Valuation of enterprise property for collateral purposes. Methodological recommendations “Valuation of property assets for collateral purposes. What you need to complete the assessment

Owners, tenants or other interested individuals and legal entities can contact appraisers in a variety of cases. The most common situations when the services of a real estate appraiser are required are:

assessment for collateral purposes- in order to make a decision on issuing a loan secured by real estate, the bank may require the borrower to provide an assessment report completed by an appraisal organization. This may be required both when pledging commercial real estate and when obtaining approval for a mortgage loan for an apartment. Some banks only accept reports completed by specially accredited companies, while some do not limit borrowers in choosing an appraiser. However, in any case, the bank checks the reports provided, so you need to contact a trusted company with relevant experience;
valuation for the purposes of a purchase and sale transaction- in some cases, more often when one of the parties to the transaction is the state or state-owned companies, the assessment is mandatory, however, the report can also act as an additional argument when bargaining between the parties or help one of the parties in making a decision on the price of sale or purchase of property (such assessment is often called assessment for management decision-making purposes);
rent assessment- appraisers are mainly contacted when one of the parties to the transaction are organizations wholly or partially owned by the state or when state-owned property is leased. A private owner can also apply for a rental assessment, however, this is much less common in practice - private tenants and private landlords usually agree on the rental price without involving appraisers (the exception is transactions between related parties - here the appraiser’s report can be an argument in case of a problem with the tax authorities). questions about the objectivity of the amount of rent);
valuation for accounting purposes- balancing, revaluation of fixed assets, etc. for the purposes of contributing to the authorized capital, insurance and in other cases when the assessment is needed not for completing a sale or purchase transaction or lease;
challenging the cadastral value- to apply to a challenge commission or to court, as a rule, you need an assessment report (in earlier publications we considered cases when an assessment is needed for these purposes and when it is not);
assessment in various types of legal disputes and other assessment cases.

Who conducts the assessment?

A real estate appraisal report can be signed by an appraiser who is a member of a self-regulatory organization of appraisers, has a valid qualification certificate in the field of “Real Estate Appraisal,” and also has a professional activity insurance policy with an insured amount of at least 300,000 rubles. An appraisal organization that can conduct an appraisal, in accordance with current legislation, must have at least two appraisers on staff, each of whom must have at least one valid qualification certificate (there can be a maximum of three: in addition to real estate appraisal, qualification certificates are issued in the following areas: valuation of movable property" and "business valuation"). The activities of appraisal companies are insured, as are the activities of appraisers. But licensing for appraisal activities has long been abolished, so sometimes the information found on the Internet about the need for a license to conduct an appraisal is outdated.

The exception is forensic examination. If the appraisal report is needed to go to court, it must still be completed by the appraisal company. However, if an examination to determine the value is appointed by the court during the process, its conduct is regulated by Federal Law No. 73-FZ “On State Forensic Expert Activities in the Russian Federation”, and not by Federal Law No. 135-FZ, which regulates valuation activities, “On Valuation Activities in the Russian Federation”. Federation". 73-FZ establishes requirements for forensic experts that differ from the requirements for appraisers established by 135-FZ, therefore, in some cases, a forensic appraiser can be a person who has appropriate professional training, but does not have the right to sign assessment reports (the result of a judicial examination is an expert opinion, not an assessment report). Most often, forensic experts are still practicing appraisers, but something else is not so uncommon.

How is the assessment carried out?

The implementation of any assessment is regulated by the above-mentioned Federal Law No. 135-FZ, as well as Federal Valuation Standards: general, relating to the assessment of all types of assets, and specialized - for real estate this is Federal Valuation Standard No. 7 “Real Estate Valuation”.

From a methodological point of view, reflected in the requirements of regulatory documents, there are three approaches to assessment: profitable, costly and comparative. Within each approach, there are also different methods used depending on the type of object, the purpose of the assessment, the amount of available market information or available documents on the subject of assessment, etc. Most often, within the framework of one approach, only one method is selected, but it is also possible to use several - they are selected by the appraiser based on the totality of available information. The number of approaches used is also left by law to the discretion of the appraiser, but he must justify the choice of approaches used in the report.

Using the income approach, the appraiser models the cash flows of the property being valued. The fundamental idea of the approach is the relationship between the income that an object is capable of generating and its value. It is more often used for commercial real estate for rent, but the presence of a rental market for similar real estate is not in itself a 100% basis for applying the income approach. For example, despite the development of the apartment rental market, the income approach to their valuation is almost never used. In some cases, income approach methods are used when valuing objects through a business. The comparative approach is based on comparing an object with so-called analogue objects - objects of a comparable purpose to the object being assessed and with similar (but not necessarily identical) characteristics - about which information is available regarding the offer price or the actual transaction. Having selected a sufficient number of analogues to perform calculations, the appraiser, by using special methods, determines what the market value of the appraised object should be, taking into account the known prices of analogues and differences in characteristics between analogues and the appraised object. The approach is used for objects that are quite actively traded on the market, and is practically not applicable to the assessment of unique objects or objects that do not have a sales market.

The cost approach is based on the idea that the acquisition price should not exceed the costs of creating a similar object to the acquired one. In this case, the appraiser separately evaluates the cost of acquiring rights to a land plot and separately the improvements located on it, taking into account the entrepreneur’s profit, wear and tear and obsolescence. The sum of the obtained values represents the market value of the object. Since probably not everything in this formula is clear at the everyday level, let us dwell in more detail on the last components. The entrepreneur's profit reflects the fact that the owner of the property is unlikely to sell it at construction cost. If we assume that the construction of the object took a year and one million rubles (including the cost of acquiring rights to the land plot), then, at first glance, it is logical to assume that this million is the cost of the object - the land plot with the building on it. However, instead of investing money in construction, the owner could at least put his million in the bank, receiving an income in the amount of interest on the deposit for the year. It is assumed that a reasonable owner, having invested money in construction, should not sell the object for less than its cost plus an income no less than the income that he could have received by choosing an alternative investment method (this is just one of the options for determining the entrepreneur’s profit, a more detailed discussion of the topic will require a separate publication).

Wear and obsolescence refers to physical wear and tear, the essence of which is clear from the name - it is caused by the physical aging of an object, as well as functional and external obsolescence. Functional obsolescence can arise due to the obsolescence of the planning or engineering solutions of the object (from an evaluative point of view, the reconception of a shopping complex is a way to eliminate precisely functional obsolescence), while external obsolescence is caused by factors external to the object (the opening of a new route, due to which the flow of customers has dropped significantly at a gas station located on the old road, and with the drop in the flow of customers, its cost has also fallen; for such a gas station there will be just a factor of external obsolescence).

To assess land plots free from development, the cost approach is not used, and the assessment of a land plot as one of the stages of the cost approach is carried out using the methods of the income or comparative approach.

What is needed to conduct an assessment?

The package of documents required for the assessment will differ for different types of objects and for different assessment purposes.

Typically, title or supporting documents for an object are required:
extract from the Unified State Register of Real Estate;
certificate of entitlement.

When assessing rent:
current lease agreement or draft agreement;
cadastral passport;
technical passport (or similar types of documents: passport of a hydraulic structure, etc.);
floor plans (the cadastral passport does not always contain a readable plan)
list of premises, sometimes it will be desirable to provide information on the actual value of rental rates, the register of tenants, the dynamics of underutilization of the facility, etc.;
materials of technical surveys and other documents.

An exhaustive list of them is formed at the stage of concluding an assessment agreement or at the beginning of its implementation, since in some cases, based on the results of studying the initially provided documents, it may be necessary to provide additional information.

In order to distinguish between the concepts of real estate as a physical object and property as a legal concept, there is such a thing as ownership of real estate, which includes all the rights, interests and privileges associated with the ownership of real estate, and expressed by any evidence of ownership that exist separately from the real estate itself as a physical object.

Thus, “real estate” refers to material concepts, and “ownership rights” refers to intangible concepts. This is important to know because the approaches, methods and procedures for expert assessment of tangible and intangible assets are different, and the customer must know what he wants to evaluate: either real estate as a tangible object, or ownership of this object as an intangible asset.

Currently, an expert assessment of real estate as part of a land plot and improvements can only be carried out if there is documentary registration of ownership of the land plot. In all other cases, only improvements on a land plot act as a real estate object: buildings, structures, perennial plantings, etc. the appraisal customer needs to know all of the above in order to correctly draw up an assignment for the appraisal of a specific property. However, drawing up a task for assessing a property is only one of the stages of assessment. Real estate valuation is a complex, labor-intensive creative process consisting of several stages and stages:

1. Statement of the problem (definition of the problem).
2. Preliminary inspection of the object and conclusion of an Agreement for the evaluation of the object.
3. Data collection and analysis.
4. Selecting an assessment methodology.
5. Assessment of the right to use or own a land plot.
6. Evaluation of improvements (buildings, structures, etc.) using several approaches.
7. Coordination of assessment results obtained using different approaches.
8. Drawing up a Report and Expert Opinion on the assessment and transferring them to the customer.

