Should a lender rely upon a commercial real estate appraisal when pieces of machinery or equipment are also part of the collateral assets?
Oftentimes, a commercial real estate appraiser or equipment appraiser who does not have extensive experience in the industry will rely upon trend table estimates to approximate values of the equipment assets which will be part of the borrower’s collateral. This approach to valuing machinery and equipment might come close in some assignments. However, it is often off the mark.
Machinery and equipment assets have unique values depending upon the physical, functional and/or economic obsolescence of the items. Depreciation tables such as Marshall and Swift and other industry guides, establish value based on useful life for that asset class. This is a means of determining physical depreciation. While this is one piece of the puzzle, functional and economic obsolescence must be considered to arrive at an accurate valuation.
For example, electronic equipment usually has a short useful life; and technology is changing so fast that it is likely that the functional obsolescence is significant, therefore resulting in a true value that a trend table may not reflect. On the other hand, brewery equipment is proving to hold its value longer than the depreciation schedules might suggest.
It is important to correctly determine the value of assets when using items as collateral. An experienced machinery and equipment appraiser understands the moving parts of functional and economic obsolescence and is, therefore, worth employing when there will be machinery and equipment assets which will be part of lending collateral.
At Brumbaugh Appraisals, we have appraised the assets involved in more than 80 different industries and conducted more than 1800 projects over the past decade. If you have questions or would like to discuss a specific project, please contact us at 919-870-8258 or contact us.