Update: New Appraisal for Detroit Institute of Arts

Fellow art appraiser Darlene Bialowski forwarded an article from the Wall Street Journal on the new appraisal recently completed for the Detroit Institute of Arts. As we know, and as reported here on the AW blog in the past the previous appraisal done by Christie's on select items had a low $454 million to $867 million valuation.  The new appraisal by Artvest Partners now indicates a $2.76 billion to $4.61 billion valuation for what is believed to be the full collection.

What is also interesting, and very positive for the appraisal profession is in the Artvest report their was a market report, taking note of market conditions and factors to take into account if selling the collection.  Imagine that, Christie's giving a report on select items with a laundry list of values, while the true appraisal firm values the collection and makes notes of market conditions and impacts on value in the event of a sale. All users of appraisals, as well as museums should take note.  I have seen numerous Sotheby's and Christie's appraisal reports (if you can call them an appraisal), and have always been disappointed with the content, descriptions and values.

The WSJ reports on the new DIA appraisal
A new appraisal of the Detroit Institute of Art's collection presents a more realistic scenario.

The headlines last week were all about the potential windfall: A second appraisal of works in the Detroit Institute of Arts' collection had come in and the number was several orders of magnitude larger than the first. The city needs a valuation because the museum's collection is in play under the current municipal bankruptcy proceeding. Back in December, Christie's had come in with $454 million to $867 million, that low-high figure the equivalent of an auction "estimate" ranging between a number below which a work won't sell and another representing its likely maximum hammer price. (Of course, auctions often break that upper barrier.)

Then last week Artvest Partners, the New York art appraisal and investment firm presented its valuation: a staggering $2.76 billion to $4.61 billion, appearing to suggest that Detroit's creditors could look forward to a far bigger payday in the event artworks had to be sold.

Yet that number is misleading. Christie's had been asked to appraise only city-owned works—2,773 of them, representing roughly 5% of the museum's holdings. Artvest appraised all 60,377 in DIA's collection, because while the city-owned works are most vulnerable, potentially the entire collection is on the table.

But the appraisal's real news was the additional information it provided. Christie's had limited itself to the valuing the artworks. Artvest went the extra mile—actually, several—by providing, in addition to its numbers, a comprehensive discussion of market conditions and other factors likely to affect any effort to liquidate parts of the museum's collection. Anyone who looks upon DIA as an ATM will be in for a shock. Because in every case, the report argues, the result will be sale prices significantly below the low-end appraisal figure. Finally, some common sense has entered into the discussion of DIA's fate.

DIA, considered one of the top art museums in the U.S., has an encyclopedic collection of painting, sculpture and graphics. Its signature work is Diego Rivera's "Detroit Industry" (1932-33), a fresco cycle celebrating the city's manufacturing and labor force, but it boasts any number of one-of-a-kind works besides, including Pieter Bruegel the Elder's "Wedding Dance" (c.1566) and masterpieces by Rembrandt, Henri Matisse, Swiss Romantic Henry Fuseli and others. The Christie's appraisal listed 11 works, among them the Bruegel and a Michelangelo drawing, as the most valuable, the group making up 75% of the total appraisal.

Two sets of creditors have had their eye on the collection: the city's pensioners and two bond insurers, Syncora and Financial Guaranty Insurance Co. The pensioners had until last Friday to vote on the so-called "Grand Bargain," under which a group of philanthropies, the state and DIA have pledged $816 million to reduce pension cuts and turn the museum into a nonprofit trust, thus shielding its collection from claims. News reports at the end of last week suggested the pensioners have taken themselves out of the equation by approving it. (The actual vote tally won't be announced until Monday.)

That leaves the bond insurers, who will learn what percentage of their debt Detroit will pay when U.S. Bankruptcy Judge Steven Rhodes holds a trial next month to determine the feasibility of Emergency Manager Kevyn Orr's Plan of Adjustment. Synocra and Financial Guaranty Insurance Co. see a sale of museum artworks as the best way of getting maximum reimbursement since, as unsecured creditors, they stand to receive less from the city than secured creditors.

They might want to think again, given the picture of the art market painted by Artvest and the likely impact a decision to sell will have on the collection's value.

The report, written by Artvest principal Michael Plummer, notes that the four biggest sectors of the fine-art market, which make up 98% of its value, are European Modern Art, Impressionism and Post-Impressionism, European Old Master Paintings and Postwar and Contemporary Art. All but the last have declined in value since 2011. Other sectors have been dropping as well, with pre-1950 American art down nearly 15% since 2007. More than three-quarters of DIA's collection is in these four declining areas. The rest of the market has plateaued and is expected to rise or fall by about 10% in the foreseeable future. That translates into works being most likely to sell at the low end of their estimate.

The one exception to this trend is Postwar and Contemporary Art, which has been exploding since 2009. But it's also the most speculative and therefore prone to crashes. Previous crashes occurred in 1990 and 2008, the latter wiping out 50% of market value.

The manner in which any sale takes place will itself greatly affect market value. Mr. Plummer argues that the wisest course would be what he calls "an orderly liquidation," where works from DIA's collection are introduced to the market over a period of five to eight years, to avoid flooding the market and thereby driving down value. Even then there are no guarantees. Not every work put up at auction sells. When it doesn't, the market automatically discounts its value by 20% of its low estimate. DIA's four big collecting areas all have unsold rates ranging from 20% to 34%.

Litigation could also delay any sale indefinitely. Or, given the criticism the auction house received when it agreed to do the DIA appraisal, Christie's (or it's main competitor, Sotheby's, for that matter), might decide that handling any DIA sale isn't worth the headache. Since those are the two biggest auctioneers in the world, Mr. Plummer estimates that sale through any other house would lead "at a minimum" to a loss of between 20% and 40% of the collections' value.

Mr. Plummer ends his report by playing out a variety of doomsday scenarios involving one or more of the factors he's outlined to come up with a bear-market valuation of the collection at between $850 million and $1.8 billion.

It's easy to understand why Detroit's creditors would look at DIA as a rich source of revenue given the steady stream of news about stratospheric prices at auction. But the reality is, they face a choice between casting their lot with Judge Rhodes or playing art-market roulette—getting money from the city now or waiting, possibly years, only to wind up with less from any DIA sale than they'd expected. Bird in the hand, anyone?
Source: The Wall Street Journal

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