7 Collectibles Worth of Investment

As appraisers we need to watch market trends, and also know more about what is happening within the overall marketplace. Sometimes we get locked into our area oc specialty and fail to look at what is happening in general and in other specialty areas.

The Street just published a short article on what it considers the 7 most investment worthy collectibles. They include Childhood Toys, Pop Memborbillia, mid century modern furniture, Star Wars memorbilia, Chinese and Japanese ceramics, contemporary art and vintage fashion.

The Street reports
NEW YORK (TheStreet) -- If there is such a thing as a golden rule for collectibles, it's buy what you love -- and if you're lucky, some of that will be valuable, too.

The collectible market is a tricky one, and a lot of what people believe will be valuable winds up becoming completely worthless (remember that '90s Beanie Baby craze?). The sector evolves over time, and interests -- and generations -- change.

"The greatest of the collecting generations, which is the World War II generation, is dying, and there's nobody stepping up to replace them in terms of buying all the stuff that they bought," said New York-based appraiser and consultant Lisa Ramaci. "The collectibles market has really shrunk."

But collectibles haven't died out all together. A number of items still fetch a pretty penny at auctions, in private transactions, or through online platforms such as eBay (EBAY - Get Report) and Amazon (AMZN - Get Report) . And as the market starts to look especially volatile, more and more people could start eyeing collecting as an alternative way to invest.

But as industry experts will tell you, returns aren't a sure thing, meaning whatever you buy you should be fine with hanging onto for a while.

"Buy something because you love it and you get pleasure from it and it kind of speaks to you. Never buy something purely for investment purposes unless you're absolutely 100% sure you can make a return on it," said Tracy Martin, an expert in antiques, post-war collectables and vintage fashion based in the U.K.

"If there's a downturn, if prices don't go up rapidly, are you as happy with that piece?" said Peter Loughrey, the founder of auction house Los Angeles Modern Auctions.

He says the most successful collectors are people who have a deep connection to their pieces, pointing to actor Steve Martin, whose art collection he says "has a fantastic point of view."

As for those approaching the arena purely for financial purposes, the end result often isn't as good. "It's not so much a collection as it is a dealer's inventory, and it's all sitting in a warehouse," he said.

Considering dipping your toes into collectibles? Here are seven categories where you can still find value -- financial and otherwise.

1. Childhood Toys

"We're seeing a lot of nostalgia, the growing middle class, and now people are buying things that remind of their childhood. You see a lot of toys, games," said Sarah Fysh, Online Operations Manager at valuation company Value My Stuff.

She pointed to the example of Micro Machines, a line of toys produced in the 1980s and 1990s. "The right Micro Machine could go anywhere from five pounds to 200 pounds [$7.70 to $308]," she said.

Martin mentioned Pippa dolls, which were made by British toymaker Palitoy in the 1970s, and Transformers figurines made in the 1980s.

"People really are buying into their nostalgia, their childhood memories," she said. "Toys are becoming one of the biggest areas of investment for collectors."

2. Pop Memorabilia

For those starting out in collecting, pop memorabilia may be a good way to get the ball rolling.

"If I was going to suggest somebody start collecting something, I would probably suggest where they could make the highest amount of return [are] things such as pop memorabilia," said Value My Stuff's Fysh. "We see things come up quite regularly at auction assigned value by the right name could be worth quite a lot in actuality when you didn't pay anything for it."

A set list written out by the late Kurt Cobain of the Seattle rock band Nirvana was sold for $8,750 at auction house Bonhams in March 2015. At the same auction, a suit worn by actor Sacha Baron Cohen in the 2006 Borat went for $5,250, and a Beatles-signed copy of a With The Beatles album was sold for $36,250.

3. Mid-Century Modern Furniture

The market for antique furniture isn't what it used to be -- instead, collectors are flocking to more modern pieces made in the 1950s, 1960s and 1970s.

