National Park Service: Federal Taxpayers Could Have Benefited	 
More From Potomac Yard Land Exchange (15-MAR-01, GAO-01-292).	 
								 
Settling 30 years of sometimes acrimonious dispute, in March	 
2000, the National Park Service completed an exchange of land	 
interests on two vacant parcels of land in Potomac Yard. Although
the Potomac Yard exchange helped to resolve years of dispute, the
Park Service could have received more than $15 million from the  
private developer--rather than owing the developer $14		 
million--if the exchanged interests had been appropriately	 
valued. As a federal agency, the Park Service has a		 
responsibility to protect federal taxpayers' interests when it	 
acquires or conveys land interests. However, the Park Service did
not to do when it instructed the appraiser to derive a value for 
development on the Alexandria parcel that was not shown to be	 
reasonably probable, or when it used an appraised value on the	 
Arlington parcel that understated the worth of the Park Service's
interests. Consequently, the Park Service gave the developer	 
credit for losses that might not have realistically occurred and 
did not receive enough credit for allowing the developer to	 
develop the Arlington parcel. However, the transaction is now	 
fully executed--as in similar situations when a government agency
pays too much for an item under a contract--it is unlikely that  
the Park Service can recover any funds. 			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-292 					        
    ACCNO:   578001						        
  TITLE:     National Park Service: Federal Taxpayers Could Have      
             Benefited More From Potomac Yard Land Exchange                   
     DATE:   03/15/2001 
  SUBJECT:   Appraisals 					 
	     Fair market value					 
	     Land management					 
	     Overpayments					 
	     Real property acquisition				 
	     Underpayments					 
	     Alexandria (VA)					 
	     Arlington (VA)					 
	     Virginia						 

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GAO-01-292

Report to the Honorable Don Young, House of Representatives

United States General Accounting Office

GAO

March 2001 NATIONAL PARK SERVICE Federal Taxpayers Could Have Benefited More
From Potomac Yard Land Exchange

Page i GAO- 01- 292 Potomac Yard Land Exchange Letter 1

Results in Brief 2 Background 3 Appraisals Did Not Appropriately Value the
Land Interests

Exchanged 8 Conclusions 15 Agency Comments and Our Evaluation 15

Appendix I Scope and Methodology 19

Appendix II Summary of Exchange Figures and GAO's Adjusted Figures 20

Appendix III Comments From the Department of the Interior 21

Appendix IV GAO Contacts and Staff Acknowledgments 23 GAO Contacts 23 Staff
Acknowledgments 23

Tables

Table 1: Estimated Figures 20 Table 2: GAO's Adjusted Figures 20

Figures

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

Page 1 GAO- 01- 292 Potomac Yard Land Exchange

March 15, 2001 The Honorable Don Young House of Representatives

Dear Mr. Young: Settling 30 years of sometimes acrimonious dispute, in March
2000 the Department of the Interior's National Park Service and a private
developer 1 completed an exchange of land interests on two vacant parcels of
land in Potomac Yard, an approximately 380- acre former rail yard adjacent
to the Park Service's George Washington Memorial Parkway near Washington, D.
C. Although the developer owned both parcels, the Park Service also had an
interest in them. On one parcel- referred to as the Alexandria parcel- the
Park Service held a commitment from the developer to build an interchange on
the Parkway; on the other parcel- referred to as the Arlington parcel- it
held a development restriction known as an indenture. In the exchange, the
Park Service allowed the developer to buy out its interchange commitment,
lifted the indenture on the Arlington parcel, and acquired specific
development restrictions on both parcels to protect the Parkway's scenic
qualities.

To estimate the fair market values of the interests being exchanged, the
developer contracted with a private appraisal firm to prepare two appraisals
(one for each parcel), which the Park Service reviewed and approved as
conforming to federal appraisal standards. The appraisals reported that on
balance the Park Service owed the developer $14 million. This represented
the difference between the estimated value of potential development
opportunities the developer gave up under the Park Service's restrictions
(totaling $29 million) and the estimated values of the indenture and
interchange (totaling $15 million) given up by the Park Service. The
developer waived the difference of $14 million.

1 The private party involved in this exchange originated as the railroad
company that owned and operated Potomac Yard for railroad purposes; it
became a real estate investment trust in 1994, and its current management
was put in place in 1997. This report uses the phrase

“the developer” whether referring to the company's current
management or its predecessor.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 292 Potomac Yard Land Exchange

Aware of Potomac Yard's significant development potential, you expressed
concern about the appraisals and whether the Park Service had received
appropriate value in the exchange. Accordingly, we examined the appraisals
to determine whether the interests exchanged were appropriately valued- and
if not, why not.

