Jump to content


"Going Concern" Appraisals


5 replies to this topic

#1 Brinn

    Part-Time Teller

  • Members
  • 6 posts

Posted 16 February 2012 - 03:38 PM

Hey Loan Universe,

I'm a commercial credit manager at a $500MM local community bank. We are looking at financing a prestigious local private school in the amount of $25MM. The note will be secured by ABA as well as the real estate. My discussions with the appraiser lead me to believe that the "going concern" value of the business is approximately $35MM plus however, the value of the tangible assets (FF&E as well as the RE) is likley to be about $10MM. From my perspective this is a poorly structured loan but the Sr. Lender and Risk Manager are supporting the deal.

The school has been around for a long time, is well run, well capitalized and generates sufficient profits and cash flows to service the debt. My concern is that should the school ever experience difficulties that we'd be very much underwater from a tangible collateral perspective as the going concern value will likely be gone. I'm also concerned that our regulator will look at this loan structure and wonder why we would make such a large loan with so little tangible collateral. Any thoughts regarding "going concern' financing or appropriate facilities and/or structures to use when financing a school? Any feedback would be appreciated. Thanks.

#2 loanuniverse

    Administrator

  • Admin
  • PipPipPipPipPipPipPip
  • 1,251 posts
  • Gender:Male

Posted 16 February 2012 - 08:12 PM

Brinn: Believe me when I tell you that you are not the first credit manager asked to underwrite to "going concern".

I also have misgivings about the structure because you keep referring to a single loan instead of a couple of facilities. We have two or three distinctive asset classes, and you do not want to be amortizing the going concern, business assets, and FF&E over the 25 years or more than is probably being considered for the RE.

I am not sure if you are even allowed to use something other than the "as is market value" as the basis for this loan. Take a look at http://www.fdic.gov/.../5000-4800.html My institution is large enough that we have hired an in-house MAI appraiser, and I would use him to back me up, but you can ask the appraiser that you hired if you can rely on the "going concern value" for a federally related transaction, my guess is that his answer will be NO.

Understanding that $25MM for a $500MM bank is a deal that is hard to pass, the best way to approach this is to try to get the Sr. Lender and Risk Manager to see your side of things, and come up with a reasonable structure that meets the requirements of the borrower and mitigates the risks. Here are my thoughts in no particular order.

- Where did $25MM come from? Are you replacing existing debt? Is it something that can be right sized?

- If not all of the proceeds are to replace existing debt, what is the purpose of the funds?

- If the client is set on the $25MM, I would probably suggest a structure that finances real estate with a long-term amortization, and another facility with a shorter amortization {think 5-10 years}. You might want to rerun your debt service coverage calculations before you recommend this.

Not sure what else to tell you. The way you approach this will depend on how much independence you have in your institution. Just remember, that at the end of the day you will be signing off on the analysis or one of your analysts will.

#3 Brinn

    Part-Time Teller

  • Members
  • 6 posts

Posted 17 February 2012 - 11:20 AM

Hey Loan Universe (can I call you "Loan" or do you prefer Mr. Universe?!?!),

The transaction is actually 3 seperate facilities; The first is a $9MM 15/25 tax exempt bond. This note is being used to refinance existing bond debt held by two other banks. The second facility is $15MM 15/24 (1 yr. interest only) construction CREM to finance the construction of two new buildings. The third facility is a $1MM demand LOC. All facilities will be cross-collateralized, cross defaulted and secured by ABA and RE.

I have looked at the FDIC regs you link to above and don't see that Section VIII of the guidlines (which addresses use of going concern values) limits our ability to use the appraisal but only mandates that we don't confuse the "going concern value" with "market value". Is my interpretation incorrect?

Again, thanks for the feedback.

Regards,

Brinn

#4 loanuniverse

    Administrator

  • Admin
  • PipPipPipPipPipPipPip
  • 1,251 posts
  • Gender:Male

Posted 17 February 2012 - 12:46 PM

View PostBrinn, on 17 February 2012 - 11:20 AM, said:

Hey Loan Universe (can I call you "Loan" or do you prefer Mr. Universe?!?!),

The transaction is actually 3 seperate facilities; The first is a $9MM 15/25 tax exempt bond. This note is being used to refinance existing bond debt held by two other banks. The second facility is $15MM 15/24 (1 yr. interest only) construction CREM to finance the construction of two new buildings. The third facility is a $1MM demand LOC. All facilities will be cross-collateralized, cross defaulted and secured by ABA and RE.



You can call me loan.

Well now it makes more sense. You did not mention anywhere in the original post that there was going to be new construction involved. I think you would be ok from a regulatory standpoint if the value "as completed" comes in high enough that your LTV for facility B is within guidelines.

Although I am not that familiar with bonds, I am pretty sure that the current bond financing is secured with the property. If that is so, I would want the following.

- For facility A} I need my "as is market value" to come in high enough that the $9MM that I am funding on day one gives me an appropriate loan-to-value. We can have a separate discussion about what the appropriate loan-to-value would be for a property that probably does not lend itself to many other uses other than a school should be. I am sure your policy has a matrix that you can follow.

-For facility B} I need my prospective "as completed value" to come in high enough that the $24MM that will be funded by the end of construction is covered by an appropriate loan-to-value. However, I am not sure if I would feel comfortable financing 100% of the construction unless there was significant equity on top of the cushion needed for facility A).

- You still need to define a purpose for the $1MM LOC "are you financing a real need? or is it something that the borrowers thought it would be nice to have". Putting lines on demand is a recipe for potential problems, a hard maturity forces people to revisit the credit every year.

If your appraiser is already telling you that the "as is" number will come in at around $10MM, I don't see how you can make facility A) work.

My impression is that it does seem like the exposure is too high for a bank your size. Although I am not familiar with your capitalization, my guess is that you would have to line up participants. Remember that having participants brings in fiduciary duties.

#5 loanuniverse

    Administrator

  • Admin
  • PipPipPipPipPipPipPip
  • 1,251 posts
  • Gender:Male

Posted 17 February 2012 - 12:47 PM

View PostBrinn, on 17 February 2012 - 11:20 AM, said:

I have looked at the FDIC regs you link to above and don't see that Section VIII of the guidlines (which addresses use of going concern values) limits our ability to use the appraisal but only mandates that we don't confuse the "going concern value" with "market value". Is my interpretation incorrect?



My interpretation of the guidelines is that they want us to use "Market Value" as defined by them and that we should stay away from "going concern". I am not saying that there is no value there, the problem is that those are not the types of loan they want banks to be making.

Let me know how everything shakes out with this request

#6 Brinn

    Part-Time Teller

  • Members
  • 6 posts

Posted 17 February 2012 - 01:32 PM

Due to our size we often participate out and participate in deals thus we have experience on that front. We actually have 4 participants lined up for this deal and, frankly, I'm surprised that none of the participant banks have balked at our potential collateral position. I guess it's possible that they don't realize the extent of the collateral shortfall and may express some serious reservations once the appraisal has been received and reviewed.

I'm doubtful that this one is going to make it to the finish line as currently structured but we shall see.





1 user(s) are reading this topic

0 members, 1 guests, 0 anonymous users