"Even people who are not wealthy, that's the kind of stuff that people are buying nowadays," Ramaci said. "That's probably almost a direct result of the Mad Men phenomenon, because once that TV show started, interest in it began booming."

And in the category, it's all about designers and names such as George Nakashima, Wendell Castle and Charles and Ray Eames. "A lot of specific names have gone up and down over time, but some of them are no less collectible," Loughery said.

A pair of lounge chairs and ottoman made by the Eames pair sold for $5,625 at a Rago Arts auction in June. A Nakashima dining table went for $26,250 in February, and a Wendell Castle desk was bought for $183,750 at the same auction.

"Ikea really personified this whole idea of 'this is how your house should look,'" Hill said. "A lot more people are going for decorative things that have a story connected to them. They want something to have a soul, a passion, a heart, rather than some anonymous piece of furniture mass produced in China and shipped over here."

4. Star Wars Memorabilia

In early 2015, a figurine of Boba Fett, Darth Vader's bounty hunter in Star Wars: The Empire Strikes Back, went for more than $27,000 at auction. It fetched the top price at an event at Vectis Auction, the world's largest toy auction house, in which former U.K. Star Wars Fan Club chairman Craig Stevens sold off 70 figurines from his personal collection.

"Obviously, that's very rare," said Martin.

In fact, according to Ramaci, Star Wars is perhaps the only film franchise with memorabilia worth such high prices, and even then, it depends which specific movie the items are related to.

"You've got people who collect Star Wars merchandise, but only from the first movie, because that's before people realized what a blockbuster franchise it was going to become, and so the amount of merchandise from it, in the first one or two years of its rollout, is highly collectible," Martin said. "If you were smart enough in 1978 to buy a plastic cape Jawa action figure for $1.99 and it's still in the package, you can sell it now for between $5,000 and $7,000, because it's very rare."

5. Chinese and Japanese Ceramics

The price of Chinese ceramics and porcelain has climbed in recent years, but that could soon change.

"That's been doing very well, and the reason for that is until recently, the Chinese economy has been booming. So as a result, there have been a lot of people buying back their heritage," said Mark Hill, an antiques and collectibles specialist who has worked for major auction houses Bonhams and Sotheby's (BID - Get Report) .

Part of what makes Chinese ceramics especially hot items is that once they are acquired by Chinese buyers, they're not likely to be up on the auction blocks again. "You will never see them on the open market again, because now they're home where they belong," Ramaci said.

China's economic slowdown and market turbulence, however, are likely to impact the market for Chinese ceramics and other collectibles as the Chinese people are no longer able -- or willing -- to buy.

Hill suggested investors start looking at Japanese items instead, for which prices could rise should that economy improve. He pinpointed ceramics and works of art from the Meiji era (the late 19th and early 20th centuries). "Lots of Meiji works of art just seem like incredibly good value at the moment, especially due to the quality," he said.

6. Contemporary Art

Contemporary art is a big mover on the art scene, and it is accessible to collectors of all kinds.

"There are levels for every collector in the contemporary art world, for example, there are levels even at the few hundred dollars to the few thousands and on up to the multi-millions," said Los Angeles Modern Auctions' Loughrey.

One such instance is American artist Jeff Koons. His "Balloon Dog (Orange)" was sold at Christie's for $58.4 million in 2013, making it one of the most expensive pieces of art work by a living artist ever to sell at auction. But not all of his pieces are so pricey.

"You could get original work for $10 million, or you could get sort of entry-level authentic edition works for $10,000. And there's also things like his skate decks for Supreme and other works that he designed for museum gift shops and things that you could get for hundreds of dollars," Loughrey said. "For a major contemporary art name like Jeff Koons, there's authentic collectible, investible works at sort of every price range, and that's one of the reasons I think that makes his work so attractive."

Loughrey added that contemporary art also appears to have multi-generational appeal. "For the last 25 years, I've found my younger collectors still being fascinated with a lot of the same pieces, and that's really good for the future of collecting," he said.