We contracted with an independent certified appraiser to conduct a desk
review of both appraisals. His review included his professional opinion on
whether the appraisals appropriately valued the land interests that were
exchanged and conformed to federal appraisal standards; he did not
reappraise the properties and did not visually inspect them. Shortly after
we began our work, we learned that lawyers representing the Park Service and
the developer had advised them not to meet with us because of a pending
lawsuit filed by a competing developer protesting the exchange. However, the
Park Service did give us a tour of the parcels and copies of documents in
the official administrative record filed in the lawsuit. The developer
initiated a meeting with us in October, after certain documents pertaining
to the lawsuit had been filed. The developer's appraiser spoke with our
review appraiser and with us during our review. The U. S. District Court for
the District of Columbia dismissed the lawsuit for lack of standing in
February 2001. Details of our scope and methodology are discussed in
appendix I.

In our view, the appraisals incorrectly valued the land interests that were
exchanged because of flawed assumptions about one parcel and an inadequate
assessment of the other. Our assessment of the exchange indicates that the
Park Service could have received more than $15 million rather than owing the
developer $14 million, if the exchanged interests had been appropriately
valued; however, the transaction is now fully executed and it is unlikely
that the Park Service can recover any funds. For the Alexandria parcel, the
Park Service and the developer instructed the appraiser to value the
development restriction- which limited development to primarily residential
uses- by assuming a high level of commercial development in its absence.
Using this assumption, the appraiser estimated the amount owed to the
developer for the loss the developer would have incurred as a result of the
restriction was $26. 6 million. However, the developer would not have
incurred such a loss because zoning ordinances already restricted
development to residential uses. Instead of determining a value owed to the
Park Service for the interchange, the Park Service and the developer
instructed the appraiser to use a cost figure they had earlier agreed to ($
8.5 million) rather than appraise it. Our review appraiser determined that
the Alexandria appraisal Results in Brief

Page 3 GAO- 01- 292 Potomac Yard Land Exchange

did not conform to federal appraisal standards, because it did not show the
assumed high level of commercial development to be reasonably probable.

For the Arlington parcel, the appraiser valued the amount owed to the Park
Service for the indenture at $6.5 million by estimating some of the costs
that the developer avoided when the indenture was lifted. However, the
appraiser did not include all of the developer's costs or additional
development opportunities; as a result, the indenture was undervalued-
although the appraisal did not provide enough information for us to reliably
estimate its value. In addition, the appraiser valued the amount owed to the
developer for the development restriction- which limited the amount and type
of development- by determining that the developer would incur a loss of $2.4
million. However, the developer would not have incurred a loss because
zoning ordinances already limited development. Our review appraiser
determined that while the Arlington appraisal conformed to federal appraisal
standards, it did not consider all the relevant costs in valuing the
indenture.

In commenting on a draft of this report, Interior expressed its views that
the report discussed issues that are the subject of ongoing litigation and
that GAO's policy is to avoid addressing matters pending in litigation; that
the report should have recognized the overwhelming public and local support
received by the exchange; and that the report's reliability was questionable
because it relied exclusively on the work of a review appraiser who in
effect reappraised the property without having the required license. While
we are aware of the sensitivity of addressing issues in litigation, we
proceeded with our review consistent with our authorities and
responsibilities to support the Congress and with the flexibility that is
inherent in our policies. The lawsuit was dismissed in February 2001. While
we acknowledge that the exchange settled years of dispute, our review
focused on the appraised values of the exchanged land interests. We believe
our analyses and conclusions are sound; our review incorporates the work of
a licensed appraiser who conducted a desk review of the appraisals- not a
reappraisal of the properties.

Land exchanges- trading federal lands for lands owned by corporations,
individuals, or state or local governments that are willing to trade- are
used by federal land management agencies, such as the Park Service, as a
Background

Page 4 GAO- 01- 292 Potomac Yard Land Exchange

tool for acquiring nonfederal land and disposing of federal land. The
Potomac Yard exchange was conducted under the Park Service's land exchange
authority. 2 Under this authority, the Park Service may convey federal land
(or interests therein) over which it has jurisdiction and that it deems
suitable for exchange or other disposal, and the agency may acquire
nonfederal land (or interests therein) that lies within park boundaries or
areas under park jurisdiction. Exchanged lands must be located in the same
state and be approximately equal in value; if their values are not
approximately equal, then the difference may be eliminated with a cash
payment.

Potomac Yard lies in northern Virginia near Ronald Reagan Washington
National Airport. According to the appraisals, it covers about 380 total
acres: about 290 acres in the city of Alexandria and about 90 acres in
Arlington County. Figure 1 identifies the location of Potomac Yard and the
parcels involved in the exchange.

2 16 U. S. C. 460l- 22( b). Location and Development

of Potomac Yard

Page 5 GAO- 01- 292 Potomac Yard Land Exchange

Figure 1: Location of Potomac Yard and the Exchange Parcels

0 500 1000 Potomac

River Ronald Reagan

Washington National Airport

Arlington Parcel Alexandria Parcel George

Washington Memorial Parkway

Washington, D. C. Proposed interchange 395

1

Potomac Yard Exchange parcels

N

Page 6 GAO- 01- 292 Potomac Yard Land Exchange

The Park Service's involvement with Potomac Yard began with the
establishment of the Parkway in 1930. In 1938, the Department of the
Interior and the developer agreed to exchange interests in several Potomac
Yard parcels that both parties claimed to own, including the Arlington
parcel. 3 As part of this agreement, the developer retained title to the
Arlington parcel while Interior obtained a legal restriction- referred to as
an indenture- that prohibited the developer from using the parcel for any
purpose other than a rail yard.

