The current dustup over the collection of the Detroit
Institute of Arts, which involves many contentious issues in the political and
legal arenas, is fascinating from the perspective of fine art appraisals. The bankruptcy case provides front-row seats
as some of the top appraisers in the country publicly assign values to the
same works of art. While each is doing
their best to develop credible results, they are reaching vastly different
conclusions. The appraisal profession struggles mightily with the concept of
subjectivity, but as the Detroit case illustrates, it is difficult to reach a
consensus when valuing works of art in the hypothetical. It also demonstrates that no appraisal exists
in a vacuum: the viewpoint of the client as well as any other intended user of
an appraisal naturally comes into play during the process of developing an
opinion of value.
The breaking news that the various creditors may be settling
probably renders all of the work that the appraisers have done in this case
moot. However, I think the case shines a
bright light onto something with which the appraisal profession is a bit
uneasy: appraisers adopt a point of view which will benefit their client. However USPAP clearly states that an
appraiser “must not advocate the cause or interest of any party or issue”. So what gives? My view is that what matters is that the
decisions and methods that an appraiser uses must be credible. When USPAP speaks of advocacy, it means that
an appraiser can’t cherry-pick comparables, or ignore facts that affect value;
every close comparable must be dealt with and all relevant facts need to be
considered. The document must be
credible. But we aren’t dealing with stocks
or bonds here; works of art are unique and the market for them opaque. Reasonable people can differ over almost
every aspect of an appraisal. So
naturally, as an appraiser goes about their work, they are going to adopt the
point of view of the person who hired them. The report has to be defensible, reasoned, and
proper in every way. But if you are not taking
your client’s point of view in a subjective situation, you aren’t doing your
job.
Jan Steen's Gamblers Quarreling, c. 1665
COD's appraiser puts this at $1 Million and DIA has it insured for $1.5 Million;
The two opposing appraisers assign values of $10 Million and $13.5 Million
All of the below appraisals were taking place while the so-called “Grand Bargain” was being struck, whereby a pile of money, from private foundations as well as the State of Michigan, would be paid to creditors in exchange for taking any of DIA’s art off the table, forever. They are still arguing over the legality of this transaction, as well as over who should get whatever money does actually get transferred, but, most importantly from the appraisal angle, the various parties are sparring over how large the pile of money should be. In other words, irrespective of whether or not any of DIA’s collection is sold, it now matters how much it is worth. The methodology used and the type of value established are where the rubber meets the road.
THE CHRISTIE’S
APPRAISAL OF DETROIT'S COLLECTION
In August of 2013, the emergency manager of the City of
Detroit announced that Christie’s was being retained to evaluate the part of the
DIA collection comprised of works acquired with City of Detroit (COD) funds,
explicitly excluding any work that was donated. They were also asked to give
advice on how to monetize the collection without selling it. The odd assignment
resulted in an odd document, produced in December of last year, that provides
values for the works and then goes on to explain how not to sell them, which is
probably not a typical assignment for an
auction house. Christie’s cover letter
states that Fair Market Value (FMV) was the valuation they arrived at and pointedly
claims that these values were not
auction estimates, but then they go on to give wide ranges of values which look
exactly like what you’d see in an auction catalog! Their report also does not give any comparables,
although they claim to be using the market data approach. And perhaps worst of all, neither the
appraisal nor the cover letter makes any reference to USPAP. At this point in time, one would expect a
major institution like Christie’s to be adhering to the professional guidelines
while performing appraisals. But I
digress.
The appraisal covers almost 2,800 objects; however they
eliminated almost 1,000 as being of little or no value. The remaining 1,741 objects were then valued
at between $454 and $867 million (you may see the report
here the very important cover letter which details
the parameters of the appraisal is
here). The appraisal itself is divided into three
parts: works on view, works in storage
with a value above $50,000 and then stored work valued below $50,000. As might be expected, most of the value was
concentrated in the first group, the 326 works actually on display in the
museum galleries.
This assignment is no joke; they had to appraise 1,741
objects in about 4 months, knowing that their values would immediately be made
public and that more than a few people would look at them as greedy lowlifes,
aiding and abetting the unholy process of stripping DIA of its art and angling
to get the works on consignment for themselves.
