Case Study: Pre-Loan Asset Verification

Asset verification is a significant part of Present Value’s services. We’ve written about it in the past here and here. Today, we’ll highlight a real-world example that demonstrates the importance of asset verification for responsible due diligence.

Present Value had a client who owned a strip mall that included a movie theater. The movie theater began to lose business, the theater owner could no longer pay rent to the property owner, left the strip mall, and defaulted on his equipment loan. According to the terms of the lease, the property owner could take over everything in the property in 45 days.

Present Value was asked to appraise the equipment in the movie theater and came up with a value one-fifth the value of the loan. The reason for the huge discrepancy was that when the movie theater operator took out his equipment loan, he misrepresented the value and type of movie equipment he owned and planned to purchase. As a result, when the theater owner defaulted on the loan, the lender lost quite a bit of money.

This problem could have been prevented if the lender had requested an asset verification prior to approving the loan. If this had been done, the lender would have had assurance that the equipment it was supporting was equal to the value of its loan.

By: Present Value

Tags: Asset Verification, due diligence, lenders

This entry was posted on Friday, November 27th, 2009 at 12:01 am and is filed under Asset Inspection, Machinery & Equipment Appraisal. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.