In 1970, Interior's Park Service and the developer agreed to exchange
interests in land adjacent to the Parkway, including the Alexandria parcel.
As part of this agreement, the Park Service gave the developer the right to
access the Alexandria parcel from the Parkway; without this access right,
the parcel's potential development would have been limited by the access
provided by existing roads. In return, the developer gave the Park Service a
commitment to build an interchange- bridge, ramps, and connections- on the
Parkway that would provide this access.

Since then, the developer has proposed several redevelopment options for
Potomac Yard, which have at times been contentious. For example, in 1987 the
developer filed a development plan for the Alexandria parcel consisting of
about 2.5 million square feet (mmsf) of commercial development- office and
retail space. When the city did not approve the plan, the developer filed a
lawsuit and in 1991 obtained a court order directing the Alexandria City
Council to approve the plan (with slight modification).

In 1992, the city created its own plan for Potomac Yard, specifying
residential development as the Alexandria parcel's sole use. Over the next
few years, the developer discussed options with Alexandria and others and
did not proceed with the court- ordered development. In 1997, the Park
Service and the developer informally agreed to the general framework of the
Potomac Yard exchange- that is, they agreed to the interests that would be
exchanged but not the values of those interests- and at about the same time,
the city and the developer agreed to a predominantly residential development
on the Alexandria parcel. After these agreements were reached, the developer
asked the court to vacate the 1991 order, stating that it preferred the
development allowed by the city to that

3 In 1938, the parcel consisted of 38 acres; 9 acres were subsequently
removed as a result of road and subway construction.

Page 7 GAO- 01- 292 Potomac Yard Land Exchange

allowed under the order. In 1998, the Park Service and the developer signed
the preliminary exchange agreement; however, the two sides did not reach
agreement on the values of the land interests until after the exchange
appraisals were completed in 1999.

Federal appraisal standards were established in 1973 to promote uniformity
in the appraisal of real property among the various agencies acquiring
property- both by direct purchase and condemnation- on behalf of the federal
government. 4 The standards require that land (or land interests) acquired
by the federal government be appraised at fair market value. According to
the standards, fair market value is defined as the amount for which a
property would be sold- for cash or its equivalent- by a willing and
knowledgeable seller with no obligation to sell, to a willing and
knowledgeable buyer with no obligation to buy. Determining the fair market
value requires an appraiser to first identify the property's

“highest and best use,” which is defined as the use that is
physically possible, legally permissible, financially feasible, and
maximally profitable for the owner.

When the federal government acquires a partial or restrictive land interest-
such as an indenture or building restrictions- federal appraisal standards
show preference for using a “before and after” method to value
the interest. In this method, an appraiser estimates the value of the whole
property before the transaction and reduces it by the value of the property
remaining in private ownership after the transaction is completed. The
resulting value becomes the interest's estimated fair market value.

The standards explicitly allow for the application of professional judgment
in the development of a fair market value estimate. According to the
standards: “The appraiser should not hesitate to acknowledge that
appraising is not an exact science and that reasonable men may differ
somewhat in arriving at an estimate of the fair market value.” The

4 There are two sets of standards that apply to appraisals of federal land:
(1) the Uniform Appraisal Standards for Federal Land Acquisitions, revised
in 1992 by the Interagency Land Acquisition Conference, a voluntary
organization established in 1968, chaired through the Department of Justice,
and composed of representatives of federal agencies that acquire land; and
(2) the Uniform Standards of Professional Appraisal Practice,

developed in 1986 and 1987 and annually updated by the Appraisal Standards
Board of The Appraisal Foundation, a not- for- profit educational
organization established in 1987 and directed by a board of trustees.
Federal Appraisal

Standards

Page 8 GAO- 01- 292 Potomac Yard Land Exchange

Congressional Budget Office reiterated this assessment in a 1998 study,
calling real estate appraisals “a mix of science and art.” 5

The Park Service has policies and procedures for land exchanges that include
obtaining appraisals to value all federal and nonfederal land involved in an
exchange. The Park Service's policies for appraisals require an agency
appraiser to review the appraisals to ensure that the reported value
estimate is reasonable and based on sound valuation concepts.

The appraisals incorrectly valued the land interests that were exchanged
because they relied upon unrealistic assumptions when valuing one parcel and
provided an inadequate assessment of the other. Our analysis of the
appraisals indicates that the developer could have owed the Park Service
more than $15 million rather than the Park Service owing the developer $14
million, as summarized in appendix II. For the Alexandria parcel, the
appraiser was instructed to assume a high level of commercial development in
assessing the impact of the development restriction imposed by the Park
Service; as a result, the appraiser determined that the developer would
incur a loss of $26.6 million. In addition, the appraiser was instructed to
use a cost of $8.5 million for the interchange- a figure agreed to by the
Park Service and the developer- rather than appraise it. Because this
appraisal assumed a level of development that was not shown to be reasonably
probable, our review appraiser determined that it did not conform to federal
appraisal standards. For the Arlington parcel, the appraiser did not
consider all of the additional costs the developer would have faced, had the
indenture stayed in place, or the additional development opportunities that
would have resulted from the indenture's removal. As a result, he
undervalued the indenture at $6.5 million; however, the appraisal did not
provide enough information for us to reliably estimate the indenture's
value. Furthermore, the appraiser determined that the restrictions would
have caused a $2.4 million loss to the developer, even though zoning
ordinances already restricted development. Despite these problems, our
review appraiser determined that the Arlington appraisal conformed to
federal appraisal standards.