Christie’s sorted through almost 2,800 objects from the entire history
of humanity, spanning very diverse regions and cultures. By focusing on the works actually on display,
they cleverly narrowed the focus onto the works which are the most
valuable. Furthermore, they presumably
did not have to bother the DIA art handlers, and were able to simply walk
around the museum. So, right off the
bat, instead of eating up time appraising 2,800 objects, they looked closely at
326 and, by their reckoning, captured about 90% of the total value of the
collection. Then, in going through the
various lists from DIA, they found another 80 works with a value of over
$50,000, which they itemized, and the rest they simply lumped together in a
single number. Along the way, Christie’s
could not resist patting themselves on the back for reattributing two works of
Asian art which they found to be much more important than DIA had realized.
Christie’s is a major force in the art world of course, with
resources, manpower and a huge network at their disposal to rely on when
providing valuation services. So,
despite the lack of comparables in the report, one has to lend considerable
credence to their efforts. I do think it
is odd to simply zero out 1,000 works.
They are described as a collection of photographs of little interest, a
group of paintings by local artists and some coins and so on. But really, zero? I mean, not even $100? I suppose this is a rounding error in the
whole scheme of things, but these are the sorts of decisions that along the way
begin to add up.
More importantly, the values that Christie’s comes up with
are puzzling. Their cover letter says
that they are establishing FMV, with all the ‘willing buyer/willing
seller/relevant marketplace’ boilerplate. However, they go on to say that the
buyer’s premium has not been considered, which is always included when figuring Fair Market Value, at least in the
USPAP and IRS definition of the term.
The wide range for the works is also strange, with the final top number
almost double the low one. They explain
that the lower number is the more conservative and the higher the “most
advantageous” between the willing parties.
As both Elizabeth von Habsburg and Victor Wiener (appraisers who later
evaluated DIA;’s collection for some of COD’s creditors) point out in their
depositions, having a range is sometimes OK in many appraisal situations, but a
range this wide is borderline useless in most case. In this instance, however, it serves their
client well.
The tricky nature of the assignment is perhaps one reason
that Christie’s was being so fuzzy about the type of value they came up with as
well as the big range. Their client, the
Emergency Manager of Detroit is trying to save the city. He wants Detroit to become a functioning
municipality with a future that has a hope of meeting its obligations, with a
community of taxpayers who stay put and as such wants to have a world-class art
collection within the city limits. He doesn’t want to sell it. But he also
needs to be seen as doing his best to pay the City’s debts—it is his
responsibility as fiduciary, so he commissioned the appraisal and is here going
through the motions of ‘putting every asset on the table’. At the same time, he has lined up a group of
donors to protect the collection who he can’t really afford to fleece as he
needs them for a bunch of other gifts down the road. So the appraisal is rather vague on a number
of important issues such as what exactly the art is worth and by what
definition the value is being calculated.
Such flexibility allows the Manager and COD’s lawyers to use it in a
variety of ways to achieve the Grand Bargain and to make it look like the best
possible outcome.
The rest of Christie’s report proposed various ideas for
creating a revenue stream from the collection without selling it, such as
creating a “Masterpiece Trust” which would be accessed by a consortium of
museums who would pay DIA for the privilege.
As it doesn’t really concern the appraisal of the works, I will not
discuss these ideas here, except to again note that the report is a real hybrid
behind which the overriding goal almost certainly is to deflect the option of
selling off the collection.
Diego Rivera's Power of Industry fresco from 1935
While all the other appraisers assumed this could not be safely removed from the wall,
Victor Wiener Associates argues that it can and thus has significant value
SOME OFFERS ARE PUT
FORWARD
During the wait for this document, a group of creditors (the
ones most likely to receive the lowest amount for their claims) petitioned the
judge to appoint a panel of independent appraisers to do the job instead of
Christie’s, but the judge turned them down, despite the obvious benefit to the
employment prospects of independent appraisers. (Nicholas O’Donnell has an
excellent collection of posts about the legal aspects of the case
here). However, there was much more to come.
Blocked from assembling an appraisal panel, the aforementioned group of
creditors solicited bids from prospective buyers of parts of the collection as
well as from a lender willing to make a loan to Detroit taking the collections
as collateral. In many ways this makes a
lot of sense: what better way to
determine the value of anything than to actually get a bid?
The offers are worth a look. (The Art Market Monitor
covered this matter quite comprehensively
here). According to court documents, 4
entities indicated interest in the collection:
-Poly International Auction house offered ‘up to$1 Billion’
for all the Chinese art, subject to their examining it.
