oversight

Indian Programs: BIA Should Streamline Its Processes for Estimating Land Rental Values

Published by the Government Accountability Office on 1999-06-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to the Subcommittee on Interior
                  and Related Agencies, Committee on
                  Appropriations, U.S. Senate


June 1999
                  INDIAN PROGRAMS

                  BIA Should Streamline
                  Its Processes for
                  Estimating Land
                  Rental Values




GAO/RCED-99-165
United States General Accounting Office                                                            Resources, Community, and
Washington, D.C. 20548                                                                         Economic Development Division



                                    B-282436                                                                                          Letter

                                    June 30, 1999

                                    The Honorable Slade Gorton
                                    Chairman
                                    The Honorable Robert Byrd
                                    Ranking Minority Member
                                    Subcommittee on Interior
                                     and Related Agencies
                                    Committee on Appropriations
                                    United States Senate


                                    The Department of the Interior’s Bureau of Indian Affairs has jurisdiction
                                    over roughly 56 million acres (about 87,500 square miles) of Indian-owned
                                    land that is held in trust by the federal government.1 In 1997, tribes and
                                    individual Indians received over $104 million from about 102,000 leases
                                    covering almost 8 million acres of land. This land is leased for a variety of
                                    uses, including farming, livestock grazing, business development, and
                                    residential use.2 The Bureau is required to approve leases on Indian land
                                    held in trust by the federal government and to ensure that the landowners
                                    receive a fair annual rental for their leases.

                                    Concerned about how the amount of rent for this land is established and
                                    how rent appraisals may affect the ability of Indians to lease their land and
                                    of lessees to rent it, you asked us to review the Bureau’s method of
                                    establishing the lease value of Indian land. On the basis of language in
                                    Senate Report 105-56 and discussions with your offices, we agreed to
                                    provide information on (1) how the Bureau uses appraisals and other
                                    methods to establish the lease value of Indian land; (2) how its appraisal
                                    methods compare to those of other federal and state agencies and of
                                    private appraisers and what other methods are used to value federal, state,
                                    and private leases; (3) what impediments to leasing Indian trust land have
                                    been identified; (4) what alternatives to appraisals could be used to
                                    establish the lease value of Indian land, including any changes in federal

                                    1
                                     Not all reservation land is trust land—some reservation land is owned by non-Indians and some is
                                    Indian-owned land that the government does not hold in trust. Interior has no responsibility for
                                    nontrust land.
                                    2
                                     In this report, we discuss only surface uses of leased Indian trust land. The subsurface rights to Indian
                                    land may also be leased for mineral development.




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                      laws and regulations that would be required; and (5) what efforts the
                      Bureau has made to improve its appraisal methods. We also provide
                      information on the leasing of Indian trust land in appendix I, on issues
                      surrounding residential leases of Indian trust and other land in appendix II,
                      and on acreage in Indian irrigation projects in appendix III.

                      To respond to these objectives, we contacted or visited officials in Bureau
                      area offices in Portland, Oregon; Billings, Montana; Phoenix, Arizona;
                      Muskogee, Oklahoma; and Aberdeen, South Dakota; and we visited several
                      agency offices within the areas we visited. We also contacted officials with
                      the Department of the Interior’s Bureau of Land Management and the
                      Department of Agriculture’s Forest Service to discuss surface-lease
                      valuation on federally managed land. In addition, we contacted officials
                      with the states of Colorado, Minnesota, Montana, and Washington to
                      discuss their methods of establishing rents for leases on state-owned land
                      held in trust for public institutions such as schools. Finally, we contacted
                      private appraisers representing two professional appraisal associations.



Results in Brief      In summary, we found the following:

                      • The Bureau of Indian Affairs relies mostly on appraisals to ensure that
                        Indian land is leased for a fair annual rental. However, the Bureau has
                        not defined fair annual rental and does not have a clear policy on how
                        that amount should be determined. We found no statutory or regulatory
                        requirement that appraisals be used to establish lease values. Under
                        certain circumstances, some Bureau offices use other methods in
                        addition to appraisals.
                      • The standards and methods that apply to Bureau appraisers also apply
                        to other appraisers, including other federal, state, and private
                        appraisers. However, managers of other land also use other methods to
                        establish lease values. For example, the Bureau of Land Management
                        and the Forest Service are required to obtain fair market value for real
                        estate transactions, and they use appraisals along with fee schedules
                        and formulas to establish lease values. Managers of state-owned land
                        also use appraisals for some types of leases, and states can also use
                        competitive bidding, market surveys, and formulas to establish rents.
                        According to several private appraisers we spoke to, the rents for
                        agricultural leases on private land are often not set by appraisal.
                        However, leases for other uses on private land, such as business uses,
                        may be valued by appraisal.




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• Impediments to leasing Indian trust land include appraisal amounts that
  are more than lessees want to pay; the time taken to prepare and review
  appraisals; and the Bureau’s cumbersome bureaucracy. Appraisal
  amounts were considered a particular problem because of Bureau
  officials’ reluctance to approve leases for less than the appraised value.
  In addition, while Bureau and other appraisers stated that there is no
  standard for the amount of time it should take to prepare or review an
  appraisal, some Indian communities expressed frustration with the time
  taken by the Bureau’s processes. For example, in one area office, the
  Bureau’s review of contractor-prepared appraisals submitted by one
  Indian community required an average of 146 days.
• In addition to appraisals, other methods are available for establishing
  lease values in some circumstances. Such other methods include
  advertising for competitive lease bids, conducting market surveys, and
  applying fee schedules or formulas. Current laws and regulations do not
  require the use of appraisals to establish lease values and would not
  need to be changed for the Bureau to adopt these or other alternative
  methods to establish rents for leases. Interior’s field solicitor in
  Minneapolis, Minnesota, conducted a preliminary legal review and
  found no statutes that require the Bureau to prepare appraisals.
  However, Bureau officials said a more comprehensive review of laws,
  regulations, and court cases would need to be conducted before
  Bureau-wide changes would be considered.
• The Department of the Interior is reviewing the Bureau’s use of
  appraisals and is considering improvements to the Bureau’s current
  processes. Proposed improvements include training realty staff on the
  circumstances under which appraisals should be requested to limit the
  number of unnecessary appraisals and automating—and thus
  streamlining—the valuation processes for certain types of real estate
  transactions. The improvement plan also includes a recommendation
  that the Bureau develop a system for tracking appraisals to allow more
  effective use of appraisal resources. Although a Bureau workgroup
  found that such tracking systems are in place, our analysis of appraisal
  tracking records from four Bureau area offices showed that their
  usefulness varied widely. For example, we found that over 61 percent of
  the appraisal tracking records from one area office were either
  incomplete (that is, missing data) or inconsistent (for example,
  indicating a negative number of elapsed days for preparing an
  appraisal); for another office, all of the appraisal log data were usable.

This report makes several recommendations designed to clarify and
improve the Bureau’s appraisal policy.



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Background   The Bureau’s budget for real estate appraisals of Indian trust land is about
             $4.1 million for fiscal year 1999, and the agency estimates that
             approximately 27,000 appraisals will be completed this year. The Bureau
             does not maintain data on the number of appraisals that are prepared for
             leases, but appraisal logs from four area offices—Aberdeen, South Dakota;
             Muskogee, Oklahoma; Phoenix, Arizona; and Portland, Oregon—show that
             43 percent of about 6,900 appraisals approved in those offices in calendar
             years 1997 and 1998 were for leases. Appraisers may be either Bureau
             employees or contractors, and all appraisals—regardless of who prepares
             them—must be reviewed and approved by Bureau review appraisers.

             Current Bureau guidance on appraisals requires that appraisers adhere to
             professional appraisal standards when preparing appraisals, regardless of
             whether they are for the sale, lease, exchange, or other disposition of the
             land. The standards that are the basis for the Bureau’s policies are the
             Uniform Standards of Professional Appraisal Practice (USPAP), the
             Uniform Appraisal Standards for Federal Land Acquisitions, and the
             standards set forth in the Uniform Relocation Assistance and Real Property
             Acquisitions Act. USPAP, which reflects the appraisal profession’s current
             standards for preparing and communicating the results of appraisals, is
             published by the Appraisal Standards Board of the Appraisal Foundation.3
             The Uniform Appraisal Standards for Federal Land Acquisitions contain
             guidelines for determining fair market value and are intended to promote
             uniformity in the appraisal of real property among the various agencies
             acquiring property on behalf of the United States.4 The objectives of the
             Uniform Relocation Assistance and Real Policy Acquisitions Act include
             promoting public confidence in federal and federally assisted land
             acquisition programs.5




             3
             USPAP was adopted for federally related transactions in title XI of the Financial Institutions Reform,
             Recovery, and Enforcement Act of 1989 (P.L. 101-73, Aug. 9, 1989).
             4
              Uniform Appraisal Standards for Federal Land Acquisitions, Interagency Land Acquisition Conference
             (Washington, D.C.: 1992).
             5
               Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, as amended (42
             U.S.C. 4601, et seq.).




