Federal Land Management: Baca Ranch Appraisal Land Acquisition Issues
(Testimony, 03/10/2000, GAO/T-RCED-00-105).

Pursuant to a congressional request, GAO discussed the appraisal for the
Baca Ranch, focusing on the: (1) extent to which the value established
by the owner's appraisal was consistent with the comparable property
sales data presented in the appraisal and in the Forest Service's market
study; and (2) other key factors that influenced the appraisal's final
outcome.

GAO noted that: (1) although the owner's appraisal of the Baca Ranch's
value complied the federal appraisal standards, the appraised value is
higher than supported solely by sales of comparable properties presented
in the appraisal and in the Forest Service's market study because it
reflects a premium; (2) in arriving at a value, the owner's appraisal
identified sales of 16 large ranch properties located in New Mexico and
Colorado that it considered comparable to the Baca Ranch in one or more
ways, such as location, topographical features, and usage; (3) on the
basis of professional judgment, the owner's appraisers relied heavily on
two higher-valued properties that they considered to be most comparable
to estimate the Ranch's value of $101 million; (4) this value reflects a
premium over what it would be if it were computed on the basis of all 16
comparable sales; for example, using a weighted average of these sales
results in a value $37 million lower than the appraised value; (5) in
reviewing the owner's appraisal, the Service's chief appraiser told GAO
that he had questions about the value in the owner's appraisal until he
made a visual inspection of the property, which led him to agree that a
premium value was warranted because of the property's uniqueness; (6)
the Service's market study presents data on sales of 11 comparable
properties in New Mexico and southern Colorado that also support a range
of lower values for the Baca Ranch--the high end of which is still $37
million less than the appraised value; (7) the appraisal reviewer GAO
contracted with also found that the appraised value was higher than
supported by information in the appraisal, which showed that some of the
low-valued properties had similar characteristics and were comparable to
the Baca Ranch; (8) on the basis of GAO's analysis of the comparable
property sales data presented in the owner's appraisal and in the
Service's market study, the government would pay a premium for the Baca
Ranch if the value in the owner's appraisal is used to establish its
price; (9) the appraised value of the Baca Ranch--as approved by the
Forest Service--is higher than would be indicated if it were based
solely on the sales prices of all the comparable properties; and (10) to
develop this value, the appraisers applied their professional judgment
and relied most heavily on two high-valued comparable properties,
believing that the ranch would and should bring a premium.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-00-105
     TITLE:  Federal Land Management: Baca Ranch Appraisal Land
	     Acquisition Issues
      DATE:  03/10/2000
   SUBJECT:  Prices and pricing
	     Real property
	     Land management
	     Real estate purchases
	     Appraisals
	     Comparative analysis
IDENTIFIER:  Baca Ranch (New Mexico)
	     Denver (CO)

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Testimony

Before the Subcommittee on Forests and Public Lands Management, Committee on
Energy and Natural Resources, U.S. Senate

For Release on Delivery
Expected at 9 a.m., EST
Friday
March 10, 2000

FEDERAL LAND MANAGEMENT

Baca Ranch Appraisal Land Acquisition Issues

Statement of Barry T. Hill, Associate Director,
Energy, Resources, and Science Issues,
Resources, Community, and Economic Development Division

GAO/T-RCED-00-105

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to present the results of our review of the
appraisal for the Baca Location No. 1 (the Baca Ranch), a privately owned
ranch covering almost 95,000 acres in northern New Mexico that the U.S.
Department of Agriculture's Forest Service (the Service) wants to buy. Our
review was mandated by the Appropriations Act for the Department of the
Interior and Related Agencies for fiscal year 2000.

To establish a price for the ranch, the owners commissioned certified
appraisers to appraise the property. Their appraisal, completed in September
1998, identified and evaluated sales of ranches considered to be comparable
to the property and concluded that the fair market value of the Baca Ranch
was $1,061 per acre, or $101 million in total. The Service reviewed the
appraisal to assure that it complied with federal appraisal standards, which
address the principles applicable to appraising property for federal
acquisition. To facilitate its review of the appraisal, the Service
commissioned a market study by another certified appraiser, completed in
June 1998, that also identified and evaluated sales of ranches considered to
be comparable to the Baca Ranch-although it was not an appraisal. Two
Service appraisers used the market study when they reviewed the owner's
appraisal and, in September 1999, found that the appraisal met federal
standards and approved it. The Service and the owners signed a purchase
agreement for the appraised value in October 1999. In November 1999, the
Congress appropriated $101 million for the purchase and required that
authorizing legislation be enacted before the purchase can be completed.

