The Role of Appraiser as Trusted Adviser

Originally published: November 1st, 2018
by John Hagist, Controller & VP of Appraisal Services | Loeb Appraisal

How often are appraisals ordered simply because they are needed for the file? Of course, the client is going to qualify for financing regardless of the results of the appraisal. Their balance sheet alone indicates that a Forced Liquidation Value (FLV) or Orderly Liquidation Value (OLV) appraisal result will come back with a number more than sufficient to get the deal done. How often does a lender indicate the hoped-for results when ordering the appraisal?

And how often do the results come back and not support the financing contemplated? How often does an appraiser hear that they issued a "poor" report because the lending institution now cannot finalize funding because the opinion of value rendered is surprisingly different than expected?

A recent example of an appraisal in the Oil and Gas space was clearly showing FLV on the summary page but buried many pages later in the fine print was the full definition. But that appraiser, perhaps only in this instance, was defining FLV as a two-year sale process. This is clearly outside the "norm" in terms of standard definitions of FLV.

The current economy is vibrant and busy; auctions are active and procurement departments are spending their budgets. IMTS this year was, by many reports, one of the more active shows in regard to generating orders. As such, OEM lead times are creeping up because of the strong demand. And Pack Expo experienced similar activity. All indications, at surface level, are that this vibrancy will continue for an extended period of time. Orders are being placed now for equipment to be delivered over the next several months. It is this same vibrancy that is creating an illusion of value when appraisals are being ordered. Everything is "good," therefore values must be at an all-time high—and, of course, no appraisal should come in low.

This is exactly the time to use your preferred appraiser or appraisal firm as a trusted resource. Do not just use an appraisal as a justification to do a deal. Instead, use the appraisal as a tool to understand and mitigate the risk when the deal is funded as well as for the risk later during the course of the term.

It also is important to use an appraiser that has a deep understanding of the industries they are appraising, and one that knows well the industries that are not in their bailiwick. Appraising tends not to be a one-size-fits-all approach. When a firm asserts they can provide valuations within all industries, there is a high probability that it may be operating at the fringes of, or outside of, its area of equipment expertise.

All values in every sector are not consistent. There are industries seeing consistency in values while others are seeing significant year-over-year depreciation. Ask your appraiser the following questions:

• Does my client have multiples of the same equipment that will affect the opinion of values?
• What does the market absorption look like for these assets?
• How should this facility best be liquidated? Is it just a matter of running an auction and being done, or should there be a period of time included for orderly liquidation or private treaty sales prior to auction?
• How long can access and time on site be obtained? What is reasonable? Many lenders ignore or do not put the proper emphasis on access. This can greatly change the liquidation strategy and overall results.
• What are the actual definitions of FLV and OLV being used in the appraisal report? Is there a clear statement upfront of definitions, as well as the time period used for valuation? Are those in line with industry standards? Are these assets going to decline in value fairly consistently or are they in an industry seeing tumult? What does the future value look like?

Lenders need to be careful for what they are asking. They need to order a report, gain an understanding of the results and engage in a dialogue with both the appraiser and their client if the appraised value is causing a change in the planned financing structure.

The appraiser should remain neutral from a value perspective and be a trusted advisor to the client ordering the appraisal.

The State of the Evolving Manufacturing Sector

By John Hagist
Controller, VP Appraisal Services
(773) 496-5744
johnh@loebequipment.com

This article was originally published on October 24, 2017 by Equipment Finance Advisor – www.equipmentfa.com

As a firm that actively engages in the buying, selling, auctioning, appraising and financing of used industrial assets, the questions we’re being asked the most these days are “what is the state of the manufacturing sector? What has been happening in the past quarter? What about the past year?” Our firm’s core focus and area of expertise is strictly from the machinery and equipment market, so we couldn’t begin to comment on a manufacturer’s ability to innovate during these odd market times. However, the historical notion is that when the new equipment market stagnates there is greater movement in the used market.

It’s important to understand that any capital-intensive industry such as industrial machinery is cyclical.

On a simple and practical basis, this translates into monies being spent and invested in hard assets are with a long-term plan in place. Investments in capital assets are made to increase production or efficiency or both. So, what happens when it’s not the best of times or there isn’t a clear path? Companies squeeze and wait, buy used equipment, or replace components to keep machines running and buy new when there is no other option.

