THE SCENE

Progress is afoot in the Nevada desert. Roadgraders and earthmovers scrape at rocky soil. Trucks rumble past, spraying water to keep the dust down. A few miles to the north, the gaudy outline of the Las Vegas strip rises like a mirage above the dirty-blond scrubland.

The heavy equipment is laying the groundwork for a brand new city, one that will bring 18,000 people to this untouched nook of the booming Las Vegas Valley. It will have schools, parks, boulevards, stores, luxury homes, condominiums, apartments, a fire and a police station, a private golf course.

Three years ago, this land belonged to all Americans. Then the government traded it away to an Arizona land broker in an exchange that stands as the most expensive in the history of the U.S. Forest Service. A year ago, federal investigators determined that American taxpayers had been shortchanged $9.8 million.

But that figure only hints at the amount of money that private parties may make on this deal.

To effect the exchange, the Scottsdale, Arizona–based Olympic Group and its associates spent $32 million acquiring 174 acres in Nevada that they would swap to the federal government. In return, Olympic received 2,327 acres of Bureau of Land Management holdings. This land forms the heart of the sprawling desert development now under construction, known as Southern Highlands.

The land is now worth more than $50,000 an acre. Olympic’s initial investment of $32 million has blossomed into holdings valued at more than $100 million.

After an exhaustive investigation of government records, Forest Magazine was able to account for 2,061 of the 2,327 acres that went to Olympic in the swap. The Clark County, Nevada, assessor’s office estimation of the value of that land is $106 million. Appraisers are currently preparing new valuations. Sources in the office said the new values for the majority of the land Olympic received in the swap will jump from $50,000 an acre to $75,000 an acre, effective late December 1999.

That will boost the total value of the land Olympic obtained to at least $139 million—a more than fourfold return on its initial investment.

The current values account only for bare land, not for the construction work that Olympic has already undertaken or for profits the developers stand to reap when Southern Highlands homes go on the market. The true value of Olympic’s holdings may be much higher, given that Southern Highlands homes will be a twelve-minute freeway drive from the heart of Las Vegas. In November, federal land just a bit closer to downtown Las Vegas was auctioned on the open market for more than $90,000 an acre.

Less than three years after it was consummated, this land swap, known as the Zephyr Cove exchange, is a conspicuous example of how private parties have taken advantage of a faulty system to make hundreds of millions of dollars from federal land exchanges in Nevada during the 1990s.

Defenders of this and other Nevada land exchanges say such tallies are unfair because they do not account for the millions of dollars that developers will have to spend to complete developments on the scale of Southern Highlands. And, they say, the environmental benefits of the swaps counterbalance the profits realized by developers.

But the Zephyr Cove exchange went sour on the front end as well. The most valuable property that the federal government received is a 47-acre tract on Lake Tahoe that is now under Forest Service management. The land, formerly owned by mutual fund tycoon Jack Dreyfus, holds a 10,000-square-foot dwelling. The Forest Service at one point intended to have the house torn down to secure the property for conservation and for public access to Lake Tahoe. But that plan went awry. Olympic maintained ownership of the house even after the land had gone to the government. It subsequently sold the mansion to another company. That company is now negotiating with the Forest Service for rights to operate commercial ventures in the mansion. The property may soon be the site of upscale wedding receptions and business retreats.

As for the additional 127 acres that went to the government in the Zephyr Cove deal, all of which is near Las Vegas, federal investigators determined last year that the majority of “these parcels were located between existing residential subdivisions and Federally owned land that was identified for disposal.” The investigators determined that there was no reason for the government to obtain the land.

Larry Sip, a former BLM employee who served as a realty specialist in the agency’s Las Vegas office before he retired in 1997, described the swap this way: “What Olympic did was to just run roughshod over us. It was a piss-poor exchange, to put it bluntly.”

THE PLAYERS

In the 1990s, no metropolitan area in the United States grew faster than Las Vegas. The city, with its ever-more-garish casinos and 310 days a year of sun, is a magnet for retirees seeking a mild climate, entry-level workers lured by service jobs, and affluent professionals cashing in on a thriving economy. With 4,000 people moving into the valley each month, Las Vegas is the hottest housing market in the nation.