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The Bureau Relies         Bureau officials are responsible for ensuring that leases of Indian trust land
                          reflect a fair annual rental, and they rely primarily on appraisals to estimate
Mostly on Appraisals to   that value. 6 However, the Bureau has not defined fair annual rental and
Establish the Lease       does not have a clear policy on how that amount should be estimated. The
                          Bureau’s appraisal handbook, revised in October 1998, states that the
Value of Indian Trust     policies it contains apply to all real estate transactions and makes no
Land                      exception for leases,7 and Bureau officials have said they believe that fair
                          annual rental can be determined only through an appraisal. In effect, fair
                          annual rental has come to mean no less than “fair market rental” as
                          estimated in an appraisal. 8 However, we found no statutory or regulatory
                          requirement that appraisals be used to estimate fair market rental, and, in
                          fact, some area offices use other methods in addition to appraisals to
                          establish lease values.

                          Appraisals are opinions, or estimates, of the fair market value of property,
                          and the Bureau uses them to estimate property values for such transactions
                          as sales, exchanges, leases, gifts, or inheritances. The value may be
                          estimated using one or more of three approaches—comparable sales, cost,
                          or income capitalization. The approach the Bureau’s appraisers most often
                          use is the comparable sales approach, in which a property’s value is
                          inferred from recent transactions involving properties similar to the one
                          being appraised. In the cost approach, the appraiser estimates the value of
                          the property on the basis of costs that would be incurred to replace an
                          existing structure or improvement. In the income capitalization approach,
                          the appraiser estimates a property’s capacity to generate benefits (usually
                          income) and uses these benefits to derive the property’s present value. The
                          appraised value of real property is estimated on the basis of its “highest and
                          best use.” The highest and best use is that which is legally permissible,
                          physically possible, and financially feasible and results in the highest value
                          consistent with the market. While an appraisal is a tool to estimate the
                          value of a property, its actual value is established only when it is sold or
                          leased.



                          6
                           While the responsibility for granting leases on Indian trust land lies with the individual landowners or
                          tribes, Bureau officials must approve all leases on trust land.
                          7
                            Real Estate Services Appraisal Handbook, Bureau of Indian Affairs, Department of the Interior (Oct.
                          1998).
                          8
                           Fair market rental may be defined as that price in a competitive market that a well-informed and
                          willing lessee will pay, and a well-informed and willing lessor will accept, for the temporary use of the
                          property.




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Because of such practical considerations as land uses and staffing levels,
different approaches are sometimes used to establish lease values in some
areas. Officials in the Aberdeen and Billings offices told us that they do not
have enough appraisers to appraise all leases and that they sometimes use
other methods to determine the lease value of land. Some expressed
concern that if appraisals are indeed required for all lease transactions,
they are out of compliance with the Bureau’s requirements by using these
other methods. An official from the office of the Bureau’s Deputy
Commissioner emphasized that it is not the Bureau’s policy that staffing
levels should dictate the methods used to establish the fair annual rental
for trust land. The official said that the Bureau needs to have consistent
procedures that apply to all offices.

The Bureau has identified three general types of Indian trust land leases:
agriculture, business, and other. Figure 1 shows the percentage of leases of
trust land by type of use and the percentage of total leased acreage by type
of use as of December 31, 1997. It also shows the percentage of total rent
revenue by type of use for the year ending December 31, 1997.




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                      Figure 1: Percentages of Leases and Acres Leased on Trust Land as of December
                      31, 1997, and Rent Income for the Year Ending December 31, 1997

                      Percentage
                      100




                       80




                       60




                       40




                       20




                        0

                               Number of               Number of          Millions of
                               leases                  acres              dollars in
                                                       leased             rent income

                               Type of Activity

                                        Other

                                        Business

                                        Agricultural


                      Source: GAO’s analysis of Bureau of Indian Affairs’ data.




Agricultural Leases   The Bureau’s method for establishing the lease value of land for agriculture
                      varied depending on the crops grown and, in some cases, on the number of
                      appraisers employed in the area. For example, on the Yakama Reservation
                      in Washington (served by the Portland Area Office) and along the Colorado
                      River in California (served by the Phoenix Area Office), the crops are high
                      in value and of many varieties, such as fruits and vegetables. Those area
                      offices employ seven and eight appraisers, respectively, and each tract




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                  being leased receives an appraisal. 9 In contrast, on reservations served by
                  the Aberdeen and Billings area offices, the crops are lower in value and
                  more homogeneous, such as wheat and grass for grazing livestock. Those
                  area offices employ fewer appraisers—two in Aberdeen and four in
                  Billings—and often establish lease values by such methods as market
                  surveys, which provide a range of prevailing rents in an area, and
                  competitive bidding, which allows parties interested in leasing the land to
                  submit bids for the tracts they wish to rent.10


Business Leases   Establishing the value of leases for business use is more complex than for
                  agricultural use, according to Bureau officials. In each of the Bureau’s
                  areas where we contacted officials, business leases were valued by
                  appraisal. In addition to using sales of comparable properties to estimate
                  their value, appraisers may consider a business enterprise’s gross or net
                  return on sales (combining elements of the sales comparison and income
                  capitalization approaches) to establish a lease rate.

                  The areas we visited had different levels of business leasing activity. For
                  example, in the Phoenix area, business leases make up about 13 percent of
                  all leases. Two of the tribes in the area—the Salt River and Gila River
                  Pima-Maricopa Indian Communities—have properties with opportunities
                  for business development because of their proximity to Phoenix, Arizona.
                  The Salt River community leases its property for a 140-acre retail center
                  (described as the nation’s largest business development ever built on
                  Indian land), two golf courses, and a solid waste disposal operation that
                  serves the community and nearby cities. The Gila River community leases
                  property for several tribal enterprises, including three industrial parks, a
                  retail store, a billboard company, an airfield, a telephone company, and a
                  marina. In contrast, there are comparatively fewer business opportunities
                  for trust land in the Billings area: Only about 3 percent of all leases are
                  issued for business use.




                  9
                  The Yakama Tribe prepares its own appraisals under a contract with the Department of the Interior.
                  The tribal appraisers’ reports must be reviewed and approved by the Bureau’s review appraisers.
                  10
                    The Department of the Interior’s Office of Inspector General recently issued a report on leasing in an
                  agency in the Bureau’s Billings area. See Agricultural Leasing and Grazing Activities, Fort Peck Agency,
                  Bureau of Indian Affairs (Report No. 98-I-703, Sept. 1998).




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Other Leases             Leases are also issued for uses of trust land other than agriculture and
                         business. These leases typically have nominal rents; they include leases of
                         homesites for tribal members (which can be leased to tribal members for as
                         little as $1 per year) and special-use permits for temporary uses, such as
                         fireworks stands. According to the Portland Area Office’s realty officer, the
                         values for these leases are sometimes established by appraisals (especially
                         when the landowner and lessee are unrelated individuals), and sometimes
                         the values are more arbitrary (when the landowner and lessee are related
                         or when the tribe owns the land and the lessee is a tribal member).

                         This category can also include leases for residential use, when lessees rent
                         property under a long-term lease (generally up to 25 years) and build a
                         home on the land. The rent for these leases is established by appraisal, and
                         appraisers use market data for comparable residential ground leases when
                         such data are available. However, when comparable lease information is
                         not available—as in the Portland Area Office--appraisers first estimate the
                         market value of the land on the basis of sales of comparable residential
                         properties, after adjusting the value to reflect that of the land only (without
                         buildings or other improvements). Once that value has been determined, a
                         rate of return is applied to the property’s estimated market value to arrive
                         at the annual rental. In real estate markets where land values are rising,
                         this method can result in increasing rental rates. These changes in rents
                         are reflected in adjustments to the leases that, under the Bureau’s
                         regulations, must occur at least once every 5 years. We provide
                         information in appendix II on issues surrounding residential leases.



Federal, State, and      The Bureau’s appraisers are held to the same general standards and use
                         similar appraisal techniques as other federal appraisers, state appraisers,
Private Lease Values     and private appraisers. However, these land managers also use other
Are Established by       methods to establish lease values. For example, while Interior’s Bureau of
                         Land Management (BLM) primarily uses appraisals to estimate the value of
Other Methods in         public land, it also uses administrative fee schedules to establish the price
Addition to Appraisals   for such land uses as linear rights-of-way (e.g., for oil and gas pipelines or
                         power lines) and communication sites (e.g., for broadcasting and
                         transmitting television and radio signals). Managers of state-owned land—
                         held in trust for such public institutions as schools—use a range of
                         methods including market surveys and competitive bidding for cropland
                         and appraisals for residential and business uses. Private farmers usually do




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                          not use appraisals to establish rent values but rely, instead, on their
                          knowledge of the local market and on common practices in the area.


