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FEBRUARY 2003 REPORT NO. 03-115

DEPARTMENT OF ENVIRONMENTAL PROTECTION ACQUISITIONS OF LANDS BY THE STATE

JANUARY 1, 2000, THROUGH DECEMBER 31, 2001

SUMMARY The Department of Environmental Protection provides staff support to the Board of Trustees of the Internal Improvement Trust Fund for the acquisition of lands by the State. It is the Auditor Generals responsibility to routinely monitor these acquisitions and to perform audits as the Auditor General deems necessary. Six acquisitions were selected for audit based on preliminary risk assessments. The findings below reveal deficiencies in several acquisitions of the Department. While Finding Nos. 1 (Kirby Mine), 2 and 6 (St. Joe Upper Wacissa), and 3 (Rayonier) each apply to individual acquisitions, Findings 4, 5, and 7 apply to two or more acquisitions.

Finding No. 1 The underlying extraordinary assumption supporting the appraisal reports for the $10,250,000 purchase of the Kirby Mine property (Ichetucknee Trace project), which had a significant effect on the value estimations, was unsupported, and may have caused the value conclusions to be overstated by as much as $7.8 million. While we recognize that the Department may not have been able to acquire this property for

$7.8 million less than the actual acquisition price, accurate and credible value estimates would have strengthened the Departments bargaining position.

Finding No. 2 Appraisal reports for the $16,314,728 acquisition of the St. Joe Upper Wacissa River property may have overstated value conclusions due to inadequate consideration of environmental, archaeological, and physical limitations of the property.

Finding No. 3 The St. Johns River Water Management District's timber rights valuation for the Rayonier-Twelve Mile Swamp project timber purchase contained questionable assumptions related to future timber rights that may not have supported the $4,617,970 purchase price.

Finding No. 4 Unsupported assumptions and speculative statements in the area analyses and highest and best use analyses may have led to inappropriate selections and analyses of comparable sales, and may have resulted in misleading and overstated value conclusions.

Finding No. 5 Inappropriate appraisal techniques and other deficiencies in analyzing sales data may have resulted in inadequately supported and misleading appraisal reports.

AUDITOR GENERAL William O. Monroe, CPA


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Finding No. 6 Weaknesses in the verification of sales data for the St. Joe Upper Wacissa Tract acquisition may have compromised the valuation analyses, resulting in questionable value conclusions.

Finding No. 7 The appraisal reviews did not always address and ensure the correction of material weaknesses in the appraisal reports, evidencing less than adequate reviews and limiting the reliance that can be placed on the appraisals used for the negotiation and acquisition of real property.

BACKGROUND

Acquisition of lands by the State, other than for transportation purposes, are generally made by the Board of Trustees of the Internal Improvement Trust Fund utilizing staff of the Department of Environmental Protection (Department), Division of State Lands. Chapters 253, 259, and 375, Florida Statutes, provide the authority, procedures, and funding mechanisms for the acquisition of real property by the State. Department of Environmental Protection Rule 18-1, Florida Administrative Code, prescribes additional State land acquisition procedures.

Each parcel to be acquired must have at least one appraisal. Two appraisals are required when the estimated value of the parcel exceeds $1 million. An appraisal review is required for parcels valued over $500,000, while appraisals with values less than $500,000 are reviewed on a randomly selected basis. Appraisals and appraisal reviews are typically performed by outside contract appraisers who are on the Departments list

of approved appraisers. An administrative review of the appraisals and appraisal reviews is conducted by Department staff for quality assurance purposes and to determine the maximum approved value, which is the maximum purchase price, for negotiation purposes. This maximum approved value is the appraised value when one appraisal is obtained, but when two appraisals are required, it is the higher of the two appraised values or 120 percent of the lower appraised value if the two values differ by more than 20 percent of the lower value.

Section 259.041(16), Florida Statutes, provides that we conduct audits of acquisitions and divestitures which are deemed necessary, according to preliminary assessments of board-approved acquisitions and divestitures.

During the audit period, the Board of Trustees approved 146 acquisitions, which included 181,967 acres at a total purchase price of $350,875,850. The States share of the purchase price was $284,817,141. Our audit included six acquisitions totaling 84,256.87 acres, of which 7,911 acres involved the acquisition of lease interests only. The total purchase price of these acquisitions was $100,511,241, and the States share of the purchase price was $86,773,300, representing 25 percent of the total purchase price of the acquisitions approved for purchase during the audit period.

Details of these acquisitions are shown in the following table:


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Property Acquisition Partners

Date of BOT(1)

Approval

Closing Date

Acreage (Final)

Appraised Values

Purchase Price

Price per

Acre

State Share of Purchase

Price

St. Joe (Upper Wacissa)

The Nature Conservancy

7/25/00 9/27/00 8,866.70 $15,862,00017,500,000

$16,314,728 $1,840 $16,314,728

St. Joe (Torreya)


1/23/01 5/29/01 371.07 680,000 652,800 1,759 652,800

Rayonier (Pinhook Swamp)

St. Johns River Water Management District

3/13/01 8/07/01 56,116.95 60,150,00063,000,000

58,643,624 1,045 47,214,668

St. Joe (Snipe Island)


3/29/01 4/20/01 10,688.50 9,600,00010,600,000

10,032,119 939 10,032,119

Kirby Mine (Ichetucknee Trace)

N/A 8/28/01 10/05/01 302.35 10,573,50011,225,000

10,250,000 33,901 10,250,000

Rayonier(2) (Twelve Mile Swamp)

St. Johns River Water Management District

8/28/01 9/26/01 7,911.30 5,344,512 4,617,970 584 2,308,985

(1) Board of Trustees of the Internal Improvement Trust Fund. (2) Less-Than-Fee Simple Acquisition.