But the city is girdled by federal land—land that developers say must be made available to accommodate the city’s brisk growth. The BLM has earmarked about 70,000 acres around the city for “disposal.” Throughout the decade, the agency’s favored mechanism for doing so was through exchanges brokered with well-monied developers and land dealers.

Only a handful of firms have been involved in those exchanges. They include the Phoenix-based Del Webb, one of the largest housing developers in the nation. (Just east of Southern Highlands, Del Webb is building Sun City Anthem, a gated community that will accommodate 30,000 people, partially on land secured through federal exchanges.) Another of these firms is the Olympic Group, which pushed through the Zephyr Cove and several other land swaps during the 1990s.

The point man for Olympic is Guy Inzalaco.

Inzalaco, a former aide to retired Arizona Senator Dennis DeConcini, brokered his first land exchange in the late 1980s. He says he lost money on the deal, which involved property outside Phoenix. Things got better. In the years since, Inzalaco has been involved in perhaps ten exchanges with the federal government. Charles Hancock, the retired chief appraiser for the BLM in Nevada and a vocal critic of land exchanges, claims Olympic has realized spectacular profits. He has tracked down dozens of deeds for land that Olympic received from the government by exchange and then sold. On average, Hancock says, Olympic sold the land less than a year after obtaining it, for more than three times the value that the government had placed on it.

“These people have made one hell of a good living on land exchanges,” Hancock said. “They’re operators. They’re smooth. They know how the system works and they’ve milked it for everything possible.”

Federal employees in Nevada who have dealt with Inzalaco describe him as a tenacious businessman who pushes hard to finish a deal. He distinguished himself from other exchange proponents, those employees say, by showing a willingness to meet the tasks that the government required of him.

“If you went to Guy Inzalaco and said, ŒWe’ve got a problem with this title’ or something like that, he took care of it,” said Ken Stowers, who led the BLM’s lands team before he retired in 1998. “Guy was the ground-pounder who got things done.”

Stowers said that at one point during the Zephyr Cove negotiations, a parcel was found to contain archaeologically significant artifacts. Olympic quickly agreed to contribute $300,000 to help university researchers excavate the site. “Other people may have different views, but I believe Guy did his best to do what we asked him to do,” Stowers said.

But the key to Inzalaco’s success, Stowers and other sources said, is that he knows the deals inside out, always keeping the big picture in focus.

Conversely, the responsibility of overseeing the exchanges on the public’s behalf is divided among far-flung bureaucrats. The Zephyr Cove exchange involved two independent agencies on each end of the deal—the Forest Service and the BLM—as well as numerous midlevel managers assigned to handle various aspects of the swap. Clark County officials, who would ultimately have to contend with the growth that occurred on lands gained by Olympic, also had a stake in the exchange, as did a jumble of other jurisdictions.

THE DEAL

By the fall of 1995, when Olympic broached the Zephyr Cove exchange, Inzalaco was a veteran of the federal land swap game. He knew that the first step to completing a successful exchange is to find private land that federal managers will want to add to the public domain, and then to gain an option on that property or buy it outright. Competition for such parcels is often intense.

Inzalaco knew that the Dreyfus parcel on Lake Tahoe was a plum.

Olympic bought the property for $28 million in July 1996. But the exchange was already well in the works—Olympic had first proposed the deal the previous fall. In December 1995, Robert E. Harris, supervisor of the Forest Service’s Lake Tahoe Basin Management Unit, wrote to BLM District Manager Mike Dwyer in Las Vegas. “I have personally inspected this property,” Harris wrote, “and find the opportunity to place a portion of it into public ownership and control a very exciting and great public benefit.”

But there were difficulties. The most immediate was the disposition of Dreyfus’s mansion. Senior Forest Service officials now say the agency never wanted the building torn down. (Nevada Senator Richard Bryan recently weighed in on the issue, securing a pledge from Undersecretary of Agriculture Jim Lyons that the mansion would not be dismantled.)

Inzalaco’s recollection differs markedly from the Forest Service version.

During the initial discussions, he said, local Forest Service officials wanted the mansion to use as agency office space. Then they backed away from that idea and asked Olympic to tear down the structures. Inzalaco began to put out bids for demolition contractors. At that point, he said, the BLM weighed in, adamantly opposed to tearing down the mansion. “From our standpoint, we said, ŒWhatever you want us to do, we’ll do,’” Inzalaco said. “We just wanted to know.”

