Heavy Machinery Valuation Terms: Clearing Up Confusion for Lenders1/2/2020
Agriculture is a major industry in the US and a significant contributor to the economy of almost every state. The diversity of the industry requires a wide variety of equipment types for production and harvesting. Ag equipment is often financed through collateralized loans and leases. Ag lenders consider both credit worthiness as well as collateral value in their credit decision. Credit officers tend to utilize forced liquidation value (FLV) or orderly liquidation value (OLV) as the collateral component of their risk decision depending on the financial institutions exit strategy. Institutions that plan to liquidate collateral at auction will normally incorporate FLV numbers into the decision process. Remarketing is dependent on partnering with third party auction firms to liquidate their gear. This model reduces their realizations which will affect pricing making them less competitive. Institutions that deploy a more robust recovery efforts or remarketing effort will normally incorporate OLV into the decision process. In this ever increasing utilization of the internet to remarket recovered gear, OLV is becoming the preferred indicator of the recoverable amount from the sale of the equipment. These institutions will use consignment or sell to an internal dealer network or internet auction. Many institutions are managing their own remarketing web sites to avoid the cost of commissions paid to third parties. This model also requires current FMV information to set asking prices with the objective of negotiating a sale that will exceed OLV. This increases their realizations resulting in more competitive pricing.
Lenders should understand that determining these values can be a complex analysis based on different metrics for each equipment type including usage / hours, engine size, useful lives, and depreciation. To achieve a creditable analysis asset managers rely on recourses that aggregate sale information from multiple sources. Lenders should also be aware that these values reflect the gross proceeds expected to be realized on a sale. Appraisers may adjust for selling costs so lenders will have a net value. Strong terms and conditions are also required to insure proper routine maintenance and usage parameters. Lenders should rely on experienced ag appraisers with expertise in ag valuation.
FLV – An opinion of the gross amount, expressed in terms of money, that typically could be realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy on an as-is, where-is basis, as of a specific date. Source ASA
FLV assumes a public auction sale within 60 to 90 days of return. This short remarketing period assumes a sale to the first available buyer resulting in a lower sale price. It does not included recovery or selling costs incurred in the process.
OLV – An opinion of the gross amount, expressed in terms of money, that typically could be realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date. Source ASA
OLV implies an “orderly” liquidation that allows for a reasonable time to expose the asset to the market in order to obtain the highest sale price assuming “as is” condition. Minor repairs can be made but essentially the asset is offered in the condition it is returned. Although there isn’t the urgency to sell the asset, it does reflect that the seller must liquidate the asset. Selling costs are not included in the OLV.
FMV – An opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date. Source ASA
FMV implies obtaining the highest price possible because it assumes the buyer needs the equipment and the seller wants to sell the equipment but neither is compelled to act.
SVP Valuations, Montrose Global Assets, Inc.
Montrose Global Assets, Inc. is a full service asset management firm serving the financial services industry. We are a team of seasoned professionals with extensive experience, knowledge, and expertise in valuing and remarketing commercial, industrial, medical, agricultural, construction, and transportation assets.