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Understanding OLV

M&E Appraisal Associates, Inc. (“M&EAA”) is expert at providing machinery & equipment appraisals (as well as inventory appraisals) under the Orderly Liquidation Value (“OLV”) scenario.

Orderly Liquidation Value is defined as “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”. This is the value definition published by the American Society of Appraisers in the text, Valuing Machinery & Equipment (2005).

Inherent in the definition is the disposal of all assets in an “as-is” condition with all expenses of removal and transportation incurred by the buyer. It is assumed that a professionally managed sale would be conducted by a qualified party familiar with the type of equipment and that sale proceedings would begin immediately upon the decision to cease operations. This is extremely important as allowing the subject items to sit idle and unattended for an extended period of time could have a significant negative impact on value.

OLV appraisals are typically utilized by secured lenders for the purpose of determining value for the subject assets which are to be pledged as collateral by a prospective borrower. In many cases, the lender may request the utilization of a definition of value that clearly establishes the time period to be considered for an orderly liquidation. In other cases, the lender may rely on the appraiser to determine the orderly liquidation time period. M&EAA recognizes that the orderly liquidation time period is not to be assigned arbitrarily, as this factor has a significant impact on concluded values.

It is important to further understand that OLV is a gross estimate of value. A net OLV appraisal requires the consideration and reporting of the expenses to be paid by the lender during the duration of the prospective sale. These expenses include but are not limited to: occupancy costs; continued utilities costs; retained employee salaries as well as continued benefits and stay on considerations; orderly sale management fees, etc.

Gross OLV appraisals are most commonly requested by lenders. Even if the appraiser has been specifically contracted to determine the gross OLV of the subject machinery & equipment, it is his or her responsibility to consider the expenses that would be inherent with a realized orderly liquidation sale. Sale related expenses are the primary determining factor in establishing the duration of an OLV sale (both gross and net).

As an appraisal rule of thumb, if the costs associated with a prospective orderly liquidation are determined to be “high”, the orderly sale period should be shorter. If the costs associated with a prospective orderly liquidation are determined to be “low”, the orderly sale period should be longer. A typical orderly sale duration can range from as short as two months to as long as six or even nine months, dependent on variables such as machinery & equipment type, number of locations, overall quantity, and standard versus custom considerations, etc.

In summary, it is the obligation of the appraiser to report the Orderly Liquidation Value (gross or net) that maximizes potential return for the client. It is erroneous for an appraiser to automatically assume a longer orderly liquidation sale period. Expenses are an inherent and unavoidable orderly sale factor, and should be carefully considered by the appraiser in the determination of the appropriate orderly sale time period.

Appraisal Methodology

M&E Appraisal Associates, Inc. (“M&EAA”) prepares all machinery & equipment appraisals, inventory appraisals, and medical equipment appraisals in conformance with Uniform Standards of Professional Appraisal Practice (“USPAP”) requirements. USPAP compliant valuation methodology entails the use of three approaches to value: sales comparison, cost, and income.

Inherent in the valuation process is the adherence to the principal of substitution. The principle of substitution is essentially a method for determining the relative value of an asset. The principle of substitution states that a knowledgeable and willing buyer will not pay more for an asset than the price to purchase a substitute asset that performs the same function or service.

The Sales Comparison Approach –

The sales comparison (or market) approach to value involves the use of market offerings and sales of comparable items in determining the value of a subject property.

The Cost Approach –

The cost approach involves the use of the current replacement cost new of an item, less all forms of depreciation to determine the value of a subject property. Depreciation in terms of the cost approach includes physical deterioration, functional obsolescence, and economic obsolescence.

Physical deterioration is a loss in value stemming from wear & tear, exposure to the elements, etc.

Functional obsolescence is a loss in value stemming from a flaw inherent in the subject property, in comparison to its current replacement. Examples of functional obsolescence include slower output or cycle time, inability to perform a specific function, excess capital or operating costs, and other such factors that may be inherent in a subject property.

Economic obsolescence is a loss in value stemming from external causes. Examples of economic obsolescence include a change in market conditions, government intervention or regulation, changes in reimbursement, and other such factors that are external to a subject property.

The Income Approach –

The income approach is based on the premise that value is a function of the future monetary benefit to be received from the ownership of a property. This monetary benefit, or income, is quantified via capitalization or present value discounting of cash flows to arrive at a value. The income approach is difficult to apply and is not regularly used in the valuation of machinery & equipment or personal property.

