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!

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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 ›