7. Vintage Fashion

"Collectible fashion is massive at the moment," Martin said. "Good vintage names, sort of 1960s boutique culture, so Mary Quant, Biba, all things that epitomize an era."

British designer and fashion icon Mary Quant is often recognized as the originator of the miniskirt, and London fashion store Biba, run by Barbara Hulanicki, was a major force in style in the 1960s and 1970s.

Fashion from the 1940s is valuable as well -- specifically from the United States,where the industry wasn't slowed down by World War II as much as it was in Europe. "It's a lot easier to buy American, especially 1940s fashion, because you didn't have the restrictions during the war, the rationing," Martin said.

Of course, newer fashion items are worthwhile collections as well -- and can be costly ones at that. In June, a fuchsia Herm├Ęs Birkin made in 2014 set a record as the most expensive handbag ever sold at auction. It was sold for more than $200,000 in Hong Kong.
Source: The Street 


Art Galleries Operating in the Red

The Art Newspaper is reporting on a new book by Magnus Resch with a claim that nearly 1/3 of modern and contemporary art galleries operate at a loss, and that only 1/3 of the modern/contemporary art galleries in the US, UK and Germany earn a 6.5% profit margin.

Resch claims too many galleries focus on the art and not on the proper business model.  I know from my time as a dealer there were many, many who failed to understand, or to devote the necessary time and skill level to running a business, so the numbers are really not that surprising.

The Art Newspaper reports
Almost a third of modern and contemporary galleries operate in the red, while the average profit margin of 1,300 galleries from the UK, US and Germany is 6.5%, according to a forthright book about the art industry.

The updated, English version of Magnus Resch’s Management of Art Galleries, published by the Berlin-based Hatje Cantz, pulls no punches. Its author writes: “A tradition has evolved of amateur management presiding over an enterprise that is all too often sinking into financial obscurity.”

His suggested remedies are drawn from tried-and-tested business school models and include advice such as adopting more rigorous systems of management and not competing for the same small number of clients. Among the more challenging ideas are a proposed change in the way living artists are paid by galleries (largely in favour of the gallery) and a recommendation that all dealers should operate in the more profitable secondary market as well as selling new works.

Resch’s style is clear and businesslike, but he is not advocating a corporate art world. The foreword by the US curator and dealer Jeffrey Deitch begins: “Art dealers who focus less on business and more on art are generally the dealers who become the most successful and influential.”

The volume of raw data on the private art market is impressive. In addition, Resch conducted 51 interviews with industry experts over the ten years he says it took to research the book. His own experience working in galleries and ten lively case studies also pepper the pages.
Source: The Art Newspaper


Fine Art and Liquidity

Fellow appraiser Louise Allrich, ASA sent me an interesting article posted by Bloomberg on fine art and liquidity.  With markets falling, and global economic uncertainty, some collectors are looking for ways to tap the value of their art collections and luxury goods.  This includes more fine art collateralized loans.  The article notes for August, a typically slow art transaction month, there has been much activity in testing liquidity.  Again, liquidity, or the lack of liquidity has always been one of the barriers cited for fine art being considered an asset class.  As we are quickly learning, many of the barriers are falling, and art certainly appears to be moving into legitimate asset class territory.

Bloomberg reports
Art dealer Asher Edelman’s vacation in Comporta, Portugal, was interrupted Monday by inquiries from clients as global equities plunged.

Some asked about borrowing against their art collections from Edelman’s art-financing company ArtAssure Ltd. Others wanted to sell works. Everyone was looking for the same thing: liquidity.

“There are many margin calls,” Edelman said in a phone interview, adding that no deals were struck yet.

Boutique lenders said they were unusually busy in late August, when most of the art world is on holiday. Global equities and the art market have become intertwined as art prices have soared and more wealthy buyers view their collections as an investment they can borrow against.

