Outside appraisals are often required by credit committees of banks and financial institutions. This is necessary to mitigate and protect the lender’s financial risk in the transaction – lending, secured financing, and collateralization. To ensure the most productive result in this effort, it is important to hire smart, manage effectively, and monitor the process.
Hiring the right appraiser will enable you to properly value the assets in question and to properly characterize your credit risk. To properly vet the list of appraiser candidates, ask:
- Who exactly will do my appraisal. Large appraisal firms have a tendency to assign the project to a junior analyst who may not have much experience.
- Specific industry experience. How many large yellow iron appraisals have you done in the last couple of years?
- Maintain a list of approved, qualified appraisers which have done a good job for you in the past.
- What are your credentials – American Society of Appraisers certified Accredited Senior Appraiser?
- Ask co-investors or institutions you trust who they use for M&E appraisal.
- Experience in commercial lending, property tax appeal, SBA lending, ABL lending?
Effective Management of the Appraisal Process
To ensure a productive result, you must carefully manage the appraisal process:
- Define clear expectations – premise of value, timing, inspection instructions
- Purpose of appraisal – collateral value for lending, end of lease FMV for customer buyout, insurance value for litigation
- As of date – may be two years ago to resolve a legal dispute
- Coordination with third parties, facilitation of inspection
Monitoring the process of the appraisal:
Regular communication with the appraiser is necessary to keep the project on track, to keep it current as requirements change, and to ensure timely report completion.
- Weekly call to make sure the appraiser has the information he/she needs
- Define project timing and milestones, report delivery date
- Communication of preliminary results / valuation worksheet, so everyone understands what is being done when
- Discuss when project / valuation should be updated – annual for a ten-year financing?
- How will project deadlines be impacted with third parties are brought into the valuation.
- How will deliverables be presented?
Finally, discuss confidentiality of information. Many financial institutions always sign NDAs with partners for discussion, due diligence, and closing of new financing transactions. Appraisers routinely maintain these documents as well, but if you are working with a large bank, that institution will have a standard NDA that is used for all transactions. Appraisers are used to working with NDAs and have an absolute duty under USPAP (Uniform Standards of Professional Appraisal Practice) and ASA appraisal standards to maintain confidentiality and not disclose confidential and proprietary information to any third parties. Third parties such as counterparties and competing financial institutions often seek confidential information from third-party appraisers, and competent third-party appraisers know this fact and comply with professional standards with regard to NDAs.
In sum, if it is beneficial for you to work with a third-party appraiser, it is important to hire smart, communicate frequently, and monitor the process to ensure a favorable result. Your long-term appraiser partner knows this and appreciates the mutual success this will bring to your transaction.
Chris Nugent is an Accredited Senior Appraiser of the American Society of Appraisers. He holds a BA in Statistics from the University of California, Berkeley, and an MBA from Santa Clara University.
BlueChip Asset Management is an appraisal and asset management services company which serves the ABL, banking, equipment finance, legal, and turnaround industries. Members of TMA, and CFA. Contact us for asset valuation assistance at 415-515-1110, www.bcamasset.com, or schedule a free 15-minute consultation.