5 Regulatory Takings and Proposals for Change, (Washington, D. C.:
Congressional Budget Office, Dec. 1998). Appraisals Did Not

Appropriately Value the Land Interests Exchanged

Page 9 GAO- 01- 292 Potomac Yard Land Exchange

The Park Service and the developer jointly instructed the appraiser to reach
an appraised value of the Park Service's development restriction 6 -

which limited development to residences and neighborhood retail uses- by (1)
estimating the value of the parcel without the restriction and assuming a
high level of development (the “before” value), (2) estimating
the value of the parcel with the restriction and assuming a lower level of
development (the “after” value), and (3) calculating the
difference. The instructions also provided the appraiser specific levels of
development to use in this calculation: the directed high level of
development was 1.5 mmsf of office space, 25,000 square feet of retail
space, and 232 townhomes; the directed low level of development was no
office space, 10,000 square feet of retail space, and 200 townhomes. 7

According to federal appraisal standards, an appraiser must develop an
opinion of the best use for the property being appraised in each scenario.
Furthermore, in determining fair market value, appraisers must show that the
“before and after” scenarios are legally permissible and
reasonably probable. In other words, there must be good reason to assume
that the development could be built under current restrictions (such as
zoning) or a high probability that the restrictions would be changed. For
the Alexandria parcel, the instructions directed the appraiser to assume a
high level of development in the “before” scenario, stating:
“Development

scenarios presented must be assumed by the appraiser to be physically
feasible and legally permitted.” However, as the developer stated in a
letter to the Park Service prior to issuance of the instructions, this high
level of development “is not . . . in compliance with existing zoning
regulations, and is not currently ‘legally permissible. '” The
developer further noted that during the course of negotiations with the Park
Service, the developer

“made certain” of this by asking the court in 1997 to vacate the
order directing the city to approve about 2.5 mmsf of development.

6 Although the appraisal instructions suggest that the land interest that
was valued was the right to access the Parkway, the final exchange agreement
identifies the land interest that was acquired as a restriction limiting
development to residences and neighborhood retail uses. These phrases both
describe the same interest- that is, commercial development could not have
occurred without Parkway access, and the lack of such access effectively
restricted development to primarily residential uses. This report uses the
phrase

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

7 The appraiser used all of these figures but determined that only 190
townhomes (rather than 200) were feasible for the low level of development.
Alexandria Appraisal

Contained Flawed Assumptions About the Park Service's Restrictions

Page 10 GAO- 01- 292 Potomac Yard Land Exchange

Nevertheless, both the Park Service and the developer believed that the
assumed high level of commercial development was appropriate. The Park
Service, in a March 2000 letter responding to questions from the Chairman of
the House Committee on Resources, wrote that the developer's right to access
the parcel from the Parkway provided a sound basis for the assumption that
the parcel could physically support intensive development. In addition, the
Park Service noted that the assumed high level of development (about 1.5
mmsf) represented a significant reduction from the court- ordered level
(about 2.5 mmsf) and must be considered as a viable alternative, even though
the court order was no longer in effect. The Park Service further noted that
the potential availability of commuter rail facilities to serve the parcel
supported the conclusion that a high- density development was the highest
and best use. Similarly, the developer told us that the assumed high level
of development was reasonable because it was less development than had been
specified under the court order. The developer indicated that both parties
to the exchange stipulated the assumed high development level as one of the
primary principles of the exchange framework.

Following the instructions to use the assumed development levels, the
appraiser did not evaluate whether the current zoning restrictions, which
allow only residential development, might be altered to allow the
“before”

scenario's high level of commercial development. The appraiser determined
that the value of the Park Service's restriction on the parcel's development
resulted in a loss of $26.6 million to the developer, which is the
difference in the value of the “before” development ($ 31. 7
million) and the “after” development ($ 5.1 million). However,
our review appraiser found that the appraisal did not show that the
“before” development had a reasonable probability of being built
and concluded that the market would not pay a premium for the possible
increment if the probability of rezoning were low. If the restriction did
not diminish the development that would have reasonably occurred on the
parcel, it would have no market value and the Park Service should not have
given the developer any credit for it.