“Ten years ago no one in the art market paid close attention to these corrections in the stock market,” said Elizabeth von Habsburg, managing director of Winston Art Group, an independent art appraisal and advisory firm. “Now clients respond immediately.”

In 2014, the art market surpassed its pre-recession high with 51.2 billion euros ($54.1 billion) in global sales, compared with 48 billion euros in 2007, according to the latest figures by the European Fine Art Foundation. In May, a Pablo Picasso painting fetched $179.4 million, the highest price ever for a work at auction.

Next Test
With many galleries closed for vacation, the immediate impact of the stock market’s selloff on prices and sales was hard to gauge. New York’s semi-annual auctions in November will be the next big test of the art market, dealers and lenders said.

“The main question: Is this the correction everyone has been waiting for?” said Ian Peck, founder and chief executive officer of Art Capital Group, a New York-based firm that lends against art and collectibles.

Global auction results in the first half of this year slid 5.8 percent to $8.1 billion from the same period in 2014 because of weak sales in China, the U.K., France and Germany, according to New York-based Artnet.

Art financing has expanded with the rest of the market as investment banks including Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. offer loans backed by art to clients. In 2014, Winston Group did $1 billion worth of appraisals for loans using art as collateral, double the previous year, von Habsburg said.

“Collectors are finally realizing they can make their art work as an asset that they can get liquidity out of” to pay off other loans, buy a business, life insurance or more art, von Habsburg said.

More Calls
While boutique firms like ArtAssure reported a higher volume of art-related calls from clients on Monday, several banks said they didn’t. During market corrections, banks sometimes limit loans backed by art or add restrictions, said Evan Beard, art and finance leader at Deloitte Consulting in New York.

“When liquidity leaves the marketplace people will consider art loans as an option to replace volatile margin securities loans,” said John Arena, senior credit executive for Bank of America’s Private Wealth Management Business. He said his group -- which didn’t see a spike in art loan inquiries Monday -- doesn’t limit its credit exposure to art loans during market turmoil.

Iranian Artifacts
Edelman said his clients asked about the borrowing terms against works ranging from Iranian artifacts to Andy Warhol paintings. Several of Winston Group’s clients asked “what can we put our money into that can increase in value in the next year that’s not equities,” von Habsburg said.

Her recommendation: works for under $100,000 by midcareer artists including Richard Aldrich and Yinka Shonibare, whom she described as “really solid and talented.”

Frothier segments of the market will be riskier, lenders said. Art Capital’s Peck said he recently inspected a collection of hot emerging artists whose prices exploded in the past year but recently started to cool off.

“The younger emerging market is very vulnerable,” he said. “We will be more conservative than we were a month ago.”

Collectors aren’t the only ones looking for liquidity with art-backed loans. Art Finance Partners, a New York-based firm, was contacted on Monday by dealers looking to borrow money to close private sales.

Pissaro Sale
In one instance, market uncertainty spurred the seller of a painting by Camille Pissaro, with the asking price of about $500,000, to close the transaction with a dealer, who will use a loan to buy the work, said Andrew Rose, president of Art Finance Partners.

The selloff on Monday erased $2.7 trillion from the value of global equities. Volatility continued to jolt financial markets after an earlier rebound on Tuesday.

With the deadlines to consign art for the November auctions coming up, some collectors have decided to sell works rather than wait.

“Some are pulling the trigger,” Rose said. “People want certainty.”
Source: Bloomberg


More on Art Advisory Profession

Earlier this week I posted on a good NY Times piece about the changes and growth within the art advisory profession.  A few days prior to the NY Times article, the Financial Times ran an article in its Business and Economy section on the growth of art advisers. This is a good companion piece to the NY Times article and again shows the growth, increasing profile and credibility of art professionals as well as solidifying portions of the art market as an asset class.  Hard to beat coverage from the NY Times and the Financial Times.