Federal Land Management   BLM and the Forest Service are required to obtain fair market value for
Agencies                  real-estate transactions and use appraisals in many—but not all—cases.
                          While appraisers for both agencies are governed by the profession’s
                          standards and by the Uniform Appraisal Standards for Federal Land
                          Acquisitions and the Uniform Relocation Assistance and Real Property
                          Acquisition Policies Act, both agencies are also bound by land-use
                          authorizations and requirements in the Federal Land Policy and
                          Management Act and by other statutes authorizing uses of federal land.
                          For example, grazing fees on federal land (whether managed by BLM or the
                          Forest Service) are established by a statutorily defined formula.11

                          Leasing is a small part of BLM’s appraisal workload—officials’ estimates
                          ranged from 5 to 30 percent in the BLM state offices we contacted. BLM
                          officials said that the agency rarely leases land for agricultural or
                          residential use. These leases usually occur only when farms or residences
                          have inadvertently extended onto public land and BLM allows the use to
                          continue pending an exchange or sale of the land.

                          The Forest Service issues special-use authorizations, including leases, for a
                          variety of uses, including vacation homes and such business activities as
                          ski areas and guide services. It is generally required to obtain fees that
                          reflect the fair market value, as determined by appraisal or “other sound
                          business management principles,” for the rights and privileges authorized.
                          In 1996, we reported that most of these permits—about 15,200—were for
                          lots where individuals could build recreation homes or cabins. The Forest
                          Service’s method of establishing the value of land leased for vacation
                          homes is similar to that used for Indian land—the market sales value is
                          estimated by an appraisal, and the fees are computed by applying an annual
                          rate-of-return to the market sales value.12 However, we reported that, in
                          many instances, the fees the Forest Service charged did not reflect fair
                          market value because, while the fees were adjusted annually for inflation,


                          11
                           We have reported on grazing fees on federally managed land. See Rangeland Management: Current
                          Formula Keeps Grazing Fees Low (GAO/RCED-91-185BR, June 11, 1991).
                          12
                           See U.S. Forest Service: Fees for Recreation Special-Use Permits Do Not Reflect Fair Market Value
                          (GAO/RCED-97-16, Dec. 20, 1996), and Forest Service: Barriers to and Opportunities for Generating
                          Revenue (GAO/T-RCED-99-81, Feb. 10, 1999)




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                      the appraisals on which the fees were based had not been updated in nearly
                      20 years.

                      Both BLM and the Forest Service use fee schedules to determine the rent
                      amounts for communication sites (for television and radio, for example)
                      and certain rights-of-way (for oil and gas pipelines and power lines). We
                      have reported on weaknesses in BLM’s and the Forest Service’s use of fee
                      schedules in cases where they did not reflect fair market value.
                      Specifically, in July 1994, we reported that many of BLM’s fees for
                      communication sites were established on the basis of out-of-date
                      appraisals and that the Forest Service’s fees were established on the basis
                      of a 40-year-old, outdated formula. 13 In April 1996, we reported that
                      although the fee schedules for rights-of-way were established on the basis
                      of rates for those uses on private land, they were subsequently adjusted
                      downward because the industry and the agency’s management viewed the
                      rates as too high.14 In both reports, we stated that the fee schedules could
                      be updated to reflect fair market value through periodic appraisals or
                      market surveys.



State Trust Land      The four states we contacted—Colorado, Minnesota, Montana, and
Management Agencies   Washington—use various methods to establish the value of leases on their
                      trust land, depending on the use. For example, in Washington, agricultural
                      leases are offered through a competitive public auction. 15 Minimum rents
                      for land used for crops, whether irrigated or not, are established on the
                      basis of a “fair market value assessment,” that considers such factors as
                      crop options, soil type, and water availability. The rents for the state leases
                      in Washington reflect the private lease terms identified in the market value
                      assessment. However, they may be lower than the rents for private leases
                      because, unlike private landowners, the state does not provide such
                      improvements as fences and water, and lessees pay certain state taxes on
                      operations on state land. Rents for crops that are not irrigated, such as
                      wheat and other small grains, are generally paid by crop-share; that is, the
                      state takes possession of a percentage of the crop harvested and sells it at
                      market. Rents for irrigated crops, such as corn, potatoes, and alfalfa, are

                      13
                        See Federal Lands: Fees for Communication Sites Are Below Fair Market Value (GAO/RCED-94-248,
                      Jul. 12, 1994).
                      14
                        See U.S. Forest Service: Fee System for Rights-of-Way Program Needs Revision (GAO/RCED-96-84,
                      Apr. 22, 1996).
                      15
                       Renewals of expiring leases may be negotiated with the existing lessee.




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                         generally paid in cash. Both the crop-share percentages and the cash rent
                         amounts are established on the basis of market surveys of private leasing
                         practices. Taking a different approach, Colorado establishes rents for
                         agricultural leases by using income-based formulas—that is, the rents
                         reflect the amount of income the land is expected to generate.

                         The states we contacted that lease land for residential use generally
                         establish a minimum acceptable rent by applying a rate of return to the
                         property’s estimated market value. For example, Minnesota leases
                         lakeshore property for residential purposes; establishing leases for 10 years
                         with rents of 5 percent of the land’s appraised fair market sales value.
                         Rents for business leases most often are established by using an appraisal
                         to estimate the land’s sales value and then applying an annual rate of return
                         to that value, although, according to a Colorado official, business rents
                         sometimes also assess lessees a percentage of the business’ revenues.


Private Landowners       Private landowners may or may not use appraisals to value land leases,
                         depending on the intended use of the land. According to several private
                         appraisers we spoke to, rents for agricultural land are rarely set by
                         appraisal: Landowners and lessees are generally familiar with prevailing
                         lease rates and may informally negotiate the rent to be paid for a tract of
                         land. The rent for a tract of land may be affected by the presence of such
                         improvements as fences or water delivery systems, which could increase
                         the market rent (if the landowner pays for them) or result in a rent credit (if
                         the lessee pays for them). For business uses, lease rates are more likely to
                         be estimated by appraisal. In those cases, appraisers often estimate the
                         sales value of the property on the basis of recent sales of comparable
                         properties and then apply a rate of return that reflects the risk inherent in
                         the lease agreement.



The Bureau’s             There are several reasons that any land—including Indian land—might not
                         be leased. The landowners may choose not to lease the land or there may
Appraisals and           be no demand for the land because of poor soil quality, a slow farming
Processes for            economy, inaccessibility, or lack of water. However, in cases where trust
                         land is in demand because, for example, it is near other valuable land (such
Appraising and Leasing   as in Phoenix) or it can support valuable crops, there may be other
Land Were Named as       impediments to leasing the land if it has not been leased. Bureau officials,
Impediments to           tribal representatives, and lessees cited appraisal amounts, the time taken
Leasing

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to prepare and review appraisals, and the Bureau’s cumbersome
bureaucracy.

Some lessees and Bureau realty officials asserted that Indian trust land
remains unleased in some areas because the land is appraised at values
higher than lessees want to pay. Bureau officials often will not approve a
lease if the negotiated or offered rent is less than the appraised value.
These officials interpret the requirement to obtain a fair annual rental to
mean that the appraised amount is the minimum acceptable lease amount
and told us they fear approving leases for less would cause the Indian
landowners to submit appeals or file lawsuits challenging their decisions.
However, Bureau officials told us that they can and do approve leases for
less than the appraised value if the Indian landowners agree to accept less.
According to Bureau and other appraisers, appraisals are estimates of a
property’s value and should be used as a management tool for making
informed leasing decisions. In our opinion, the estimates are not intended
to be a “floor price” any more than a “ceiling price.”

Concern over this issue is not new. According to a December 1987 report
of the National Indian Agriculture Working Group, “the unswerving
application of the appraised market rental rates has frequently resulted in
the complete loss of income to Indian landowners when their land sits
unleased due to the lack of flexibility in determining rental rates.”16 While a
prospective lessee may believe that the appraised value of a tract of land is
too high, the owner of that same tract of land may believe that it is too low.
In the words of an administrative judge with the Interior Board of Indian
Appeals (IBIA), “the determination of ‘fair annual rental’ requires the
exercise of judgment and . . . reasonable people may differ in their
calculation of ‘fair annual rental.’”17

Timing is an important factor affecting the accuracy of appraisals because,
as land values increase or decrease over time, appraisals become outdated.
For this reason, according to Bureau and other appraisers, appraisals have
a limited useful life. The longer it takes to prepare and review an appraisal,
the more likely it is that the data used in it to estimate a property’s value are
too old to accurately reflect the current market.



16
 Final Findings and Recommendations of the National Indian Agricultural Working Group, prepared for
the Assistant Secretary—Indian Affairs and the Intertribal Agricultural Council (Dec. 1987).
17
 Strain v. Portland Area Director, 23 IBIA 114, 117-18 (1992).