Statement of the problem (definition of the problem) is a very important stage, since the choice of an adequate assessment methodology depends on the quality of work at this stage, which will predetermine its results in the future.

The problem statement includes the following steps:

identification of the property;

identification of the subject of assessment;

determination of the assessment date;

establishing the purpose and function of evaluation;

establishing the type of estimated value;

drawing up restrictive conditions and familiarizing the customer with them.

Let's consider the content of individual stages.

Identification of real estate objects is the establishment and written recording of the name of the object, its legal status, location, physical composition and actual characteristics.

When assessing, it is necessary to determine the legal rights associated with the object. The client may have only a lease or limited right to use the property, or the rights associated with the property may represent an interest in a joint tenancy or partnership. Additionally, the property may be encumbered by liens or have zoning restrictions that make it difficult to use. Thus, legal requirements may limit the extent to which a property can be used.

Establishing the subject of assessment is the identification of what is subject to assessment: the entire complex of property rights or only some property rights (the right to lease, to a share in joint rights, etc.).

Determining the valuation date is a very important point for the entire valuation process, since over time the value of real estate objects may change under the influence of numerous external and internal factors. The valuation date is the date on which the value of the valuation object is determined. As a rule, the assessment date is set jointly by the appraiser and the customer, and it coincides with the date of inspection of the property. In some cases, the valuation date may be set by third parties, for example, tax authorities or courts in connection with the insolvency of an enterprise, liquidation commissions in case of bankruptcy of an enterprise, etc.

Establishing the purpose and function of the assessment is one of the most important stages that determines the subsequent choice of assessment methodology, on which, in turn, the assessment results mainly depend.

When formulating the purpose of an assessment, it is necessary to answer the question: what is being assessed? The purpose of the assessment determines the type of estimated value (base of assessment), which must be determined after establishing the purpose, the nature of the data used, as well as the principles and approaches that will guide the appraiser when assessing the object. Therefore, an unambiguous definition and fixation of the purpose of the assessment is carried out precisely at the stage of setting the task jointly by the customer and the appraiser. Examples of goals could be:

Determination of the market value of full ownership rights to buildings and structures of the property being assessed with the right to use the land plot;

Determination of the market value of full ownership rights to the property being assessed;

Determination of the liquidation value of the property, etc.

The customer should be aware that the use of the obtained real estate assessment results for purposes other than those specified in the statement of the problem and the Assessment Report is incorrect and unacceptable. This is due to the fact that, for example, the methods for valuing a property for subsequent sale differ from the methods used for valuing it during its liquidation, etc.

When forming an assessment function, it is necessary to answer the question: why is assessment necessary? That is, the evaluation function determines the scope of its subsequent use.

The assessment can be carried out for subsequent purchase, sale, lending, rent, liquidation, insurance of the property, etc. When setting the task and in the Assessment Report, it is necessary to indicate for which function or functions the assessment results will be used.

For one evaluation purpose, there can be several evaluation functions and vice versa. Here are examples of some combinations of goals and evaluation functions:

The purpose of the assessment is to determine the market value of full ownership rights to the building being assessed; evaluation function - the evaluation results will be used when making a decision regarding the sale of the assessed building;

The purpose of the assessment is to determine the market value of full ownership rights to the property and long-term lease rights to the land plot underneath it; appraisal function -- appraisal can be used for: subsequent sale; lending secured by an appraised property; issue and placement of shares, sale of shares to personnel; division of property;

The purpose of the assessment is to determine the market value of non-specialized fixed assets and the residual replacement cost of specialized fixed assets of the enterprise; valuation function - the valuation results will be used to determine the fair value of fixed assets when they are revalued for the purpose of displaying it in the accounting and financial statements of the enterprise.

In conclusion of the description of this stage, I would like to give the customer the following advice - if the appraiser cannot help the client in establishing the purpose and function of the assessment or is confused about these concepts, it is better to immediately refuse his services, since the correctness of the future results of the assessment of such an appraiser is doubtful.

Determining the type of value largely depends on the purpose and function of the valuation, as well as on the type of property. There are market and non-market valuation bases.

Market valuation bases include market value and market value under existing use. Non-market valuation bases include such types of value as investment value, liquidation value, insurance value, tax value, replacement value, use value, salvage value, special value. Determining the type of value is a direct and quite responsible task for the appraiser, since it determines the subsequent choice of valuation methodology, including the choice of approaches, methods and valuation procedures.

Drawing up restrictive conditions and familiarizing the customer with them is the last stage of the problem formulation stage. The appraiser must draw up a list of restrictive conditions and assumptions that accompany the process of assessing the value of any real estate property. Restrictive conditions and assumptions are formulated by the appraiser and agreed upon with the customer in order to mutually protect their interests. This is done in order to avoid in the future, when performing an assessment and drawing up a Report, possible conflict situations in the relationship between the customer and the Expert. Each customer must require the Expert to provide explanations for each of them. If the Expert is unable to do this, his services should be refused.

The main restrictive conditions for assessing the value of real estate objects:

1. When preparing a report on the assessment of an object, forecast data on future profits and depreciation charges received from the customer are used.
2. Financial and technical and economic characteristics of the object used in the assessment are taken or calculated on the basis of financial statements without conducting a special audit of its reliability and inventory of property.
3. During the assessment process, a special legal examination of documents relating to ownership rights to the objects being assessed is not carried out.
4. The forecasts contained in the report are based on current market conditions and expected short-term factors influencing changes in supply and demand and the economic situation remaining during the forecast period. However, these forecasts are subject to change due to changing future conditions.
5. This assessment is valid only as of the assessment date specified in this report and for the purposes specified therein.
6. The customer guarantees: any information, judgments, analytical developments of the appraiser and other materials of this report will be used by him exclusively in accordance with the purposes of the assessment assignment.
7. The expert appraiser and the customer guarantee the confidentiality of information received by them in the process of assessing the property, except for cases provided for by the current legislation of the Russian Federation.
8. The appraisal report should be considered as a limited study in which the appraiser has not complied with all the appraisal requirements of the appraisal standards.
9. The conclusion and report on the assessment of the property represent the point of view of the expert appraiser without any guarantees on his part regarding the subsequent sale of the property.
10. The expert appraiser does not provide any guarantees or obligations regarding the safety of property and the absence of violations of current legislation.
11. The customer provides the expert appraiser with all the information necessary for the assessment, including the technical passport of the object, balance sheets and reports on the results of activities for the last four years, the texts of agreements with third parties, documents confirming ownership of the property, and other documents. The expert appraiser has the right to receive information about the property required for appraisal directly from government authorities.

If it is impossible to obtain the full documents and information necessary for the assessment, including from third parties, the appraiser must reflect this in his report. The expert appraiser is not responsible for conclusions drawn on the basis of documents and information containing false information.

12. The customer provides a personal acquaintance of the expert-appraiser with the property and the opportunity to question the administration.

Preliminary inspection of the object and conclusion of the Assessment Agreement is the second stage of the assessment process, consisting of inspection of the object, familiarization with the initial information about it and establishing the sources of its origin, drawing up and signing of the Agreement for expert assessment with an appendix to it - an assignment for the assessment and development of a calendar plan.

The customer needs to know that the more complete and detailed information about the object he provides to the Expert, the more the estimated value of the object will correspond to the truth. Sometimes the customer asks the Expert to urgently evaluate the property and the latter agrees to do this work without visiting the site.

This is one of the most serious violations of the standards of professional activity of an appraiser.

After inspection of the object and negotiations, an Agreement is usually concluded between the customer and the Expert, which stipulates the rights and obligations of the parties, the cost of assessment services, deadlines for completing the work, confidentiality conditions for mutually submitted data and documents and other special conditions that both parties deem necessary to include in the Agreement. The Contract is accompanied by a task containing the name of the customer and the Expert, a definition of the subject and date of the assessment, the purpose and function of the assessment, the type(s) of the estimated value, restrictive conditions and assumptions.

At this stage, an assessment plan is developed. Developing an assessment plan is necessary to avoid duplication and reduce labor costs and assessment time. The plan helps you focus only on those factors that actually determine the price of the property.

The decisive step in drawing up an assessment plan is to prepare and submit a written request for the appraiser's fee, the amount of which depends on the complexity of the problem being solved, the amount of expected costs, the legal reliability of the work and the range of services provided. The fee is paid in the form of a lump sum or hourly payment. It is not allowed to establish a fee as a percentage of the amount of the property appraisal. As is known, in world practice the amount of payment is 50-150 dollars for 1 hour of work of an appraiser.

Stage 3 is data collection and analysis.