Eventually, it was determined that Olympic would maintain ownership of the mansion. In July 1997, Olympic reached an agreement with a Nevada company called Park Cattle Co. to sell the building for $300,000. The deal also gave Olympic two memberships to the nearby Edgewood Country Club, which is owned by Park, and seven weeks’ exclusive access to the mansion during each of the next twenty years. The Department of the Interior’s Office of Inspector General, which scrutinized the deal, put its total value at $3 million.

Meanwhile, attention shifted to the appraisals, which were needed to determine the value of the land involved in the exchange.

Appraisals are key to the exchange process because they determine how much land will change hands. For the proponent, those values are critical. The higher the appraisal, the more land the federal government has to hand over in return. On the other end of the deal, Olympic wanted as low an appraisal as possible placed on the federal land they would receive in return.

For reasons that are unclear, appraisers treated the 47-acre Tahoe property as five parcels instead of one, as it had been sold to Olympic by Dreyfus. An axiom of the appraisal process is, “The smaller the parcel, the more valuable it is on a square-foot by square-foot basis.” (After the deal was finished, the Department of the Interior’s Office of Inspector General determined that the approach was flawed. Subdividing the land was not an option under the area’s governing management plan.)

When appraisals for the Tahoe property were finalized a few months later, the value had jumped to $37.75 million. The Office of Inspector General later determined that figure to be overvalued by $9.8 million, meaning more federal land was given to Olympic than should have been.

Appraisals were also conducted on the BLM land that Olympic would receive in return. BLM officials identified 2,327 acres in the southern Las Vegas Valley, land that was determined to be worth $41.8 million, or $17,980 an acre. To even the deal, Olympic transferred 127 acres it had purchased elsewhere in the Las Vegas area to the government, which was valued at approximately $4 million. (That includes the land next to the subdivisions that government investigators later determined did not meet the criteria established for federal land acquisitions.) Finally, Olympic made a cash payment to the federal Treasury of $153,693.

The date was April 25, 1997. The deal was finished, except, of course, for the ongoing dispute over the fate of the Dreyfus mansion. According to the government’s official ledger, both Olympic and the federal government had given up assets valued at precisely $41,838,693 and had received assets valued at precisely $41,838,693.

THE PRESSURE

Eighteen months separated the day that Olympic first proposed the exchange and the day it was finished. During that period, federal land managers charged with overseeing the exchange faced intense pressure, particularly those who worked in the Las Vegas office of the BLM, which was the lead agency on the swap. That pressure came from many quarters—from Olympic and its supporters, from opponents of the exchange, from the Nevada congressional delegation, from the press, and from various county, state and federal agencies.

One agency that registered concerns about the exchange was the Nevada Division of Wildlife, which questioned the wide gulf in the amounts of land changing hands. On June 20, 1996, the agency’s supervising biologist, Cornelio O. Padilla, wrote to the BLM. “The exchange rate of over [ten acres to one] should also be reviewed carefully,” Padilla wrote (the final ratio was more than 13 to 1). “The lands which would be acquired by Olympic Group, Inc., are highly desirable lands in terms of development potential and would be very valuable. A more equitable exchange rate would be desirable.”

At the same time, Las Vegas BLM officials acknowledged that they had not followed proper procedures requiring public notification that the exchange was in the works. They agreed to extend the appeal period to July 9.

In the four days before that deadline, three formal appeals to the exchange were filed. One was filed by Hancock, the former BLM appraiser, alleging, among other things, that the Las Vegas land should have been sold at public auction. That would have given the federal government plenty of money to buy the Tahoe parcel outright, Hancock said. Another appeal was filed by a homeowner whose property was surrounded by land going to Olympic. The third, filed by the citizen advisory council of the sparsely populated community of Enterprise, where Southern Highlands is located, argued that the development “will effectively isolate most of the residents onto small islands surrounded by housing.”