One year ago was the lead up to one of the more hotly contested and divisive Presidential elections in history. The normal trend is that in the run up prior to an election there is a collective holding of the breath and a small wait and see attitude is adopted. Last year was clearly no different than past elections. Okay, it was! The result is firms are still waiting and still holding their breath, to a large extent.

Earlier this year PwC published an article on manufacturing trends stating that the International Monetary Fund (IMF) predicts just a 3.4% increase in the global demand for manufactured goods in 2017. Here we are early in the 4th quarter, a year into this new administration, and politics is still getting in the way of business, and companies are still waiting. However, they still need to produce products, earn revenues, grow their businesses and keep innovating.

No one can wait in a vacuum, and that is why the economy is still chugging along.

What are we seeing in the marketplace?

From an appraisal perspective, it’s been noted that many firms have pushed their equipment to the very end of its replacement cycle. This continues to affect opinions of value. The value trend over the last several years has been that to retain any significant value, equipment must be newer. Generally speaking, ‘old’ used to mean a manufacture date of ten years or more, but over time that has moved to seven years, and now, in some cases, that is coming to mean five years or older. There is a value perspective wherein if equipment is expected to trade on the used market under the concept of Forced Liquidation Value or Orderly Liquidation Value, there is little value remaining for this older equipment. New equipment needs to be five years or younger from a hard components perspective. Controls/PLC’s and technology can and do move the value curve. If the equipment is kept current, maintained well and kept in use it can hold its value longer.

Repeat appraisals over the last year are showing little investment in new assets, but are showing continued investment in existing plant assets or the recognition that the equipment they have in place will need to hold up as long as possible before consideration is given to purchasing new. Obviously there are exceptions.

Almost a year has passed since the election and companies are now starting – only only very recently – to spend and invest. There is an overwhelming sense of political uncertainty in all three branches of our government, it’s likely we will see changes in NAFTA, and potentially even a wall being built. Divisive attitudes are still at play and will continue to shape the national dialogue as well as expenditures in the manufacturing space, and this will continue to be reflected in appraised values.

The equipment financing perspective ties closely into the opinion of the appraisal market, as most often the appraisal clients are either banks or finance companies. It would be bold to suggest that from a lending perspective, there have been few lessons learned from 2007 and 2008. There is an abundance of ‘dry powder’ and financial institutions are fighting to lend every dollar they can in a buyers’ market. Deals are being chased downstream. Smaller banks are lending into deals where the previous norm wouldn’t permit them to do so, but would instead be financed by non-bank lenders, and that trend now continues all the way up into the major banks.

The used industrial asset marketplace remains cautiously busy for all the reasons previously mentioned. The competition this last year has not, for the most part, been against the client choosing to purchase a new piece of equipment rather than used, but instead has been against the client waiting to purchase regardless of new or used. Activity remains steady because firms need to replace, improve efficiency and/or increase production and they are looking to do so in the most economically efficient way possible. Often the used industrial asset dealer can supply the needed asset faster than the OEM and though it may not be exactly the specs desired, it can be close enough to the desired output needed and available now for often a fraction of the cost.

Manufacturing investment became hesitant starting months before the 2016 election and it has continued to remain hesitant thus far in 2017. The sector will remain hesitant. Consolidations will continue, redeployment of existing assets will continue, plant closures will continue, squeezing out greater efficiencies will continue and the usage of assets that are at or past their replacement time won’t end anytime soon. That being said, new expenditures are just starting to occur, investment is happening, new lines are being installed, new controls to make lines more efficient are being purchased and both new and used equipment orders are happening. While there are still concerns about the financing that is available, that financing is starting to drive the industrial space. 

Why the Accuracy of the Asset List is Paramount to the Overall Valuation

By John Hagist
Controller, VP Appraisal Services
(773) 496-5744
johnh@loebequipment.com

Loeb takes a proactive approach to ensuring the assets reported in our valuations are correct and that the list is complete. An integral step in this approach is our Asset Verification Process. Upon completion of the field inspection, Loeb issues an asset verification list back to the facility with two primary questions in mind.

First of all, is the list complete? It’s not necessarily a concern that the appraisers may have “missed” something, but more that the facility didn’t show everything. There could be additional assets at an offsite location, currently being rebuilt or at a co-packers facility, but that should also be included with the report.