The reliability of the evaluator's conclusions depends on the quantity and quality of data used in his work. Inaccurate or unreliable data may lead to an unfounded assessment conclusion. In the process of searching and checking source data, the appraiser needs to answer the following questions:

1. Are all collected data necessary for evaluation purposes? Extraneous or redundant information included in an assessment report does not increase the reliability of the result.
2. Is the data obtained confirmed? To do this, the appraiser needs to personally inspect the property, obtain confirmation of information from knowledgeable persons about sales of comparable properties: make sure that the financial indicators used in calculating the expected income stream are comparable to data for similar properties available on the market.
3. Is there any reason to believe that the data is inaccurate? During data processing, it is necessary to identify and eliminate possible distortions or deviations.

The data that needs to be collected takes into account the following factors: economic, social, government, legal and environmental factors, as well as the location of the property being assessed. Such a database can be formed on the basis of information from newspapers and magazines of an economic nature, such as: “Economics and Life”, “Russian Economic Journal”, “Financial News”, “Expert”, etc. or obtained via the international computer network Internet. It is also important to find data on the region where the object is located, which affects its value. This is data on the city and microdistrict, taking into account information on price levels and employment, characteristics of the population and its preferences in relation to real estate.

Special data should include documents on the right of ownership of property (title), data on state registration of property rights, a description of the physical parameters of real estate, etc.

Considering various aspects of valuation for collateral purposes, the author offers various directions to optimize the final result of the work and overcome the most common obstacles.

Victor Roslov
Valuation for collateral purposes – realities, features, requirements
"Economic Strategies", No. 02-2008, pp. 144-152

Introduction

Bank lending, like any profitable activity, is associated with the risk of loss of allocated resources. No matter how perfect the tool for financial analysis of the borrower’s activities, it never fully eliminates the above-mentioned risk. In this regard, banks use various hedging instruments, the main ones of which are collateral, surety and guarantees.

Among the instruments for hedging credit risks, collateral is recognized as one of the most reliable. This opinion is based on two factors. Firstly, the current legislation provides a creditor with the rights of a pledgee with a preferential right over other creditors when satisfying their claims in relation to the subject of pledge, and secondly, the interests of the creditor are protected by property assets, the condition and value of which do not always depend on possible changes in the financial condition of the debtor.

The subject of pledge can be fixed assets (real and movable property), raw materials, finished products, goods for resale, securities (both quoted and unquoted), rights of claim under various obligations. There is still little practice of pledging intangible assets. The lion's share of pledged assets falls on real and movable property, as well as goods in circulation. At the same time, the most complex objects from the point of view of work methodology are real estate and movable property in the form of machinery and equipment.

A pledge can reliably protect the interests of the pledgee only if the following conditions are met:

correct selection of assets for loan collateral purposes;
an adequate initial assessment by the bank of the qualitative and quantitative characteristics of the collateral (primarily liquidity and value);
high-quality legal expertise to identify legal risks associated with the pledge of the property in question;
taking appropriate measures to preserve the collateral.

This, in fact, is the content of collateral work.

Among the stages of collateral work, the most difficult and responsible is the assessment of the potential collateral at the stage of consideration of the loan application.
An objective and correct assessment result can only be achieved if there are clear and adequate requirements for the assessment procedure. At the same time, the bank understands the result of an assessment of a potential collateral not only as its value, but as a whole as a conclusion about the acceptability of the property in question to secure a specific credit transaction.

First of all, it is necessary to determine what information about the potential collateral the bank needs to make a credit decision.

Liquidity priorities

First of all, in addition to the fundamental possibility of accepting property as collateral due to legal circumstances, as well as the presence of legal risks, the bank is interested in whether it is possible in principle and how to quickly sell the collateral if such a need arises, i.e. what is its liquidity? Paradoxically, despite the obvious importance of the issue, with very few exceptions, such information is absent from valuation reports carried out for bail purposes.
The liquidity of the objects constituting the collateral is the main characteristic of the collateral and in many cases allows us to judge how quickly the loan debt can be repaid through the exercise of the rights of the pledgee to the collateral. Without a liquidity analysis, it is impossible to make the right decision either about the fundamental possibility of working with an asset or about quantitative parameters - the collateral value and the degree of security of the loan transaction.

The liquidity of property is characterized by how quickly the object can be exchanged for money, i.e. sell at a price adequate to market value on an open market under competitive conditions, when the parties to the transaction act reasonably, have all the necessary information, and the transaction is not affected by any extraordinary circumstances. A quantitative characteristic of liquidity can be the time of market exposure of an object, i.e. the time it takes to sell a property in an open and competitive market at market value.

The issue of determining liquidity is not as clear-cut as it might seem. For example, in the case of lending to large enterprises, the property pledged as collateral is often buildings, structures, transmission devices and equipment. The list of property can consist of a large number of items - hundreds and sometimes thousands of units. Traditional approaches to the assessment of this type of security, based on the assumption that claims against the debtor will be satisfied through the direct alienation of the pledged objects and their sale, are not entirely applicable for a number of reasons.

One of the reasons is the following: large volumes of fixed assets, as a rule, are illiquid when they are sold in bulk. In addition, such types of property as structures, transmission devices, specialized real estate or complex technological equipment cannot be sold in isolation from other fixed assets. Liquidity, as well as the value of this type of property, is closely related to the liquidity of the property complex or business of the enterprise. Such assets can be called “conditionally liquid”. The liquidity of such objects is directly related to the liquidity of the technological group or production complex of which they are a part.

Assets may be recognized as conditionally liquid if the following conditions are met:

the entire property complex or its autonomous part has liquidity;
the assets in question are a significant component of the complex, perform key functions in its operation and cannot be separated without causing disproportionate damage;
assets are operational and do not require replacement or significant repairs.

As an example of equipment belonging to the “conditionally liquid” group, one can cite rolling mills of metallurgical plants, installations for purifying exhaust gases of blast furnaces, large-sized installations and equipment of chemical and oil refineries. It can also be various machines, machines, installations and other equipment, which are listed in large quantities on the balance sheet of a large operating enterprise.

The practical significance of this classification lies in the need to form the collateral mass in such a way that, as a whole, the collateral has liquidity, for example, an autonomous technological unit, a separate production workshop with the possibility of repurposing, etc.

The market value of the above property, determined on the basis of traditional approaches, is not informative for the bank. However, the statement that such property is inappropriate to consider as a source of debt repayment in the event of loan default is not entirely obvious, and most often there is no alternative (other liquid property). Moreover, the practice of working with problem debt shows that in a number of cases, assets that are illiquid in themselves, but key for business, allowed the creditor, who has such assets as collateral, to return his funds faster and in a larger volume than to creditors secured in the form of liquid commodity leftovers

What cost should you target?

The second most important issue is the issue of property value.

The concept of “collateral value”, actively used in economics as such, is, oddly enough, not standardized in the Russian Federation today, i.e. There is no clear definition or generally accepted assessment methods. The adopted Federal Standards (1-3) do not contain valuation requirements for collateral purposes, with the exception of mentioning the need to determine market value for these purposes.

If we turn to international practice, then, for example, in the International Valuation Standards (4-6) one can find the following definition: “The mortgage lending value (MLV) is the value of the property determined by an appraiser conducting a prudent assessment of the future marketability of the property with taking into account the long-term sustainable aspects of the property, normal and local market conditions and current use and suitable alternative uses of the property." The definition of the cost of mortgage lending is contained in European legislation (Directive 89/647/ECC as amended by Directive 98/32/EC). These directives concern issues of banking regulation and the establishment of minimum standards for the solvency of lenders engaged in lending against property. This value is used by banks when assessing credit risks and differs from the current market value assessment by taking into account long-term sustainable trends and excluding speculative elements. In other words, MLV can be characterized as a value determined taking into account some conservative forecast of changes during the lending period (7). This concept is more applicable for mortgage lending for fairly long periods. An important point in the above definition is the reference to “an assessment of future marketability,” which implies, along with determining the value, an analysis of the liquidity of the property.

Valuation requirements for securing loans, mortgages and debentures are set out in International Valuation Application 2 (IVA 2) Valuation for Lending Purposes. This standard assumes the possibility of determining for the purposes of collateral not only the market value, but also the value of an operating enterprise or liquidation value, etc., however, market value is chosen as the main type of value from the point of view of consumers. It is also important to note that the consumers of such an assessment are clearly defined in the standard as credit institutions. A feature of the recommendations in accordance with this standard is the emphasis on the appraiser’s use of market data. The standard requires the appraiser to clearly identify situations in which it uses non-market data or obtains non-market value.

Thus, we can conclude that, in accordance with the recommendations of international standards, market value is most often determined for the purpose of securing debt obligations.

Why is market value recommended as the base value? The concept of “market value” is quite transparent and tangible. In practice, many proven methods, methods and techniques for its determination are used. And most importantly, there is accessible information about real prices based on the results of completed transactions, as well as price information in the context of supply and demand. Generally speaking, market value is probably the only type of value, apart from investment value, for which there is a stable reference point in the form of a real market. Those. valuation tools can be verified based on an independent opinion about the value of the assets of their owners (sellers and buyers).