The BLM had little time to consider the merits of the appeals; the first phase of the exchange was set to close between July 23 and 25. In an undated memo that was apparently issued between July 9 and the targeted closing date, Cheryl Ruffridge, a realty specialist for the BLM’s Las Vegas office, wrote that the “resolution of 3 protests is being prepared for dismissal through the Nevada State Office.” In that same memo, Ruffridge advised that “the transfer of the Dreyfus property to federal ownership has the full support of the entire Nevada Congressional delegation.”

“Their minds were already made up,” Hancock said. “That’s what it amounts to.”

Eventually, that time frame eased somewhat. The first phase of the exchange was finalized on October 9, 1996. But the appeals were dismissed.

During this time, scrutiny of the BLM’s overall land exchange program was heating up. In July 1996, the Office of Inspector General issued an audit finding that the BLM had failed to follow regulations on three prior land exchanges, which led to losses of about $4.4 million. On July 19, 1996, the Department of the Interior, which oversees the BLM, placed a partial moratorium on land exchanges in the Las Vegas Valley. Work continued on six exchanges that were given a “priority” designation. One of those was Zephyr Cove.

Pressure to secure the Tahoe property continued. On September 17, 1996, John E. Upton, chairman of the Tahoe Regional Planning Agency, wrote to Mike Dombeck, then the BLM director, urging that the swap be completed. “Very little of Tahoe’s 72-mile shoreline is available to public use,” Upton wrote, noting that the Sierra lake attracts nearly four times as many visitors as Yosemite National Park. “This is an invaluable opportunity to expand the opportunity of visitors to Tahoe to enjoy the Lake.”

All of this pressure prompted the BLM to put the Zephyr Cove exchange on the fast track. In its 1998 audit of the exchange—the same audit that determined that appraisers had overvalued the Tahoe property by $9.8 million—the Office of Inspector General found that the BLM’s Las Vegas office had issued a notice of decision to proceed with the exchange before the land appraisals “and other required analyses” were completed, in violation of federal regulations.

THE INSIDERS

Land exchanges are not simple affairs. The BLM’s Zephyr Cove files are several feet thick. So are the files in the Clark County government center that pertain to the Southern Highlands development.

For an exchange to be profitable, the proponent must secure the approval of at least two levels of government: the federal, which is responsible for administering the swaps; and the local, which sets the terms for what can be done with the land once it is transferred to private hands. Given this complexity, an intimate knowledge of the political landscape—and of the power brokers who inhabit that landscape—is critical.

Guy Inzalaco shines in this venue.

“I will always be involved in politics—I always have been,” Inzalaco said. “I stay in contact with everybody I know, on a local level and a federal level. I update them, ask advice from them.”

And he gives them money. Records show that since 1997, Inzalaco has donated nearly $10,000 to federal candidates for office, including a $750 contribution to Nevada Senator Harry Reid in 1998. Inzalaco’s partner, Garry Goett, gave more than $11,000 during that time, including $1,000 to Nevada Representative James Gibbons and $3,000 to the Nevada State Republican Central Committee. In 1994, both Inzalaco and Goett gave $1,000 to Nevada Senator Richard Bryan.

Inzalaco said his donations spring from a passion for politics and nothing more. “I’ve never contacted the congressional delegation asking them to move something along,” he said. “I’ve never asked them to support a land exchange.” But in 1996, Olympic paid for a flight to show John Ensign, then a Nevada representative, and his chief of staff the Tahoe property. Ensign said he took the trip because he wanted to evaluate the tract. Inzalaco described the trip as “a fact-finding mission.”

Olympic has been even more charitable to local politicians. According to Clark County records, from 1995 to 1998, Olympic contributed $41,000 to candidates for the Clark County Board of Commissioners.

In 1997, the board gave its approval to the Southern Highlands development.

Inzalaco has shown the same accommodating demeanor to county officials that has won him praise from federal managers. In January 1997, for example, he sent a letter to a Clark County employee confirming that Olympic would cover overtime for work she was doing on their projects at a rate of $37.08 an hour. “As always, thank you for all you do to help us,” Inzalaco wrote. “Your work is greatly appreciated.”

Several rank-and-file BLM employees who are familiar with Nevada land exchanges said they believe there’s a reason that only a few private parties were able to take advantage of the swaps during the 1990s. They’re the ones who enjoy insider connections with higher-ups in the Clinton administration, those employees said. Some even voice suspicions that the mafia is involved, although no evidence has been found to support that.