-Yuan Capital, an investment group with partners offered
between $895 Million and $1.4 Billion for 114 works of their choice.
-Bell Capital Partners, another investment group offered
$1.75 Billion for everything (not sure if that included the empty vitrines, but
it probably did).
-Art Capital Group offered a $2 Billion loan against the
entire collection, with an interest rate of between 6 – 9%
Like an appraisal, these numbers are hypothetical. The prospective participants did have to
provide some proof that they had the ability to close any proposed transaction
and that they weren’t simply shills for the creditors, but they could easily
back out of any deal and, of course, the works aren’t actually for sale at this
point. So, like the various appraisals,
these offers become less about reality and more about jostling for position in
the legal cage-match.
THE ARTVEST APPRAISAL OF DETROIT'S COLLECTION
In July, 2014, the COD revealed that it had commissioned an
appraisal of the entire collection from Artvest, an ‘independent advisory firm
that provides investment advice for the art market”, according to their website. This is not an appraisal company, per se, but
again the COD was not looking for a straightforward appraisal. As was the case with Christie’s, the COD
directed Artvest to not only come up with values, but to come up with some
ideas of how to generate income from the collection without selling it. Artvest was also tasked with exploring how
feasible it was to actually sell the whole collection, as well as to examine
the proposed deals that the creditors had generated.
The legal strategy here is easy to discern: by putting the whole collection forward, the
COD again was ostensibly following the emergency manager’s claim that
‘everything is on the table’. The
creditors had obviously made enough headway with their demands that the entire
collection was up for grabs that the COD had to address it. The COD was also stealing a march on any
creditor who was appraising the collection as a whole and taking the
opportunity to diminish any possible impact that the offers for parts of the
collection might have.
Artvest comes up with a number between $2.7 and $4.6
Billion, and then lands on the midpoint of about $3.68 Billion. They arrived at
the number in the following manner:
First, they simply accepted Christie’s appraisal of 2,800 COD works,
taking the mid-point of their high/low range.
This makes sense; Christie’s is obviously a reputable company and probably
the mid-point was what Christie’s was intending to be used all along. Besides, they still had a lot of objects to
appraise.
Artvest then undertook their own appraisal of remaining
works in the collection that they identified as high value, by which they meant
anything listed on DIA’s insurance as $1 Million or higher, and/or which they
spotted during their own walk-through of the collection which they thought
would be over $750,000. To do this work,
they hired four appraisers [two of whom I know professionally: Betty Krulick is the President of the AAA, of
which I am a student member and aspire to become a full-fledged member, and
Sabine Wilson, who was an instructor of mine at NYU]. This step also seems sensible; they were
trying to spend their time wisely, focusing only on the high-value items, and a
filter of the insurance values combined with a walk-thru seems credible to me.
The work the appraisers did is credible as well. All four were striving to establish FMV and
in most cases, they actually list the comparable that they felt was the
closest, which made for very pleasurable reading, at least for me. Added up, the four appraisers assigned values
of between $1.6 and $2.4 Billion, which Artvest averaged to $2.05 Billion.
However, this covered only another 423 works, meaning they
still had another large group to account for.
Their next step was to basically group everything into various
categories (Contemporary, American Furniture, Islamic, and so on). They then took the average value for objects
under $750,000 in Christie’s report, using the lower estimate and multiplied
that by the number of objects in each category, and neatly appraised about
57,000 objects. In this equation, they
also excluded anything that was listed under $5,000 (I assume on DIA’s
insurance).
This last step I find a bit off. I certainly recognize that it is not possible
to appraise over 60,000 without a team of 300 appraisers working for a
year. (By the time a smaller team
finished, the market would have moved!)
So obviously, some assumptions have to be made. But for these 57,000 objects, they came up
with a value of $971 Million. Bear in
mind, they were creaming off anything above $750,000 as they walked around the
museum. That certainly leaves a lot of
money on the table, as I assume there must be a number of $500,000 works in the
collection. Interestingly, Artvest makes
the argument that this methodology actually overstates
the value, since a lot of what is in a museum collection is low-end stuff that
they simply agreed to accept as gifts in order to get a few choice items from
wealthy donors; in other words, to flatter collectors they agree to accept an
entire collection when only a few things are museum quality. This is debatable, but deft, giving cover to
a rather sweeping decision. In my
opinion, to take 57,000 objects in a major museum and pencil in $971 Million
just doesn’t pass the smell test.