SCOPE AND METHODOLOGY

The audit was conducted in accordance with applicable standards contained in Government Auditing Standards issued by the Comptroller General of the United States. The objectives of the audit were:

To document our understanding of management controls relevant to the appraisal of properties for land acquisitions.

To evaluate management's performance in administering its assigned responsibilities in accordance with applicable laws, administrative rules, and other guidelines.

To determine the extent to which the Department's management controls promote and encourage the achievement of management's control objectives in the categories of compliance with controlling laws, administrative rules, and other guidelines; the economic and efficient operation of State government; the reliability of financial records and reports; and the safeguarding of assets.

To identify recommended statutory and fiscal changes that may be included in the audit report and subsequently reported to the Legislature pursuant to Section 11.45(7)(h), Florida Statutes.

We performed appropriate audit tests and procedures to evaluate the Departments land acquisition processes with regard to the


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appraisal reports, the review of the appraisal reports, and the negotiation and closing process. We tested for adequate documentation of these processes by the Department to indicate compliance with controlling laws, rules, policies, and procedures.

FINDINGS AND RECOMMENDATIONS

Finding No. 1: Extraordinary Assumptions

On October 5, 2001, the Department closed on the $10,250,000 purchase of the Kirby Mine (Ichetucknee Trace) property located in Columbia County. The property contained 302 acres, including a 120-acre portion which was leased to a third party for limerock mining purposes. The Department obtained a mineral evaluation/appraisal report, two real property appraisal reports that incorporated the mineral value findings, and an appraisal review. The two real property appraisal reports contained estimated values of $10,573,500 and $11,225,000.

The extraordinary assumption among all three appraisal reports was that the entire 302 acre parcel was permitted and available for limerock mining. We believe that this assumption is unsupported for the following reasons:

Our review of the permit (which, although not included in any of the appraisal files, was readily obtainable from the Department) revealed that only 60 of the 120 acres of the property leased

to the limerock mining company were subject to the general use limerock mining permit issued by the Department. The remaining 242 acres was neither permitted nor grandfathered for any mining activity. Since January 1, 1989, operators of existing mines that intend to disturb new surface areas must provide conceptual plans for reclamation as well as obtain general use permits for expanded areas of mining activity (Department of Environmental Protection Rule 62C-36.003, Florida Administrative Code). Consequently, a new general use permit would need to be obtained for the 242 acres not currently subject to the existing general use permit.

The adjoining Anderson-Columbia Mine property had been acquired by the Department in September 2000. All of the appraisals utilized to acquire the Anderson-Columbia Mine contained statements that any new mining in the area would be opposed by the Department. The Anderson-Columbia mineral appraisal stated that while new mining may be allowed in the county, it would be subject to compliance with numerous requirements and, in the opinion of the appraiser, the likelihood of any new limerock mining being permitted in the future is very small.

The Departments appraisal review agreed with the appraisers extraordinary assumption that the 302 acres was permitted and available for limerock mining, and concluded that the three reports were well


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documented and that the final conclusions of value appeared to be reasonable and supportable. In our opinion, however, as indicated above, the underlying extraordinary assumption supporting the conclusions in the appraisals, which had a significant effect on the value estimations, is unsupported.

From information contained in the appraisal reports, and based on the mineral reserves and unit value per ton identified by the mineral appraiser, but using only the acreage actually permitted for mining (60 acres), we estimated an overstatement of approximately $7.8 million in the estimated value attributable to the assumption that the entire property was permitted for mining. While we recognize that the Department may not have been able to acquire this property for $7.8 million less than the actual acquisition price, accurate and credible value estimates would have strengthened the Departments bargaining position.

We recommend, in the interest of accurate and credible value estimates, that the Department ensure that appraisal reports and reviews are based on credible and accurate assumptions as to the allowable uses of properties.

Department Response:

The Department does not agree that the opinions of values are overstated and that the assumptions are not credible as indicated in the Auditor Generals finding. The Extraordinary Assumptions referred to in the finding regard whether or not permits for mining would be available and if it is proper

to assume that mining can continue beyond the existing approval periods or grandfathering. The Uniform Standards of Professional Appraisal Practice require in Standards Rule 1-2(g) that an extraordinary assumption be used only if: it is required to develop credible opinions and conclusions; the appraiser has a reasonable basis for the extraordinary assumption and the use of the extraordinary assumption results in a credible analysis. The appraisers included this assumption in the event that for some unforeseen reason the mining does not continue and that the mining activity ceases to be allowed. The appraisers assumptions and opinions of value are reasonable and credible based on information known and available as of the date of value.

