What Are Financial

Institutions Looking For In

Appraisers and Appraisal

Reports? Paul R. Cogley, Jr., ASA

Senior Vice President

Commercial Valuation Manager

Banc of America Leasing

Email: paul.r.Cogley@baml.com

The views and opinions expressed in this presentation are those of the author and do not represent official policy or position of Banc of America Leasing and/or Bank of America Merrill Lynch. This presentation is intended for educational purposes only and does not replace independent professional judgment. Statements of fact and opinions expressed are those of the author and are not the opinion or position of the American Society of Appraisers. The American Society of Appraisers does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented.

Financial Institution Behavior Is Driven In Large Part By Regulation……..

•There are at least NINE Federal Regulators for US Financial InstitutionsFederal Reserve (safety and soundness of financial institutions)Office of the Comptroller of the Currency (charter, regulate and supervise all national banks and thrift institutions)Federal Deposit Insurance Corporation (maintain stability and public confidence in the nation’s banking system)Financial Oversight Stability Council (identify and monitor excessive risk to the U.S. financial system)Securities and Exchange Commission (protection of investors, maintaining fair and orderly functioning of securities markets, facilitating capital formation) Commodity Futures Trading Commission (regulation of futures and options markets)Consumer Financial Protection Bureau (responsible for rule-making, supervision and enforcement of federal consumer financial protection laws)Federal Housing Finance Agency (regulates Fannie Mae, Freddie Mac and the Federal Home Loan banks)Nation Credit Union Administration (regulate, charter and supervise federal credit unions)

•In addition, US Financial Institutions are audited byPublic Accounting FirmsInternal AuditorsVarious State Regulatory Authorities

Source: Liquid Analytics

In Turn, The Increased Scrutiny Everywhere Has A Direct Impact

On Appraisers

Source: ASA Appraisal Review Management 201

And The Requirements Keep Getting Tougher….

• Appraisals must be USPAP conforming• Minimum education requirement – 30 hours college level• 120 hours of appraisal classroom coursework• 15 hours USPAP• Must pass an exam based upon 45 hours of coursework• Continuing education – 70 hours over 5 years, 20 hours in valuation

theory• 700 hours of general personal property experience• Specialized experience

• 1,800 hours of market-related appraisal experience or• 4,500 hours of market-related non-appraisal experience (dealer,

curator, instructor, scholar, machinery sales rep, jeweler or• A combination of above on a ratio of 1 to 2.5 years appraisal / non-

appraisal

However Still Less Than ASA Requires

As Appraisers, We Feel The Downstream Effect

By Having To Contend With:

• Getting on Approved Appraiser Lists

• Endless Interaction with Sourcing Organizations

• Exhausting Due Diligence

• Standardized (unfriendly) Engagement Letters

• Standardized (unfriendly) Master Service

Agreements

• Navigating Electronic Payment Systems

Some financial institutions have them, some don’t

What does it take to get on ‘the list”

• Find out who makes the decision

• Identify and promote your company’s specific strengths

• Provide pre-deal support and documentation of your experience

by industry

• Get referrals from respected sources - other financial

institutions, appraisers

• Do good work on every project, including high quality valuation

and timely report delivery

• Some financial institutions like firms that facilitate buying and

selling in addition to appraising

Approved Appraiser Lists

Identify the decision maker

There may be a vetting process

• Interview

• OFAC / Background/Security Check / Transportation Worker

Identification Credential (TWIC) card

• Qualifications

• References

• Inquiry about your industry experience and knowledge

• Understanding of your credentials - credibility and salability to

third-party investors

• They may ask about your security / confidentiality practices

Interaction With Sourcing Organizations

Define financial institution requirements

• E&O Insurance, Liability Insurance, Indemnifications of financial

institution

• Confidentiality / Information Protection

• Secure emails and attachments

• Requirements for security on your servers

• Storage and retention of data

• Who on your staff has access to data

• Want the right to “audit” your IT and accounting systems

• Acknowledgment of various financial institution policies

• Anti-corruption

Standardized Master Service Agreements / Engagement Letters

Communication of report and results

• Company being appraised may or may not have

access

• Company may be client and not allow you to share the

results with financial institution who referred you

• May be multiple buyers who what information

• May be multiple appraisal companies working on same

project

• Auditors may ask for information, but are not

“authorized users of data”