I also question the decision to zero out everything under
$5,000. Artvest states that it would
cost more to catalogue, ship and sell these works than $5,000 in their
reasoning, but I disagree. Christie’s zeroed out 1,000 objects; it is likely
that Artvest has zeroed out ten times that.
They are dismissed along the way as pottery shards, arrow heads and
textile fragments. Surely these things
have a value. I mean, mightn’t someone out there like to own an arrow head from
DIA and be willing to pay, say $20? Or
$30? And maybe there are a few really
good ones. Artvest argues that it would cost more to sell
them than their value, which again might well be true. But this is something one can control for
later in the appraisal by, perhaps applying some discounts and so on in a later
step.
And in fact, Artvest does one whole heck of a lot of
adjusting. Indeed, although they used
very credible appraisers to establish FMV, Artvest refers to the all of the
values as “indicative value” which is not an appraisal term as far as I am
aware. An internet search reveals it to
be an investment term which is a preliminary estimate of the bid/ask of a given
security. And this is exactly the manner
in which Artvest uses the numbers.
Having established what they hope is a credible ‘indicative value’
Artvest proceeds to apply all sorts of discounts and scenarios to the top line
and end up with a range of values from about $1.84 Billion to as low as $850
Million dollars, for the whole shebang.
Bear in mind that evening sales of contemporary art are
considered a failure if they fail to crack $400 Million in one night. How on earth can the entire contents of one
of the best museums in the United States ever be listed at $850 Million? There were at least two offers for more than
that for parts of the collection!
Taking a look at the report, it makes the following points
about the market in general, relying heavily on their interpretation of Clare
McAndrew’s latest TEFAF reports:
-People think the art
market is hot, but it is only the big ticket items that sell well; the middle
and low part of the market is soft.
While maybe 500 objects in the museum are masterpieces, a lot of it
would fall into the ‘soft’ part of the market.
-Three of the four
hottest categories in the market have declined since 2011.
-Except for
Contemporary, the art market has reached a plateau and the new money from the
BRIC countries that fueled the current boom is waning, so the rest of the
market is probably going to go down in the next five years.
-Contemporary art has
peaked and it too could reach a ‘breaking point” and go down soon. Lots of savvy collectors are selling, which
is another sign of a top. And when it
all crashes, it crashes hard, like in 2008, when everything went down by 50%.
-Because it is a
bankruptcy situation, the DIA would not be able to sell privately and would
have to go through auction, which is more risky. And the two best auction houses wouldn’t
agree to handle most of the small-ticket items in the collection, meaning
smaller firms would handle the sale and the prices would be lower and the
buy-in rates higher.
Reading through this report, you would have thought that the
art market had been in a slump over the past few years, except for the
occasional masterpiece that comes up at a contemporary sale, and that it was
about to cease functioning altogether in the near future.
What am I missing here?
Is it possible that the art market is so bad? Is everything I see and hear showing that a
lot of people are buying a lot of art a mirage?
I do agree that selling art is not as easy as it looks and that we
needn’t get carried away by all the glamour and hype, but I feel Artvest goes
overboard.
Then, turning to DIA’s situation in particular, Artvest
notes:
-A lot of what DIA has
is out of favor at the moment (like American Art in particular)
-A DIA sale would be
boycotted by a lot of collectors, museums in particular would refuse to buy and
even if they didn’t, they don’t have any money to buy art anyway, so a private
sale to another institution would be off the table.
-The big ticket items
would attract a lot of attention at a sale and the notoriety would work against
achieving high prices.
-Selling everything at
once means you need to look at liquidation value, as well as apply a blockage
discount.
-Things would
inevitably be bought-in, which would further reduce their value, as they would
be burned.
-The amount of work on
offer would be way too high for Christie’s or Sotheby’s to offer guarantees,
increasing risk.
-Since there is so
much work, it would be best to sell things over time, which also increases
risk, so if you don’t apply a liquidation and or blockage discount, you have to
apply a discount that takes into account the time factor.
-Litigation would
prolong and hinder the sales process at every juncture.
-Controversial museum
sales in the recent past have not done well at auction.