Secondly, are all the assets owned outright or are there any leased assets? It’s most common that equipment within a facility belongs solely to a customer, but often times major assets or newly installed lines are leased. Regardless of ownership, we leave the assets within our report, and make sure they are clearly identified as “Property of Others” or “Leased.” While it doesn’t factor into the overall value of the facility, leaving all the assets in the report regardless of ownership, removes any question of whether the assets were inspected and what is the status of each asset is.

As an example, Loeb recently appraised a contract packaging facility in which a complete production line was owned by one of their clients. If that had not been disclosed during this asset verification process, there would be have been an additional $750,000 in value left in the appraisal which would have distorted the overall opinion of value.

With every engagement comes the distinction of whether the appraisal client is in search of a complete report or just a report delivered quickly. Obviously it’s the nature of business today to want to turn around information an expedient manner, but as accredited valuation experts, first and foremost we stake our reputation on providing a complete and accurate report. While it may seem like just an extra step the final hurdle to issuing the final report, the asset verification process is integral to issuing the most accurate and complete appraisal as possible.

Equipment valuations for industrial facilities of all sizes!
Contact Loeb for all your Appraisal needs!

Learn More About Loeb Appraisal ›

Valuation Expertise: Going Beyond Just the Written Report

A typical appraisal is a snapshot of a specific group of assets with an opinion of value rendered as of a specific date. However, the standard appraisal report does not capture all of the additional valuation work that is performed by the appraisal firm. Behind the scenes, there are often a number of additional scenarios discussed with the client.

Our relationship with our clients is paramount for us and they often call with a large list of questions and scenarios dealing with not only the specific industry but also the specific assets, typically long before an engagement letter is signed. Often, these hypothetical conversations provided are sufficient to give the client the quick input needed to keep them going with their deal. If the client is a bank, they may ask why they should continue to chase a deal if all the expectations of the client are unrealistic compared to the value of the assets. If the client is an end user wanting to purchase assets coming off lease they want to investigate the realistic pricing.

"Being able to use Loeb and their expertise as a sounding board early in our credit decisions is invaluable to our business. Because Loeb not only appraises but also actually sells assets, we see their expertise as grounded in real world application."

Because of our day to day transactions buying, selling, auctioning, financing and appraising industrial assets, our relationships don't start nor stop at a signed report. The industrial marketplace is fluid and fast moving. By being able to give a client insight into an asset or asset class early in the process, it helps them to achieve or retain the competitive edge in the transaction being reviewed. The earlier the knowledge is gained, the better.

Equipment valuations for industrial facilities of all sizes!
Contact Loeb for all your Appraisal needs!

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Real Asset Knowledge Trumps a Typical Report

Are you sure your last appraisal was accurate?

Banks hire appraisal firms because they want an opinion of value. Why? The majority of banks in today's banking climate, even when they identify themselves as an asset based lending group, they are, in fact, effectively cash flow lenders. The assets, as collateral, are important, but the focus of the lender is on the borrower's ability to service their debt and not necessarily on the actual value of the underlying collateral.

Special Asset Groups within banks hire appraisers for a different purpose. They hire because the possibility of actually liquidating the underlying collateral has increased significantly and now the bank needs to truly understand the value of the collateral as a priority of the then existing lending relationship.

It is no longer an ABL theoretical exercise but rather a practical exercise of what may happen.

For this reason, regardless of the group within the bank and regardless of the overall size percentage of the lending relationship the M&E represents, it is important to engage a firm that is actively trading, selling, buying, and auctioning the types of assets being appraised as collateral because when it is time to sell it is time for them to prove their values. You can't compare values if one firm does the appraisal and one does the auction.

Loeb recently completed a sale of a group of equipment previously appraised for several years. Two things occurred. The sale substantiated the prior opinion of value and also, because of that sale, we were then engaged to appraise other equipment in the same industry. Actual sale results are the best basis for a real world opinion of value.

There are many firms that produce reports that look great, but they are not actively trading those assets.

A firm that engages in performing inventory appraisals may not be the right firm to perform an M&E valuation and visa versa. Hire an expert in the area that an opinion of value is needed. It is challenging to be an expert in everything.

The right firm for your engagement is the firm that openly specializes in certain fields and doesn't perform appraisals in others. The Loeb difference is our day-to-day involvement in the marketplace which is critical when it comes to true asset valuations. As an active participant in the market from multiple disciplines, our appraisals are based on actual transactions of buying, selling, financing, and auctioning industrial assets applying real world analysis to our approach.

Equipment valuations for industrial facilities of all sizes!

