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Six things that cost lenders money in an equipment appraisal
Most equipment appraisals reach the credit file without trouble. The ones that cost money tend to share a short list of problems. Each one is easy to check.
Item 1
Leased equipment in the totals
Newer, high-value machines are often leased. When they are valued with owned equipment, collateral is overstated by the full value of those units. A lender cannot take a lien on them. Look for a separate schedule of leased and third-party items, excluded from the totals.
Item 2
Software and intangibles valued as equipment
CAD/CAM, ERP and practice management licenses sometimes appear on the asset schedule with a value. They are intangible assets. They do not transfer the way equipment does and they have little liquidation value. They belong in a business valuation, not an equipment collateral total.
Item 3
Real property counted as equipment
Walk-in coolers, dry kilns, hood systems, foundations and building services can be part of the real estate. When they are valued as equipment, the same value may also sit in the real estate appraisal. The report should identify fixtures and say how they are treated.
Item 4
Liquidation values set by formula
A report that sets orderly liquidation at a fixed percentage of fair market value for every item has not tested the market. Liquidation recovery varies widely by asset class. Look for support from auction results and dealer data, and for a stated exposure period.
Item 5
The wrong definition or premise
Many bank policies require fair market value as defined in Revenue Ruling 59-60. Reports often cite another definition, or report a premise that does not fit the loan. An acquisition loan and a workout need different premises. The definition and premise should match the engagement.
Item 6
Scope and math that do not tie
A desktop report that certifies a personal inspection. A schedule total that does not match the transmittal letter. Liquidation costs deducted twice. These are clerical, but they make it hard to rely on the conclusion. The scope statement, schedule and summary should agree.
Checklist
A short checklist for the credit file
- Leased and third-party items excluded.
- No software or intangibles in equipment totals.
- Fixtures identified.
- Liquidation values supported by market data, with an exposure period.
- Definition and premise match the policy and the loan.
- Scope, schedule and summary agree.
Have an assignment?
Send the asset list or company name and the intended use. You will get scope, fee and timing back by email, the same business day.