Concluding Value –

All value approaches are considered as part of the machinery & equipment appraisal process. The sales comparison and cost approaches are typically utilized in determining the value of machinery & equipment. Market information relied upon as part of the sales comparison approach generally includes recent sales or current sales offerings for comparable items. Original equipment manufacturers (“OEM’s”) are typically contacted to determine replacement cost new as part of the cost approach analysis. The appraiser’s knowledge resulting from the valuation of similar machinery & equipment is also typically applied. After the consideration of three approaches to determining value and all relevant data and information, values are then concluded by the appraiser.

Understanding USPAP

M&E Appraisal Associates, Inc. (“M&EAA”) prepares all machinery & equipment appraisals, inventory appraisals, and medical equipment appraisals in conformance with Uniform Standards of Professional Appraisal Practice (“USPAP”) requirements.

USPAP is a set of Standards that is applicable for most appraisals prepared in the United States. USPAP was developed by the Appraisal Standards Board (“ASB”) of the Appraisal Foundation. There are 10 Standards associated with USPAP. Standards 7 and 8 establish requirements for the development and reporting of personal property appraisals and are therefore applicable to machinery & equipment appraisals, inventory appraisals and medical equipment appraisals.

M&EAA appraisals at a minimum contain the following USPAP Standards requirements: the identification of the client and any intended users; a statement of the effective date of the appraisal and the date of the report; a statement of the purpose of the appraisal, including the type and definition of value and its source; identification of the intended use of the appraisal; a statement of all assumptions, hypothetical conditions and limiting conditions that affected the analysis, opinions and conclusions; a summary the information analyzed, the appraisal procedures followed, and the reasoning that support the analysis, opinions and conclusions; the inclusion of a signed certification by the appraiser.

In addition to the 10 Standards, there are also basic rules in the Preamble section of USPAP. These include but are not limited to the Ethics Rule (which encompasses the Conduct, Management, and Confidentiality Sections), Record Keeping Rule, and Competency Rule. These rules establish the basic requirements for the ethical conduct of USPAP compliant appraisers.

The Ethics Rule is intended to promote and preserve the public trust. Within the Ethics Rule are the Conduct, Management and Confidentiality Sections.

The Conduct Section deals with the performance of an appraisal and the appraiser’s ability to be impartial, objective, and independent and to not have any personal interest in appraisal assignment. Pursuant to the Conduct Rule, the appraiser “must not communicate assignment results with the intent to mislead or to defraud” and “must not perform an assignment in a grossly negligent manner.” In regard to any personal interests in the property, the appraiser must disclose to the client any current or prospective interest in the subject property or parties involved.

The Management Section primarily details five issues relevant to the appraiser/client relationship. An appraiser can never accept an assignment that is contingent upon: reporting a predetermined opinion of value; a direction in value that favors the cause of the client; the amount of a value opinion; attainment of a stipulated result; the occurrence of a subsequent event directly related to the appraiser’s opinions and specifics in the assignment’s purpose.

The Confidentiality Section states that he appraiser must not provide anyone with any confidential information that the client provides to the appraiser, and most importantly, must not disclose a value to anyone other than the client and any other intended users of the appraisal.

The Record Keeping Rule refers to the retention of the appraiser’s work file. The appraiser must prepare a work file for each report prior to its delivery to the client. The work file can be in a printed format or an electronic format but it must have the necessary and required information outlined in USPAP.

The Competency Rule applies to the appraiser prior to the acceptance of an appraisal assignment. The appraiser must determine if they are competent to perform the assignment. If not competent, the appraiser must acquire the necessary competency to perform the assignment, or decline the assignment. Competency requires the knowledge, experience and ability to perform the appraisal assignment.

M&EAA machinery & equipment appraisals, medical equipment appraisals and inventory appraisals are prepared in compliance with USPAP requirements. In addition, M&EAA appraisers and associates are current with all continuing education and testing requirements.

Definitions of Value

M&E Appraisal Associates, Inc. (“M&EAA”) has extensive experience preparing machinery & equipment appraisals, medical equipment appraisals, and inventory appraisals under various definitions of value. The intended use of an appraisal dictates which definition of value is applicable to a specific assignment. M&EAA utilizes or bases its definitions on those published by the American Society of Appraisers (“ASA”), specifically relating to Machinery & Technical Specialties Assets.