Our review addressed (1) the extent to which the value established by the
owner's appraisal was consistent with the comparable property sales data
presented in the appraisal and in the Service's market study and (2) other
key factors that influenced the appraisal's final outcome. In our review, we
examined the owner's appraisal, the Service's appraisal review report, and
the Service's market study. We also contracted with an independent and
certified appraiser to conduct a desk review of the appraisal. Neither we
nor the appraisal reviewer we contracted with attempted to reappraise the
property. Because we were told by the owner's representative that the Baca
Ranch was inaccessible due to winter conditions during the limited time
available for our review, neither we nor the appraisal reviewer we
contracted with visited it.

In summary, we found the following:

   * Although the owner's appraisal of the Baca Ranch's value complied with
     federal appraisal standards, the appraised value is higher than
     supported solely by sales of comparable properties presented in the
     appraisal and in the Service's market study because it reflects a
     premium. In arriving at a value, the owner's appraisal identified sales
     of 16 large ranch properties located in New Mexico and Colorado that it
     considered comparable to the Baca Ranch in one or more ways, such as
     location, topographical features, and usage. On the basis of
     professional judgment, the owner's appraisers relied heavily on two
     higher-valued properties that they considered to be most comparable to
     estimate the Ranch's value of $101 million. This value reflects a
     premium over what it would be if it were computed on the basis of all
     16 comparable sales; for example, using a weighted average of these
     sales results in a value $37 million lower than the appraised value. In
     reviewing the owner's appraisal, the Service's chief appraiser told us
     that he had questions about the value in the owner's appraisal until he
     made a visual inspection of the property, which led him to agree that a
     premium value was warranted because of the property's uniqueness.
   * The Service's market study presents data on sales of 11 comparable
     properties (4 of which are also in the owner's appraisal) in New Mexico
     and southern Colorado that also support a range of lower values for the
     Baca Ranch-the high end of which is still $37 million less than the
     appraised value. The appraisal reviewer we contracted with also found
     that the appraised value was higher than supported by information in
     the appraisal, which showed that some of the low-valued properties that
     the owner's appraisers did not use to calculate the Baca Ranch's value
     had similar characteristics and were comparable to the Baca Ranch. On
     the basis of our analysis of the comparable property sales data
     presented in the owner's appraisal and in the Service's market study,
     the government would pay a premium for the Baca Ranch if the value in
     the owner's appraisal is used to establish its price.

Mr. Chairman and Members of the Subcommittee, the appraised value of the
Baca Ranch-as approved by the Forest Service-is higher than would be
indicated if it were based solely on the sales prices of all the comparable
properties. To develop this value, the appraisers applied their professional
judgment and relied most heavily on two high-valued comparable properties,
believing that the ranch would and should bring a premium price. As the
Congress weighs its authorization decision, we believe it is important for
you to be aware of this premium.

Background

Federal appraisal standards require that property to be acquired by the
federal government be appraised at fair market value, which is the amount
for which a property would be sold by a willing and knowledgeable seller
with no obligation to sell to a willing and knowledgeable buyer with no
obligation to buy. Determining fair market value requires the appraiser to
first identify the property's "highest and best use," defined as the use
that is physically possible, legally permissible, financially feasible, and
maximally profitable for the owner. Appraisers must then use an accepted
valuation approach; the sales comparison approach is generally considered to
be the most reliable when sufficient market data are available. This
approach estimates a property's value by comparing it with other properties
that have been sold, considering various factors-such as the location, size
and other physical characteristics, and uses of the properties-to estimate
the extent of comparability. A property's size is one of the physical
characteristics considered when comparing the sales of similar properties;
other things being equal, smaller parcels of land tend to have higher
per-acre values than larger parcels.

Federal appraisal standards also require, among other things, that
appraisers collect, verify, analyze, and reconcile available data; identify
and consider appropriate market information; use all pertinent information
in developing the appraised value; and report their analyses, opinions, and
conclusions clearly and accurately in a manner that is not misleading and
that contains sufficient information to allow the report's users to
understand it properly. The standards generally address appraisal procedures
and documentation rather than outcomes; different appraisers can consider
the same data and follow the same methodology but develop different
estimates of appraised values, because they apply different professional
judgments, and still comply with the standards. The federal standards also
state that it is essential for appraisers to visually inspect the properties
they are appraising and the properties used as comparisons.

