butit has no tracking system to ensurethat the statements are actuallysubmitted and reviewed for potentialconflicts of interest. Our auditfound that two key FS managementpersonnel involved in landmanagement decisions at both the

forest and the regional office had not submitted financialdisclosure statements for the past 3 years. As a result,potential conflicts of interests by key lands personnel cannotbe detected by regional management for resolution.

Federal regulations (5 CFR 2634.904) provide that the agencydetermine who should file financial disclosure statementsbased on the duties and responsibilities of an employee’sposition. Sensitive positions are those which require anemployee to participate personally and substantially, throughdecision or the exercise of significant judgment, in aGovernment action in which the final decision or action willhave a direct and substantial effect on the interest of thenon-Federal entity.


The region has a listing of personnel designating whichmembers of the staff, by name, position, and grade, arerequired to file financial disclosure statements. The listingincludes all FS line management personnel up to the districtranger level, as well as regional land appraisers and keylands personnel.

During our audit, we noted that the forest supervisor at theHumboldt and Toiyabe National Forest and the regional directorof lands had not submitted financial disclosure statements forthe past 3 years. These are the two key positions responsiblefor administering the land exchange and acquisition program inthe region. At our request, the FS obtained retroactivefinancial disclosure statements from these employees.

The region needs to have a tracking system in place to ensurethat those required to submit financial disclosure statementshave actually submitted their statements for review forpotential conflicts of interest.

RECOMMENDATION NO. 11

Develop a tracking system at the region to ensure thatfinancial disclosure statements are submitted by the requiredFS personnel.

FS Response

The FS concurs but would like to broaden the recommendation toinclude all regions. Under current procedures, each region isrequired to track and submit compliance reports to the WO onthe numbers of occupied positions whose incumbents aredesignated to complete Confidential Financial DisclosureReports and whose reports have been received. They mustsubmit updated reports on a monthly basis until all documentsare received. During the next reporting cycle, which beginsOctober 1998, the WO will ask that all compliance reports besigned by someone who attests to their accuracy. FS regionaland station ethics officials received training from the Officeof Government Ethics in tracking and reviewing financialdisclosure documents on April 16, 1998. Also, in letter datedJune 5, 1998, the Acting Director of Human ResourcesManagement sent letters to all regional foresters, stationdirectors, International Institute of Tropical Forestrydirectors, and WO staff to reinforce the understanding aboutthe requirement for filing the Confidential FinancialDisclosure Report, with emphasis on positions involved inlands activities. In addition, during periodic reviews ofregions and stations, confidential financial disclosure filesare reviewed by the WO Human Resources Management staff.

OIG Position



As a result of recommendations from

FINDING NO. 12

MANAGEMENT NEEDS TOASSESS THE REGIONAL LAND

STAFF’S WORKLOAD ANDCOMPETENCE

the FSWO internal review team,processing of land transactions bythe Humboldt-Toiyabe forest landsstaff was taken over by regionallands staff personnel, not all ofwhom have exhibited the necessaryskills. Regional lands staffattrition and a hiring freeze hasalso resulted in a backlog of workfor the remaining lands staff. Inone case, regional lands staff are

still clearing title to properties conveyed to the FS over 3years ago due to an administrative error by BLM.

During our audit, we found that the number of appraisers inthe region had decreased from four to one. As a result, theone remaining appraiser could not keep up with the workloadand began to contract most of the appraisal work to feeappraisers. Even though contracting did help, there is stilla backlog of appraisal work and an additional need forappraisal reviews. The regional appraiser estimated that thecurrent backlog and workload could be handled by three full-time appraisers. The region has four full-time-equivalentpositions identified for appraisers, which would allow them tohire a fourth appraiser if needed. The region has recentlyhired a second appraiser; however, a hiring freeze has delayedhiring a third appraiser and would most likely delayindefinitely the hiring of a fourth appraiser.

