Are California agencies using flawed appraisal systems to grab open space?
October 10, 2014
TRUCKEE, Calif. — Close observers of conservation land purchases in California are calling for greater transparency and accountability from state agencies that distribute hundreds of millions of dollars in public money on an annual basis.
On a local level, the Truckee Donner Land Trust has executed roughly 42 purchases — some funded with public money — overall varying in size from about 300 acres to more than 7,000 acres of open space since 1990, when a small group of hikers bought a 160-acre parcel in the Coldstream Valley near Donner Lake.
Perry Norris, executive director of the Truckee Donner Land Trust, said he is aware of the controversy, but asserted that as it relates directly to purchases in the Northern Sierra, it is all much ado about nothing.
"The review process for appraisals has been undergoing much more scrutiny as of late," Norris said. "It's a much more arduous process, although it's never been a slam dunk."
“Thou shalt not use conservation purchases as comps. They are tainted. They are not a good indicator, mostly because the buyers are playing with someone else’s money.”
Nevada County real estate appraiser
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Real estate appraisals are the method by which certified professionals arrive at a correct and approximate value for a given piece of real estate.
Norris admits the process is an inexact science, pointing out that Royal Gorge, a roughly 2,800-acre plot of land his organization purchased in 2011 for $10.5 million, was valued at more than twice as much — about $24.5 million — the year before.
READ MORE: Back in 2012, conservation groups hailed TDLT's purchase of Royal Gorge as the most significant Sierra Nevada land acquisition "in our lifetimes."
Norris said the discrepancy had to do with the appraiser, who, on the initial and overinflated valuation, hailed from Colorado, had an incomplete picture of the Northern California real estate market and how deflated prices had become after The Great Recession.
FAIR MARKET VALUE?
Due to the relative nature of the appraisal discipline, an increasing chorus of detractors claim California agencies such as the Wildlife Conservation Board, which provides millions to land trusts like Truckee's and other conservation organizations, are using flawed appraisal systems, and thus paying inflated prices for swaths of land that would fetch far less on the open market.
Sandy Dean, chairman of the Humboldt Redwood Company, LLC, headquartered in San Francisco, has been leading the charge to vest the appraisal process overseen by public agencies with more accountability and transparency.
"The state is overpaying (for land and conservation easements)," Dean writes in a letter addressed to three members of the WCB. "We live in a time when California struggles mightily to adequately fund schools and social services. If we are going to expend funds for conservation, the state should be paying current fair market value supported by analysis that would pass muster with private market buyers."
The WCB, a division of the California Department of Fish and Wildlife, oversees capital outlays in the hundreds of millions annually toward projects aimed at enhancing wildlife protection and public recreation.
The board, which meets quarterly, disbursed about $21.5 million during one meeting in May, according to board minutes, including about $1.08 million during the consent portion of the meeting, typically reserved for noncontroversial matters.
Dean and other critics who have attended WBC's meeting assert that appraisals used by the state in an effort to assess appropriate value relating to purchases of land outright or conservation easements are riddled with stale "comps" (comparisons) and faulty analysis "that no private buyer would ever accept."
'SOMEONE ELSE'S MONEY'
While Dean is at the forefront of this movement that began in 2011 after he and his colleagues began to monitor WCB's activities, he is not alone.
Daniel Ketcham, a Nevada County real estate appraiser, said he and some of his colleagues have developed a dictum based on recent land purchases by the conservation community.
"Thou shalt not use conservation purchases as comps," he said. "They are tainted. They are not a good indicator, mostly because the buyers are playing with someone else's money."
The term "comp" is real estate vernacular for "comparison," and describes the process in which professional appraisers ascertain the value of a piece of real estate by studying other parcels of a similar size and function that have been recently sold.
While generally speaking, Ketcham, Dean and other critics, including Republican lawmakers and members of the Howard Jarvis Taxpayers Association, have expressed concern over public funds being used to enrich landowners at the expense of taxpayers.
However, the crux of the issue focuses on the appraisal process by the state and whether it is being used appropriately to arrive at accurate land valuations that would fly in the open market.
Locally, the Truckee Donner Land Trust grabbed headlines in December 2012 after it agreed to pay $11.25 million for the 3,000-acre tract of land at Royal Gorge. Of that price, roughly $3 million was contributed by WBC.
Norris points out that the nearly $3,800-per-acre price point was a steal, particularly when the previous owner, developer Kirk Syme, payed approximately $30 million for the property in 2005, when the real estate market was approaching its apex.
Syme's grand plan to convert a large portion of the unscathed land into a 950-unit luxury resort and vacation-home subdivision never came to fruition, largely because the project was dogged by infrastructural problems, including access to potable water and sewage linkage.
READ MORE: Mr. Syme's default on $16.7 million loan in June of 2011 and subsequent court actions essentially ended his development bid.
Further, the Great Recession, which started in 2007, meant financing for large-scale developments receded into scarcity or disappeared altogether. For this reason, the property was valued at around $24 million in 2011 when it was announced the property was up for sale.
