Liquidation Value of a CNC Machining Center for Asset-Based Lending
Subject: a 2017 Haas VF-4SS vertical machining center with 12,400 spindle hours, a 4th-axis rotary table, and high-pressure coolant. The borrower requests a $1.1 million asset-based loan secured by five machines; the subject is the largest. New replacement price is $185,000 installed; freight and rigging to the subject's floor were $9,500. The current owner bought it new and has maintenance logs; the spindle was rebuilt at 9,000 hours. Three comparable sales: (1) 2016 VF-4SS, 15,800 hours, no 4th axis, sold at auction for $61,000; (2) 2018 VF-4SS, 7,200 hours, with 4th axis, sold in an orderly dealer transaction for $96,000; (3) 2015 VF-4SS, 18,000 hours, rebuilt spindle, auction $54,000. Removal cost is $6,000; rigging and installation at a buyer's site $8,000. The lender wants the value that could be realized within 90 days if the borrower defaults.
1. Identify the appropriate value premise and market for the lender's purpose. Explain why fair market value in continued use is not the same as liquidation value.
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The lender needs an orderly liquidation value or a forced liquidation value, depending on the assumed marketing period and whether the borrower is operating. A 90-day default horizon points to orderly liquidation value if the lender can conduct a reasonably advertised sale, and to forced liquidation value if the sale must be completed immediately. Fair market value in continued use assumes the machine remains installed and operating in a going business, with a willing buyer and seller and a reasonable exposure period. Liquidation value assumes a compelled sale, often as-is and where-is, and may require removal by the buyer. The distinction matters because the same machine can have materially different values under the two premises. The report must define the premise, the market, the assumed marketing period, and who bears removal and rigging costs.
2. Adjust the three comparables to the subject and reconcile an orderly liquidation value range. Address hours, 4th axis, sale type, and removal or rigging costs.
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Comparable 1 is a 2016 auction sale at $61,000 with 3,400 more hours and no 4th axis. Adjust upward for fewer hours, the 4th axis and the newer year, but keep in mind auction data are closer to forced liquidation. Comparable 2 is the best indicator of orderly disposition: a 2018 dealer sale at $96,000 with 5,200 fewer hours and a 4th axis. Adjust downward for the subject's higher hours and older year. Comparable 3 is a 2015 auction sale at $54,000 with 5,600 more hours, a rebuilt spindle and no 4th axis; adjust upward for age, hours and the 4th axis. An orderly liquidation range of roughly $72,000-$88,000 is supportable, with the upper end relying on the dealer sale and the lower end on the auction evidence. A forced liquidation indication would be lower, perhaps $55,000-$65,000, after considering the $6,000 removal cost. Do not add the buyer's $8,000 installation cost to an as-is liquidation value.
3. The draft report adds the original $9,500 installation cost to each auction comparable to make them equivalent to the subject. Critique that treatment.
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The adjustment conflates different premises. An auction price is typically as-is and where-is; the buyer bears removal and reinstallation. Adding the seller's original installation cost to an auction comparable assumes the comparable buyer receives an installed machine, which is not what the auction price represents. In continued use, installation cost can support the subject's installed value, but only if every comparable is adjusted to the same installed premise and the adjustment is supported by market evidence. In liquidation, the relevant cost is removal and rigging, which reduces realizable value rather than adding to it. Adding installation cost to auction data double counts and overstates collateral value. The reviewer should require a consistent premise for each comparable and a clear statement of who bears freight, rigging and removal.