We also found a similar situation in the regional lands staffsection. The region normally has three realty specialistsworking on exchange case processing; however it is currentlyoperating with only two specialists. The lands staff hastried to hire a third specialist, but the hiring freeze hasprevented them from doing so. The two realty specialists arecurrently working on 87 exchange transactions, which are indifferent stages of processing. A realty specialist statedthat at the current level of transactions, they have not beenable to reduce the backlog of work which needs to becompleted. Also, our audit noted that, due to anadministrative error by BLM, regional lands staff areconcentrating their efforts on clearing title to propertiesconveyed to the FS over 3 years ago in the Galena Resortexchange.

The reduction in staff has not resulted in a correspondingreduction in the number of land exchange cases beingprocessed. As we have noted throughout this report, theregional lands staff has routinely agreed to process exchangesproposed by third-party facilitators, even though the numberof exchanges has clearly exceeded the staff’s ability to keepabreast of them. In addition, the region is processing landexchanges which are increasingly complex and sophisticated.In our opinion, lands staff management is not competent tojudge the appropriateness of the workload or, as is evidentfrom its other actions, to engage in land exchanges thatdemand a comprehensive expertise in real estate transactions.

Regional management should determine the effect that thebacklog is having on the land exchange program and whether itis causing delays in case processing. Regional management


should also assess the current workload and the skills andcompetence of the lands staff. Based on this assessment, theregion should consider the options of (1) issuing a moratoriumon new land transactions so lands staff can process thecurrent backlog; (2) hiring the needed personnel to handle theworkload; and (3) ensuring skilled and competent individualsare placed in key lands staff management positions.

RECOMMENDATION NO. 12

Assess staffing and skill levels (competency) to ensure theyare commensurate with the demands of the existing workload.

FS Response

The FS concurs. The make-up of regional and forest landsstaff should include individuals with the necessary skills andcompetencies to perform the priority landownership adjustmentworkload. The regional forester has identified the need andis committed to filling a journeyman-level lands staffposition on the Humboldt-Toiyabe Forests to increase thetechnical and managerial expertise in the Lands Program atthat level. The regional forester has also committed toincreasing the managerial lands expertise at the regionallevel by establishing an assistant director of lands andrecreation position with emphasis on lands expertise.

The competency and performance levels of both the regionaldirector and the regional land adjustment program manager willalso be evaluated as part of the personnel review noted inresponse to Recommendation No. 1a. The regional forester willalso be requested to assess the workload and prioritize thelandownership adjustments program and assure the necessarypersonnel to carry out those priority adjustments.

OIG Position



EXHIBIT A - SUMMARY OF MONETARY RESULTS

RECOMMENDATIONNUMBER DESCRIPTION AMOUNT CATEGORY

1bIncorrect acceptance of bargainedvalue. $5,900,000

FTBPTBU5 -Management orOperatingImprovement/Savings

3a Excessive appraisal valuations. $2,900,0006

FTBPTBU -Management orOperatingImprovement/Savings

5a

Invalid statement of intent. Thestatement of intent is a non-bindingagreement between exchange parties.The FS withdrew from this proposalafter being alerted by OIG. $6,500,000


7aAcquisition of water rights that couldnot be used by the FS. $2,100,000


8a

Proposed land exchanges with little orno benefit to the FS. Gaspariproposal valued at $8.5 million wasbeing considered by the forestsupervisor at the time of our audit.According to the FS, the Deer Creeklots proposal valued at $1.6 millionhas been deferred. The DurkeeDonation valued at $375,000 hasbeen disclaimed by the FS afternotification by OIG. $10,500,000


TOTAL $27,900,000

5 Funds To Be Put To Better Use

6 The total amount questioned in Finding No. 3 is $8,800,000; however, $5,900,000 of this amount is the same$5,900,000 questioned in Finding No. 1. As a result, we are only indicating the difference of $2,900,000 for thisrecommendation.

Exhibi t A - Page 1 of 1


EXHIBIT B - LOCATIONS VISITED OR CONTACTED

ORGANIZATION/ENTITY LOCATION

Forest Service Washington Office

Forest Service Intermountain Regional Office (Region 4)

Humboldt-Toiyabe National Forest Supervisors Office

Carson City Ranger District

Spring Mountain National Recreation Area Ecounit Office

Bureau of Land ManagementState OfficeDistrict Office

Office of the General CounselWashington OfficeRegional Office

Office of Inspector General, Department of Interior

Fee Appraisers’ Offices

Exchange Proponent’s Office

Third-Party Facilitator’s Office

State of Nevada, Division of Water Resources

Washington, D.C.