As of the date of the appraisal, Kirby Mine was in apparent compliance with required permits and regulations. There were no known notices of violation resulting from existing operations for adverse impacts to the states environmental resources. At the time of the appraisal, at least two department permits, which would have been needed for renewal or as a new permit, were in the application process. An application was submitted for an Environmental Resource Permit (ERP) in April 2000 to the DEP Bureau of Mine Reclamation. The DEP Northeast District had been contacted in 2000 about the Industrial Wastewater permit (IW), which was to expire in December 2001. The applicant voluntarily suspended the processing of both the ERP and the IW while the process to acquire Kirby Mine was taking place by the DEP. Both of these permits are


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issued for a five-year period. A mine operator typically applies for a land area that is projected to be mined over the five-year period. Thus, it is common for a mine landowner to not have permits in place for the entire land area under their ownership. As indicated by Joseph Bakker, Chief, Bureau of Mine Reclamation, DEP, the unpermitted area is contiguous with the permitted area; and thus, the permitting of the unpermitted area would be viewed as an extension of the existing operations. Mr. Bakker also indicated that based on existing technology, it is reasonable to assume that the mine operator can implement appropriate mining methods that would allow him to mine the previously unpermitted area while providing reasonable assurance that there will be no adverse impacts to the states environmental resources.

As indicated in a letter dated January 19, 2000 from Dale Williams, County Coordinator, on Board of County Commissioners - Columbia County letterhead, which is documented in the appraisal reports: both mines [Kirby and Anderson Columbia] have been determined to be legal, nonconforming uses. These mining operations and contiguous lands have been determined to be vested uses, and may continue as a non-conforming use.

Mine reclamation requirements of Part IV, Chapter 378, F.S. and Chapter 62C-36, F.A.C., do not provide for permit-like approvals. Under this program, the DEP does not have the authority to approve or disapprove mining or mining operations. Under the reclamation program, compliance and

enforcement activities only begin when areas of the mine become available for reclamation.

As summarized above, the existing mine was in apparent compliance with known regulations and the necessary applications were in process to continue the mining. Based on projections by the consultant geologist and the appraisers, the existing mine area would not be depleted for several more years. Forecasting political, social, economic and regulatory influences relating to a property into the future is difficult. In that the purchase price of any property embodies the buyers expectations of the future value and use of the property, it is a reasonable assumption relating to Kirby Mine that at the time additional permits are needed, the operators of the mine will seek and comply with regulations and permits.

The quantity and quality of the limerock reserves were proven at Kirby Mine and the entire area under the Kirby family ownership, which would influence an investor to pay more for this asset than a site with unknown mineral resources. An independent Certified Mineral Appraiser was hired to provide a report for use by the real estate appraisers. A site investigation relating to the reserves was conducted, boreholes were drilled and the quality of the limerock was tested at the facilities of Asphalt Technologies, Inc. It is not unreasonable to assume that an owner would seek to exploit all of the reserves.

Additionally, mine activity has occurred at Kirby Mine since the 1950s; thus, it is a reasonable assumption that mining will


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continue over the projection period in the appraisal reports.

The Department feels that assumptions employed in the appraisals were reasonable and the valuation was credible for the entire subject area given what was known at the time. There was no indication that the necessary permits for expanded mining activities would have been denied.

Follow-up to Department Response:

The Secretary, in his response to this finding, stated that the Department does not agree that the opinions of value are overstated and that the assumptions are not credible. The Secretary concluded that limerock mining of the entire site is grandfathered and referenced a letter from Columbia County to support his conclusion.

The letter from Columbia County referenced by the Secretary is a letter from a Columbia County Coordinator to the sellers of the property stating that the existing mine has been determined to be a legal, non-conforming use of the land in accordance with the Columbia County Comprehensive Plan and that the mining operation and contiguous lands have been determined to be vested uses in accordance with Columbia County Land Development Regulations.

The letter from the County referred to by the Secretary indicates that the Columbia County Land Development Regulations could allow for mining beyond the existing mine; however, mining of land beyond the 60 acres would be subject to further permitting by the State. The Secretary referred to a permit application that was suspended while the process to acquire the Kirby Mine was taking place. There was no

documentation to indicate that the permit application was intended to extend the mining activity from 60 acres to 302 acres, but rather appeared to indicate an intent to extend to only 120 acres. The Secretary has not provided any documentation to indicate that the State-issued permit for mining would likely have been extended to any parts of the purchased land other than the 60 acre parcel. Accordingly, we continue to believe that the value estimations supporting the amount paid for the land in December 2001 were unsupported.

Finding No. 2: Consideration of Environmental and Other Limitations

On September 27, 2000, the Department closed on the $16,314,728 purchase of the Upper Wacissa Tract (Tract) that includes 8,867 final surveyed acres and is dominated by jurisdictional wetlands (73 percent) and low flatwoods. The appraised values for this acquisition were $15,862,000 and $17,500,000. The Tract is located on the east and west sides of the Wacissa River and is accessible only by easements that are one-lane dirt timber roads. The subject property's river frontage is dominated almost entirely by jurisdictional wetlands. Approximately 90 percent of the property lies within the 100-year flood zone, and a high percentage of the property is often flooded, including some of the interior access trail roads.

Both appraisers acknowledged in their report that only about 30 percent of the overall tract is useable due to the high percentage of wetlands, scattered uplands, difficult access, and poor soil conditions. Nevertheless, in developing their value estimates, the


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appraisers appear to have placed less emphasis on the physical limitations of the subject property and much greater emphasis on unsupported claims of superior location, development potential, and river amenity.

Our analysis of the appraisal reports, appraisal files, and acquisition files disclosed no mention or consideration of the archaeological sensitivity of the subject property, which has a well-publicized reputation for its historical and archaeological significance as documented in the 2000 Conservation and Recreation Lands (CARL) Report and the 2001 Florida Forever Report. Our review disclosed that the subject property would likely face difficulties in obtaining permits for additional roads or other development where wetlands or archeological sites would be impacted. We found that at least 40 archaeological sites have been discovered on the subject property, making it subject to stringent restrictions on development.