John Hiatt, a twenty-three-year Enterprise resident who has served as chairman of the town’s advisory board for the past ten years, has heard all the rumors. He voices skepticism when asked if he thinks there’s anything to them.

“There’s no doubt, though, that there has been an opportunity for quite a bit of mischief,” he said. “Basically, we’ve wound up with appraised values that don’t make a lot of sense in the real world.”

THE TALLY

Inzalaco takes issue with the assertion that his company will realize windfall profits from the Zephyr Cove exchange, despite the dramatic disparity between what the land is worth now and what Olympic had to pay to acquire it.

Olympic will spend millions of dollars to extend urban services to what is now barren desert, Inzalaco said—money that taxpayers would likely have had to pay if the area were developed in a piecemeal fashion. For example, he said a flood-control detention basin will cost $10 million, all out of Olympic’s pocket. “This takes expenses away from the county and puts it in the hands of the developer,” Inzalaco said.

After Olympic had taken title to the BLM land, Inzalaco said, the group still had to buy dozens of other parcels to put together a contiguous chunk of property. He said that because the owners of those parcels knew that Olympic needed them to complete the development, they were able to demand greatly inflated prices. Early in the acquisition process, Inzalaco said, Olympic was paying about $30,000 an acre to obtain those parcels. More recently, he said, Olympic has had to pay as much as $200,000 an acre.

“Without acquiring those properties, this development would not have been possible,” Inzalaco said. “They would hold us hostage to whatever demands they wanted to establish.”

Critics counter that the same dynamic also worked in Olympic’s favor. They say the intense demand among land speculators for parcels like the Tahoe property, which can be used as exchange bait, has artificially inflated the values of those properties. That means the government has to trade away more land to secure them.

For now, no new land exchanges are being processed in the Las Vegas Valley. In 1998, after a decade of controversy and public outcry, Congress approved the Southern Nevada Public Land Management Act. Instead of land swaps, the legislation calls for auctioning off the much sought BLM holdings around Las Vegas, using the proceeds to pay for schools, land purchases and water projects. The first auction, held in November, brought in $9.5 million for 105 acres—an average of more than $90,000 an acre. That stands in marked contrast to the $18,000 an acre value that the federal government placed on the nearby land that went to Olympic. (Of the prices paid at that auction, Inzalaco said, “From my standpoint as a developer, I don’t see how those properties are going to pencil out.”)

BLM officials who wrestled with land exchanges during the 1990s voice relief at the new system. “There are a hundred reasons to do land exchanges,” said Gary Ryan, who now works for the BLM in Fallon, Nevada, after an eight-year stint as associate manager of the Las Vegas district. “But I think once you get into an environment where values are going up as fast as they are in Las Vegas, and with so much growth going on, it should be done by auction.”

In the final analysis, the Zephyr Cove exchange amounted to this:

The federal government received forty-seven coveted acres along Lake Tahoe, but the public seems destined to share the space with a private concessionaire. They also obtained more than 100 acres of land that government investigators later determined had no purpose for being added to the federal domain. In return, the Olympic Group and its associates received 2,327 acres of some of the most lucrative undeveloped real estate on the planet—land that is now worth more than $100 million more than the amount Olympic paid to secure it three years ago, and land that will likely appreciate dramatically when it is developed into home sites.

A fair deal?

According to Ryan, the Zephyr Cove exchange had one advantage over other controversial exchanges of the 1990s: it was driven by a well-intentioned desire to secure a piece of property in the public interest.

Says Ryan: “The process should be driven by what the American people are going to get, not what the bureau or another agency is going to get rid of. In that regard, this one was much better than others.”

Hiatt, the long-time Enterprise resident whose rural community will have to deal with the growth brought by the exchange, holds a different view: “Now that the land is privatized, development is inevitable and the nature of this place will totally change. For the taxpayer, the bottom line is that the public takes it in the shorts.”

And Inzalaco? He claims Olympic has done no analysis of how much profit it might make on the swap and the subsequent development. “We’re doing a master-planned community, which is really the direction that Las Vegas wants us to go,” he said. “This development will, hopefully, some day, bring us a return on our capital.”