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Representatives of the Salt River Pima-Maricopa Indian Community
expressed frustration about the slowness of the Bureau’s Phoenix Area
Office in reviewing and approving appraisals prepared by appraisers under
contract to the community. According to Bureau officials, all appraisals—
whether prepared by a Bureau appraiser or a contract appraiser—must be
reviewed and approved by a Bureau review appraiser to ensure that they
are consistent with USPAP. Community representatives said that it
sometimes takes months to hear back from the area office when the review
appraiser has a problem with their appraisals and that the Bureau’s
slowness jeopardizes the Community’s business deals.

We analyzed records from the Phoenix Area Office’s appraisal tracking
system for the period from January 1, 1997, to December 3, 1998, to see
how long it took to review or prepare appraisals. 18 From the tracking
system, we were able to compute review times for 30 contractor-prepared
appraisals submitted by the Salt River Pima-Maricopa Community to the
area office for review. Review time is defined as the number of days
between the date a contractor appraisal was received by the Bureau for
review and when it completed the review. We calculated that the 30 Salt
River appraisals had an average review time of 146 days:

•   1 was reviewed and approved the same day,
•   16 were reviewed and approved in between 4 and 77 days,
•   8 were pending approval after between 297 and 512 days, and
•   5 were rejected after review periods ranging from 13 to 40 days.

We were also able to compute the preparation time for nine
Bureau-prepared appraisals of tribal land on the Gila River Reservation.
Preparation time is defined as the number of days between the date the
Bureau received an appraisal request and the date it returned the reviewed
appraisal to the requester. The Gila River community recently hired an
appraiser to estimate the value of some properties because the Bureau was
taking too long. We calculated that the nine Gila River appraisals had an
average processing time of 82 days: All were prepared, reviewed, and
approved in between 40 and 126 days.




18
  We used only the data that were complete or were not obviously inconsistent (such as showing a
negative number of elapsed days). Because we found weaknesses in the Bureau’s data and did not
independently verify the usable data, we consider these results to be only indicators of the time periods
involved.




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While we did not specifically determine the reasons for the time required to
prepare and review appraisals, the former chief review appraiser at the
Phoenix Area Office cited workload issues and concern about the quality of
contractor-prepared appraisals as reasons for some delays. He emphasized
that USPAP requires a review appraiser to do sufficient work to be satisfied
that an appraisal meets the standards and does not limit the time allowed
for review.

Some lessees and Bureau officials identified a variety of problems with the
Bureau’s bureaucracy; for example, the Bureau’s processes were
characterized as more cumbersome than the private sector’s (for example,
the Bureau takes more time, requires more paperwork, and is less flexible).
Some said Bureau staff show a lack of initiative and accountability for such
things as being responsive to lessees and for leasing land on behalf of
landowners. One lessee complained to us that a Bureau agency office
closes its realty office on Mondays and Fridays. We also found a related
situation when we attempted to contact a realty officer at one of the agency
offices—twice in one week, we were told that he was not accepting any
calls while he worked on a report.

According to Bureau officials, the primary factor affecting the speed with
which they can approve leases is the prevalence of tracts of land with
multiple owners. This occurs when an Indian landowner dies without a
will, and the property is divided among the landowner’s heirs in accordance
with the Indian General Allotment Act of 1887, as amended.19 Over time, the
number of owners of some tracts of land has increased as the ownership
interests have passed through several generations of multiple heirs. The
landowners may all be individual Indians; sometimes the tribe or
non-Indians also own an interest. For example, in 1992 we reported that
over one-third of the trust land tracts on the Yakama Reservation had
multiple owners and that 19 percent of these tracts had more than 25
owners.20 Under the Bureau’s regulations, officials must notify and obtain
concurrence from landowners owning a majority interest before leasing
land; therefore, the more owners a tract of land has, the longer it may take
for the Bureau to obtain their concurrence.




19
 25 U.S.C. 348.
20
 See Indian Programs: Profile of Land Ownership at 12 Reservations (GAO/RCED-92-96BR, Feb. 10,
1992).




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The Bureau Could Use      In addition to appraisals, a number of other methods may be used to
                          establish lease values. These methods do not preclude the use of
Methods Other Than        appraisals, but appraisals would not necessarily be prepared for every
Appraisals to Establish   lease transaction. These other methods include advertising for competitive
                          bids, conducting market surveys, and applying fee schedules or formulas.
Lease Values for Indian   We did not analyze the costs and benefits of these methods, but they are
Land                      used to varying degrees by other federal and state land management
                          agencies and by private landowners. While we recognize that the Bureau’s
                          trust responsibility to Indian landowners is unique and differs from the
                          relationships of other federal agencies to federal taxpayers and of state
                          land managers to school trust funds, these other methods may be
                          appropriate in some circumstances. In fact, some area offices currently
                          use some of these methods, in some cases because they do not have
                          enough appraisers to appraise all tracts of land before leasing them.

                          Alternative approaches that are already in use in some Bureau offices
                          include competitive bidding and the use of market surveys:

                          • Under its regulations, the Bureau is allowed to advertise tracts of
                            unleased trust land for competitive lease bids if the landowner wishes to
                            explore the market and is required to do so for leases that are not
                            negotiated or for which a fair annual rental cannot be obtained through
                            negotiations. When there is a competitive market, the high bid received
                            in a competitive auction would establish the market rental value. The
                            Bureau would then approve the granting of a lease to the highest bidder.
                            Two of the agencies we visited (in the Billings and Portland areas) have
                            advertised unleased trust land for competitive lease bids with mixed
                            success (see app. I). Competitive bidding is also used to lease
                            state-owned trust land in some states, such as Montana (for cabin and
                            homesite leases) and Washington (for agricultural leases). In addition,
                            when the demand for land is high, private landowners may use
                            competitive bidding techniques by soliciting sealed bids from potential
                            renters.
                          • Market surveys may be used to identify the range of prevailing lease
                            rates for land in a specified area, particularly where the land use is
                            homogeneous. Some Bureau offices—such as those in Aberdeen and
                            Billings (for agricultural leases)—already use this method. Market
                            surveys result in generalized statements of what rents should be, or
                            parameters that decisionmakers can use in negotiating leases. The lease
                            rate for a specific tract of land is compared with the range of rates
                            identified in the market survey to determine if the lease rate is within




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     that range. The market survey approach differs from an appraisal in that
     an appraisal is done for a specific property and is used to estimate the
     market value of that property. Some states also use this method for
     determining whether the rent for their trust land is consistent with
     prevailing rents in an area.

Other approaches, which are not currently being used for Indian trust land,
include the use of fee schedules and formulas:

• As with market surveys, fee schedules could be used where land is used
  for homogeneous purposes, such as grazing or the cultivation of some
  crops. Instead of appraising each site, land managers would refer to a
  fee schedule to establish the rent. We have reported on BLM’s and the
  Forest Service’s use of fee schedules for communication sites (for
  television and radio, for example) and rights-of-way (for oil and gas
  pipelines and power lines). While we support the concept of fee
  schedules, we have reported on weaknesses in their implementation in
  cases where they did not reflect fair market value.
• Some states, such as Colorado, use formulas to determine the
  appropriate lease value for cropland. Formulas can be used where
  information is available on expected income and costs associated with
  the land. For example, the Colorado State Land Board determines the
  per-acre rent value of irrigated cropland on the basis of the farmer’s
  expected per-acre income for the parcel of land. The board multiplies
  the state's share by the per-acre income (the state’s share varies by
  agricultural crop and practices) and reduces the total to reflect the
  farmer's irrigation costs. Washington also uses formulas to set rates for
  grazing permits on its trust land.

Changes in current laws or regulations would not be necessary for the
Bureau to adopt these or other alternative methods. Consistent with this
view, in December 1998, a workgroup studying appraisal issues reported to
the Deputy Commissioner for Indian Affairs that it found no statutes that
specifically require the Bureau to conduct appraisals.21 A representative of
the Deputy Commissioner’s office emphasized that this position has not
been adopted by the Bureau and that a legal review that examines laws and
court cases that apply Bureau-wide would be required before it would



21
 There was one exception. For purchases of certain Indian land in Oklahoma, fair market value must
be determined by appraisal.




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                        B-282436




                        consider doing so. We discuss this workgroup and its results in greater
                        detail below.