Using the liquidation value as the basis for calculating the collateral value seems logical at first glance. However, it should be taken into account that the approaches to assessing liquidation value used and described in the literature are based, as a rule, on the construction of theoretical models that reflect, to varying degrees, the authors’ ideas about the mechanisms for forming the values of the necessary discounts from the market value (8, 9). Without detracting from the merits of the authors of these works, in the absence of sufficient statistical data to verify the adequacy of the proposed approaches, the value of such theoretical constructs for practice must be considered doubtful.

It is also worth considering the concept of “fair value of collateral”, introduced by the Bank of Russia in the “Regulations on the procedure for the formation by credit institutions of reserves for possible losses on loans, on loan and similar debts”, more often referred to in the banking environment as Regulation 254-P.
In accordance with this document, the fair value of the collateral is the price at which the mortgagor, if he were the seller of the property provided as collateral, having full information about the value of the property and not obligated to sell it, would agree to sell it, and the buyer, having complete information about the cost of the specified property and who is not obliged to purchase it, would agree to purchase it within a reasonably short period of time, not exceeding 180 calendar days. That is, based on current standards, we can say that for items with a typical exposure period of less than 180 days this is, in fact, the market value, for others it is the liquidation value with an exposure period of no more than 180 days. Since no recommendations have been developed for determining this value, banks in practice operate with the same market value.

It would be logical to assume that the most adequate understanding of the essence of collateral value should first of all be sought from direct consumers, i.e. at banks.

At the stage of making a credit decision, the bank needs the collateral value as a measure of assessing the value of the collateral for comparison with the size of loan obligations when determining the required degree of security for the transaction. It is logical to assume that a bank, when providing a certain amount of money as a loan, wants to know what part of these funds can be returned using collateral. And it is this amount that banks understand as collateral value.

This conclusion is confirmed by the results of the survey. According to the majority of interviewed heads of credit and collateral departments of a number of banks, the collateral value is understood as the most likely amount of money that can be obtained to satisfy the bank’s requirements as a result of the sale of the collateral itself or other activities in which the collateral will play a key role.

In banking practice, the value of the collateral value is determined as a derivative of the market value by reducing it by a certain amount, the so-called collateral discount. The values of collateral discounts in relation to property assets generally range from 20 to 60%. The lower limit is determined by the lender's virtually guaranteed losses in the form of mandatory payments, the upper limit is probably determined by common sense and the presence of competition among banks. The main indicators that influence the applied discount rate are the liquidity of the property, the dynamics of changes in value over time and the projected costs that arise when foreclosure and sale of property. This issue is discussed in more detail in the book “Valuation for collateral purposes: theory, practice, recommendations” (10).

And further…

Taking into account the stimulating role of the collateral, useful information for the bank is the importance of the asset in question from the point of view of participation in generating the client’s income, in other words, its significance for the business.

Since the moments of provision of credit funds and their repayment are staggered in time, sometimes significantly (up to 5-7 years), it is necessary to take into account the change in the value of the collateral over time, i.e. For the bank, it will be very useful to forecast changes in the value of the property during the term of the loan agreement and, possibly, subsequent foreclosure on the collateral. Such changes will be determined by market trends, the properties of the property itself (for example, wear and tear), and the need to make investments to maintain the quality condition of the property (repairs, etc.).

Another important issue is the assessment of the costs that arise when foreclosure on the collateral and its sale. Such costs can significantly affect the credit decision regarding the collateral (for example, for equipment with significant weight and size characteristics, they can be comparable in size to the value of the property). The list of such costs will depend on the scenario in which the process of working with problem debts will proceed, but in most cases their size is quite predictable.

Banks and appraisers

Most banks do not have professional appraisers on their staff; work with collateral is handled either by employees of specialized departments (hereinafter referred to as “mortgagors”), or employees of credit departments who combine credit analysis and collateral analysis, or employees of the credit risk analysis department.

Pledgers, as a rule, have basic knowledge and skills in valuation, and if they have sufficient work experience, they are not inferior to professional appraisers, but situations often arise when:

Carrying out work to evaluate assets by bank employees is not economically profitable for the bank. This situation arises for banks with a branch network when the size of the loan portfolio in the regional division is relatively small;
assessment of assets on our own does not meet the requirements for temporary standards for considering loan applications;
the level of complexity of the assessment tasks being solved does not correspond to the level of qualifications of bank employees and requires the involvement of professionals in the field of assessment;
the client shows an insistent desire to determine the value of his property from an independent appraiser or between the bank and a potential borrower; in some cases, a dispute arises between various divisions of the bank regarding the value of the collateral.

Separately, we should mention the actively developing area of standard credit products (for example, mortgage lending and lending to small and medium-sized businesses). When working in these sectors with products that require collateral, banks clearly cannot use internal resources to adequately evaluate the collateral.

Therefore, most banks need the services of professional appraisers. The results of a survey of the banking community conducted by the ARB Committee on Appraisal Activities (11) confirm the high degree of involvement of appraisers in the lending process (Table 1).

Valuation for collateral purposes occupies a significant place in the total volume of appraisal work in the Russian Federation. In developed economies, valuation for lending purposes is practically the main job of appraisers. Therefore, it can be assumed that in the future the same trend will be characteristic of the domestic market for appraisal services. Based on the results of the survey of appraisers, a picture was revealed, illustrated in Table. 2.

Analysis of the survey data made it possible to determine which property, in relation to the most common types of assets, appraisers are most often involved in assessing. The results are presented in table. 3.

The degree of confidence of banks in the results of accepted reports can be characterized by the data given in table. 4.

As can be seen from the tables, the vast majority of reports received by the bank are checked in the bank's divisions. In this case, the test results look as presented in table. 5.

Such a low degree of confidence in the assessment results is not unfounded. The practice of working with problem debts, according to the survey, shows that only in 5% of cases the sale price of assets correlates with the initial assessment carried out by the appraiser. To identify the reasons for the low quality of services provided, the questionnaire included questions asking banks to rate on a 100% scale the weight of various negative factors noted by banks when checking reports. The results are shown in table. 6.

As can be seen from table. 6, the greatest importance is attached to the problem of the so-called “custom” assessment. At the same time, the borrower’s belonging to one or another lending sector is not so critical.

The reason can be explained by the motivation of the participants in the credit transaction. It is obvious that when conducting an assessment for the purposes of a pledge, the appraiser finds himself in rather strict conditions. The customer, who directly pays for the appraiser’s work, is not interested in the real value of his asset, which in most cases he himself knows very well. He is interested in the desired maximum result confirmed by the report, which allows him to attract large credit resources against the pledged assets.

Due to this factor and in contrast to the generally accepted opinion, the bank is not interested in understating the value, because in this case, he will limit himself in the volume of lending and, consequently, in receiving income. Distorting the value of collateral upward can lead to real financial losses in the event of a loan default. Therefore, in fact, the person interested in the quality of the assessment is the bank, although formally the report is ordered by the owner of the assets, the potential mortgagor. By the way, appraisers understand this fact quite clearly.

The considered motivational factors also influence the quality of reports. In Western practice, for an appraiser, a significant factor limiting subjective manifestations is reputational risk, however, the crisis in the mortgage market in the United States and a number of European countries has shown that “custom” appraisal is not alien to developed society. At the same time, the West has developed appropriate protective mechanisms. In the USA, for example, the customer of the report is a bank, although the work of the appraiser is paid for by the potential mortgagor. In a number of European countries, the following mechanism is used: the bank enters into a contract for asset valuation with a certain company well-known on the market, which, in turn, hires appraisers. In this case, the bank client pays the invoice issued by the company, and often does not even meet with the appraiser. Working with one company allows banks to significantly improve the technology and efficiency of the interaction process.
The current level of civility in the domestic market for appraisal services also, unfortunately, does not yet allow banks, with rare exceptions, to take risks on the reputation of the appraiser when performing appraisals for collateral purposes.

What would you like

We will try to formulate general recommendations and requirements for the valuation of property assets for collateral purposes. The practice of collateral work and experience of interaction with appraisers made it possible to formulate the following general requirements for the work of an appraiser when assessing for collateral purposes.