Some of these are good points, some seem a stretch. A later report by Victor Wiener rebuts a lot
of these claims so I won’t go into it much here. What is important to note is that Artvest is
saying that the DIA provenance would hurt rather than help a given work’s
prospects at a sale.
The above factors lead Artvest to apply various discounts in
different scenarios. In every case,
there is at least a 50% discount applied to the value before reaching the
bottom line.
These scenarios are:
A.
An immediate sale to a single buyer (requiring a
discount to get a liquidation value or at least blockage)
B.
Applying all the other possible discounts
besides blockage/liquidation just because the whole situation is screwed up and
also because the Contemporary market is about to crater
C.
Assuming a 3-5 year window to sell everything,
requiring a discount for the risk of the passage of time and for things buying
in
D.
A 3-5 window, but where litigation drags things
out.
Then, for each of the above, Artvest runs the numbers twice,
once at the mid-point and once at the low estimate of their ranges—never the
high.
In short, the Artvest report takes a very dim view on the
entire matter; it opines that at most, the creditors would be lucky to get $1.8
Billion. Again, all of these assumptions
are ones that an appraiser is allowed to make.
And the decision to go low is, of course, dictated by the client. The question is, is this credible to start
low and then discount heavily?
Really, the Artvest document cannot really be called an
appraisal at all; they themselves do not refer to it as such. It is properly an
“Expert Witness Report” and as such it is really a partisan legal filing meant
to buttress the argument that the Grand Bargain is fair. Again, the point of view of the client has
affected the final numbers.
Renoir's Woman in Armchair from 1874;
Insured by DIA for $14 Million and appraised by Artvest at $10 Million;
Winston assigns a value of $15 Million and VWA appraised this at $22.5 Million
THE VICTOR WIENER
ASSOCIATES APPRAISAL OF DETROIT'S COLLECTION
While the COD was working on their side of the story, two
creditors took matters into their own hands and hired their own
appraisers. Winston Art Group’s
Elizabeth von Habsburg was hired by Syncora and Victor Weiner Associates was
hired by FGIC to develop their own theories of the monetary value of DIA’s
art. Both of these clients are bond
insurers who stand to get hammered in the bankruptcy; if they can sell off the
art to get paid in full, they would, and if they can get the Grand Bargain to
kick in more money, that also helps them. (They were also involved in
generating the offers mentioned above).
So their motivation is to get a higher number than Christie’s and
Artvest. [I note here that I have had
professional interactions with Winston Art Group and Ms. von Habsburg is on the
board of the American Appraisers Association; Victor Weiner has been my
instructor for two appraisal classes at NYU].
The Wiener appraisal can be found in its entirety on the State of
Michigan website; I have been unable to find a copy of the Winston report, but
a lot of the information in it appears on Wiener’s and her deposition can be
found online.
The Wiener appraisal, along with his long, contentious
deposition,
makes for a great read.
Unlike Christie’s or Artvest, VWA puts a single specific number on the
collection: $8,149,232,354, although it immediately states that the number is
‘probably more than that’. The value
given is Marketable Cash Value (MCV), which is what it sounds like: the amount of money a seller would get after
all commissions and expenses have been taken out of the selling price. VWA and Artvest are the only two appraisals
that look at the collection as a whole so I will focus on them together here.
It is interesting to consider what might be the most
appropriate value in this situation.
When things are being donated for charitable purposes, or when they are
gifted under non-charitable circumstances, or when an estate is being settled,
the value used is FMV. One might argue
that under the Grand Bargain, the work is not being sold, and is, in a sense,
being donated or gifted, so FMV makes sense.
However, VWA’s client wanted them to consider the
possibility of using the DIA art as collateral, so in that case MCV is much
more appropriate. Furthermore, even
though it is a lower number, it allows the creditors to say that this is what
one could actually get. And course, even
though MCV is typically lower than FMV, the appraisers came up with a much
higher number than Artvest.
What was their methodology?
I should start by saying that finally in all of this appraising, VWA
mentions adhering to USPAP, which is a great relief! Disappointingly, most of their comparables
are contained in the workfile and are not publish, but it should be noted that
VWA is claiming the high ground by invoking USPAP.