Per the ASA, these definitions are offered to provide the fundamental value concepts; they are not the only acceptable definitions, since contracts or jurisdictions may dictate somewhat different philosophies. Therefore, these definitions may be expanded or refined as the purpose and function of an appraisal dictate, as long as the fundamental concepts are not altered. In other cases, the laws of a country, state, region, or regulatory agency may require other terms, which therefore would take precedence over the definitions shown here. Machinery & equipment value definitions, as defined by the ASA, are provided as follows:

ASA Definitions of Value –

Reproduction Cost New is the cost of reproducing a new replica of a property on the basis of current prices with the same or closely similar materials, as of a specific date.

Replacement Cost New is the current cost of a similar new property having the nearest equivalent utility as the property being appraised, as of a specific date.

Fair Market Value is 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.

Fair Market Value in Continued Use with Assumed Earnings is 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 and assuming that the business earnings support the value reported, without verification.

Fair Market Value in Continued Use with an Earnings Analysis is 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 and supported by the earnings of the business.

Fair Market Value – Installed is 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, considering market conditions for the asset being valued, independent of earnings generated by the business in which the property is or will be installed, as of a specific date.

Fair Market Value – Removed is 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, considering removal of the property to another location, as of a specific date.

Liquidation Value in Place is an opinion of the gross amount, expressed in terms of money that typically could be realized from a properly advertised transaction, with the seller being compelled to sell, as of a specific date, for a failed, non-operating facility, assuming that the entire facility is sold intact.

Orderly Liquidation Value is 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.

Forced Liquidation Value is 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.

Salvage Value is an opinion of the amount, expressed in terms of money that may be expected for the whole property or a component of the whole property that is retired from service for possible use elsewhere, as of a specific date.

Scrap Value is an opinion of the amount, expressed in terms of money that could be realized for the property if it were sold for its material content, not for a productive use, as of a specific date.

M&EAA Definitions of Value –

M&EAA relies on the ASA definitions previously stated, although the published definition is not always used verbatim. Commonly utilized machinery & equipment value definitions, as defined by M&EAA, are provided as follows:

Replacement Cost is the current cost new, including installation, of a similar new property having the nearest equivalent utility as the property being appraised. This differs from Reproduction Cost which would entail the current cost of an exact replica of the property being appraised.

Fair Market Value-Installed is the anticipated selling price which would be agreed upon between a willing buyer and a willing seller for all items under prevailing market conditions and including installation. Neither party is considered to be under duress. Both parties are assumed to be knowledgeable and aware of all relevant facts affecting the selling price. No warranties or guarantees are assumed to be provided by the seller and all items are sold on an “as is” basis. It is assumed the subject equipment would be available for continued use at its present location.

Fair Market Value-In Continued Use is the anticipated selling price which would be agreed upon between a willing buyer and a willing seller for all items under prevailing market conditions and including transportation and installation. Neither party is considered to be under duress. Both parties are assumed to be knowledgeable and aware of all relevant facts affecting the selling price. No warranties or guarantees are assumed to be provided by the seller and all items are sold on an “as is” basis. It is assumed the subject machinery & equipment would continue to be operated at its present site and that the business earnings support the concluded value.

Fair Market Value is the amount, expressed in dollars, which could reasonably be expected to exchange between a willing buyer and a willing seller with each aware of any factors affecting value or utility and with neither under compulsion to buy or sell. It is assumed that all items would be sold “as is, where is” and without any warranties or guarantees provided. The values concluded assume that all items would be removed from their existing location and that the related removal and relocation expenses would be incurred by the buyer(s).

Orderly Liquidation Value (Machinery & Equipment) is the estimated gross dollar amount which could typically be realized from an orderly sale of the subject assets on a negotiated basis, held under forced or distressed conditions, with a limited marketing period. Inherent in the definition is the disposal of all assets in an “as is” condition with all expenses of removal and transportation incurred by the buyer. It is assumed that the sale would be conducted by a qualified broker familiar with this type of equipment. The specific time period for an orderly liquidation will vary based on the type and quantity of machinery & equipment under consideration. M&EAA’s appraisal reports will state the anticipated orderly liquidation time period.