These issues raise concerns over the validity of the appraised values. Furthermore, Department of Environmental Protection Rule 18-1.006(3), Florida Administrative Code, requires that appraisal reports address environmental sensitivity and applicable permitting requirements relating to development potential. The appraisal reports relied upon by the Department did not appear to adequately address these factors.

The appraisers justified their value conclusions by using price per gross acre as the unit of comparison, a wide range of sales

data, and subjective adjustment analyses. As a check for reasonableness of value conclusions in the appraisal reports, we compared the comparable sales used in the appraisals to the subject based on a price per useable acre, which we believe is a more appropriate unit of comparison, given the subject propertys low percentage of useable land (all of the comparable sales had higher percentages of useable land than the subject).

Using the value conclusions and sales data in the appraisal reports, we calculated and compared the value per useable acre, excluding timber value estimates, of the subject property and sales of comparable properties. The price per useable acre of the comparable sales ranged from $1,238 to $2,910. We calculated one appraisers value conclusion on a per useable acre basis at $4,167, which is far above the range of the sales data. The other appraisers value, excluding the timber value estimate, was calculated at $4,784 per useable acre. Both appraisers viewed the comparable sale located in Jefferson County ($2,910 per useable acre) as overall superior to the subject property. This indicates that the appraisers valuation analysis may be flawed, and the value conclusions overstated, since the subjects value should fall within the range of the sales data if both inferior and superior sales are used.

We recommend that the Department assure that fee appraisers exercise due diligence in collecting and properly analyzing all environmental, archeological, and physical limitations in the valuation of properties considered for acquisition. We also


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recommend that the Department strictly enforce all administrative rules relating to appraisal reports.


The appraisal reports apply appropriate methodology and analysis consistent with the opinion as to the highest and best use of the property. The highest and best use is determined to be for silviculture and recreational use. Recreational use may include outdoor activities such as hunting, canoeing, hiking, camping, mountain biking or other similar activities. These recreational uses are compatible and can coexist with silviculture use. The analysis of the subject, the highest and best use determination and the comparable sales analysis are consistent within the reports. Suggestions in the Auditors report that archeological sites and wetlands may affect the future development potential are not pertinent to the current highest and best use of the site. The alternative analysis in the Auditors report that the valuation be based on usable acres as a unit of comparison is also not applicable to the current highest and best use of the subject as silviculture and recreational property.

Reference to the future development potential in the appraisal reports is used only as an influence on the value of the subject within the range of prices indicated by the market consistent with the current highest and best use determination. The appraisers apply judgment and do not ignore the fact that the subject has a substantial amount of river frontage, which has an impact on value

both for the current recreational use and potential development in the future.

The Department agrees with the recommendations as to appraisals in general; however, in regard to this finding the Department believes that appropriate methodology was applied and the conclusions in the appraisal reports are reasonable.


The Secretarys response states that the highest and best use conclusions for the subject property are silviculture and recreation and that basing the value on only usable acres is not applicable to such uses. The Department, therefore, concludes that our concerns about the archaeological significance, extensive wetlands, and lack of useable acres as a unit of comparison are not applicable to the highest and best use. However, both appraisal reports also include rural residential use as a third component of the highest and best use and give substantial weight to this component in the valuation analyses without proper recognition of the legal and physical limitations of the property arising from extensive wetlands, limited access, and archaeological significance. Further, given the low percentage of useable land due to extensive wetlands, even for a silvicultural use, we believe a valuation analysis using useable acres as a unit of comparison would be appropriate in determining a credible value conclusion.

Finding No. 3: Timber Rights Valuation

On February 19, 2001, the Department and the St. Johns River Water Management District (District), through a joint acquisition,


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closed on the $20,138,405 purchase of a 21,898 acre tract of land within the Twelve Mile Swamp land acquisition project. The land was acquired subject to an existing timber lease, which excludes public access and does not terminate until December 31, 2025. On September 26, 2001, the Department and the District closed on the purchase of certain outstanding leasehold interests on 7,911 acres (97 percent wetlands) of the larger parcel for a purchase price of $4,617,970. Of the 7,911 acres, timber harvesting rights were acquired on 7,533 acres, public access rights were acquired on 275 acres (plus some harvesting restrictions), and both timber and public access rights were acquired on 103 acres.

In a memorandum dated August 13, 2001, the Director, Division of Land Management, St. Johns River Water Management District, provided a summary of the methodology for estimating the value of the timber interest. The estimated value was $5,344,512 for the timber rights and public access rights on the 7,911 acres. The valuation consisted of an estimated value of the standing timber ($3,687,453) and an estimated present value of future timber earnings ($1,657,059).

Based on soil maps, the District's memorandum indicated that of the 7,636 acres (7,533 plus 103 acres) with timber harvesting rights, 2,955 acres would be classified as plantable pine, 3,325 acres would be classified as non-plantable pine, and 1,356 acres would be classified as non-plantable non-pine.