The main task of the appraiser is to show the quantitative and qualitative prospects for the feasibility of the appraised object.
The assessment result is primarily necessary for the bank, therefore, when conducting an assessment, the appraiser should work in contact with bank specialists.
The type of value determined depends on the degree of liquidity of the valued object. Therefore, the primary task is to analyze liquidity and agree with the bank and the customer on the type of value determined in the report.
The description of the objects of assessment must contain clear features that make it possible to unambiguously identify the object.
When determining market value, all estimates and assumptions must be based on reliable market data and trends. Assumptions based solely on the expert opinion of the appraiser should be minimized.
All sources of information used in the report must be indicated in a form that allows one to verify their adequacy.
The assessment report should contain, with a minimum of length, all the information necessary to understand the validity of the results obtained.
In order to increase the efficiency of work, intermediate calculation results can be submitted to the bank.
If there is a significant discrepancy in the results obtained using different approaches, an analysis of the reasons must be carried out and the most reliable result, in the opinion of the appraiser, must be selected as the final result.
An appraiser is not allowed to evaluate an object without inspecting it. Photographs of the objects being assessed (if there is a large number of objects, possibly selectively) must be included in the appendices to the report. Photographs must objectively reflect the condition of the entire object being assessed, and not its best fragments or parts.
By agreement with the bank and the customer, the appraiser can determine the parameters of the appraisal object that are not provided for by the requirements of the Federal Valuation Standards, but are necessary for the bank to make a decision.
The assessment must be completed within a time frame that does not exceed the limits established by the credit process. To minimize deadlines without loss of quality, the appraiser, at the stage of setting up an assessment task, must clearly understand his task, determine the amount of information and composition of documents required for the work, and stipulate the deadlines for submitting documents.

The stated requirements do not contradict Federal standards and correlate quite well with the requirements of International standards. In particular, the following main points can be highlighted in the MCO requirements.

In the case of determining the market value, the methodology for assessing the potential collateral must be strictly tied to the real market situation and contain a minimum of assumptions and assumptions of a subjective nature.

The International Standards state that “the method of sales comparison or other methods of market comparisons must be based on market research. That is, if the appraiser uses in his calculations information provided by the customer and that corresponds to reality, but does not correspond to market realities, such an approach when valuing for pledge purposes are unacceptable.

In addition to meeting the general requirements of IVS for report content, valuation reports for bond purposes should generally include information on the following items:

analysis of current activities and main trends in the relevant market segment;
retrospective, current and expected future demand for this type of property in a given region;
potential and likely needs for alternative uses of the property;
the current liquidity of the property, as well as, if necessary, the likelihood of its stability;
the degree of impact on the value of the collateral of certain forecast factors (at the time of the assessment);
the approach taken in making the valuation, and the extent to which reliable market data is used to support the valuation.

Separately, we can highlight the requirements for the appraiser.

The authority and responsibility of the appraiser must be clear to both the appraiser and his client. Appraisers must clearly understand the risks associated with conducting an appraisal for the purpose of granting a loan, since misunderstandings, misunderstandings or errors in this area can lead to disputes and litigation between the lender and the appraiser.
When conducting an appraisal for the purpose of granting a loan, the appraiser should pay particular attention to maintaining independence from the borrower.
It is important that the appraiser has relevant experience with a particular type of property, otherwise he will need to seek expert advice.

The standards require the appraiser to be competent and understand the lending process. Appraisers should have a general understanding of the requirements of banks and other financial institutions and, if possible, the terms of the loan. These are the basic requirements of the International Standards as applied to valuation for collateral purposes.

When performing an appraisal for collateral purposes, the appraiser is caught in a “triple scissors.” On the one hand, there is the customer of the assessment with a natural desire to obtain the highest possible result, on the other hand, there are the bank’s requirements for the quality of the assessment, the reliability and evidence of the report, and on the third, tight deadlines for completing the work. Practice shows that there are several directions for successfully solving a problem in such difficult conditions. In particular, these are:

optimization of the list of work performed, including the selection of methods and approaches used;
optimization of the report structure;
developing an algorithm for interaction with bank employees during the assessment process.

The approach of a number of banks to organizing interaction with appraisers, presented in Table 1, seems to be quite effective. 7.

The presented scheme is characterized by several significant points.

Firstly, this is a tripartite form of agreement, according to which the bank is a co-customer of the report and acts as an acceptor of the work.
The need for bank specialists to participate in the assessment is discussed in the Basel Committee on Banking Supervision consultation materials, in particular: “Additional collateral should be assessed with caution. For example, for significant commercial real estate loans, banks should obtain careful estimates of the current fair value of the collateral from qualified professionals - internal or external to the bank. Management should review the assumptions and conclusions of each assessment to confirm their relevance and validity."

Secondly, this is the formulation of technical specifications at the initial stage, which makes it possible to maximally specify the object of assessment, the requirements for the methods and approaches used, and reflect the necessary features.

Thirdly, these are ongoing consultations with bank employees during the assessment process, which makes it possible to promptly resolve emerging issues and allows bank employees to use intermediate results to make a credit decision without waiting for the completion of the report.

With hope for the future

Currently, under the leadership of the Expert Council of the ARB Committee on Valuation Activities, important and relevant work is being carried out to create unified methodological recommendations for valuation for collateral purposes. It is expected that the result of this work will be requirements and recommendations agreed upon with the largest banks, the appraisal community and the main consumers of appraisal services, which will improve both the quality of appraisal and the efficiency of interaction between producers and consumers of services.

In conclusion, I would like to emphasize that the bank is interested in the appraiser as a conscientious and professional partner, capable of taking responsibility for the result of his work; the bank must be sure that the value obtained in the report is adequate to the market and can serve as a reliable guide when making a credit decision.

Valuation for bail purposes is quite difficult and requires significant effort and professional skills. However, practice shows that companies that are successful in this field are just as successful in business.

PES 8062/24.03.2008

Notes
1. Federal assessment standard No. 1 “General concepts, approaches and requirements for assessment (FSO No. 1)”, approved by order of the Ministry of Economic Development of Russia dated July 20, 2007 No. 256.
2. Federal Valuation Standard No. 2 “Purpose of Valuation and Types of Value (FSO No. 2)”, approved by Order of the Ministry of Economic Development of Russia dated July 20, 2007 No. 255.
3. Federal Valuation Standard No. 3 “Requirements for an Valuation Report (FSO No. 3)”, approved by Order of the Ministry of Economic Development of Russia dated July 20, 2007 No. 254.
4. International assessment standards. Seventh edition. 2005/
Per. from English I.L. Artemenkova, G.I. Mikerin, N.V. Pavlova. M.: LLC "Russian Society of Appraisers", 2006.
5. European assessment standards. 2000 / Transl. from English G.I. Mikerin, N.V. Pavlova, I.L. Artemenkova. M.: LLC "Russian Society of Appraisers", 2003.
6. International Valuation Standards, Eighth Edition, International Valuation Standards Committee, 2007.
7. Konrad Ruchardt. Mortgage Lending Value, Verband deutscher Hypothekenbanken, Bonn, 2003.
8. Galasyuk V.V., Galasyuk V.V. Determination of liquidation value using the Galasyukov method (GMLV) / Ed. Galasyuk V.V. Dnepropetrovsk: JSC "Publishing House "Zorya"", 2007.
9. Rodin A.Yu. Methodology for assessing the liquidation value of property // Questions of assessment. 2003. No. 1, p. 30-33.
10. Assessment for collateral purposes: theory, practice, recommendations / M.A. Fedotova, V.Yu. Roslov, O.N. Shcherbakova, A.I. Myshanov. M.: Finance and Statistics, 2008.
11. Bulletin of the ARB. 2008. No. 04.

Valuation Committee
ASSOCIATION OF RUSSIAN BANKS

General issues of valuation of property assets for collateral purposes

The following people took part in the work on the document:

Gorshenina G.V. (head of the working group), Shcherbakova-Pacheva D.A., Savintsev S.A., Tarasov Yu.B., Doval S.V., Kozodaev M.A.

Coordination of work – Shcherbakova O.N.

Curator of the direction - Roslov V.Yu.

The document has been approved:

Credit organizations:

OJSC Bank VTB

OJSC Gazprombank (Risk Management Department)

OJSC Rosselkhozbank

OJSC "Bank of Moscow"

OJSC Alfa Bank

CJSC UniCredit Bank

OJSC Uralsib

OJSC Bank "Zenith"

Self-regulatory organizations of appraisers:

Russian Society of Appraisers

NP "Self-regulatory Interregional Association of Appraisers"

NP "National Board of Appraisers"

NP SRO "Association of Regional Masters of Valuation"

Review of valuation requirements for the purposes of pledging legislative and regulatory documents, national and international standards Valuation information required by the bank on the subject of collateral
Ethical standards and rules for conducting assessments, recommendations for the interaction of participants in the assessment process. General requirements for the composition and quality of work during the assessment. General assumptions and limitations General recommendations for the structure of the valuation report for collateral purposes
Literature

The recommendations cover general issues of valuation of property assets for collateral purposes. The document was developed in accordance with the requirements of current legislation in the field of valuation and contains recommendations based on the specifics of valuation for collateral purposes.

Terms used, definitions and abbreviations

Bank – credit organisation.

Appraiser– an individual or legal entity authorized to engage in valuation activities in accordance with the legislation of the Russian Federation.

Property assets– in the context of these Recommendations, tangible assets in the form of real estate, machinery and equipment or goods.