Interior Is Proposing   The Department of the Interior is currently reviewing the Bureau’s
                        appraisal process as part of an improvement project begun in 1997 by the
Several Improvements    Office of the Special Trustee for American Indians and the Bureau. The
to the Appraisal        appraisal program was included in the project because of a lack of
                        consistency in preparing appraisals across the Bureau’s area offices and
Process                 because of a backlog of appraisals requested by agency officials but not yet
                        completed. As of June 1998, the Bureau’s area offices reported a total of
                        almost 1,500 appraisal requests that were more than 60 days old.22

                        The improvement plan included several proposed changes to the Bureau’s
                        appraisal program at the time we began our review (July 1998); the plan
                        was updated in the fall of 1998. Specific initiatives in the improvement
                        plan, together with their status, follow:

                        • Appraisers must be certified in accordance with title XI of the Financial
                          Institutions Reform, Recovery, and Enforcement Act of 1989
                          (FIRREA). 23 By the fall of 1998, 28 of the Bureau’s 43 appraisers were
                          certified, including all of the area review appraisers, and the remaining
                          appraisers were completing the certification requirements.
                        • The Bureau was to update its real estate appraisal handbook (issued in
                          1970), which it did in October 1998.
                        • The Bureau was to hire a Bureau-wide chief appraiser; the position was
                          filled in April 1999.
                        • The Bureau was to identify the extent of the appraisal backlog. The
                          backlog was identified as of June 1, 1998.
                        • The Bureau was to increase funding for the appraisal program. Funding
                          is being requested under the Office of the Special Trustee’s budget to
                          implement improvements in the appraisal program and to eliminate
                          appraisal backlogs.

                        The improvement plan was updated in the fall of 1998 to include two
                        additional initiatives. The first directed the Bureau’s Office of Trust


                        22
                         The Phoenix Area Office did not report its appraisal backlog.
                        23
                          FIRREA (P.L. 101-73) requires that appraisers of federally related transactions be certified or licensed
                        by a state with certification or licensing requirements that meet the minimum criteria as issued by the
                        Appraisal Foundation.




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Responsibilities, with assistance from Interior’s Office of the Solicitor, to
determine whether and to what extent existing laws, regulations, and court
rulings require appraisals of trust land. The second directed Bureau offices
to develop and maintain a database for tracking appraisals. In November
1998, the Bureau convened a workgroup to consider and recommend ways
to reduce the backlog of appraisal requests, which are made for many types
of land transactions, including sales, exchanges, rights-of-way, and leases
of property. In December 1998, the workgroup made its recommendations
to the Deputy Commissioner for Indian Affairs.

The field solicitor in the Minneapolis Area Field Office reviewed the legal
requirements for appraisals. He concluded that no laws specifically require
the Bureau to conduct appraisals of property or interests in that property
and that the statutes give the Secretary of the Interior discretion in
determining the fair value of property. However, Bureau officials stated
that the review was preliminary and that a comprehensive legal review by
Interior’s Office of the Solicitor would be required before the Bureau would
consider making changes to the program on that basis.

The appraisal workgroup also reported that each area or agency office
maintains its own tracking system and that all systems are adequate to
monitor, or track, appraisal requests. According to the improvement plan,
these tracking systems are designed to provide the Bureau with
information on when most of the appraisals are needed and to enable
Bureau management to use appraisal resources (funding and staff) more
effectively.

However, we obtained appraisal tracking data from four offices and found
wide variability in the usability of the data; in some cases, data on an
individual appraisal were virtually unusable for analyzing the status of the
appraisal.24 We requested appraisal tracking data from five area offices
(Aberdeen, Billings, Muskogee, Phoenix, and Portland) and obtained such
data from four (Billings did not have an areawide system). Specifically,

• in Aberdeen’s system, 100 percent of the tracking records for 54 lease
  appraisals were usable for determining the status of the appraisals;
• in Portland’s system, 99 percent of the tracking records for 1,781 lease
  appraisals were usable;


24
  Records that we defined as unusable were incomplete (that is, data were missing) or inconsistent (for
example, indicating a negative number of elapsed days to prepare an appraisal).




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• in Phoenix’s system, 66 percent of the tracking records for 545 lease
  appraisals were usable; and
• in Muskogee’s system, 39 percent of the tracking records for 585 lease
  appraisals were usable.

The workgroup also recommended several short-term and long-term
changes to the appraisal program, both in how appraisals are prepared and
in how they are requested. Short-term changes include establishing
reservation- or neighborhood-specific computer-generated models for
determining the value of multiple ownership interests in land and training
realty specialists on when to request appraisals and what type of report is
sufficient for the realty action to be taken.

According to Bureau officials, a great deal of their time is spent estimating
the value of each of the multiple ownership interests in tracts of land. For
homogeneous land such as cropland, grassland, or hayland within a
reservation or neighborhood, the appraisal workgroup has recommended
that Bureau offices use computer-generated models—similar to those used
by tax assessors—to estimate the market value of these multiple interests.
The appraisers would be responsible for collecting and entering
capitalization and market rental rates for the land into the computer
modules on a regular basis. In a separate initiative, the Department of the
Interior has proposed legislation that would provide a way to consolidate
very small ownership interests in Indian-owned land. It has requested a
budget increase of $10 million in fiscal year 2000 to expand an ongoing pilot
project to consolidate land ownership interests of 2 percent or less.

According to the workgroup, many appraisals are prepared for transactions
that are never completed (if, for example, the landowner or tribe decides
not to lease the land). Although the exact number is not known, these
unnecessary appraisals could be canceled—or never requested—if realty
clerks were better trained in evaluating the need for appraisals. Also, the
workgroup noted, the type and format of appraisal report has a significant
impact on the cost and time required to complete the appraisal, and realty
clerks often request more extensive reports than are called for by the type
of transaction being considered.

Long-term actions the workgroup recommended that the Bureau take
include, among other things, creating appraisal guidelines that address
specific circumstances in different geographic areas. These guidelines
would give officials the flexibility to request limited—and, thus, less
expensive and time-consuming—appraisal reports when appropriate.



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              B-282436




              Under USPAP’s “departure” provision, appraisers may agree to prepare an
              appraisal that is less detailed or different from the work that would
              otherwise be required by USPAP’s guidelines. The appraiser must be
              certain that the resulting report would not be misleading and must clearly
              identify and explain the departure, and the client must agree that a limited
              appraisal is appropriate. Under this long-term action, the Bureau’s area or
              agency offices would be allowed to create guidelines on when different
              formats may be used for appraisal reports.



Conclusions   Under its regulations, the Bureau of Indian Affairs is required to ensure that
              Indian land is leased for a fair annual rental. The Bureau often relies on
              appraisals, which must be prepared in conformance with professional
              appraisal standards—the same standards that apply to all professional
              appraisers, including other federal, state, and private appraisers. However,
              fair annual rental has not been defined and the Bureau does not have a
              clearly stated policy on how it should be determined. In some Bureau
              offices, methods other than appraisals are used when land uses and staffing
              levels make appraisals impractical, but officials have expressed concern
              about whether they are complying with the Bureau’s requirements in using
              these other methods. Consistent policies and procedures for deciding how
              lease values should be determined would alleviate these concerns and
              clarify for realty officials what methods they may rely on for valuing leases.

              Appraisals were cited as an impediment to leasing, both because officials
              adhere to the appraised value as a minimum lease value and because the
              processes are considered by some to be too time-consuming. However, we
              believe that, in addition to appraisals, other methods are available to
              Bureau officials for estimating a fair annual rental for Indian land and could
              be used under certain circumstances. Furthermore, we believe that these
              methods could be implemented without legislative or regulatory changes.
              This view is consistent with the results of a preliminary legal review
              conducted by the Minneapolis Area Office’s field solicitor. However, before
              the Bureau will consider adopting those findings Bureau-wide, officials say
              a Bureau-wide review of laws, regulations, and court cases must be
              conducted.

              The Department of the Interior has begun to review its use of appraisals
              and is considering alternatives to the current processes. One proposed
              improvement to the current system included making sure that Bureau
              offices have systems for tracking the status of appraisals. While a Bureau
              workgroup found that Bureau offices have adequate tracking systems, we



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                  B-282436




                  found that the appraisal tracking records were not consistently usable.
                  Because these tracking systems could provide the Bureau with information
                  on when most appraisals are needed and could allow Bureau management
                  to use appraisal funding and staff more effectively, the data in these
                  systems should be more consistent and complete.



Recommendations   In addition to concurring with the Department of the Interior’s ongoing
                  efforts to review and revise the Bureau’s appraisal program, we
                  recommend that the Secretary of the Interior direct the Commissioner of
                  the Bureau of Indian Affairs to do the following:

                  • Develop a clear policy on how fair annual rental can be estimated using
                    other methods in addition to appraisals, such as market surveys, fee
                    schedules, and formulas, where appropriate.
                  • Establish consistent standards and guidelines for applying lease
                    valuation methods.
                  • Review the area offices’ appraisal tracking data and ensure that the data
                    are consistent and complete so that the Bureau can monitor and make
                    the most effective use of its appraisal resources.



Agency Comments   We provided a copy of a draft of this report to the Department of the
                  Interior for its review and comment. Interior agreed with our
                  recommendations that the Bureau evaluate alternatives to appraisals for
                  estimating fair annual rental, establish consistent standards for applying
                  lease valuation methods, and ensure that appraisal tracking data are
                  complete and consistent. Furthermore, Interior commented that work has
                  begun to address the recommendations, and the Assistant Secretary for
                  Indian Affairs stated that he is confident that they will be fulfilled. Interior
                  provided technical clarifications on funding for the appraisal program,
                  which we incorporated as appropriate. Interior’s comments appear in
                  appendix IV.