The District had obtained a timber cruise report of the natural stand timber on the

property from the lessee, and that cruise was subsequently audited by an independent timber expert. Although the timber cruise obtained by the District stated that the volume of standing pine timber was only seven percent of the total volume of product present on the 7,636 acres, the District's memorandum regarding the value of the future timber rights assumed that 83 percent of the 7,636 acres of wetlands could be put into pine production by bedding and aerially seeding (planting methods). We found no evidence of a cost/benefit analysis to determine the financial feasibility of placing the wetlands into pine production.

The basis for, and the reasonableness of, this significant assumed change to silviculture (tree farming) on the subject wetlands (i.e., the assumption that 83 percent could be put into pine production) was not explained or justified in the memorandum.

We recommend that the Department and the District carefully document and justify extraordinary assumptions made in any type of written communication rendered or obtained, and relied upon, by staff or independent experts.


The Department agrees that oversight of the appraisal process in joint acquisitions with the water management districts should be improved. In response to previous audit findings, the Division of State Lands instituted a policy of reviewing appraisal reports acquired by water management districts for joint acquisitions.


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As a result of this policy, the Department is performing technical and/or administrative reviews on pending joint acquisitions with water management districts. The Department is also providing input into the selection of appraisers on joint projects.

Finding No. 4: Highest and Best Use Analyses and Area Analyses

In determining the most probable and maximally productive use for a property, it is imperative that the appraiser provide market evidence to show that adequate demand exists in the propertys neighborhood to justify the conclusion of the highest and best use. Our review of the highest and best use determinations in the appraisal reports for the selected acquisitions disclosed the following:

St. Joe (Torreya): The appraiser stated in his report that rural acreage is currently in a state of very high demand, driven by buyers who are acquiring large acreage tracts within easy commuting distance of major metropolitan communities. The tracts are being purchased primarily for recreational purposes such as private hunting, family estates, and supplemental/part-time agricultural use. The appraiser concluded that, as a result of being approximately one hour from Tallahassee, properties in the subject neighborhood are good candidates for this type buyer. The appraiser made this statement concerning demand without providing any market evidence, especially in the subject neighborhood, to

justify and support this assumption. Considering the lack of relevant sales data in the subject vicinity, there appears to be no basis for the belief that the stated demand exists.

Elsewhere in the report, the appraiser stated that the county in which the property is located is a sparsely populated area that is experiencing moderate to slow growth at best and growth and development is extremely limited. The appraisers analysis of the sales data appears to have overemphasized the unsupported demand for the stated highest and best use of the subject property which may not be reflected in the market. This may have led to an overstated value conclusion.

St. Joe (Upper Wacissa): One appraiser concluded that the highest and best use of this property was a blend of agricultural (silviculture), recreational, and rural residential uses. The other appraiser estimated the highest and best use to be for a recreational type use or large acreage rural residential use in conjunction with continued agricultural/silvicultural use. The highest and best use analyses lacked adequate market support to justify the residential and recreational uses which were given substantial emphasis in the valuation analyses. This may have led to an overemphasis on less important elements of comparison that may not have had a material impact on the subjects value. While the silviculture use


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on the useable land (approximately one-third of the property) is reasonable, the appraisers provided no detailed market support for statements concerning demand attributable to the river and proximity to Tallahassee (20 miles to the west), especially in light of the property's limitations mentioned in Finding No. 2.

We found additional sales data that may be more appropriate in valuing this property than some of the sales used by the appraisers. For example, the Snipe Island Tract, another State acquisition located approximately eight miles south of the subject property in the same project, is similar in size, topography, access and amenities to the Upper Wacissa tract. The comparable sales used in the appraisals for the Snipe Island tract were more similar to the Upper Wacissa Tract than the comparable sales emphasized in the Upper Wacissa appraisals, with lower prices per acre.

Rayonier (Pinhook Swamp): The acquired property is located in northwestern Baker County and abuts the Georgia state line near the Okefenokee Swamp. One appraisal report describes the Baker County area as one that has experienced slow growth over an extended period of time, and the long-term outlook is for continued slow growth. The appraisal report's highest and best use analysis states that land use classifications limit development to low intensity development. The highest and best use conclusion was timber

production with the possibility of low intensity development at some point in the distant future. The other appraisal report contained similar statements as to the nature of the area and concluded a similar highest and best use of silviculture/recreational, with long term speculative investment.

The Supplemental Appraisal Standards for Board of Trustees Land Acquisitions states that highest and best use shall be considered to apply to the immediate future, which shall mean a period of time not to exceed five years. The highest and best use estimate is a logical extension of the area analysis, and the appraiser is required to comment on existing land use patterns surrounding the subject property, and its relationship to those use patterns. Phrases used in the appraisal reports, such as long term and distant future, are vague and indefinite and do not comply with the Supplemental Appraisal Standards.

Both reports contain statements that the possibility of future development was identified for the subject property due to its proximity to Jacksonville. Neither report contained market based data to support this assertion. The descriptions and analyses of the subject property's lack of development potential are inconsistent with assertions as to development potential made in the valuation analyses. The appraiser should not assume that an element of comparison affects value


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unless its influence is indicated by the market data.

The above noted inconsistencies, unsupported assumptions, and questionable sales analyses may have led to misleading and overstated value conclusions.

We recommend the Department require consistency within appraisal reports and market evidence to support demand for highest and best use conclusions, and ensure that supplemental appraisal standards relating to the period of time to be considered in highest and best use analyses be adhered to.