VWA’s first step was to appraise 387 objects
themselves. It is somewhat unclear
exactly how these were chosen, as they range in value from $175 Million down to
$2,000. In his deposition, Wiener states
that they were trying to at once capture the really expensive items, but to
also create a sample, appraising objects from all the various departments at
DIA, which would then help them later on in their appraisal. Like appraisers before them, VWA gives a range,
in this case $3.09 – $4.04 Billion and lands on $3.56 Billion for the first
batch. Since these are all individually
appraised, using comps, one would need to actually see the comps to critique
them, but the methodology as described is sound.
Second, VWA took all of the 596 works that they themselves
had not appraised but that had been individually appraised by either
Christie’s/Artvest as well as Winston, and then averaged the midpoints of their
valuations and came up with $311 Million.
Again, this is a decision an appraiser has to make to get a project done
under the deadline but it must be credible.
Is it credible to take an average of other values and simply use
them? It is certainly problematic. For one thing, all the other values purport
to be FMV. VWA is reporting MCV, so it’s
not apples to apples, at least on the face of it. In his deposition, Wiener stated that because
they had done their own appraising of a lot of things and compared them to the
other appraisers, they felt everyone else was too low, so by taking their FMV, they
felt it was ‘implicit’ that these were really the lower Marketable Cash
Value. Also, VWA spends considerable
time attacking the numbers of both Christie’s and Artvest, so it does make it a
bit harder for them to simply take their word for it, but again, by averaging
Winston in with it, VWA felt as if they had controlled for a lot of these
errors.
Then, like everyone before them, VWA had almost 60,000
objects left to deal with.
In the third step, they took everything that was left over
that was given an insurance value by DIA and not appraised by
Christie’s/Artvest or Winston, just over 16,000 objects . Here it gets very interesting. VWA recognizing that insurance values (let’s
call them Retail Replacement Values, although DIA doesn’t) are unreliable. Firstly, they might be out of date and
secondly RRV is almost always way, way higher than MCV. So, to control for this they calculated the
average age of the listed RRVs and they also compared the RRVs to works that
they themselves had appraised. This gave
them a factor with which to adjust DIA’s RRV, and they gave the group a value
of almost $759 Million.
Here again, the appraiser is struggling to find a way to
credibly appraise a huge amount of disparate material in a short amount of
time. Relying on RRVs requires a few
leaps of faith, and VWA does acknowledge that in their report. Values used for insurance do not always
correspond to the realities of the marketplace and the manner in which they are
generated is not always the most rigorous.
Nonetheless, these values have to come from somewhere and DIA, being a world-class
institution would presumably spend some time making sure that their collection
was properly insured, especially when objects were being moved, conserved or
loaned. Furthermore, VWA compared a sample
of objects it had appraised on its own with the insurance values that DIA had
listed and made a reasoned effort to extrapolate based on these results. Because it relies upon individual values
assigned to individual pieces by someone connected to DIA, I do find this to be
credible, as unorthodox as it might be.
VWA then had just under 43,000 works of art left after these
three steps. This large group of items
had not been appraised by anybody and had no insurance values assigned by DIA. What they did was use the groupings that DIA
used to describe the works (Asian, Islamic, Old Master, Contemporary and so
on). They then went to the 2013 auction
sales results from Christie’s and Sotheby’s and figured out the average selling
price for each work within each category.
They then decided to add a premium or subtract a discount based on how strong
that particular market is. VWA refers to
this as a “pricing matrix”
So, for example, there were 1,679 objects on the DIA
inventory listed as “Ancient” in the final group. VWA calculated that the average selling price
at the two major auction houses in this category in 2013 was $80,049. So they multiplied 1,679 to 80,049. Then, because they think that the ancient
market is strong and because the DIA provenance would enhance the desirability
of the works as well as insure that the pieces would not violate international
laws governing the trade in antiquities, they add a multiple of 25% for this
category. So, 1,679 x 80,049 = $
134,402,271. Then, the 25% premium
brings it up to $1,680,02,838. (VWA has
a slightly different number in their report, page 214, likely due to
rounding).