                  We conducted our review from July 1998 through June 1999 in accordance
                  with generally accepted government auditing standards. We did not
                  independently verify or test the reliability of the data provided by the
                  Bureau’s offices. Details of our scope and methodology are discussed in
                  appendix V.




                  Page 22                             GAO/RCED-99-165 Rent Appraisals of Indian Land
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We will send copies of this report to the Honorable Bruce Babbitt,
Secretary of the Interior; the Honorable Hilda Manuel, Deputy
Commissioner, Bureau of Indian Affairs; and other interested parties. We
will also make copies available to others upon request.

If you or your staff have any questions, please call me at (202) 512-3841.
Key contributors to this report were Jennifer Duncan, Sue Naiberk, Cynthia
Rasmussen, and Victor Rezendes.

Sincerely yours,




Barry T. Hill
Associate Director, Energy,
 Resources, and Science Issues




Page 23                          GAO/RCED-99-165 Rent Appraisals of Indian Land
Contents



Letter                                                                                                1


Appendix I                                                                                           26
Leasing Indian Trust
Land

Appendix II                                                                                          30
Residential Leases

Appendix III                                                                                         33
Trust Land Within
Indian Irrigation
Projects

Appendix IV                                                                                          35
Comments From the
Department of the
Interior

Appendix V                                                                                           38
Scope and
Methodology

Related GAO Products                                                                                 43


Tables                 Table I.1: Ownership and Type of Use for Trust Land,
                         December 31, 1997                                                           27
                       Table I.2: Rent Proceeds for Leased Trust Land, by Use, for the
                         Year Ending December 31, 1997                                               27
                       Table III.1: Status of Trust and Nontrust Land in 16 Indian Irrigation
                         Projects, January 8, 1999                                                   33




                       Page 24                            GAO/RCED-99-165 Rent Appraisals of Indian Land
         Contents




Figure   Figure 1: Percentages of Leases and Acres Leased on Trust
           Land as of December 31, 1997, and Rent Income for the Year
           Ending December 31, 1997                                                  7




         Abbreviations

         BLM        Bureau of Land Management
         FIRREA     Financial Institutions Reform and Recovery Enforcement Act of
                    1989
         GAO        General Accounting Office
         IBIA       Interior Board of Indian Appeals
         USPAP      Uniform Standards of Professional Appraisal Practice



         Page 25                         GAO/RCED-99-165 Rent Appraisals of Indian Land
Appendix I

Leasing Indian Trust Land                                                                                                         ApIenxdi




                        The Bureau of Indian Affairs has jurisdiction over roughly 56 million
                        acres—about 87,500 square miles—which are held in trust by the Secretary
                        of the Interior for Indian tribes and individuals. Indian trust land
                        represents less than 3 percent of the total land base of the United States
                        (3.5 million square miles) but is, in total, equal to almost twice the area of
                        Pennsylvania or more than half the area of California. Over 95 percent of
                        this trust land is located in states west of the Mississippi River, and much of
                        it lies within the boundaries of about 280 Indian reservations.1 Indian tribes
                        own the majority of the trust land—about 46 million acres, or 82 percent of
                        the total—and individual Indians own the remaining 10 million acres, or 18
                        percent of the total.



Information on Leased   According to the Bureau’s most recent published data on land use, about
                        102,000 surface leases were in effect at the end of 1997. These leases
Trust Land              covered almost 8 million acres (12,000 square miles) and generated over
                        $104 million in rental income for the landowners.2 About 70 percent of the
                        leased acreage was used for agricultural purposes, but about 65 percent of
                        the leases were for other, nonbusiness purposes with nominal rents,
                        including temporary special uses (such as a fireworks stand) and
                        homesites for tribal members. Table I.1 presents data on leases and leased
                        acreage reported by the Bureau as of December 31, 1997, for agricultural,
                        business, and other surface uses. Table I.2 shows the revenue these leases
                        generated in 1997.




                        1
                         Not all reservation land is trust land—some reservation land is owned by non-Indians and some is
                        Indian-owned land that the government does not hold in trust. Interior has no responsibility for
                        nontrust land.
                        2
                        In this report, we discuss only surface uses of Indian trust land. The subsurface rights to Indian land
                        may also be leased for mineral development.




                        Page 26                                        GAO/RCED-99-165 Rent Appraisals of Indian Land
                                            Appendix I
                                            Leasing Indian Trust Land




Table I.1: Ownership and Type of Use for Trust Land, December 31, 1997

                         Agricultural                    Business                          Other                             Total
                    Number of                        Number of                    Number of                          Number of
Ownership              leases           Acreage         leases      Acreage          leases          Acreage            leases         Acreage
Tribal                  11,530      2,049,019            3,068        65,349          36,615        2,059,744           51,213        4,174,112
Individual              19,596      3,371,342            1,951        24,874          28,958           60,802           50,505        3,457,018
Total                   31,126      5,420,361            5,019        90,223          65,573        2,120,546          101,718        7,631,130
                                            Source: GAO’s analysis of data from the Bureau of Indian Affairs.




                                            Table I.2: Rent Proceeds for Leased Trust Land, by Use, for the Year Ending
                                            December 31, 1997

                                            Ownership              Agricultural            Business                 Other                 Total
                                            Tribal                 $14,909,653          $23,272,798             $4,357,872        $42,540,323
                                            Individual              41,300,465            17,933,435             2,321,902           61,555,802
                                            Total                  $56,210,118          $41,206,233             $6,679,774       $104,096,125
                                            Source: GAO’s analysis of data from the Bureau of Indian Affairs.




Process to Lease Trust                      Neither the Bureau nor landowners are required to lease trust land. For
                                            land that is unleased, the process usually begins with an expression of
Land                                        interest by either the landowner or a potential lessee. For land that is
                                            already leased, Bureau realty staff identify which leases will expire within
                                            the next year or so and send a “90 day notice” to the owners to provide 3
                                            months for them to negotiate leases with lessees. In either case, realty staff
                                            request appraisals for the tracts of land.

                                            If a lease agreement is successfully negotiated, the prospective lessee and
                                            at least one landowner sign and submit a lease application to the
                                            responsible Bureau agency office. The application is routed to various
                                            Bureau departments for review, including a determination as to whether
                                            the negotiated amount is at least equal to the appraised amount. For land
                                            with more than one owner, landowners owning a majority interest must
                                            consent to the lease. The application is then sent to the agency office
                                            superintendent for approval. If approved, a lease is prepared for the tract
                                            of land and signed by the landowner(s) and lessee; it is then returned to the
                                            agency office and reviewed for signatures, bonding, insurance, and rent
                                            and fee payments and is presented to the superintendent for approval.



                                            Page 27                                      GAO/RCED-99-165 Rent Appraisals of Indian Land
                      Appendix I
                      Leasing Indian Trust Land




                      If no satisfactory lease agreement has been negotiated for expiring leases
                      or if landowners wish to advertise their land for competitive bid, Bureau
                      realty staff prepare, mail, and post lease advertisements. If sealed bids are
                      received for the land, the bid amounts are compared with the appraised
                      amounts. If the bid is acceptable—that is, if it equals or exceeds the
                      appraised amount—a lease is prepared. If it does not equal or exceed the
                      appraised amount, Bureau officials may either reject the bid or—as we
                      found at the Fort Peck and Yakama reservations—begin negotiations with
                      the prospective lessee to reach an acceptable rent amount. When the
                      signed lease is returned to the agency office, it is reviewed for
                      completeness, submitted to tribal officials for action if tribal land is
                      involved, and submitted to the superintendent for approval.



Information on        Most Indian trust land—more than 48 million acres (75,000 square miles) at
                      the end of 1997—is not leased. This unleased land may be occupied and/or
Unleased Trust Land   otherwise used by the various landowners (e.g., for residences or tribal
                      enterprises such as agricultural operations), or it may be unused. The
                      Bureau does not maintain statistics on the use or condition of all the
                      unleased trust land. For this reason, the Bureau could not provide us with
                      information for unleased trust land on (1) the number of acres that are
                      currently used and the number of acres that are currently unused, (2) the
                      number of acres of unused land that could be economically productive, or
                      (3) the number of acres of potentially productive unused land that could be
                      leased and could generate revenue for the landowners.