The Department recognizes the desirability of consistency throughout appraisal reports and that the Supplemental Appraisals Standards be substantially followed. As stated on page 1, Section A of the Supplemental Appraisal Standards, the supplemental standards have been created to serve only as a guideline in the appraisal and appraisal review procedures and that the Uniform Standards of Professional Appraisal Practice shall serve as the most appropriate instruction. As indicated in this finding, the contract appraisers have deviated from using specific terminology in the Supplemental Standards regarding the five year time period to be considered in analyzing the highest and best use of the subject. Appraisers used terminology such as distant future and long term which were deemed vague in the finding.

Contract appraisers and reviewers will be directed to use clearer terminology regarding

timeframes and their impact on value, as indicated in the Supplemental Standards.

Other concerns expressed in this finding regard areas where an appraisers judgment is applied to the analysis of the data. The finding posits that the substantial river frontage on the Upper Wacissa parcel not be reflected as an influence on value because the highest and best use within the five year period is deemed to be for silviculture, recreational and rural residential use. If a set of comparable sales does not have river frontage, this might be interpreted, as suggested in this finding, as saying there is no market evidence that a river would influence the value of the property. However, the Department believes an appraiser, in using judgment and knowledge from other appraisal experience, could reasonably conclude that river frontage does have an impact on value, whether or not it be within the five year time period suggested in the Supplemental Appraisal Standards for the highest and best use. Furthermore, the appraisals conform to the Uniform Standards of Professional Appraisal Practice Standards Rule 1-3(b), which states: an appraiser must develop an opinion of the highest and best use of the real estate; and Standards Rule 1-4(a) which states that: when a sales comparison approach is applicable, an appraiser must analyze such comparable sales data as are available to indicate a value conclusion.


The Secretarys response to this finding indicates that an appraiser, in using judgment and


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knowledge from other appraisal experience, could reasonably conclude that river frontage does have an impact on value. However, the Secretary did not provide the basis for such a conclusion in the instant circumstance, i.e., extensive wetlands surrounding the property thus limiting access and development potential. The Secretary did not address the additional sales data referred to in the finding that were more similar to the subject property than those included in the appraisal reports.

Finding No. 5: Analysis of Sales Data

Essential to the value conclusions stated in the appraisal reports for all of the acquisitions were comparisons of the subject properties to comparable properties that had been sold recently. While the sales price of a comparable property can be used as an indicator of value for the subject property, it is often necessary to consider adjustments for differences between the subject and comparable properties. Our review of the appraisal reports disclosed the following concerns regarding the techniques applied in analyzing the sales of comparable properties, inconsistencies, inadequate support, and illogical statements concerning adjustments to the sales data that have likely damaged the credibility and reliability of the value conclusions:

A common problem among the appraisal reports, that included the sales comparison approach to value the land, is the lack of an indication as to the magnitude of adjustments in the valuation analyses. As stated in the Appraisal Institutes text, The Appraisal of

Real Estate, Eleventh Edition, adjustments derived in comparative analysis should be expressed in "descriptive terms that clearly convey the magnitude of the difference in the element of comparison between the comparable and the subject."

The appraisals provided for the acquisitions included in this audit generally contained statements as to whether for each element of comparison the comparable property is inferior, similar, or superior to the subject property. For example, one appraisal of the Upper Wacissa tract indicated the following comparisons of comparable sale No. 1 to the subject: the tracts public access (both paved and graded) was considered superior to the subjects easement access. Also, the aesthetics/unique qualities associated with this propertys frontage on two freshwater lakes were viewed as inferior to the subjects frontage along a crystal clear, spring fed river. The appraiser neither indicated the magnitude of the value impact for each element of comparison nor which elements had greater impacts on the subjects value, especially in light of the subjects highest and best use.

In responding to the review appraisers concern about the comparable sales chosen by the appraiser of the St. Joe (Torreya State Park Additions) acquisition, the appraiser stated: ...it was appropriate to try to compensate for the subjects attribute of being adjacent a


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conservation/recreation area and its inclusion of unique topographical and vegetative features. I did this by including sales which had the positive characteristic of being slightly closer to Leon County/Tallahassee. The logic of comparing dissimilar characteristics is not apparent. To compound the problem, in addition to offsetting a characteristic with a dissimilar characteristic, the appraiser made adjustments for location, topography, and amenities in his sales comparison analysis.

The same appraisal report for the St. Joe (Torreya State Park Additions) acquisition, contrary to paragraph A-8.01 of the Supplemental Appraisal Standards for Board of Trustees Land Acquisitions, included a government purchase of 40 acres in his analysis with other private party sales and placed the greatest weight on this sale in reconciling a value conclusion of Parcel 2 of the Torreya acquisition. Paragraph A-8.01 requires that if appraisers use government related sales in their market approach, they must be analyzed and considered separately from the analysis of private party transactions.

One appraiser appraised two of the subject properties, (1) St. Joe (Upper Wacissa Tract) and (2) St. Joe (Snipe Island). In the valuation analysis of both reports, he applied a statistical analysis to the comparable sales data which involved determining the minimum, maximum, mean, and median for various factors,

such as price per acre and size, for the group of comparable sales. For this analysis to be relevant and reasonably accurate, it is important to have a sufficient population size and similar sales data to the subject property. The appraisers application of this statistical analysis is questionable, because the population of the analysis included only five sales, which were not all reasonably comparable to the subject property as to size, access, and topography. The excessive range of values due to the use of sales that were not reasonably comparable may have skewed the results of the statistical analysis resulting in misleading conclusions. The appraisers reconciliation of the final value estimate for the St. Joe (Upper Wacissa Tract) appears to have placed substantial weight on the results of his statistical analysis.

