You’ve probably heard the saying that you can’t get blood from a turnip. It’s true, you know. You can never squeeze hard enough. Not that I’ve tried. But that seems to be what some regulatory officials may be expecting of commercial appraisers these days.
Humor me for a second while I bellyache. With nothing better to do at 3:00 AM, I opened up an anthology of articles compiled by the Appraisal Institute in a book entitled “Business Enterprise Value.” I wanted to review a specific technique used to allocate value among various asset classes in a business enterprise. The technique is called Multi-Period Excess Earnings Method (MPEEM).
If it sounds complicated, that’s because it is. This particular method requires an understanding of abstract appraisal theory and accounting techniques. Now I love appraisal theory. But how does appraisal theory work its way out in practice? That depends. There is a subset of commercial appraisers whose primary clients are involved in the accounting business. Perhaps these appraisers are supplied with a detailed list of equipment, its age and replacement cost, prospective financial information, the anticipated rates of return on investment, and the birth-weight of the owners’ mother.
Maybe they have all the time in the world to construct intricate discounted cash flow models, then sit in an ivory tower and discuss them over a cup of coffee.
Meanwhile, those of us living in the real world are lucky if our lender-client actually knows what the collateral consists of – an office building or a convenience store; an unintended consequence of Dodd-Frank. Much less will we receive an itemized list of equipment and projected cash flows to analyze at our leisure. Yet, the FDIC, OCC, Federal Reserve Board, FASB, Appraisal Foundation, and USPAP all require a separate allocation for intangible assets.
What, exactly, are you asking for? Blood from a turnip?
I would anticipate that the collective answer from all these federal regulatory bodies would be that the appraiser must determine the scope of work and should demand these items from the client – a client base that would quickly dissipate should such items be demanded.
As I noted in a recent post, banks are now faced with the prospect of dealing with the question of undercollateralized portfolios. Appraisers are now faced with allocating assets in an environment when limited information is available and correct methodology is in dispute. I recently noted a case where an appraiser was disciplined for not properly allocating intangible assets. I’m not familiar with the details of the case but I hope the treatment of the appraiser was equitable.
There will always be fallout and scapegoats when the economy goes awry. Someone has to be at fault. All too often, the scapegoats are the little guys, insufficiently financed to stay above the fray. My hope and prayer is that while the powers-that-be hash out these complex issues, we keep mercy as our watchword.
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