                      These data are not available for at least two reasons. First, much of the
                      trust land is not considered economically productive and there is therefore
                      little or no interest in leasing it. While there are exceptions to this
                      generalization, Bureau officials said they believe that the trust land that can
                      support economic production is already leased. Second, the Bureau has
                      limited staff resources to manage trust land, and these staff rely mostly on
                      landowners or potential lessees to express interest and thereby initiate the
                      Bureau’s leasing process. Officials said they do not believe that the Bureau
                      has sufficient staff resources to identify unused and unleased trust land and
                      actively market it to potential lessees. However, they also said that a
                      computer system that would allow the Bureau to have this information is
                      being developed and will be piloted in the Billings, Montana, area in the
                      summer of 1999.

                      The Bureau does not have good information on the interest or lack thereof
                      in leasing trust land. We obtained data from two of the Bureau offices we



                      Page 28                            GAO/RCED-99-165 Rent Appraisals of Indian Land
Appendix I
Leasing Indian Trust Land




visited that advertised tracts of unleased trust land for competitive bids in
1998: the Fort Peck agency office in Montana advertised 251 tracts, and the
Yakama agency office in Washington advertised 1,425 tracts. In both cases,
the tracts offered for lease had generally been leased, but the leases were
due to expire. Responses to the advertisements varied widely between the
two offices, indicating that interest in leasing trust land may also vary
according to local conditions. The Fort Peck office received bids on 69
percent of its advertised tracts; in contrast, the Yakama office received bids
on only 7 percent of its advertised tracts.3 Anecdotal information suggests
that land without a history of being leased tends to remain unleased even
when it is offered for competitive bid.




3
 At Fort Peck, about 83 percent of the bids received were accepted, and at Yakama, about 5 percent of
the bids received were accepted. At both locations, additional properties were leased through
negotiations.




Page 29                                       GAO/RCED-99-165 Rent Appraisals of Indian Land
Appendix II

Residential Leases                                                                                                       ApIpx
                                                                                                                             Ien
                                                                                                                               di




                     Residential leases can present a variety of issues for the Bureau of Indian
                     Affairs and for other land managers. These include controversies over rent
                     adjustments, which we found at the Swinomish Reservation in Washington
                     and on state land in Montana. We were also told of other problems with
                     residential leases in some places, such as confusion among lessees over
                     who owns the land.



Controversies Over   Rent adjustments were controversial on the Swinomish Reservation and on
                     state trust land in Montana. The controversy on the Swinomish
Rent Adjustments     Reservation focuses on five allotments of trust land located on Puget
                     Sound (about 75 miles from Seattle) that are divided into about 250 lots on
                     or near the water, many of which are leased for residential use. At one
                     time, these lots were very primitive—they were considered “camping
                     lots”—and lessees made only small investments in putting houses or other
                     structures on the lots. Given the small amounts they invested, lessees
                     could choose with relative ease not to renew their leases (thereby losing
                     their investments) if their rents increased over time. However, as these lots
                     became more attractive for permanent residences, lessees built
                     increasingly expensive homes on them and increased their investments.

                     In the early 1990s, two events dramatically increased lessees’ costs: The
                     lots were reappraised and the rents were increased to reflect the increased
                     land value, and the Swinomish Community improved the water and sewer
                     systems in the area. Annual rents increased from an average of about
                     $1,200 to between $5,000 and $6,000, and the improvements resulted in
                     utility assessments that ranged from $8,000 to $11,500 for each of the lots
                     and, in many cases, were charged to the lessees.1 The Community arranged
                     for funds from Skagit County (under a state block grant) of up to $8,000 per
                     lot to defray the utility assessment costs for low-income lessees; 30
                     lessees—about one-third—qualified for the grant.

                     Lessees asserted that the new appraisals overstated the value of the lots
                     and that the resulting lease increases were inappropriately high; however,
                     landowners asserted that the appraisals might have understated the value
                     of the lots. Lessees appealed the increased rents, which were upheld by the




                     1
                      The law does not permit encumbrances to be placed on trust land without the landowner’s consent.
                     Some landowners agreed to pay the assessment, but only if rents were increased accordingly.




                     Page 30                                      GAO/RCED-99-165 Rent Appraisals of Indian Land
                      Appendix II
                      Residential Leases




                      Interior Board of Indian Appeals. 2 The lessees filed suit in the U.S. District
                      Court for the Western District of Washington, which dismissed the case in
                      March 1999.

                      Following this dismissal, the Community—which has an ownership
                      interest in two of the allotments—plans to meet with other landowners and
                      Bureau officials to discuss possible changes that may relieve some of the
                      lessees’ concerns. These include changes in the lease term (such as
                      increasing the term from the current 25 years to 50 years) and alternative
                      methods for adjusting rents (such as allowing the prepayment of rents or
                      linking rent increases to a federal Treasury index).

                      A similar rent adjustment controversy occurred in Montana where,
                      according to one official, the state leases over 1,000 sites for cabins and
                      homes. The controversy began in the late 1980s, when Montana began
                      setting rental rates at 5 percent of the respective property’s appraised
                      market value—a 5-percent rate of return. In response to the change, there
                      was such an outcry from lessees that, according to the official, the Montana
                      legislature intervened and directed the state agency to reduce the rate of
                      return on which the rent was based by 30 percent, to 3.5 percent of the
                      property’s appraised sales value.



Other Problems With   Leases of residential properties can pose other problems. For example,
                      Bureau officials in the Phoenix Area Office told us of a situation on one
Residential Leases    reservation where lessees are confused about who actually owns the land.
                      According to these officials, the Colorado River Tribe in Arizona and
                      California leased land to a non-Indian for use as a trailer park; the lessee
                      then sublet parcels for trailer-home use. Because these subleases have
                      tended to be longer-term and, in some cases, were even transferred to a
                      sublessee’s heirs, some sublessees are confused over who actually owns
                      the land. In addition, Bureau officials in the Portland Area Office told us
                      about a controversy with lessees of oceanfront property on the Tulalip
                      Reservation in Washington. Some of the land is eroding, and some lessees
                      believe the Bureau should reduce their lease rents to cover the costs of
                      moving their homes away from the eroding banks. The Bureau disagrees; it
                      will instead measure each lot, appraise the land, and reduce the rent
                      accordingly if the lot size has decreased through erosion. According to


                      2
                       The director of the Portland Area Office reviewed the rents for some of the leases and adjusted the rate
                      of return used to compute them downward.




                      Page 31                                        GAO/RCED-99-165 Rent Appraisals of Indian Land
Appendix II
Residential Leases




Bureau officials, the existing lease documents include a provision that
warned lessees of the erosion problem and made lessees responsible for
maintaining the banks.

Other land managers told us they avoid leasing property for residential
purposes. For example, a Minnesota state official told us his agency was
disposing of its residential properties, which are primarily lakeshore
properties. A Washington state official said his agency has four residential
properties and will sell them if there is an opportunity to do so.




Page 32                           GAO/RCED-99-165 Rent Appraisals of Indian Land
Appendix III

Trust Land Within Indian Irrigation Projects                                                                          AIpIenxdi




               About 527,000 acres of trust land (and about 222,000 acres of nontrust land,
               primarily owned by non-Indians) lie within the boundaries of 16 Indian
               irrigation projects administered by the Bureau.1 The costs of operating and
               maintaining these projects are supposed to be paid through assessments
               that are levied annually against the acres that can be irrigated within each
               project (called “assessable” acres). Landowners are responsible for paying
               these assessments (or their lessees may agree to do so), whether the land is
               being leased or is being used by the landowner to produce crops. In
               January 1999, the Bureau reported that, in total, about 543,000 acres were
               considered to be assessable and about 231,000 of these acres were leased.
               Table III.1 provides additional information on the status of trust and
               nontrust land within the Indian irrigation projects.



               Table III.1: Status of Trust and Nontrust Land in 16 Indian Irrigation Projects,
               January 8, 1999

                                                 Assessable acreage
                                                                                                 Total assessable
               Ownership and                                                                   and nonassessable
               leasing status                Leased        Unleased               Total        acreage in projects
               Trust                        229,339          148,271           377,611                       526,546
               Nontrust                        1,425         163,573           164,997                       221,604
               Total                        230,764          311,844           542,608                       748,150
               Source: GAO’s calculations based on data from the Bureau of Indian Affairs.


               While roughly three-quarters of the total acreage within the irrigation
               projects was considered to be assessable, there are striking differences in
               the percentages of trust and nontrust assessable acres that were reported
               as leased: 61 percent of the assessable trust land was leased, whereas only
               1 percent of the assessable nontrust land was leased. Bureau officials told
               us that most of the non-Indian landowners farm their land rather than
               renting it out and that the trust land is generally not being farmed unless
               the acres are leased. However, the Bureau does not have data on unleased
               trust acreage that is or is not in agricultural production.




               1
                There are 18 Indian irrigation projects in total, but this appendix presents information on only 16. We
               excluded two projects—the Flathead and San Carlos Projects—because the Bureau’s National
               Irrigation Information Management System did not include data for them that would allow this analysis.