Investment cost- the cost for a specific person or group of persons for the investment purposes established by this person (persons) for using the valuation object

Liquidation value- an estimated value reflecting the most likely price at which a given valuation object can be alienated during the period of exposure of the valuation object, which is less than the typical exposure period for market conditions, in conditions where the seller is forced to make a transaction for the alienation of property.

Market price- the most probable price at which the valuation object can be alienated on the valuation date on the open market in a competitive environment, when the parties to the transaction act reasonably, having all the necessary information, and the transaction price is not affected by any extraordinary circumstances;

FSO– federal assessment standards

FSO No. 1- Federal assessment standard “General concepts of assessment, approaches to assessment and requirements for assessment” (Approved by Order of the Ministry of Economic Development of Russia dated July 20, 2007 N 256);

FSO No. 2- Federal Valuation Standard “Purpose of Valuation and Types of Value” (Approved by Order of the Ministry of Economic Development of Russia dated July 20, 2007 N 255);

FSO No. 3- Federal assessment standard “Requirements for an assessment report” (Approved by Order of the Ministry of Economic Development of Russia dated July 20, 2007 N 254);

Review of assessment requirements for pledge purposes of legislative and regulatory documents, national and international standards.

The concept of collateral value, actively used in the practice of commercial lending as such, is not standardized in the Russian Federation today; there is neither a clear definition nor generally accepted methods for its calculation. In practice, banks determine the collateral value as a derivative of the market value, applying reducing factors.

FSO 2 prescribes to determine the market value when assessing for the purposes of collateral. The FSO does not contain recommendations on taking into account the specifics of valuation for collateral purposes.

The International Valuation Standards (IVS) defines: “mortgage lending value (MLV) is the value of a property as determined by a Valuer making a prudent assessment of the future marketability of the property, taking into account the long-term sustainable aspects of the property, normal and local market conditions and current use. and suitable alternative uses for the property.” This definition is contained in European legislation (Directive 89/647/ECC as amended by Directive 98/32/EC). These directives concern issues of banking regulation and the establishment of minimum standards for the solvency of lenders engaged in lending against property. This value is used by banks when assessing credit risks and differs from the current market value assessment by taking into account long-term sustainable trends and excluding speculative elements.

The following main points can be highlighted in the MCO requirements.

1. In the case of determining the market value, the methodology for assessing the potential collateral must be strictly tied to the real market situation and contain a minimum of assumptions and assumptions of a subjective nature. International standards state that “the sales comparison method or other market comparison methods should be based on market research. Construction costs and depreciation amounts should be determined based on cost analysis and accumulated depreciation based on market data. The income capitalization method or discounted cash flow method must be based on market-determined cash flows and market-based rates of return." Those. If the Appraiser uses in his calculations information provided by the customer, which corresponds to reality, but does not correspond to market realities, such an approach when assessing for collateral purposes is not applicable.

2. The standards make clear that the going concern assumption used as a basis in a valuation for financial reporting purposes is not appropriate in a valuation for collateral purposes. The standards recommend that owner-occupied properties be assessed for lien purposes as owner-occupied. Those. any advantage associated with a specific owner of the property should be excluded. For example, if the owner mortgaging his property enjoys preferential conditions for paying for utilities, then when assessing the property, one should focus on the market level of expenses.

When evaluating income-generating objects, the standards oblige the Appraiser to draw the lender’s attention to the significant difference between the value of the object in the “going concern” mode and the object where:

business ceased;
supplies were removed;
licenses/certificates, franchise agreements or permits have been revoked or are at risk of being revoked;
property has suffered from uncivilized treatment;

or there are other reasons that may negatively affect the results of subsequent functioning. Those. international standards immediately direct the Appraiser to analyze the default situation.

3. The standards indicate that where a property has a higher alternative use value, lenders should be aware of any potential for increased value. However, the basis for calculating value for collateral purposes is primarily the existing use of the property.

4. In addition to meeting the general requirements of the IVS for the content of the report, assessment reports for collateral purposes, as a rule, must include information on the following points:

retrospective, current and expected future demand for this type of property in a given region;
potential and likely needs for alternative uses of the property;
the current liquidity of the property, as well as, if necessary, the likelihood of its stability;
the approach taken in making the valuation, and the extent to which reliable market data is used to support the valuation.

5. Separately, we can highlight the requirements for the Appraiser.

The powers and responsibilities of the Appraiser must be clear to both the Appraiser and his client. Appraisers must clearly understand the risks associated with conducting an appraisal for the purpose of granting a loan, since misunderstandings, misunderstandings or errors in this area can lead to disputes and litigation between the lender and the Appraiser.
When conducting an appraisal for the purpose of granting a loan, the Appraiser should pay particular attention to maintaining independence from the borrower.

It is important that the Valuer has relevant experience in the field of valuation of a particular type of asset, otherwise he needs to seek expert advice.

The Standards require the Appraiser to be competent in understanding the lending process. Appraisers should have a general understanding of the requirements of banks and other financial institutions, and, if possible, the terms of the loan.

Valuation information required by the bank about the collateral

When considering a property asset as collateral for a credit transaction, in order to make a credit decision, the bank must have information about a number of the following characteristics of the object:

liquidity;
price;
the significance (essentiality) of the asset for the owner’s business;
forecast of changes in the value of the collateral over time;
determining the amount of costs associated with the process of foreclosure on the collateral.

A) Liquidity

In addition to the fundamental possibility of accepting property as collateral due to legal circumstances, the bank is interested in the fundamental possibility and speed of selling the object - i.e. his liquidity.

The liquidity of the potential collateral is the most important characteristic in terms of assessing the risks associated with the collateral. Errors in determining the degree of liquidity are quite critical for the bank.

The liquidity of property is characterized by how quickly the object can be exchanged for money, i.e. sell at a price adequate to the market value on the open market in a competitive environment, when the parties to the transaction act reasonably, having all the necessary information, and the transaction is not affected by any extraordinary circumstances.

A quantitative characteristic of liquidity can be the time of market exposure of an object, i.e. the time it takes to sell a property in an open and competitive market at market value. In relation to these Recommendations, it is assumed that the exposure period does not include the time required for formal confirmation (execution, registration) of the purchase and sale transaction, i.e. The exposure period is the typical time from the moment of placing a public offer for the sale of an object until the seller and buyer make a decision to complete the transaction.

It is recommended to characterize liquidity by dividing it into separate groups depending on the possibility of sale and the projected period of sale. The following gradation of property liquidity is proposed depending on the timing of sale (Table 1).

Table 1

The main purpose of the proposed gradation is subsequent use by banks in the process of determining the collateral value. The functional usefulness of such a gradation lies primarily in the possibility of comparing a certain degree of liquidity with the value of the liquidation discount and its subsequent inclusion as a component in the collateral discount. A higher degree of liquidity corresponds to a smaller discount and discount.

Liquidity depends, first of all, on the availability and magnitude of demand for property. For example, retail real estate located on busy highways is always in demand on the market and can be sold within a limited period of time at a price close to the market value. An alternative example is industrial real estate in industrial cities, a legacy of the Soviet industrial era. The demand for such real estate is quite small.

Other factors affecting liquidity are:

Elasticity of demand for this type of property. For example, living quarters. In the absence of a shortage and a sufficiently large supply of housing on the market, a relatively small reduction in price will lead to an increase in the number of people wishing to purchase residential real estate. A similar conclusion can be drawn regarding goods, for example, rolled metal or petroleum products;

Condition of the property. Mostly related to equipment. As a rule, old and worn-out equipment is less liquid than relatively new equipment that does not require large restoration costs;

Compliance with modern technologies. The factor is especially critical for process equipment. The most striking example is computer technology. Considering the construction industry, we can highlight technological equipment for the production of finishing materials. When some materials are replaced by others - more technologically advanced, convenient, safe or environmentally friendly, the demand for equipment used to produce obsolete materials decreases accordingly. With a fairly dynamic development of this area, the factor under consideration becomes very insidious. In relation to real estate, we can note retail facilities with a ratio of retail and auxiliary areas that does not correspond to modern technologies, when trade is carried out practically “on wheels”;

Scale. This factor is characterized by a decrease in the liquidity of property that has characteristics significantly different from the average values. For example, filling lines with very high capacity or production facilities with a large area or volume. Such assets may be in demand by a very limited circle of buyers and, in this regard, the exposure period for such objects is quite long, and high-performance equipment, if large market participants do not need it, may generally be illiquid.

Quantity. Quite often, property that is liquid in small quantities loses liquidity when the volume of collateral exceeds the market capacity. The most striking example is metal-cutting machines. Several machines can be easily sold, but several hundred machines cannot be sold at a time.

Location. If a property that is in demand in the market is located in a location where it is impossible or expensive to move, the liquidity of such property will be very low or non-existent. For example, construction equipment in remote areas of the North or Siberia.

In some cases, illiquid assets are highly specialized equipment, auxiliary production facilities, etc. can acquire liquidity as part of property complexes or parts thereof. Such assets can be called “conditionally liquid”. The liquidity of such objects is directly related to the liquidity of the technological group or production complexes of which they are a part.