Orderly Liquidation Value (Inventory) is a professional opinion of the gross sales that the inventory would typically realize in a negotiated sale, properly advertised and professionally managed, by a seller obligated to sell, with a limited marketing period. The ability of the inventory to draw sufficient prospective buyers to assure competitive offers is considered. It is assumed that all of the inventory will be sold on a piecemeal basis “as is, where is” with the purchaser(s) being responsible for removal at their own risk and expense. In the event of sales to existing customers, shipping and terms would be consistent with the historical relationship. M&EAA’s appraisal reports will state the anticipated orderly liquidation time period. The definition of value originated from a national commercial lender, specific to inventory appraisals. The definition has been adopted and amended M&EAA for use in inventory appraisals.

Forced Liquidation Value is the estimated gross dollar amount which could typically be realized from a properly advertised and conducted public sale held under forced or distressed conditions and with a sense of immediacy. Inherent in the definition is the disposal of all assets in an “as is” condition with all expenses of removal and transportation incurred by the buyer. It is assumed that the sale would be conducted by a qualified seller with experience in selling this type of equipment. M&EAA’s appraisal reports will state the anticipated forced liquidation time period.

Fair Value is the amount at which the asset or liability could be bought or sold or incurred or settled in a current transaction between willing parties (i.e., other than a forced or liquidation sale). Thus the fair value of the reporting unit refers to the amount that the whole unit could be bought or sold for in a current transaction between willing parties. Based on recent published Financial Accounting Standards Board (“FASB”) statements, it is the opinion of M&EAA that the Fair Value of the machinery & equipment, as part of an operating business unit, is the value of all items installed and available for operation. Accordingly, Fair Value is then analogous to Fair Market Value-In Continued Use Value as defined by M&EAA. As previously stated, M&EAA’s value definition is based on the published definition of Fair Market Value-In Continued Use with Assumed Earnings as set forth by the ASA. Although the ASA definition is not used verbatim, M&EAA’s definition includes the basic tenets of the published definition, namely a willing buyer and a willing seller; values include installation; and the assumption that the concluded values are supported by the business earnings.

Appraisal Report Types

M&E Appraisal Associates, Inc. (“M&EAA”) has extensive experience preparing both standard or traditional machinery & equipment appraisals and desktop appraisals.

“Standard” Machinery & Equipment Appraisals –

A standard or traditional machinery & equipment appraisal includes an on-site inspection of the subject items. By utilizing this methodology, the appraiser has the opportunity to physically inspect the subject items and gather requisite information relevant to the appraisal process. During an on-site inspection, the appraiser typically identifies and notes the subject by type, make/manufacturer, model, serial number, age, size, capacity, controls, associated components, observed upgrades or rebuilds, and opinion of condition.

The estimation of condition by the appraiser is an integral component and advantage of the on-site inspection process. Condition codes are subjective, and are based primarily upon appearance. The appraiser assumes no liability for actual condition and provides no warranty or guarantee therein. Typical conditions and definitions are as follows:

New – item in new condition.

Excellent – some use, but almost new.

Very Good – in above average condition; low hours or miles, or recently overhauled or refurbished.

Good – average or as would be expected for items of similar age and utility.

Fair – in below average condition; has seen considerable use or is an older item.

Poor – needs major repairs; may or may not be operable.

Scrap – scrap value only with value adjusted to reflect any cost of removal.

A standard on-site machinery & equipment appraisal is the more common of the machinery & equipment appraisal types.

“Desktop” Machinery & Equipment Appraisals –

A desktop machinery & equipment appraisal does not include an on-site inspection of the subject items. A desktop appraisal is a method of analysis which identifies and values the subject items without the benefit of inspecting them.

The appraiser specifically relies on information provided by the client and/or the subject company as the basis for this type of appraisal. The appraiser presumes the information to be accurate. By definition, a desktop appraisal may not contain the detail and content that would be normally included in a standard or traditional appraisal. In order to contemplate a desktop machinery & equipment appraisal, the information provided must be considered sufficient to accurately identify the subject items for the purpose of developing credible appraisal results. If the information is not considered sufficient to ascertain credible appraisal results, a desktop approach should not be utilized.

All M&EAA appraisals (both traditional and desktop) are provided in the format of a Restricted Appraisal Report and are intended to comply with the reporting requirements as defined under Standards Rule 8 of the Uniform Standards of Professional Appraisal Practice (“USPAP”). As such, M&EAA presents only summary discussions of the data, reasoning, and analyses that are used in the processes to develop the appraiser’s opinion of value. Supporting documentation that is not provided with the appraisal report concerning data, reasoning and analyses is retained in the appraiser’s file.