Data on Comparable Sales Support a Lower Value for the Baca Ranch

While the September 1998 owner's appraisal is consistent with federal
appraisal standards, it presents data on comparable ranch properties that
support a value for the Baca Ranch that is lower than $101 million. The
appraisal used the sales comparison approach to value the property as a
"trophy ranch" that is used primarily for recreation. The appraisers first
considered over 50 sales of properties as possible comparable sales, then
narrowed the number to 16 large ranch properties located in New Mexico and
Colorado that were more comparable to the Baca Ranch. These 16 properties
had per-acre prices (adjusted to account for changes in land prices over
time) ranging from $2,908 per acre for 5,800 acres to $196 per acre for
90,000 acres (the only property of the 16 that is approximately the same
size as the Baca Ranch).

The appraisal further narrowed its consideration of comparable sales to five
properties. Although these five properties were much smaller than the Baca
Ranch (ranging from about 4,000 to 32,000 acres), they were considered to be
the most relevant on the basis of other factors such as the date of sale,
location, physical characteristics (other than size), and diversity of use.
The appraisal estimated that the Baca Ranch's value fell between the values
of two properties that it considered to be most comparable to the Baca Ranch
in terms of location and usage: a property classified as superior at $1,395
per acre for about 11,000 acres and a property classified as inferior at
$880 per acre for about 32,000 acres. The appraisal calculated the Baca
Ranch's value by assigning 85 percent of the per-acre value to these two
properties (40 percent and 45 percent, respectively) and the remaining 15
percent to the three lower-valued properties (5 percent each), resulting in
the appraised value of $1,061 per acre for the Baca Ranch.

By relying on the two high-valued properties, the appraisal resulted in a
per-acre value that reflects a premium over what it would have been, had it
been computed on the basis of all 16 sales of comparable properties. We
computed the weighted average per-acre price for all 16 comparable ranches
presented in the appraisal to be about $670 per acre. Although a weighted
average does not reflect all of the factors affecting a property's value, it
shows that, on average, the value of the comparable properties is about $390
lower per acre-and $37 million lower, in total-than the appraised value of
the Baca Ranch. Figure 1 shows the time-adjusted price per acre and the
total acres for each of the 16 comparable properties, the weighted average
price per acre for the 16 properties, and the appraised value of the Baca
Ranch.

Figure 1: Price per Acre v. Total Acres for All 16 Comparable Property Sales
Included in the Owner's Appraisal, the Weighted Average Price per Acre for
These Sales, and the Appraised Value of the Baca Ranch

In reviewing and approving the Baca Ranch appraisal and the appraised value,
two review appraisers in the Service verified that it was complete and
accurate, that its analysis and conclusions were logical, and that it met
federal appraisal standards. As part of their review, the review appraisers
visually inspected the Ranch as well as other properties discussed in the
appraisal. The Service also used the market study to define the market and
identify sales of properties that would be relevant to the sale of the Baca
Ranch. The market study used the sales comparison approach, analyzing sales
of 11 ranch properties located in New Mexico and southern Colorado (ranging
from about 2,000 acres to about 95,000 acres) and comparing them to the Baca
Ranch on the basis of several factors-such as the property's location and
size, the presence of buildings or other improvements, and amenities such as
trees and water. Using a valuation technique similar to that used in the
appraisal, the study placed the Baca Ranch's value between a property with a
price of $670 per acre (for about 16,000 acres) and another with a price of
$400 (for about 24,000 acres); a third property, priced at about $580 per
acre (for about 11,000 acres), was judged to be equal to the Baca Ranch.
These values range from about $390 to $660 per acre lower than the appraised
value of the Baca Ranch and suggest a total price about $37 million to $63
million lower than the appraised value.

The Service's chief appraiser said that the market study was useful and
saved him substantial time in reviewing the subsequent Baca Ranch appraisal
because it provided verified market information about the characteristics
and sales prices of relatively large western ranch properties. Furthermore,
he said the study allowed the Service's managers to make an early assessment
that the agency would probably be able to approve an appraisal-which had not
yet been submitted to the Service-that would meet the price expectations of
the Baca Ranch's owners. However, he also said that he did not consider the
market study's values to be relevant to the appraisal because they were not
supported by physical inspections. We acknowledge the importance of physical
inspections in appraising property; however, even without such inspections,
the market study provided market data on comparable properties that indicate
a lower range of value than estimated in the owner's appraisal.

