Net recovery by understanding the true costs involved in liquidating or auctioning a credit.
Many focus on gross appraisal values but now need to pay more attention to the rising unrecoverable costs of liquidating a facility. Net values have become more mainstream as more lenders focus on the final results.
Loeb now asks every facility appraised for a variety of facility costs on a 1-month basis. We ask for such things as:
- Rent/mortgage payment and Real Estate Taxes
- Utilities & Maintenance
- Any other recurring miscellaneous expenses, such as waste water permits or costs associated with purging the product from the system
*Assumed three (3) months FLV and six (6) months OLV
Looking at our database we have normalized the average utilities at 10% of costs under production for an idle facility. In calculating Net FLV we assume 3 months of expenses and 6 months of expenses for Net OLV. Furthermore, given our auction expertise, we additionally estimate marketing, setup and selling expenses.
Below is an example from an actual appraisal recently performed where the Net OLV is less than the Net FLV. This is not uncommon though surprising to lenders that are not underwriting or credit-focused.
In the real world, a major facility (such as the example above), would generally liquidate in one of two manners:
- Sold as turnkey, and thus most likely achieving a value over OLV
- The facility would be shuttered and prepared to sell at auction. (It is less common in the real world for a net OLV scenario to play itself out)
Quantifying your exit strategy and understanding the financial impact of your lending practices is crucial when lending on hard assets. Loeb Appraisal is focused on providing clear concise data so that more informed credit decisions are made.