Assets may be recognized as conditionally liquid if the following conditions are met:

The entire property complex or its autonomous part has liquidity;
The assets in question are a significant component of the complex, perform key functions in its operation and cannot be separated without causing disproportionate damage to the owner of the complex. Moreover, from a legal point of view, assets can be considered as independent units;
The assets are operational and do not require replacement or significant repairs.

The liquidity indicator fundamentally influences the choice of approach to valuation and the type of value determined. Therefore, it is recommended to study the degree of liquidity of the valuation object first of all in order to correctly set the task for the valuation.

Due to the lack, most often, of publicly available information about the specific timing of the sale of various assets, a real way to determine the liquidity of property is consultations with market participants, i.e. with those who are directly involved in the sale of the assets in question on the market. In relation to real estate, these are real estate companies; in relation to equipment, these are manufacturers or their representative offices or dealers, as well as companies selling used equipment.

B) Price

The second important indicator is the value of the property. Most often, as prescribed by FSO No. 2, the base value for collateral purposes is the market value. At the same time, the bank must be sure that the value obtained by the Appraiser is based on real information and fully corresponds to market data. If the potential collateral does not have a market value due to the impossibility of independent sale, a different type of value may be determined by agreement with the bank.

C) The significance of the asset for the owner’s business

Taking into account the stimulating role of the collateral, useful information for the bank is the importance of the asset in question from the point of view of participation in the formation of the client’s income, in other words, its significance for the business of the mortgagor enterprise.

It is proposed to conditionally divide the assets under consideration into two groups: “Significant” property and “Insignificant” property.

The “Significant” group may include property objects that play a decisive role in the business process of the enterprise. Alienation of such objects, their exclusion from the composition of the enterprise’s property can complicate economic activity up to its complete stop. The loss of “significant” property will significantly worsen the financial performance of the mortgagor enterprise and reduce its solvency.

The “Insignificant” property group includes objects whose alienation will not have a significant impact on the production and economic activities of the mortgagor and will not significantly affect its financial condition.

The significance characteristic plays a significant role when lending to manufacturing enterprises at the stage of selecting assets to secure the transaction.

D) Forecast of price changes

Since the moments of provision of credit funds and their repayment are sometimes significantly separated in time (up to 5 - 7 years), it is necessary to take into account changes in the value of the collateral over time, i.e. It will be very useful for the bank to forecast changes in the value of the property during the term of the loan agreement and, possibly, subsequent foreclosure on the collateral. Such changes will be determined by market trends, the properties of the property itself (for example, wear and tear), and the need to make investments to maintain the quality condition of the property (repairs, etc.).

The need to perform cost forecasting and its horizon d.b. specified in the Assessment Task.

E) Determination of the amount of costs associated with the process of foreclosure on the subject of collateral

An important issue when making a credit decision regarding the collateral is the assessment of the costs that arise when foreclosure on the collateral and its sale. Such costs can significantly affect the amount of the collateral discount established by the bank. In the part related to the work of the Appraiser, the list of costs to be assessed may include:

Operating costs for a certain time period;
Dismantling and transportation costs;
Costs of consulting and intermediary services;
Other costs specific to individual types of assets.

The list and size of such costs can in most cases be predicted.

The obligation to determine the above characteristics, with the exception of cost, is not prescribed by the FSO. However, this list contains the business information necessary for the bank and the Appraiser’s willingness to include these characteristics in the list of parameters being determined will create significant competitive advantages for the bank. The need to determine certain parameters required by the bank is discussed at the stage of setting the assessment task.

Types of value determined for collateral purposes

As stated earlier, in most cases, when assessing liquid property for collateral purposes, market value is used as the basis for calculating the collateral value.

If the bank is considering, in agreement with the customer and the bank, the result of the assessment may be the investment value.

It is not recommended to use investment modeling methods to determine the market value of objects proposed for demolition or reconstruction when assessing for collateral purposes.

The liquidation value is determined by the Appraiser if the customer and the bank have such a need. In this case, it is recommended to specify the methodology used at the stage of setting the task for assessment.

In relation to objects that do not have independent liquidity, but are an inseparable part of a property or technological complex that generally has liquidity (conditionally liquid assets), it is proposed to consider market value as a basis for assessment, but on the assumption that the sale of assets is possible only as part of the property complex . This value will be understood as the share of the cost of the complex attributable to these assets when the complex is sold at market value.

When assessing conditionally liquid objects, their value is considered as part of the value of the property complex of which they are a part.

Therefore, when calculating their cost, two ways are possible:

determination of the value of the entire property complex and proportional allocation of the value of the objects being valued . This approach is recommended when considering the totality of assets that make up the majority of the complex (more than half the value);
valuation of individual assets using a cost approach. When determining wear, it is necessary to correctly take into account all its components. This option is more applicable to individual components of the property or technological complex. If there is a possibility of separate sale for such assets, an assessment of market value is necessary.

When setting up an assessment task, it is necessary to clearly stipulate what type of value will be determined in the report.

The cadastral value is not used when assessing for collateral purposes.

This section does not contain general ethical requirements for the Appraiser; the section includes recommendations regarding the ethical side of the Appraiser’s activities, due to the specifics of the assessment for collateral purposes.

It should be taken into account that when assessing for collateral purposes, increased demands are placed on the independence, integrity and professional integrity of the Appraiser. This is explained by the existing likelihood of the appraisal customer influencing the Appraiser in order to encourage him to inflate the value of his assets in order to obtain large volumes of borrowings. In most cases, such subjective influence on the part of the customer can only be resisted by the principled position of the Appraiser.

Appraisers should have a general understanding of the lending process, bank requirements and, if possible, loan terms and conditions. The appraiser must clearly understand that the results of his work are used to make real financial decisions and risks. Poor quality work by Appraisers can lead to economic losses not only for banks, but also for other market participants and the population.

The appraiser must be aware of his level of competence. When solving issues that require highly specialized knowledge, it is necessary to involve technical specialists. In such cases, it is unacceptable to limit ourselves to unfounded expert assessments of the Appraiser himself.

The cost of the Appraiser’s services is formed on the basis of the tariff policy applied by him as an element of the contractual relationship with the customer. The appraiser must pursue a balanced tariff policy that ensures adequate quality of the results of his work. Dumping, which inevitably entails a decrease in the quality of the assessment result, as well as an unjustified increase in tariffs, do not contribute to the development of partnerships. In cases where the Bank is not directly the customer of the assessment, it is recommended to refrain from influencing the formation of the cost of services.

The appraiser must constantly strive for professional development, analyze accumulated knowledge and experience, monitor market trends, improve qualifications and undergo periodic training. A good help for developing and improving knowledge and skills is interaction during the assessment process with competent employees of the relevant departments of the bank. Maintaining databases, automating report preparation processes, the presence of quality control systems in the company, and preparing analytical reviews for the region are indicators of the Appraiser’s professional maturity.

Quite often the Appraiser becomes aware of the details of upcoming loan transactions. Disclosure of commercial and other information that could cause damage to the customer or bank is unacceptable. The involvement of third parties as experts or consultants, associated with the need to disclose confidential information, is subject to agreement with the customer and the bank.

It is unacceptable to offer the customer of appraisal services to use the services of another bank to complete a transaction.

When interacting with representatives of the customer or bank, the Appraiser must show loyalty and tact. When discussing current issues and problems, only a constructive and businesslike tone is allowed. This recommendation equally applies to representatives of the customer and the bank.

In order to overcome the factor of subjective distortion of the assessment results and increase the efficiency of the assessment process as a whole, it is recommended to use a mechanism in which the bank is either the customer of the assessment or is included in the assessment process as a co-customer of the report and party to the contract receiving the report. A bank employee, while monitoring the quality of the appraisal report, acts as a counterweight to the influence of the customer and, to some extent, protects the Appraiser.

For the case when the bank acts as a co-customer, the general interaction algorithm is presented in Table. 2

Table 2.

		Ongoing events
	Approval of the assessment task	The object of assessment, rights and encumbrances are determined, the approaches used, assumptions and limitations are discussed (the required amount of information and the timing of the assessment are determined). As a rule, it is carried out with the participation of the customer and combined with an inspection of the facility.
	Conclusion of an agreement	The agreement has a tripartite form. The bank acts as a co-customer and recipient of the report (along with the pledgor) and signs a tripartite acceptance certificate.
	Ongoing consultations	The appraiser informs the bank employee about emerging problems (for example, with the provision of information), controversial issues are discussed together
	Submission of summary assessment results to the bank	The appraiser provides the bank with the results obtained in a brief form. When the bank agrees on the results, the Appraiser prepares an assessment report
	Presentation to the customer	The prepared report is presented to the customer

The presented scheme is characterized by several significant points.

Firstly, This is a tripartite form of agreement, according to which the bank is a co-customer of the report and acts as an acceptor of the work.