Standardized Master Service Agreements / Engagement Letters

Standardized Master Service Agreements / Engagement Letters• Definitions

• Scope of the Agreement

• Term of Agreement

• Termination

• Pricing/Fees

• Invoices/Taxes/Payment

• Mutual Representations and Warranties

• Representations and Warranties of Appraiser

• Financial Responsibility

• Business Continuity

• Relationship of the Parties

• Appraiser Personnel

• Insurance

• Confidentiality and Information Protection

• Indemnity

• Limitation of Liability

• Environmental Initiative

• Audit

• Non-Assignment

• Governing Law

• Dispute Resolution

• Mediation/Arbitration

• Non-Exclusive Nature of Agreement

• Ownership of Work Product; Rights In Information

Registration In Electronic Vendor Systems

If you want the assignments you will have to play the game

• Self-Registration

• W-9 Form

• Evidence of Insurance

• Electronic Invoicing

• Fees?

What Types Of Appraisal Services Do Financial Institutions Need?

• Phone consultations (?)

• Desktop evaluations (restricted reports)

• Complete appraisals (with or without inspection)

• Inspections only

• Economic Useful Lives

So, What Do Financial Institutions Look For In Appraisers?

• Accreditation

• Qualifications

• Experience

• Competency

• Responsiveness

• Security

• Price competitiveness

What Triggers The Need For Third Party Appraisal Services?

• Current value confirmation

• Tax support/compliance

• Future value forecasting

• Loan value to collateral value analysis

• Credit migration analysis

• Default, repossession analysis

• ASC impairment review

• End of term lease negotiations

• Asset disposition

• Other?

What Are The Questions To Ask When Engaging for An Appraisal Assignment?

Define clear expectations - outline requirements, timing

Obtain clear understanding of assignment

• Inspections versus desktop

• Contractual documentation (at least definition of value

and required condition of equipment)

• List of equipment

• Intended users, intended use, premise of value

• Effective date of valuation

• Assumptions – extraordinary, hypothetical

What Are The Questions To Ask When Engaging for An Appraisal Assignment?

Negotiate price - fees, and expenses

Manage for the future - remember the importance of a long-term relationship

Scope the project appropriately

• Intended Use

• Collateral value for lending decisions?

• End of lease buyout negotiations?

• Purchase price allocation for acquisition?

• Litigation?

• Bankruptcy

What Are The Questions To Ask When Engaging for An Appraisal Assignment?

Premise of value - appropriate to purpose

• Market Value, FMV, OLV, FLV, Value in Place, Value in

Continued Use?

As of date - retrospective?

List of Equipment - access to required information

• Accounting ledger

• “All assets in the yard at this address”

• Inspection / Inventory

What Are The Questions To Ask When Engaging for An Appraisal Assignment?

Negotiate project fees

• Competitive bidding?

• Fees per day of work?

• Fixed fee?

Develop long term relationships

• Pre-transaction guidance

• Market/Industry updates affecting value

• Annual or semi-annual appraisal updates

• Sales support

• Liquidation assistance

• Non-confidential leads of companies seeking financing

What Are Financial Institutions Fee Expectations:

• Many times they’re asked to provide a fee estimate to clients

without full scope

• Sometime they expect “freebies”

• It’s competitive

• Often multiple bids will be solicited

• But price may not be the only factor

• Availability to complete the engagement in the required

timeframe or other factors may drive need

• Relationships do matter

• Retainer agreements

What Are Financial Institutions Looking For In Your Appraisal:

USPAP Compliance Industry Information

Market Perspective Company Information

Equipment information Observations

Alternative Uses Sources of Your Information

***Ability to understand how you reached your conclusions***

Financial Institutions Want The Value (As Defined) As Of Today (Or A

Prospective Date, Defined)Balancing Credit/Risk

Overcapacity Employee attitudes Plant lay-out / inefficiency

Process flow Excesses or roadblocks in facility or operations

Maintenance (short-term and long-term)

Major maintenance upcoming?

Obsolescence factors (all types – especially technological)

Area / community development

But They Also Need To Know What You Observed - - In Plain English; Not Disguised Terminology:

What Are Some of the More Common Issues Financial

Institutions Encounter With Appraisals:

• Too much boilerplate• Irrelevant economic information

• Textbook regurgitation of market, cost, and income approaches

• Every possible term defined when only a few are used

• Condition codes described, but not on worksheets

• Redundant information

• Limiting Conditions comingled with Certification Statements and vice versa

• Too little meat on the bone• No market comparables, adjustments (Real estate appraisers do this all the time!)

• No details supporting the cost approach

• EUL? REUL? Functional / Economic obsolescence? Curable / Incurable?

• No reconciliation of values

• No source information

• Incomplete equipment listings (no condition, serial number, model number, etc.)

Q&A