The preliminary analysis of the mineral component of the St. Joe (Snipe Island) acquisition revealed that due to stringent permitting requirements, uncertain reserve amounts, and a lack of adequate demand, the appraisers acknowledged little effect on the property value, if any, of the mineral reserves on the property. However, in the valuation section, the opposite is true. The appraisers made adjustments to the comparable sales in favor of the subjects mineral reserves.

In one appraisers report, the rankings for the location adjustment for Sales 1, 2, and 3 on the sales comparison grid did not agree with the narrative discussion. The


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narrative stated that the sales were ranked similar, similar, and inferior, respectively, while the chart showed the sales as superior, superior, and similar.

Both appraisers of the St. Joe (Upper Wacissa) property analyzed the location and amenities (water frontage) adjustments from a residential development perspective rather than the primary use of the subject as timberland and non-useable wetlands. The appraisers indicated that the Flagler County sale was located in an inferior area with less development potential than the subject and had an inferior water amenity. Our inspection of this comparable sale and the subject property revealed that the two properties were very similar in regards to location and water frontage and both had very limited access to the water bodies due to wetlands. The location and water amenity have little, if any, positive impact on the value of the subject property in view of the subjects primary highest and best use, which is silviculture on the useable land. The secondary uses of the subject property would likely be immaterial due to the physical and legal restrictions addressed in Finding No. 2. In fact, the river would likely inhibit access to the subject for harvesting timber and may even have a negative impact on value from this standpoint.

The problems discussed above have resulted in inadequately supported and misleading appraisal reports.

We recommend that the Department be more diligent in evaluating the adequacy and appropriateness of the selection and analyses of comparable sales.


As is usually the case in the appraisal of rural land and is exhibited in the appraisals discussed in this finding, sales data is sparse, which limits the quantity of and similarity of the sales to the subject. Hence, data is sometimes not available from which adjustments for specific elements of comparison can be isolated and extracted through paired sale analysis. Qualitative comparison of sales data is an acceptable practice. Ranking adjustments for differing elements of comparison as similar, inferior or superior leads to an overall cumulative conclusion as to whether or not the unit price paid for a given sale is above, below or similar to what would be anticipated to be paid for the property being appraised. Selection of comparable sales involves an understanding of the market in which the subject competes through research and analysis; yet, it also involves subjectivity when there is a lack of sales. In these cases, sales may be selected that are not that similar to the subject.

The St. Joe/ Snipe Island appraisals included a mineral valuation component and qualitative adjustment factors in the sales comparison analysis that indicated certain sales were inferior as a result of them not


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having any or low mineral reserves potential. This adjustment factor, as well as the location adjustment factor in one of the appraisals, are only part of the list of adjustment factors, which do not relate to specific dollar or percentage adjustments. The overall conclusion as to whether a sale is inferior, similar or superior considers the aforementioned factors and others, so the final conclusion reflects all of the characteristics affecting the opinion of value.

Thus, what may appear to be an inappropriate selection of sales is the result of few sales from which to choose.


The Secretarys response indicated a lack of similar sales in some cases requiring the use of subjectivity in appraising the subject property. However, we believe that such a lack of sales of similar properties requires greater due diligence and oversight to ensure that all relevant market data is discovered and adequately analyzed. Further, these conditions impose a greater need to include all factors affecting the analysis in the appraisal reports.

While we recognize that it is sometimes difficult to find good sales data from which to choose comparable sales and make appropriate quantitative adjustments, in this audit we found that more appropriate sales data was available in the market and could have been used to value the Upper Wacissa parcel, as discussed in Finding No. 4. The use of more relevant sales data, with proper analysis, would likely have resulted in lower value conclusions. Further, appraisers also need to assess whether a lack of sales data may

indicate a lack of demand, which negatively impacts value.

Finding No. 6: Verification of Sales Data

The Supplemental Appraisal Standards for Board of Trustees Land Acquisitions, Section A-8.03 states, All sales, rentals, offerings or contracts shall be verified by the appraiser or his staff with either a party to the transaction or the agent handling the transaction.

One appraisal for the St. Joe (Upper Wacissa Tract) did not indicate independent verification of three of five sales used in the analyses, but rather relied on third party verification, which is not permitted in the Supplemental Appraisal Standards. Three of the sales were either verified by the second appraiser or by an unrelated party to the transaction. The other appraiser did not verify the land sale of one comparable sale with a party to the transaction, but rather with third parties related only to the purchase of the timber interests.

Lack of compliance with applicable standards can result in the appraisers using inaccurate information as a basis for their valuation analyses.

We recommend that the Department enforce applicable standards pertaining to verification of sales data.


The Department agrees that the Supplemental Appraisal Standards should be enforced in regard to the verification of sales. The Standard requires that the appraiser or his staff verify sales with either a party to the


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transaction or the agent handling the transaction. However, the reliability and credibility of the appraisal report is not necessarily compromised if the sales data is obtained from another source deemed reliable. There may be circumstances where contact with either party to a transaction is not possible or practical; and given time constraints regarding appraisal report delivery due dates, verification with a party to the transaction may not be possible, even though attempts were made. Secondary verification sources may be the only alternative in certain circumstances.

These situations have been addressed in the past, and attention to this will be made again through staff appraisers and contract fee appraiser reviewers. In regard to the verification requirement, the Supplemental Appraisal Standards will be enforced.

