Our take on the news & trends of the art market
TPC Art Finance in conversation with Chris Wise, VP of Risk Strategies:
In this edition of Lending Insights, we spoke with Chris Wise, Vice President, Fine Art Practice, at Risk Strategies, about the intricacies of appraisals and valuations, and what collectors should know about the two before they seek out an estimate of their collection’s value. Wise is an expert on insurance and art, and he has spent more than 20 years helping collectors insure their artworks.
“It can be hard for people to talk about money and art,” says Wise. Part of the difficulty that collectors often have when a monetary value is assigned to an individual artwork or collection is that it often feels too limited. “People take it very personally,” Wise adds.
Collectors who are deeply attached to a specific artwork may feel that its value is higher due to reasons that are largely sentimental or difficult to quantify with objective metrics. Moreover, collectors who see art as a vehicle for investment may feel that the artwork has been undervalued because criteria relevant to its valuation have been overlooked.
However, the way artworks are assessed is highly standardized, and determining the value of an artwork involves the consideration of a wide variety of factors and how these factors impact comparable artworks on the market. “It’s purely about having a shared set of facts,” Wise says, and notes that some examples of the criteria that are considered include: condition and provenance of the artwork, present interest in the artist’s work, and the artwork’s cultural significance and significance within the context of the artist’s oeuvre. The state of the market can also have a major impact on the estimated value of the artwork, as can the reason for the appraisal or evaluation (e.g., protecting the initial investment, replacing the work in a tight market).
Naomi Baigell, Managing Director at TPC Art Finance, agrees. “Assessments are highly regulated and performed by professionals who have gone through specific appraisal education and training courses. These are trusted methodologies that have stood the test of time.”
Despite such standardization when it comes to the criteria employed to determine the value of an artwork, what may come as a shock to some newer collectors is that different professional services may use different means of evaluating the worth of the same collection or even individual works of art. These differences in value are not capricious or arbitrary; rather, they serve different purposes that we will explore in this blog.
A valuation is an estimate of the market value of an artwork at a specific moment. It is a snapshot of how much the artwork is worth at the time, given market conditions and the performance of comparable artworks.
Valuations consider numerous types of circumstances in which the artwork is sold, the most straightforward of which is fair market value. Fair market value is defined by the Internal Revenue Service as the price of any item or property on the open market, meaning “the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.” Meanwhile, replacement value is the amount it would cost to immediately replace the artwork. This is typically the maximum value one could use for insurance purposes and the broker opinion of value (BOV) when determining the value of a collection for said purposes.
Another common form of valuation, particularly in the art market, is marketable cash value, which is the estimated value that an item would realize on an open and competitive market, minus the amount required to ultimately sell it. Marketable cash value is rarely used when writing an insurance policy, but it is a common BOV within the context of the art market, as marketable cash value would also take into consideration storage, shipping, and any applicable fees or commissions involved in selling the artwork.
Giving Value Context
In most cases, a collector who recognizes art as an investment and believes in their abilities to navigate the market will only sell under ideal conditions. Consequently, that is the value that they assign to the artwork. Any amount below the fair market value may seem not only disappointing but flawed.
However, fair market value is not the typical form of valuation that either art-secured lenders or insurers use when assessing an artwork. Insurers tend to use replacement value. As Wise explains, the goal of an insurer is to provide impartial risk mitigation and recompense the individual who lost the work. In other words, they are not accounting for any of the psychological effects of losing the artwork or its potential appreciation in value; they are merely making the policyholder whole. “This is a process that substantiates the value of their collection.”
However, Wise notes, not all insurance policies are the same, and some can be written to maximize loss payout. “My goal is to help maximize the payout and to make sure that the insurance company agrees with the underlying logic of the appraisal.”
In instances where a collection is being broken apart and distributed to multiple parties, as is the case in matrimonial proceedings or estate planning contexts, marketable cash value is the most common form of valuation method. It is not a BOV that an insurance company would typically employ. Once again, this form of valuation takes into account the financial burden of storing, packing, marketing, and selling artworks.
Valuations at TPC Art Finance
Marketable cash value is the valuation method used at TPC Art Finance, as it gives the clearest picture as to what a seller would net when the work is sold. We loan up to 50% of the value of the secured artwork and the client retains ownership of the artwork throughout the terms of the loan. By converting up to 50% of the value of the artwork to cash, the recipient of the loan can then pursue new business ventures, finance new acquisitions, or bridge liquidity gaps. At TPC Art Finance, we assess each collection individually to help clients seize opportunities and support their unique goals.