The Park Service also obtained a no- development restriction on a 15- acre
portion of the parcel adjacent to the Parkway. The appraiser determined- and
our review appraiser agreed- that the restriction had no market value
because a prior restriction under Virginia state law already precluded

Page 11 GAO- 01- 292 Potomac Yard Land Exchange

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

The Park Service's chief appraiser determined that the appraiser's
methodology was reasonable, concluded that the Alexandria appraisal met the
federal appraisal standards, and approved it for Park Service's use.
However, our review appraiser determined that the appraisal did not conform
to all federal appraisal standards because it did not analyze the
reasonableness of the “before” level of development.
Furthermore, the appraisal did not clarify that a value based on an
unrealistic level of development might differ from the fair market value of
the property. Our review appraiser concluded that the instructions provided
by the Park Service and the developer for the “before”
development scenario ultimately led to the appraisal's not conforming to
federal appraisal standards because of issues related to the reasonableness
of the highest and best use development level prescribed by the
instructions.

As part of the exchange, the developer bought out its 1970 commitment to the
Park Service to construct an interchange on the Parkway, for $8.5 million.
This figure is an estimate of the cost of constructing the interchange- it
is not an estimate of market value that was prepared by the appraiser. The
Federal Highway Administration was asked by the Park Service to prepare an
initial estimate of the construction costs and determined them to be $12
million; an engineering firm hired by the developer revised this estimate,
using different assumptions, to $8.5 million. The Park Service and the
developer agreed to use this figure in the exchange before they sought the
appraisals and then instructed the appraiser to use this figure to calculate
the total amount owed to the Park Service in the exchange, by adding it to
the appraised value of the Arlington parcel's indenture. Our analysis also
includes this figure as an amount owed to the Park Service.

The appraiser faced two valuation determinations for the Arlington parcel.
He needed to determine (1) the value of a restriction (indenture) owned by
the Park Service that precluded office/ retail/ residential development on
the parcel and (2) the value of other development restrictions imposed by

8 The 15 acres were included in a resource protection area because they were
part of a wetland and a flood plain. Arlington Appraisal Did

Not Correctly Value the Indenture

Page 12 GAO- 01- 292 Potomac Yard Land Exchange

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

“before and after” methodology when making these valuation
calculations. Unlike the Alexandria parcel, the appraisal instructions for
the Arlington parcel did not provide the appraiser levels of development to
use in his analysis of the indenture's fair market value and the
restrictions. Instead, the appraiser relied on his professional judgment to
estimate the levels of development likely to occur with or without the
indenture, and with or without the other development restrictions.

In estimating the Arlington parcel's “before” value- with the
indenture lifted- the appraiser determined that the developer could
reasonably obtain new zoning that would allow the construction of about 1.9
mmsf of office space on the parcel. In estimating the “after”
value- with the indenture in place- the appraiser noted that Arlington
County allows developers to shift development density from one parcel to
another. The appraiser determined that, had the indenture remained in place,
the developer would have pursued this option and the county would have
allowed the shift of 1.9 mmsf from the Arlington parcel to a smaller
adjacent parcel (which was vacant and zoned for about 1.1 mmsf of office
space). This shift would have resulted in the development of 3.0 mmsf on the
adjacent parcel, and the appraiser determined that this parcel would likely
have been rezoned to accommodate the additional development. Therefore, the
appraiser found that the developer could have constructed the 1.9 mmsf of
development associated with the Arlington parcel with or without the
indenture in place.

The appraiser calculated the indenture's value as the difference in the
estimated cost of (1) building the 1.9 mmsf of office space on the Arlington
parcel and (2) shifting this same square footage and combining it with 1.1
mmsf of office space on the adjacent parcel. The appraiser estimated that
the developer would have had to spend $6.5 million more to construct the 1.9
mmsf on the adjacent parcel than on the Arlington parcel, to provide another
level of underground parking to accommodate the additional development on
the smaller parcel. 9

9 The appraiser reported that the county's zoning ordinance required 5,171
parking spaces for 3.0 mmsf of development, which would in turn require
about 1. 8 mmsf of parking area. Because the developer did not plan to
provide surface parking, the appraiser determined that the cost of building
an underground parking garage was the critical element in valuing the
indenture.

Page 13 GAO- 01- 292 Potomac Yard Land Exchange

While our review appraiser agreed that the appraisal's methodology was
reasonable, he disagreed with the appraiser's conclusion that the
indenture's value should be this single estimated cost. The developer would
have likely incurred additional costs had it shifted the 1.9 mmsf to the
adjacent parcel. We found three main reasons why the appraisal understated
the value of the indenture:

? According to the appraisal instructions, the adjacent parcel contained 17
acres; the appraiser assumed that all 17 acres were available for
development. Our review appraiser examined the developer's site maps and
determined that only 10 acres of the adjacent parcel were available for
development, because 4 acres fell under railroad rights- of- way and another
3 acres were not contiguous. Shifting 1.9 mmsf of density to the remaining
10- acre site would have likely cost the developer more than the appraiser's
$6.5 million estimate. For example, the appraiser determined that the
developer would have to build three levels of underground parking, assuming
that 98 percent of the 17- acre parcel were excavated; however, information
in the appraisal indicates that five levels of underground parking would be
needed if 98 percent of the 10- acre site were excavated. The appraiser told
us that each additional level of underground parking increases the
construction costs substantially over previous levels because of the
additional expenses associated with building and strengthening the garage
walls. Our review appraiser noted that- while the appraisal's cost concepts
as applied to parking may exceed the detail the market would know or care
about- the more severe the excavation needs to be, the more the market would
consider it.