Finding No. 7: Appraisal Reviews

Our audit disclosed a recurring lack of identification and correction by the review appraisers of material deficiencies in the appraisal reports relied upon by the Department in acquiring millions of dollars of land on behalf of the State.

In addition to Finding Nos. 1 through 6, our audit disclosed the following:

St. Joe (Upper Wacissa Tract): In the correction request letter from the review appraiser to the appraiser, the reviewer questioned an appraisal reports lack of support for emphasis on the subject's location and future development potential. The appraiser did not

subsequently provide the supporting documentation, and the issue was not raised again by the reviewer. This concern was not addressed in the correction letter for the second appraisal even though this appraisal report had the same problems. In the review appraiser's report, the reviewer commented about the property's remote location and lack of future development potential, but acquiesced to the appraisers unsupported claims of the subject property's desirability and potential (see Finding No. 4).

As discussed in Finding No. 2, a significant omission from the appraisal reports and reviews was the failure to consider and explain the archaeological and environmental sensitivity of the subject parcel. We found no evidence in the appraisal reviews or the Department acquisition and appraisal files that addressed this important issue that would likely have a material impact on the market value of the property.

St. Joe (Snipe Island): The appraisal review did not address the following inconsistencies within and between the appraisal reports:

- One appraiser adjusted five out of six sales for encumbrances (power line easement), while the other appraiser did not consider the impact significant enough to include this component in the analysis.


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- One appraiser adjusted all six sales for topography, while the other appraiser did not adjust any of the sales for topography.

- As discussed in Finding No. 5, in one appraisal report, the rankings for location for three sales did not agree with the narrative discussion. The narrative stated that the sales were ranked similar, similar, and inferior, respectively, while the chart showed the sales as superior, superior, and similar.

Rayonier (Pinhook Swamp): Neither the appraisal review nor the Departments administrative review of the appraisal reports and appraisal review report noted or appeared to question any of the deficiencies found in the appraisal reports concerning the market, highest and best use, and valuation analyses discussed in Finding No. 4.

The deficiencies discussed above, and in the previous findings, have resulted in inadequately supported and misleading appraisal reports which may have led to overstated value conclusions. The Uniform Standards of Professional Appraisal Practice (USPAP), as promulgated by the Appraisal Standards Board of the Appraisal Foundation, appear to have not been followed and are summarized below:

Rule 2-1(c): disclosure of extraordinary assumptions and their impact on value (see Finding Nos. 1 and 3);

Rule 2-2a(x): rationale and support of highest and best use (see Finding No. 4);

Rule 1-3(a): unsupported market assumptions (see Finding Nos. 2 and 4);

Rule 1-1(a): applying recognized methods and techniques to provide a credible report (see Finding No. 5);

Rule 1-4: verification of sales data (see Finding No. 6);

Based on our findings, it appears that the review appraisers are not ensuring that appraisers fully comply with applicable appraisal standards, nor are they providing accurate opinions of the quality and accuracy of appraisal reports.

Our findings revealed that the review appraisers are not consistently complying with Standard 3 of USPAP which requires reviewers to develop and report a credible opinion as to the quality of the fee appraisers work.

We recommend that the Department exercise greater diligence in overseeing review appraisers work to ensure that review appraisers strictly comply with applicable appraisal standards and resolve all inconsistencies within and between appraisals.


The Department agrees that appraisers are to comply with applicable appraisal standards and that there be consistency in the appraisal reports. This is done through the use of contract review appraisers for parcels with values over $500,000 and through


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administrative reviews of appraisals of parcels with values less than $500,000. When the contract review appraiser submitted questions to the appraiser, the responses may have been verbal, by letter or through replacement pages in the appraisal report itself. Thus, an audit may not reveal the manner in which the response was given to satisfy the review appraisers questions. In the end, we feel confident that the USPAP standards were upheld.

To ensure that satisfaction of review questions is made and the process can be understood by others, contract reviewers will be instructed to provide comments in the appraisal review report when verbal responses to questions are given, to obtain replacement pages for the appraisal or to document on the review letter to the appraiser as to how each question was satisfied.

AUTHORITY

Pursuant to the provisions of Section 11.45, Florida Statutes, I have directed that this report be prepared to present the results of our operational audit.

William O. Monroe, CPA Auditor General

AUDITEE RESPONSE

The Secretary of the Florida Department of Environmental Protection, in a letter dated January 27, 2003, provided his response to our audit findings and recommendations. Excerpts from the Secretarys response are included under the applicable findings and recommendations above. The Secretarys response, in its entirety, may be viewed on the Auditor Generals Web site.

To promote accountability in government and improvement in government operations, the Auditor General makes operational audits of selected programs, activities, and functions of State agencies. This operational audit was made in accordance with applicable audit standards contained in Government Auditing Standards issued by the Comptroller General of the United States. This audit was conducted by Mark Hesoun and supervised by Dick Heller. Please address inquiries regarding this report to Jim Dwyer, CPA, Audit Manager, via e-mail at [email protected] or by telephone at (850) 487-9031. This report and other audit reports prepared by the Auditor General can be obtained on our Web site at http://www.state.fl.us/audgen; by telephone at (850) 487-9024; or by mail at G74 Claude Pepper Building, 111 West Madison Street, Tallahassee, Florida 32399-1450.

Auditor 03 115

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