Secondly, This is setting the task for assessment at the initial stage. This allows you to maximally specify the object of assessment, the requirements for the methods and approaches used, and reflect the necessary features.

Third, These are ongoing consultations during the assessment process with bank employees. This stage allows you to promptly resolve emerging issues and enables bank employees to use intermediate results to make a credit decision without waiting for the final preparation of the report.

A scheme is also possible when, on behalf of the owner of the asset proposed to be pledged, the bank acts as the customer of the report. In this case, the Appraiser’s services are paid for by the bank. Subsequent compensation to the bank for the costs incurred is possible by agreement between the bank and the client in a form acceptable to them. In this case, the agreement is concluded in a bilateral form.

Close partnership between the Appraiser and the bank is a guarantee of an effective business process.

General requirements for the composition and quality of work during assessment. General assumptions and limitations.

Requirements for valuations performed for the purposes of loan collateral, as well as for other purposes in general, are given in the Federal Security Service and the standards of self-regulatory organizations of appraisers. However, the goal in question presupposes the presence of certain specifics due to the following reasons.

1. In fact, the consumer of the Appraiser’s services is a credit institution, while the customer of the report, as a rule, or in most cases, is a potential mortgagor.

2. The value determined by the Appraiser is considered as the base for the subsequent calculation of the collateral value. At the same time, unlike other valuation purposes, the issue of liquidity of the valuation object comes to the fore, the degree of which significantly determines the collateral value.

3. To make a credit decision regarding the collateral for a transaction, the bank needs, in addition to the base value, to know a number of parameters directly related to the value of the potential collateral (see section 3)

4. The activities of the Appraiser are determined by the following factors:

taking into account the fact that, based on the assessment results, the bank accepts real financial risks, the requirements for the quality of the report are quite stringent;
in accordance with the business needs of market participants, valuation services must be provided within a time frame acceptable to all stakeholders.

In view of the above, the following general requirements must be presented to the Appraiser when valuing for collateral purposes.

The main task of the Appraiser is to show the quantitative and qualitative prospects for the feasibility of the assessed object.
The result of the assessment, first of all, is necessary for the bank, therefore, when conducting the assessment, the Appraiser is recommended, in agreement with the bank, to interact with its authorized specialists. This interaction does not imply pressure on the Appraiser from the bank and does not violate the principle of independence of its activities.
The type of value determined depends on the degree of liquidity of the valued object. Therefore, the primary task is to analyze liquidity and agree with the bank and the customer on the type of value determined in the report.
The description of the objects of assessment must contain clear features that make it possible to unambiguously identify the object. It is not allowed to be limited to indicating names and accession numbers.
When determining market value, all estimates and assumptions must be based on reliable market data and trends. Assumptions based solely on the Appraiser's expert opinion should be minimized.
All sources of information used in the report must be indicated in a form that allows one to verify their adequacy.
The assessment report should contain, with a minimum of length, all the information necessary to understand the validity of the results obtained.
In order to increase the efficiency of work, interim assessment results can be submitted to the bank in a form agreed with the bank.
If there is a significant discrepancy in the results obtained using different approaches, an analysis of the reasons for such discrepancy must be carried out and the most reliable result, in the reasonable opinion of the Appraiser, must be selected as the final result.
It is not allowed to evaluate the object by the Appraiser without inspecting the object. Photographs of the objects being assessed (if there is a large number of objects, perhaps selectively the most significant ones) must be included in the Appendices to the report. Photographs must objectively reflect the condition of the property being assessed;
By agreement with the bank and the customer, the Appraiser can determine the characteristics of the appraisal object that are not provided for by the requirements of federal appraisal standards, but are necessary for the bank to make a decision.
The assessment must be completed within a time frame that does not exceed the limits established by the credit process. To minimize deadlines without loss of quality, the Appraiser, at the stage of setting up an assessment task, must clearly understand his task, determine the amount of information and composition of documents required for the work, and stipulate the deadlines for submitting documents and priorities.
The analysis section of the market segment to which the assessed object belongs should contain the following information:

analysis of current activities and main trends in the relevant market segment;
retrospective, current and expected future demand for this type of property in the region;
existing and likely needs for alternative uses of the property being assessed;
the degree of impact on the value of the collateral of certain forecast factors (at the time of the assessment);

When using the income approach when constructing cash flows, it is necessary to rely on market indicators, including in a situation where the owner of the property enjoys advantages that put him in a more advantageous position relative to other market participants (benefits, etc.). Existing encumbrances of the object (eg lease, easement), which will be preserved upon alienation of the object, are subject to mandatory consideration during the assessment.

General guidelines for the structure of a valuation report for collateral purposes

The structure of the assessment report, taking into account the specifics determined by the purposes of the pledge, is recommended in the following form.

Part 1. Summary of results and conclusions. This is the operative part of the assessment report, allowing the user to immediately obtain comprehensive and comprehensive information about the results of the work performed. Here we briefly summarize the main characteristics of the valuation object, the results obtained when applying various approaches to valuation, the final value of the valuation object, as well as important conclusions and recommendations that, in the opinion of the Appraiser, are important for the customer and for the bank.

Part 2. Assessment task. This part of the report contains three sections.

1) A comprehensive description of the object is provided with all the characteristics that were taken into account and should be taken into account during the assessment. The role of the object of assessment in the business or production process of the owner and its significance are indicated. It also provides a description of the property rights to the object of assessment and the encumbrances of the object that affect its value.

2) It is indicated that the assessment results are intended to be used for collateral purposes. Information is provided on the valuation standards used and other documents (including these Recommendations), the type(s) of value determined, as well as additionally determined parameters and characteristics are specified. The date on which the assessment is carried out and the deadline for completing the work are indicated.

3) The assumptions and limiting conditions used by the Appraiser that may affect the result of the assessment are given.

Part 3. Information about the customer of the assessment and about the Appraiser. In addition to the information indicated in accordance with FSO No. 3, information is provided about the bank - the potential mortgagee in terms of its name and location of the territorial unit (if work is carried out with a bank branch). If the assessment is carried out without the participation of a bank, information about the bank is not indicated.

Part 4. Analysis of the market/market segment to which the volume relates CT assessments. The results of the analysis of the market/market segment to which the object of assessment belongs, the identified main trends, price ranges and main influencing factors are presented.

Part 5. Analysis of the liquidity of the valuation object. A section not provided for by the standards, but extremely important for the bank. The section provides characteristics of the liquidity of the valuation object and the expected period of market exposure. The sources for determining liquidity indicators are indicated.

Part 6. Best use analysis. When assessing for collateral purposes, this analysis is carried out only in the event of a clear inconsistency between the property being assessed and its existing use. In this case, an assessment taking into account a change in the intended purpose of the object should be carried out if such a purpose has already been determined and explicitly.

Part 7. Description of the assessment process. The section provides information about the methods used, as well as all calculations. It is recommended to provide information about the analogues used, calculations and adjustments made in tabular form. The information presented should make it possible to easily trace the logic and correctness of the result obtained. If expert opinion is used as information material to the value being determined, the valuation report must analyze this value for compliance with market conditions described in the market analysis section.

Part 8. Definition of additional characteristics. If, in accordance with the assessment task, the Appraiser determines additional characteristics of the appraisal object, for example, a forecast of changes in value over time or the amount of costs associated with foreclosure, the initial data, logic and results of calculations are presented in this section. Also, in agreement with the Bank and the Customer, the liquidation value of the valuation object can be calculated. In this case, it is necessary to indicate the methodology used and the rationale for its choice.

Part 9. Coordination of results and final conclusion about the cost of the object. Weighting of results obtained by different approaches is carried out only when there is no significant discrepancy between the results. If there is a significant discrepancy, an analysis of the reasons is carried out and the most reliable result, in the opinion of the Appraiser, is selected as the final result.

Applications. In the Appendix to the report in accordance with the requirements FSO No. 3 Copies of the documents used are provided. When using small-circulation regional publications as information sources, it is recommended to include in the report not links, but copies of the relevant pages. It is mandatory to have photographs of the object being assessed.

In order to increase the efficiency of the assessment process, it is recommended to submit brief materials to the bank, allowing the bank employee to understand the reliability of the assessment result before receiving the main report. Such information should include:

Description of the subject of assessment;
Analysis of the market segment to which the valuation object belongs;
Photographs of the subject of assessment;
Calculation material with the output of the final result.

Literature

International assessment standards. Seventh edition. 2005 /Trans. from English I.L. Artemenkova, G.I. Mikerin, N.V. Pavlova. – M.: LLC “Russian Society of Appraisers”, 2006.
European assessment standards. 2000/Per. from English G.I. Mikerin, N.V. Pavlova, I.L. Artemenkova, - M.: LLC "Russian Society of Appraisers", 2003.
International Valuation Standards, Eighth Edition, International Valuation Standards Committee, 2007.

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Valuation of real estate with collateral - advantages

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