               Page 33                                       GAO/RCED-99-165 Rent Appraisals of Indian Land
Appendix III
Trust Land Within Indian Irrigation Projects




In January 1999, the Bureau reported that unpaid assessments totaled more
than $22 million ($15 million in unpaid principal and $7 million in unpaid
interest and penalties). Whereas 93 percent of the unpaid assessments
related to trust land, trust land represents only 70 percent of the total
assessable acreage. One project, the Wapato Irrigation Project in
Washington, accounts for about two-thirds of the total unpaid assessments.

Trust land represents 56 percent of the Wapato project’s 146,000 total acres
and 145,000 assessable acres and 99 percent of its 44,000 leased acres.
However, 92 percent of the almost $15 million in unpaid assessments
(including interest and penalties) for the Wapato project relate to trust
land. In 1997, we reported that the main reason for past due assessments
was the Bureau’s practice of deferring the collection of assessments from
owners of trust land that was not in agricultural production. 2 Specifically,
we found that the Bureau had sometimes declined to mail assessment bills,
had failed to collect assessments from some lessees, and did not
aggressively collect past due assessments.

We reported that changing farm economics and poor soil conditions were
among the reasons that land within the project area was out of production.
In addition, we reported that the Bureau had not often exercised its
authority to grant leases of trust lands on behalf of landowners but that the
superintendent had decided to do so. For example, in leasing parcels that
have multiple owners, the superintendent of the Yakama agency had
decided to approve the leases on behalf of the owners rather than letting
the land remain idle because the Bureau was unable to locate enough of the
landowners to consent to lease the land. We also reported that the Yakama
agency had begun marketing unleased trust land more extensively,
expanding its advertising of trust land available for lease to newspapers in
major cities such as Seattle and planning to do more.




2
 Indian Programs: BIA’s Management of the Wapato Irrigation Project (GAO/RCED-97-124, May 28,
1997).




Page 34                                     GAO/RCED-99-165 Rent Appraisals of Indian Land
Appendix IV

Comments From the Department of the
Interior                                                               ApIV
                                                                          exn
                                                                          p di




              Page 35     GAO/RCED-99-165 Rent Appraisals of Indian Land
Appendix IV
Comments From the Department of the
Interior




Page 36                               GAO/RCED-99-165 Rent Appraisals of Indian Land
Appendix IV
Comments From the Department of the
Interior




Page 37                               GAO/RCED-99-165 Rent Appraisals of Indian Land
Appendix V

Scope and Methodology                                                                       Appx
                                                                                               V
                                                                                               end
                                                                                                 i




             We obtained information on the Bureau of Indian Affairs’ methods of
             establishing the lease value of Indian land through discussions with
             officials from the Department of the Interior and the Bureau at their
             headquarters offices in Washington, D.C., and at Interior’s Office of Audit
             and Evaluation in Denver, Colorado. We also met with officials at the
             Bureau’s Portland (Oregon) Area Office and its Puget Sound and Yakama
             agencies, the Billings (Montana) Area Office and its Northern Cheyenne
             and Fort Peck agencies, and the Phoenix (Arizona) Area Office and its Salt
             River and Pima agencies. We spoke by telephone with Bureau officials at
             the Aberdeen (South Dakota) and Muskogee (Oklahoma) area offices. We
             obtained and reviewed the Bureau’s guidance on appraising trust land,
             including the area offices’ specific guidance, and obtained and examined
             examples of appraisals and leases. We examined various reports on
             appraisals and leasing, including reports by Interior’s Office of Inspector
             General, the National Indian Agriculture Working Group, and GAO.

             Through discussions with officials from Interior’s Bureau of Land
             Management (BLM) and the Department of Agriculture’s Forest Service at
             their headquarters offices in Washington, D.C.; at BLM field offices in
             Colorado, Oregon, Washington, and Idaho; and Forest Service offices in
             Colorado and Oregon, we obtained information on how BLM and the
             Forest Service value surface leases on the land they manage. We also
             obtained and reviewed documents containing appraisal guidance for BLM
             and the Forest Service. To identify methods used to establish rents for
             leases on trust land in various states, we contacted officials in Colorado,
             Montana, Minnesota, and Washington, either in person or by telephone. We
             also interviewed, either in person or by telephone, private appraisers and
             representatives of the American Society of Farm Managers and Rural
             Appraisers and the Colorado chapter of the Appraisal Institute.

             To identify impediments to leasing Indian trust land, we met with
             representatives of the Swinomish, Yakama, Northern Cheyenne, Sioux and
             Assiniboine, Salt River Pima-Maricopa, and Gila River Pima-Maricopa
             tribes and spoke with lessees of Indian land at the Yakama and Fort Peck
             reservations. We obtained and examined documents related to the
             Bureau’s analysis of its appraisal backlog and obtained appraisal workload
             logs from the Portland, Phoenix, Aberdeen, and Muskogee area offices. We
             used the appraisal workload logs to determine the time it takes to prepare
             and review appraisals at the various area offices.

             To determine whether the Bureau has a legal or regulatory requirement to
             appraise trust land for leasing, we reviewed laws and regulations relevant



             Page 38                           GAO/RCED-99-165 Rent Appraisals of Indian Land
Appendix V
Scope and Methodology




to the leasing of Indian land. We identified alternative methods of
establishing the rent value of land through discussions with Bureau and
other land-management officials and with private appraisers and
landowners, as well as through a review of prior GAO reports on
land-management practices.

We identified the Department of the Interior’s efforts to improve the
appraisal process through discussions with Interior and Bureau officials.
We obtained and examined documents describing the ongoing Trust
Management Improvement Project and recommendations of the appraisal
workgroup.

To provide information on the leasing of trust land, we obtained statistics
on leasing and owning Indian land from the Bureau’s headquarters. We also
obtained information on unleased land within irrigation districts from the
Bureau’s National Irrigation Information Management System in
Albuquerque, New Mexico, and the results of competitive lease auctions in
two Bureau area offices.

We conducted our review from July 1998 through June 1999 in accordance
with generally accepted government auditing standards. We did not
independently verify or test the reliability of the data provided by the
Bureau’s offices.




Page 39                           GAO/RCED-99-165 Rent Appraisals of Indian Land
Page 40   GAO/RCED-99-165 Rent Appraisals of Indian Land
Page 41   GAO/RCED-99-165 Rent Appraisals of Indian Land
Page 42   GAO/RCED-99-165 Rent Appraisals of Indian Land
Related GAO Products


               Indian Trust Funds: Interior Lacks Assurance That Trust Improvement
               Plan Will Be Effective (GAO/AIMD-99-53, Apr. 28, 1999).

               Forest Service: Barriers to and Opportunities for Generating Revenue
               (GAO/T-RCED-99-81, Feb. 10, 1999).

               Indian Programs: BIA’s Management of the Wapato Irrigation Project
               (GAO/RCED-97-124, May 28, 1997).

               U.S. Forest Service: Fees for Recreation Special-Use Permits Do Not
               Reflect Fair Market Value (GAO/RCED-97-16, Dec. 20, 1996).

               Military Bases: Update on the Status of Bases Closed in 1988, 1991, and
               1993 (GAO/NSIAD-96-149, Aug. 6, 1996).

               U.S. Forest Service: Fee System for Rights-of-Way Program Needs Revision
               (GAO/RCED-96-84, Apr. 22, 1996).

               Federal Office Space: More Businesslike Leasing Approach Could Reduce
               Costs and Improve Performance (GAO/GGD-95-48, Feb. 27, 1995).

               Federal Lands: Fees for Communications Sites Are Below Fair Market
               Value (GAO/RCED-94-248, July 12, 1994).

               Hawaiian Homelands: Hawaii’s Efforts to Address Land Use Issues
               (GAO/RCED-94-24, May 26, 1994).

               Bank and Thrift Regulation: Better Guidance Is Needed for Real Estate
               Evaluations (GAO/GGD-94-144, May 24, 1994).

               Forest Service: Little Assurance That Fair Market Value Fees Are Collected
               From Ski Areas (GAO/RCED-93-107, Apr. 16, 1993).

               Appraisal Reform: Implementation Status and Unresolved Issues
               (GAO/GGD-93-19, Oct. 30, 1992).

               Resolution Trust Corporation: Better Qualified Review Appraisers Needed
               (GAO/GGD-92-40BR, Apr. 23, 1992).

               Indian Programs: Profile of Land Ownership at 12 Reservations
               (GAO/RCED-92-96BR, Feb. 10, 1992).




       Leter   Page 43                          GAO/RCED-99-165 Rent Appraisals of Indian Land
                   Related GAO Products




                   Rangeland Management: Current Formula Keeps Grazing Fees Low
                   (GAO/RCED-91-185BR, June 11, 1991).

                   Farm Programs: Conservation Reserve Program Could Be Less Costly and
                   More Effective (GAO/RCED-90-13, Nov. 15, 1989).




(141220)   Leter   Page 44                       GAO/RCED-99-165 Rent Appraisals of Indian Land
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