? The appraiser noted that the value of the 3.0 mmsf would likely decrease
if the developer were unable to build on the full 46 acres, because
higherdensity projects generally take longer to sell and obtain lower prices
per square foot. He also noted that any deficit could be offset by the lower
costs of concentrating the infrastructure needed for the 3.0 mmsf on the
smaller site. However, because the area actually available to accept the
additional 1.9 mmsf is about 40 percent smaller than he assumed- 10 acres
rather than 17- the resulting development would have been significantly more
dense than he determined. Our review appraiser noted that putting all of
this density on the smaller site raises questions of feasibility. At a
minimum, we believe that the potential lower revenues from such a dense
development could eclipse any potential cost savings that the developer
might realize.

? The appraiser did not include the impact on the indenture's value of the
developer's shifting an additional 1.1 mmsf of development density to the

Page 14 GAO- 01- 292 Potomac Yard Land Exchange

Arlington parcel and the adjacent parcel. A 1993 agreement between the
developer and Arlington County allows this shift if the Park Service
indenture is lifted. 10 The appraiser reviewed the agreement and found it to
be weak; interviewed the county's planning director, who suggested that the
county was unlikely to approve this shift (which would result in a mixed-
use development of more than 4.0 mmsf) owing to traffic- related issues; and
reported finding no reliable evidence to conclude that this shift would take
place. In our view, the possibility of this density shift is at least as
strong as the possibility of shifting density from the Arlington parcel to
the adjacent acreage, because an existing legal agreement with the county
allows it. If the indenture remained in place, the developer would lose the
option of shifting the 1.1 mmsf. Because the developer cannot shift this
density without the removal of the indenture, the appraiser should have
assigned some additional value to the indenture.

Considering these factors, we agree with our review appraiser's conclusion
that the indenture should have been assigned a higher value than $6.5
million. However, the appraisal does not provide enough information for us
to reliably estimate the indenture's value.

As a condition of having the indenture lifted, the developer agreed to
restrict its construction on six areas within or adjacent to the parcel by
one or more of the following factors: (1) building height; (2) proximity to
the Parkway; and (3) type of building (for example, office, retail, or
residential). In valuing these restrictions- land interests the Park Service
would acquire in the exchange- the appraiser determined that restrictions in
four areas would limit the amount and type of development that could be
built, and that restrictions in the other two areas would not affect the
developer since zoning already limited building heights. The appraiser
estimated the potential economic impact of the restrictions- that is,
reductions in market values- in each of these four areas, tallied these
reductions, and concluded that the restrictions would have caused a $2.4
million loss for the developer.

Our analysis shows that the appraisal overvalued the restrictions. The
appraiser valued the areas as if they were six separate parcels, rather than
analyzing the financial impact of the restrictions on the entire parcel's

10 Under this agreement, the county receives title to a 25- acre parcel
owned by the developer, located north of the Arlington parcel, for community
recreation and open space; in return, the developer receives about 1.1 mmsf
of development density to shift to the Arlington parcel and the adjacent
acres.

Page 15 GAO- 01- 292 Potomac Yard Land Exchange

value, as required by federal appraisal standards. Our review appraiser
further determined that the building restrictions on the Arlington parcel,
in aggregate, had no detrimental impact on the parcel's value because zoning
and other building restrictions limiting development predated the Park
Service- imposed restrictions. Our review appraiser noted that the
restrictions had the potential to affect a project's design or placement but
concluded that they would probably have no impact, in aggregate, on the
development. Thus, the building restrictions would not have resulted in a
loss for the developer because they did not diminish the development
opportunities available on the parcel and adjoining acres. Therefore, the
restrictions should have been assigned no value.

The Park Service's chief appraiser determined that the appraiser applied a
reasonable methodology, concluded that the Arlington appraisal met the
federal appraisal standards, and approved it for Park Service's use.
Although the appraisal understated the value of the indenture and overstated
the value of the Park Service's restrictions, our review appraiser agreed
that the appraisal conformed to federal standards.

Although the Potomac Yard exchange helped to resolve years of dispute when
it was completed in March 2000, the Park Service could have received more
than $15 million from the developer- rather than owing the developer $14
million- if the exchanged interests had been appropriately valued. As a
federal agency, the Park Service has a responsibility to protect federal
taxpayers' interests when it acquires or conveys land interests. However,
the Park Service did not do so when it instructed the appraiser to derive a
value for development on the Alexandria parcel that was not shown to be
reasonably probable, or when it used an appraised value on the Arlington
parcel that understated the worth of the Park Service's interests.
Consequently, the Park Service gave the developer credit for losses that
might not have realistically occurred and did not receive enough credit for
allowing the developer to develop the Arlington parcel. However, the
transaction is now fully executed and- as in similar situations when a
government agency pays too much for an item under a contract- it is unlikely
that the Park Service can recover any funds.