The appraisal reviewer we contracted with found that the owner's appraisal
complies with professional appraisal standards; however, he disagreed with
the appraisal's conclusion regarding the appraised value. He said that the
information on comparable sales presented in the appraisal indicate that the
appraised value should be lower, but he did not estimate how much lower that
value should be because he did not reappraise or visually inspect the
property.

The Baca Ranch's Uniqueness Was Cited as a Key Factor in Assigning It a
Premium Value

The key factor that was cited by the appraisers as influencing their
ultimate assessment of the property's premium value-and by the Service's
chief appraiser as influencing his decision to accept it-was the Baca
Ranch's uniqueness. Specifically, the owner's appraisal said that the Baca
Ranch is a unique property-because of characteristics such as its location,
size, scenery, and pristine appearance-and that purchasers of such "trophy
ranches" as the Baca Ranch are willing to pay premium prices for uniqueness.
Furthermore, the appraisal asserted that properties such as the Baca Ranch
that range in size from 10,000 to 100,000 acres do not follow the usual
size-price relationship in land-that is, as the amount of acreage increases,
the price per acre decreases. As a result, the owner's appraisers believe
that the Baca Ranch's size does not matter as much as its location, usage,
and other physical characteristics do and that the property should bring a
premium price because of these other factors. According to the owner's
appraisal, no properties are truly comparable to the Baca Ranch; therefore,
the appraisers applied professional judgment and used qualitative analysis
to eliminate most of the larger and low-valued comparable properties and
instead rely on two smaller comparable properties to compute the appraised
value. The appraisal then used the per-acre prices of these two relatively
high-priced properties to estimate the per-acre value of the Baca Ranch and
calculated the total appraised value by multiplying the per-acre value by
the ranch's acreage-a calculation that assumes that the property's total
value is directly based on its size.

The Service's chief appraiser agreed with the owner's appraisal that the
Baca Ranch is unique and said that professional judgment was a key factor in
his review and approval of the appraisal. He said that the appraised value
for the Baca Ranch lies within the parameters of the existing market-that
is, it lies within the range of comparable sales data that are presented in
the appraisal. However, he also said that in his review of the appraisal, he
was initially very concerned that the appraised value appeared to be too
high, but then he visually inspected the Baca Ranch and the comparable
properties. In seeing the properties firsthand, he said that on the basis of
his professional judgment, the relatively high value given to the Baca Ranch
in the appraisal was warranted. He did not provide more specific information
about the basis for his professional judgment, however, to support his
approval of the appraised value. He noted that an appraised value is only an
estimate and that the actual market value of a property can reasonably be
expected to vary as much as 10 percent either way.

The appraisal reviewer we contracted with disagreed with the basic premise
of the owner's appraisal, namely, that the Baca Ranch is unique and
therefore exempt from the usual size-price relationship. He said that the
information presented in the appraisal did not conclusively demonstrate to
him that the Baca Ranch is unique. For example, he noted that the appraisal
presented no clear evidence that the Baca Ranch property is the only large
property with streams, timber, and other amenities. He said that the
appraisal provides information showing that some of the lower-valued
properties it identified have physical characteristics that make them
comparable to the Baca Ranch. For example, some of the properties also
reflect values associated with keeping them undeveloped. Furthermore, he
said that the sales of these comparable properties clearly demonstrate the
usual size-price relationship-size matters-and that the size of the Baca
Ranch is a relevant factor to consider in estimating its appraised value.
For these reasons, he said that the comparable sales support a lower
appraised value.

_ _ _ _ _

In closing, Mr. Chairman and Members of the Subcommittee, the value placed
on the Baca Ranch by the owner's appraisal and agreed to by the Forest
Service is higher than would be indicated if it were based solely on the
sales prices of all the comparable properties. In arriving at this value,
the appraisers applied their professional judgment and relied most heavily
on two high-valued comparable properties, believing that the Baca Ranch
would and should bring a premium price. Ultimately, the Congress will decide
whether the federal government should acquire this property and whether the
property warrants a premium price. In weighing its authorization decision,
we believe it is important for the Congress to be aware of the significance
of this premium in determining the property's appraised value.

Mr. Chairman, this concludes our testimony, and we would be happy to respond
to any questions that you and the Members of the Subcommittee may have.

Contacts and Acknowledgements

For further information, please contact Barry T. Hill at (202) 512-3841.
Individuals making key contributions to this testimony were Jennifer L.
Duncan and Sue Ellen Naiberk.

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