Contact Loeb for all your Appraisal needs!

Learn More About Loeb Appraisal ›

Preservation of Value vs. Value Enhancement: What does money spent mean to value?

By John Hagist
Controller, VP Appraisal Services
(773) 496-5744
johnh@loebequipment.com

Fixed asset registers are an interesting list. Every time a business makes a purchase, the decision needs to be made if the purchase is being capitalized and subsequently added to the fixed asset register, or if the purchase is expensed, thereby having an effect on the P&L of the business. The Sarbanes-Oxley act (particularly sections 302 and 404) added to each businesses decision making process.

When Loeb Appraisal is engaged to perform a valuation on a facility, the facility will often send over their fixed asset list so that there’s a mutual understanding of the overall facility and the scale and scope of assets involved.

These lists can be both helpful and misleading at the same time.

Recently, we’ve encountered experiences where prior Loeb appraisals have been used for purchase price allocation purposes and where the appraisal list has been uploaded into the fixed asset register software. After a month or two, the next purchase on the register reads as “Replacement Motor” at a cost of $7,500. A machine already on the list has a motor that is now being replaced? When the purchase is a maintenance-related expenditure, it is NOT an enhancement to value but rather a preservation of the original value.

In simpler terms, if you buy a $10,000 used car and get into an accident where repairs will cost you $4,000 to fix it to pre-accident conditions, the car isn’t valued at $14,000, it’s still just a $10,000 car. This is the fallacy that often occurs with assets in these registers.

When a company purchases a new or used piece of equipment for $75,000 (as an example) they capitalize the purchase and add it to the register. They put it into service and begin using it. Throughout its use wear parts and service are purchased and expensed as “Preventative Maintenance” or “Cost of Goods” expenses. A replacement motor is purchased and added to the fixed asset registry. Is any consideration being made to expensing the balance of the cost of the motor that is being replaced? In short, usually not…

Change parts are also interesting because they often cost quite a bit but do not always have as large a value from the appraisal perspective especially when the dies or parts are customized or specific to the product being produced. There is little to no resale value if it can’t immediately be put into service for another end user.

Fixed asset lists need to be read and reviewed with a critical eye and understanding that there is not a straight translation into current market value regardless of the definition of value the appraisal is opining on.

Equipment valuations for industrial facilities of all sizes!

Contact Loeb for all your Appraisal needs!

Learn More About Loeb Appraisal ›

Idle, Seasonal, or Truly Surplus: Equipment Bone Yards are not Bank Accounts

By John Hagist
Controller, VP Appraisal Services
(773) 496-5744
johnh@loebequipment.com

Recently Loeb Appraisal has been fielding the following question as it pertains to equipment valuations: What, in the appraisers opinion, is truly surplus equipment versus idle or seasonally needed equipment?

Traditionally, appraisal clients request gross value regardless of whether it was gross forced liquidation value (FLV) or gross orderly liquidation value (OLV). The logical progression, dictated by the late 2000’s, is that clients have now started requesting net values and want to see the calculations to understand how net values were achieved. This came from when liquidation occurred and no one was “achieving” the reported appraised opinion of value. Net values have helped tighten that range considerably.

Every manufacturing facility has some amount of surplus, idle, and/or seasonal equipment. The question then becomes: does the facility need this equipment for ongoing business purposes or is the equipment being retained so it can be leveraged?

Our financial clients are straight forward with the facilities and maintain the position there are no issues with a standard advance rate on necessary idle or seasonal equipment, but they are not always prepared to advance at the same rate on truly surplus equipment.

This “bone yard” of assets is only getting older and continues to lose value. Better that it is turned into cash now as opposed to later. This discussion is an open process with both the facility and our client. Often times there is a difference of opinion in terms of these assets that need to be discussed and worked through.

Loeb Appraisal has the ability to work through these issues with the facility. Our day-to-day involvement in the marketplace is critical when it comes to true asset valuations. With Loeb as an active participant in the market from multiple disciplines, our appraisals are based on actual transactions of buying, selling, financing, and auctioning industrial assets. We apply these real world values and analysis to our approach.

The more questions asked, the more knowledge that can be obtained from an equipment appraisal. Always ask!!! Our goal is always to make the assets within the appraisal as accurate and clearly defined as possible for our clients.

Equipment valuations for industrial facilities of all sizes!
Contact Loeb for all your Appraisal needs!

Learn More About Loeb Appraisal ›