They do this for every category and come up with about $3.5
Billion for that group. I have thought
about this a lot and read the VWA report a number of times and I don’t think
the pricing matrix approach as they use it here works. For one thing, I tried to follow along with
the data they used (they relied on pages 67-69 of the Artvest report which
tabulates the number of lots and values at the two houses in 2013) and could
not replicate the factors they were using…I come up with lower average prices
than they do in every instance. But more
importantly, I feel that their method overstates values. For one thing, they are only looking at what
works sold; they are not adjusting for the fact that some things buy-in. In other words, they are not dividing the
gross sales numbers with the total
number of works offered for sale but rather only those that actually sold. Furthermore, as COD’s lawyers point out, VWA
is taking the top two auction houses and looking at their sales which include
some very important items and using those results to appraise a selection of
works which has already been filtered a number of times for high-value
items. Indeed, the works they are using
this formula on have NO INSURANCE VALUES listed. I am willing to imagine that DIA has a few
pricey items in there. But a lot of it
must be things that would never appear at any auction, let alone Christie’s or
Sotheby’s.
VWA’s final number is
about $8.1 Billion, almost $3.5 Billion higher than Artvest’s. Furthermore, their $8.1 Billion is MCV,
whereas Artvest’s is an ‘indicative value’, subject to at least a 50%
discount. Clearly, the two sides are
very far apart.
VWA’s report is laden with arguments for why they think the
DIA collection is worth more than what Artvest says. Their report attacks a great deal of
Artvest’s assumptions and conclusions while arguing that instead of discounting
works because they come from DIA, one should be augmenting them.
Specifically, VWA states:
-Michael Plummer, who
signed the Artvest report is not an appraise, the report is not USPAP
compliant.
-The DIA collection is
incredibly important, assembled through the efforts of some of the richest and
knowledgeable collectors of the 20th Century.
-A museum provenance
enhances works at auction and many collectors see deaccesioning as a great
opportunity to acquire great works. (VWA
here deftly quote their adversary’s experts, Christie’s, who say as much in a
number of their own publications.)
-Celebrity adds
excitement and a DIA sale would be the “Sale of the Century” resulting in a
feeding frenzy.
-The current market
pays a premium for works of extraordinary quality, of which DIA’s collection
contains many.
-Artvest misinterprets
and cherry picks data from the TEFAF report, which, in VWA’s opinion shows that
auction numbers are down because of a lack of supply of quality works, which
would not be the case with a DIA sale.
Artvest also uses 2011 to show that a peak has been reached, but
overall, the market for art has not peaked when looking at a longer timeframe.
-The new money flowing
into the market from emerging economies has only begun and is not about to dry
up.
-The steep rise of the art market in the past 10 years
is not ‘once in a lifetime’ as it happened before in the late 1980s.
-By using limited time
frames, Artvest incorrectly shows that a number of collecting categories are
out of favor.
To make a number of these arguments, VWA hired two outside
consultants to prepare reports, Zhang Yi, who was a co-author of the recent
TEFAF report as well as Dr. Janet Barth, an economist with a specialty in the
art market.
Overall, they do a pretty good job of pounding on
Artvest. As I indicated above, I feel
that Artvest went way too far in the grim picture they paint of the art
market. On the other hand, it may well
be that VWA is being too aggressive. For
example, while a DIA provenance would certainly appeal to a lot of collectors,
when work is being sold that is of major importance it will already have an
astronomical price. Would the fact that
a masterpiece that is unobtainable except in extraordinary circumstances really
be sold for more just because it is from DIA?
Wouldn’t everyone bidding on Van Gogh’s Self Portrait already know what their maximum bid would be
irrespective of the fact that it came from DIA instead of, say, a private
collection? But in general, VWA
dismantles Artvest’s rather shaky arguments, and hiring outside experts to
assist in this adds greatly to the credibility in this regard.
THE WINSTON ART GROUP
APPRAISAL OF DETROIT'S COLLECTION
Winston Art Group, like VWA, is a major player in the
appraisal field. As mentioned above,
Elizabeth von Habsburg, a principle at Winston, headed the team that appraised
part of DIA’s collection. Unfortunately,
I have not been able to obtain a copy of their actual report, although information
from it is included by VWA in their report, and von Habsburg’s deposition
regarding it are available online. In total, they examined 582 objects from
throughout the collection and assigned a FMV of $1.74 Billion. Unlike Christie’s, they use the accepted
definition of FMV, which includes the buyer’s premium and/or any other
commissions due the seller.