We provided the Department of the Interior with a draft of this report for
its review and comment and, in light of the then- pending lawsuit, also
provided a copy to the Department of Justice. Interior expressed three main
concerns in its response; Justice did not provide comments. Conclusions

Agency Comments and Our Evaluation

Page 16 GAO- 01- 292 Potomac Yard Land Exchange

First, Interior commented that the report discussed issues that were the
subject of ongoing litigation and that GAO's policy is to avoid addressing
matters pending in litigation. Our report disclosed that a competing
developer filed a lawsuit protesting the exchange and, for this reason,
lawyers representing the Park Service and the developer advised
representatives from the agency and the developer not to meet with us during
our review. While GAO is aware of the sensitivity of addressing issues in
litigation, we decide whether to continue our involvement on a case- by-
case basis. In this case, the Chairman of a congressional committee with
jurisdiction expressed serious concerns about whether the exchanged land
interests had been appropriately valued, and we proceeded with our review
consistent with our authorities and responsibilities to support the Congress
and the flexibility inherent in our policies. The court dismissed the
lawsuit for lack of standing in February 2001.

Second, Interior disagreed that the taxpayers' interest was not well
protected in the exchange and asserted the exchange received overwhelming
public and local support. We acknowledge that the exchange helped to resolve
long- standing and contentious community development issues in Alexandria
and Arlington, and that for this reason the local governments and other
parties supported the exchange. However, our review focused on the appraised
values of the exchanged land interests. Our review found that the appraisals
incorrectly valued the exchanged interests, and we concluded that the Park
Service could have received more than $15 million in the exchange rather
than owing the developer $14 million. Had these funds been received, federal
taxpayers could have benefited more from the exchange than they did. We
clarified the report title to reflect our emphasis on federal rather than
local interests.

Third, Interior questioned the reliability of the report because, in
Interior's view, it relies exclusively on the work of a review appraiser who
in effect conducted a reappraisal of the Alexandria parcel's development
restriction even though he is not licensed in Virginia and did not inspect
the property. Interior stated that it firmly believes the Alexandria
appraisal is sound under applicable law and appraisal standards. We disagree
with Interior's assertions. Our report is reliable and based on information
that we verified with the Park Service, the developer, the developer's
lawyers, and the appraiser. Specific points follow:

? Our report incorporates the results of a desk review of the appraisals,
but it does not rely exclusively on these results. Our staff independently
read

Page 17 GAO- 01- 292 Potomac Yard Land Exchange

and analyzed the appraisals, federal appraisal standards, and other relevant
documents, to develop this report; this review is the most recent of several
of our examinations of appraisals used in federal land transactions. 11 We
clarified the report to better distinguish our review appraiser's work and
our analysis.

? The appraiser we contracted with to conduct a desk review has over 40
years' experience as a professional appraiser; he is affiliated with the
Appraisal Institute and other professional real estate associations; and he
is licensed as a certified general appraiser in the state of Colorado.
Although under Virginia law, persons who appraise properties within Virginia
must be licensed by the state, this law does not apply to those who provide
consulting services that are not appraisals. 12 The appraiser we contracted
with conducted a desk review and did not reappraise either parcel.

? Appraisers conducting a desk review are not expected to visit the property
that was appraised. In our review appraiser's desk review of the Potomac
Yard appraisals, he checked the arithmetic, considered the appropriateness
of the methods and techniques used, and evaluated the reasonableness of the
conclusions reached. Regarding the Alexandria parcel's development
restriction, our review appraiser found that the appraised value was not
based on a credible analysis because there was no determination that a
reasonable probability existed that the parcel would be rezoned to
accommodate the high level of commercial development that was assumed in the
“before” scenario. For this reason, our review appraiser
concluded that the Alexandria appraisal did not conform to all federal
appraisal standards and likely overstated the fair market value of the
development restriction.

11 BLM and the Forest Service: Land Exchanges Need to Reflect Appropriate
Value and Serve the Public Interest (GAO/ RCED- 00- 73, June 22, 2000);
Federal Land Management: Land Acquisition Issues Related to the Baca Ranch
Appraisal (GAO/ RCED- 00- 76, Mar. 2, 2000); Federal Land Management:
Appraisals of Headwaters Forest Properties

(GAO/ RCED- 99- 52; Dec. 24, 1998); and Federal Land Management: Appraisal
of Crown Butte Mines' New World Property (GAO/ RCED- 98- 209, May 29, 1998).

12 Va. Code Ann. 54. 1- 2009 through 2011 (2000).

Page 18 GAO- 01- 292 Potomac Yard Land Exchange

The full text of Interior's letter is in appendix III. We conducted our
review from April 2000 through February 2001 in accordance with generally
accepted government auditing standards. Details of our scope and methodology
are discussed in appendix I.

As requested, unless you publicly announce its contents earlier, we plan no
further distribution of this report until 30 days from the date of this
letter. At that time we will send copies to the Honorable Gale A. Norton,
Secretary of the Interior, and the Honorable Denis Galvin, Acting Director
of the National Park Service. We will also send copies to other appropriate
congressional members and make copies available to others upon request.