Ogden, Utah

Sparks, Nevada

Carson City, Nevada

Las Vegas, Nevada

Reno, NevadaLas Vegas, Nevada

Washington, D.C.Ogden, Utah

Sacramento, California

Carson City, NevadaLas Vegas, Nevada

Las Vegas, Nevada

San Francisco, California

Carson City, Nevada

Exhibi t B - Page 1 of 1


EXHIBIT C - LAND TRANSACTIONS REVIEWED

ACRES VALUE

CASE NAME Federal NON-FED Federal NON-FED

State of Nevada 120.00 14.67 250,000 250,000

Grover Hot Springs 93.42 185.83 350,000 350,000

Elko County 152.83 120.00 8,000 8,000

D. L., Trustee 95.00 798.83 2,090,000 2,000,000

Sweetwater Ranch 507.63 959.04 85,000 85,000

Fibreboard (Last Chance) 88.96 360.00 230,027 222,000

K. J., et ux. 320.04 400.00 40,000 40,000

Rosaschi Ranch A 1,013.49 A 1,600,000

Venture A 3,120.00 A 2,150,000

Peavine A 5,404.00 A 3,475,000

Galena A 3,864.00 A 19,868,696

J. C. & J. C. 40.00 80.00 16,000 16,000

Washoe County 20.00 200.00 230,000 234,000

Deer Creek (Bulk)(Lots)

A 383.2175.77

A 7,630,0002,890,000

Cashman A 1,300.33 A 8,500,000

H./Deer Creek Lots(3 lots)

10.00 8.75 275,000Not apprvd

by FS

393,000Not apprvd

by FS

Mt. Rose 831.35 B 3,235,000Not apprvd

by FS

B

N. LV/Red Rock A 278.62 A 3,900,000

PB/Deer Creek Lots(14 lots)

C 25.37 C 1,458,000Not apprvd

by FS

RO Ranch D 3,074.25 D D

Exhibi t C - Page 1 of 3



ACRES VALUE

CASE NAME Federal NON-FED Federal NON-FED

B./Mustang A 200.00 E E

Boy Scout Exchange 200.00 142.97 F F

Harris Springs (Tied toKings Canyon exchange)

C 48.62 C 1,215,000Not apprvd

by FS

Hutchinson (Possibleaddition to KingsCanyon exchange)

C C C C

Kings Canyon A 1,880.00 A 4,450,000

Douglas County Office(Prospectus Exchange)

G G G G

H-P/S. 50.00 160.00 F F

R. Homes 675.00 279.30 C C

R. R. 155.99 100.71 8,000 F

Springmeyer/ Dresslerville Pit 680.00 480.00 E E

Western ResourcesManagement

H 1,312.40 H 164,000

Western States Minerals Corp.(Northumberland)

3,425.56 767.29 522,556 503,500

Tonapah Administrative Site I I I I

Faye-Luther Canyon J 3.00 J 37,000Not apprvd

by FS

Blue Diamond Oil C 2,997.67 C C

Gaspari K 1,000.00 K 8,500,000Not apprvd

by FS

Durkee L 32.00 L 375,000




LEGEND

A - Part of a BLM pooling exchange.B - Non-Federal lands had not been identified for exchange.C - Part of a proposed exchange with BLM.D - Part of a Department of Justice case.E - Exchange dropped by FS/proponent.F - Exchange in process.G - Competitive exchange that is in the planning process.H - Will be acquired by purchase.I - Acquired by purchase.

J - Now a right-of-way acquisition.K - Proposed for exchange with the FS.L - Proposed donation to the FS.



EXHIBIT D - FS RESPONSE

Exhibi t D - Page 1 of 13


Informational copies of this report have been distributed to:

Office of the Chief Financial OfficerDirector, Planning and Accountability Division (1)

General Accounting Office (1)

forest service humboldt-toiyabe national … · fiscal years 1990 to 1997 sparks, nevada ... the...

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