It is not clear how the 582 works were chosen; von Habsburg
stated that it was her clients who gave her the list to work off of. Looking at the range of values they provided
as well as the material, it seems to me as if it was trying to capture all the
masterpieces and then do a sampling of the rest of the collection. My guess here is that the Winston report is
meant to do what VWA’s does: illustrate that the COD is coming in too low, but,
unlike VWA, without relying on any statistical
gymnastics to try and figure out what the whole thing is worth. If they can take the top 100 works, show that
Artvest and/or Christies are too low on a case-by-case basis, they will have
scored some points for their client. Also,
by doing a sample, they can give their side more ammunition to attack the
findings of Artvest and Christie’s.
The works Winston appraised to not synch exactly with all
the others, so it is hard to quickly say if they are higher or lower. Without doing a full-scale analysis of their
values, it seems as if they are sometimes the lowest and sometimes the
highest. In general, though, it seems
safe to say that they come in quite a bit lower than VWA and a little bit
higher than Artvest. None of their values seemed way off, at least
in the areas that I am familiar with, and it seems reasonable to assume that
they could defend their valuations.
What is interesting to think about with Winston and VWA is
that, presumably, the two creditors who commissioned these appraisals
coordinated their efforts with each other.
I have no way of knowing this, but it would stand to reason that since
they have the common goal of undermining the COD’s appraisal of the DIA
collection, they might check in with each other as they go about this
task. By having VWA do the whole
collection and Winston do a sample, the strategy may have been to give both of
their lawyers ammunition in the fight.
However, the two existence of two reports also allowed the COD to play
them off one another.
THE COD STRIKES BACK
Late in August, the COD deposed
both Victor Wiener and Elizabeth von Habsburg and then later in the month petitioned
the judge to exclude VWA’s report. As is
typical in these legal filings, the language and the tone was withering. It begins by stating that “Victor Wiener is an appraiser
who purported to appraise the entire 60,000-plus collection of art at the
Detroit Institute of Arts (“DIA”) in less than
two weeks—a feat that even Mr. Wiener admits had never been
achieved in the history of art appraisal.”
It goes on to state that his approach is a ‘mishmash method’, which is ‘slapdash’
and unreliable.
COD’s major points in this are:
-A lot of VWA’s
values are too high…’off the charts’
-Step 2, where
other appraisals are simply averaged is unorthodox
-The Step 2
averaging uses numbers that VWA criticizes in other parts of its report
-Step 2 uses other
appraiser’s FMV numbers but VWA is calculating MCV
-Step 3 uses
values from DIA; these insurance values were old, unreliable and anyway, using
insurance values to calculate MCV is a no-no
-VWA admitted to
making mistakes which they corrected, but there are likely other ones
-The supplements
that VWA applies in Step 3 are arbitrary, cannot be independently tested and
the Step 3 methodology has never been used before and in fact was invented by
VWA and used for the first time in the appraisal
-Step 4, where the
remaining works were compared to average prices at Christie’s and Sotheby’s inflates
the values because the works sold at auction are much better than the works in
this group, which had been picked of most of the good stuff
-And again, Step 4
is a new invention
COD buttress their argument by pointing out a couple of
instances where VWA and Winston were
miles apart on a couple of Rembrandt prints and they quote
from von Habsburg’s deposition where she stated that usually an appraiser
should never rely on unverified values on spreadsheets or use insurance values
to calculate FMV. (She was not referring
to VWA in these statements but rather was responding to a general question).
COD makes some good points.
As I stated above, I think Step 4 is suspect and it is also true that
VWA makes it hard to follow along with them in their decision-making. On the other
hand, a lot of what Artvest could be criticized in the same way. They worked quickly, invented new ways of analyzing
the data and propose discounts which are impossible to test. There really is not much difference in the
leaps that each firm took in preparing their report, at least in the abstract
sense. If one wants to say that their
methods are wrong, one has to deal with them.
Of course some new methods have to be invented here, no major museum’s
collection has ever been used as a bargaining chip in a bankruptcy proceeding
before.
In fact, the entire proceeding is
an exercise in wild conjecture: how much income will a toll road generate 23
years from now? What amount of tax
revenue can Detroit expect to generate in 2024?
What return will the retiree’s fund earn next year? In every instance, the answer depends on your
point of view. So when Christie's considers 1,000 objects to be worthless and then Artvest does the same with 10,000, or Victor Wiener Associates adjusts insurance values to calculate marketable cash value, they are not doing anything different from the rest of the experts who are involved in the case and they are making an honest effort to be of use to the court...and their clients.