If you or your staff have any questions about this report, please call me at
202- 512- 3841. Key contributors to this report are listed in appendix IV.

Sincerely yours, Barry T. Hill Director, Natural Resources

and Environment

Appendix I: Scope and Methodology Page 19 GAO- 01- 292 Potomac Yard Land
Exchange

To examine whether the appraisals the National Park Service used for the
Potomac Yard land exchange appropriately valued the interests that were
exchanged, we reviewed (1) documents associated with the exchange, (2) the
Alexandria and Arlington appraisals, (3) the Park Service's review of those
appraisals, and (4) federal appraisal standards. Because of a pending
lawsuit filed by another developer protesting this exchange, the U. S.
Attorney's Office advised the Park Service in June 2000 that its personnel
should not agree to interviews with us. A Park Service representative did
give us a tour of the Alexandria and Arlington parcels and responded to our
questions about the sites; however, we were unable to interview
representatives from the Park Service during most of our review. Similarly,
representatives of the developer told us in June 2000 that they had also
been advised not to agree to interviews with us. However, after certain
documents had been filed in the lawsuit, the developer initiated a meeting
with us in October 2000. The appraiser hired by the developer agreed to talk
with us, and we met with him to better understand the appraisals and his
analyses. After we completed our fieldwork, we met with Park Service
officials, the developer, the developer's lawyers, and the appraiser to
verify the factual accuracy of the data we obtained; we then provided the
Park Service and the Justice Department a draft of this report for review.
The court dismissed the lawsuit for lack of standing in February 2001.

Additionally, we contracted with Mr. Peter D. Bowes- an independent and
certified appraiser in Denver, Colorado, who has over 40 years of experience
in appraising properties such as vacant urban land and has worked with
various government entities- to conduct a desk review of the appraisals. His
review included his professional opinion on whether the appraisals
appropriately valued the land interests that were exchanged and complied
with federal appraisal standards. A desk review is not a reappraisal, and he
did not visually inspect either the Alexandria or the Arlington parcel. In
addition, he did not confirm details contained in the appraisal reports, add
new data, or talk with the Park Service or the developer.

We performed our work from April 2000 through February 2001 in accordance
with generally accepted government auditing standards. Appendix I: Scope and
Methodology

Appendix II: Summary of Exchange Figures and GAO's Adjusted Figures

Page 20 GAO- 01- 292 Potomac Yard Land Exchange

In the Potomac Yard land exchange, the appraiser reported that the Park
Service owed the developer $14 million (which the developer waived). As
shown in table 1, this figure represented the difference between (1) the
appraised values of the development opportunities given up by the developer
(totaling $29 million) and (2) the estimated cost of the interchange (a
figure that was not appraised) and the appraised value of the indenture
given up by the Park Service (totaling $15 million).

Table 1: Estimated Figures (Dollars in millions) Land interest Owed to the

developer Owed to the Park Service Net owed to the

developer Alexandria parcel

Development restriction $26.6 Interchange $8.5

Arlington parcel

Indenture 6.5 Building restrictions 2.4

Total $29.0 $15.0 $14.0

In our view, the appraisals overestimated the value of the development
opportunities given up by the developer- by as much as the full appraised
values- and underestimated the value of the indenture- by an amount we could
not determine. As shown in table 2, the developer could have owed the Park
Service more than $15 million, including the $8.5 million interchange
figure.

Table 2: GAO's Adjusted Figures (Dollars in millions) Land interest Owed to
the

developer Owed to the Park Service Net owed to the

Park Service Alexandria parcel

Development restriction $0 a Interchange $8.5

Arlington parcel

Indenture >6.5 b Building restrictions 0

Total $0 >$ 15.0 >$ 15.0

a The appraisal did not show that rezoning was reasonably probable, in which
case the restriction would not diminish the development that was likely to
occur and would have no market value. b The indenture should have been
assigned a higher value than $6.5 million, but the appraisal does not
provide enough information for us to reliably estimate the indenture's
value.

Appendix II: Summary of Exchange Figures and GAO's Adjusted Figures

Appendix III: Comments From the Department of the Interior

Page 21 GAO- 01- 292 Potomac Yard Land Exchange

Appendix III: Comments From the Department of the Interior

The developer apparently obtained a copy of the draft report from the
Department of the Interior. We provided the draft report to Interior and
requested its comments because Interior is the agency affected by our
review. For this reason, we did not include the developer's letter or
respond to it in our report.

Appendix III: Comments From the Department of the Interior

Page 22 GAO- 01- 292 Potomac Yard Land Exchange

Page 23 GA0- 01- 292 Potomac Yard Exchange

Sue Ellen Naiberk, (303) 572- 7357 In addition, Jay Cherlow, Doreen Feldman,
Susan Irwin, Diane Lund, Jonathan S. McMurray, Cheryl Pilatzke, Susan
Poling, Carol Herrnstadt Shulman, and Dan Williams made key contributions to
this report. Appendix IV: GAO Contacts and Staff

Acknowledgments GAO Contacts Staff Acknowledgments

(141448)

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