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Construction Equipment Lending - Commercial Loan - LoanUniverse Community

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Construction Equipment Lending - Commercial Loan

equipment lending

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#1 loanuniverse

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Posted 09 January 2012 - 08:22 PM

We recently had a little bit of a challenge in our hands. The financial institution where I work has been doing commercial loans for about two decades, and has a large commercial portfolio in its books. However, there are some types of commercial financing that we have not done. One of the loans that we have stayed away from is the financing of used heavy construction equipment. However, we had a prospect that needed a loan to support its construction equipment rental fleet.

This prospective customer has been in business for many years and is considered the industry leader in the area. We got to the point of feeling comfortable about the company, the debt service coverage, and the facility structure. The problem that we had was how to get comfortable about the value of the collateral. The reliance on machinery and equipment as collateral for loans requires a certain level of valuation expertise due to the sometimes illiquid nature of the secondary market for equipment as well as the lack of readily available data sources for comparison. Taking this into consideration, we needed to rely on third-party professionals for this specialized type of valuation service.

After some research, we decided to use (American Society of Appraisers) ASA-accredited appraisers to perform this work. By utilizing ASA-accredited appraisers, there is a level on comfort as to the valuation proficiency, knowledge of the market and profession, experience, and reputation.

The process to pick the right appraiser was extensive and time consuming. I must have spoken to a dozen different people, and reviewed many sample appraisals. At the end, we came up with a small list of 6 firms. The main factor in choosing who made the list and who did not was how comprehensive the sample reports were.

Lending on equipment is usually structured based on the “Orderly Liquidation Value” or “Net Orderly Liquidation Value”. As a matter of good credit practice, it is always a good idea to obtain the “Forced Liquidation Value” commonly known as the “Auction Value”. This additional value can be used as a guide for underwriting, and to more accurately determine the downside risk of the equipment as collateral.

The following is some of the value terminology that I learned while going through this process:

Forced Liquidation Value The estimated gross amount, expressed in terms of money, that could typically be realized from a properly advertised and conducted public auction; the seller being compelled to sell with a sense of immediacy on an “as is, where is” basis, as of the effective date. This concept considers the assets offered piecemeal for removal from present installations.

Orderly Liquidation Value The estimated gross amount, expressed in terms of money, that could typically be realized from a liquidation sale, given a reasonable period of time to find (a) purchaser(s); the seller being compelled to sell on an “as is, where is” basis, as of the effective date. This concept considers the assets offered piecemeal for removal from present installations.

Net Orderly Liquidation Value The estimated gross amount, expressed in terms of money, that could typically be realized from a liquidation sale, given a reasonable period of time to find (a) purchaser(s); the seller being compelled to sell on an “as is, where is” basis, as of the effective date. This concept considers the assets offered piecemeal for removal from present installations. This value is net of estimated liquidation expenses.

Fair Market Value is herein defined as: A professional opinion of the estimated most probable price, expressed in terms of cash in U.S. dollars, which the subject could typically realize in an exchange between a willing seller to a willing buyer with equity to both, neither being under any duress or compulsion to buy or sell, each having knowledge of the full use, worth and relevant facts of the assets appraised, as of a specific date.





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