'AN INEXACT SCIENCE'
Dean asserts that infrastructural problems need to be included in real estate appraisals when attempting to discern fair market value. He said repeatedly in letters to the WBC that the policy of evaluating land at the "Highest and Best Use" is flawed.
Highest and Best Use is another real estate term which means land is often valued at would it could conceivably fetch on the market when considering all the uses the land could have.
For instance, if a 2,000-acre parcel of land is appraised at $10 million, the Highest and Best Use method encourages an appraiser to consider what would occur if you subdivided the parcel into 100, 20-acre lots, each of which sold for, say $200,000. This doubles the appraised value.
Dean said these Highest and Best Use appraisals do not include costs of introducing infrastructure, roads or wells to render the land developable, and the comparisons are typically based not only on other land purchases where there was either the prospect of state support for the deal.
"We have … appraisals largely relying on stale state comps, with little adjustment for any change in market conditions for the 2008/2009 economic decline, being used to buy raw land for residential development with no economic analysis of the costs of development or the time and expense required to sell individual lots," Dean writes.
Norris conceded that real estate appraisal is an "inexact science"
"You can have two or three appraisals done, and you will have values that are of a range," Norris said. "You are never going to have two appraisers hit on the same number. The numbers are based a lot on the assumptions an appraiser makes, comparison sales and how far they look back and how they approach the fluctuations in the real estate market."
Nevertheless, Norris — whose organization has received several million dollars from the Wildlife Conservation Board for other purchases locally and regionally, including the Webber Lake, Perazzo Meadows and Waddle Ranch properties — believes the state appraisal review process is actually more rigorous than many of the reviews that are conducted in the free market.
READ MORE: The Truckee Donner Land Trust finalized its endeavor in 2008 to conserve Perazzo Meadows, one of Sierra's largest intact meadows.
BREAKING IT DOWN
When the WCB provides money to a project, an independent review from the California Department of General Services is performed. Norris said those reviews are conducted with an eye toward protecting the public money under the purview of the state.
"The WCB is very sharp, very conscious of their fiduciary responsibility," Norris said. "The state does not want to be contributing money to an entity that is paying over fair market value. There is also more scrutiny."
Dean, meanwhile, continues to push for more accountability and more scrutiny. He said the WBC should be releasing appraisals, and purchase prices should be made prior to the consummation of the deal so the public can weigh in on individual transactions.
"We have repeatedly advocated for disclosure of appraisal for hard to value assets in advance of Department of General Services review," Dean states in a letter to board members in April 2012. "It is clear that the staff of the WCB, and the conservation groups that benefit from WCB funds, seek to have the least change possible to the existing system."
According to minutes relating to the May 2012 meeting, WCB Executive Director John Donnelly said a policy of releasing appraisals in advance would not conform with other state agencies that procure land on behalf of taxpayers or bondpayers.
He added that such a policy may have a cooling effect on certain landowners willing to work with the WBC, and, as appraisals require a great deal of technical know-how, such documents would be subject to the misinterpretation of the general public.
Dean balked at such a notion, insisting on the public's right to know.
He and others asserted the board should hire an independent appraiser to come up with his or her own land valuations, as the existing policy of allowing the buyer to contract appraisals may be insufficient, considering the buyer is ultimately using public money and may not possess a vested interest in keeping the price down to the detriment of public coffers.
'MORE TRANSPARENCY WILL HELP'
Ultimately, the three-person board struck a compromise, agreeing to keep appraisals from public view in advance of the sale, but allowing the WBC can contract out for an independent appraisal on land deals where the agency's contribution has exceeded $5 million.
The issue so far is that, according to Karen Fink, a high-ranking member of the California Department of Finance, and a WBC board member, none of the projects that have come before the board have met the $5 million threshold.
"There have been no large acquisitions," Fink said. "We haven't been able to use the external review process yet."
During the May 2014 meeting, two projects — one aimed at preserving a coastal canyon in Los Angeles County, the other designed to protect 1,000 acres of mixed conifers along the coast in Humboldt County — came in at just under the threshold, $4.5 million and $4.51 million, respectively.
Further, according to the same board minutes, Donnelly and his staff brought back recommendations to the board to strike or gut the appraisal policy, stating that it was causing worries with partners about different standards across different agencies and eliciting unnecessary delays.
The board did not agree to strike the policy, asserting that it had not been properly tested and voted to keep it in place.
Meanwhile, Dean has not agreed to relent on his bid for more public involvement in the process.
"The state deserves to get great deals in this time of economic distress, and more transparency will help," he writes.
Click here to learn more about the Truckee Donner Land Trust.
— Matthew Renda is a Northern California freelance reporter and a former news reporter for the Sierra Sun, North Lake Tahoe Bonanza and Tahoe Daily Tribune newspapers. He may be reached for comment at firstname.lastname@example.org.