To stay credible, all art professionals need to stay abreast of ethics and standards.  It is important for all appraisers to be qualified and write and develop their reports according to industry accepted guidelines, such as USPAP, AQB criteria, as well as the higher standards of professional appraisal organizations such as the International Society of Appraisers (ISA), Appraisers Association of America (AAA) and the American Society of Appraisers (ASA).

We as appraisers need to continue to network and build relationships with asset managers, insurance brokers, accountants financial planners, private bankers and high net worth individuals (HNWIs). If we do, we will certainly see a return on our investment and growth in our individual appraisal practices.

The FT reports on art advisers
Andy Warhol knew the score. “Making money is art and working is art and good business is the best art,” he said. And with interest growing in art as an asset class, advising investors on the best way to combine all three has become big business.

Advisers have existed as long as people have collected art, but now investors want financial expertise as well as academic knowledge. Last week saw the launch of Cadell & Co, which for the first time combines regulation by the UK’s Financial Conduct Authority with art management advice for trustees and family offices.

Yet for Steven Kettle, chairman of the art management division of Stonehage Fleming Family and Partners, a wealth manager, the emergence of more advisers raises concerns about the direction of the art market.

“I’m not at all surprised to hear that there is more art advice with an investment angle — it is the fashionable thing. It is symptomatic of a market that is extremely expensive at the moment.”

Nicole Kluk, senior consultant at Quintessentially Art, which operates a similar art management service, agreed. “Every second person you meet in the art world is an art consultant,” she said.

According to the Deloitte Art & Finance Report 2014, more than three-quarters of art buyers and collectors questioned said they were looking to buy art for investment purposes — up from just over half the year before.

“[This] will most likely increase the need and demand for professional and wealth management services relating to the management and planning, preservation, leverage and enhancement of art and collectable assets,” the report noted.

Philip Hoffman, chief executive of the Fine Art Fund Group, one of the world’s largest art advisory companies, said the best advice was not to buy. “Most art advisers are paid proportionally on a deal being successful. If you come and ask me to buy you a Degas and pay me typically 2-5 per cent then you’re not interested in negotiating the best deal.”

He dismissed the idea that the market was overheating. “The froth is in about 30 artists,” he said. “But if you look underneath the headlines, there are a lot of Old Masters not making much money at all — and lots of contemporary artists whose prices have not gone crazy.”

Many larger financial institutions, such as Deutsche Bank, which has an extensive collection, employ in-house art managers, although the number of companies that do dropped rapidly following the financial crisis of 2008-09.

Luke Dugdale, a founding partner of Cadell, said: “[Trustees] are very good at outsourcing the management of more vanilla investments like equities, bonds or hedge funds to private banks or asset managers. But when it comes to art, they have the same fiduciary responsibility, yet no experience or real education of how to look after the art.”
Source: The Financial Times 


Fractional Interest Discounts

Last week I posted an article from artnet news' Spencer's Art Law Journal on multiples with the notation that there soon would be an Art Law Journal article on fractional interest.  It was published and it is a very interesting article and cites a recent tax court ruling in favor of the use of fractional interests, which the IRS has opposed in the past. The court ruling allowed for a 10% discount due to the complexities of fractional interest. The estate was looking for a 45% fractional discount which the court ruled to be too high.

This is an article every appraiser should read.

artnet news reports
This essay is about fractional interests in visual art. For a long time the Internal Revenue Service position has been that fractional interests in tangible personal property such as visual art (ownership in, say, a painting, divided between several people, often family members) are not entitled to reduced gift or estate tax valuations. Recently, the US Tax Court and the Fifth Circuit Court of Appeals decided that the IRS position was wrong, and a fractional ownership interest in visual art is, indeed, entitled to a reduced valuation. This opens interesting planning options for art owners who can bring themselves to give up part ownership of their art.

● ● ●

For many years, the Internal Revenue Service has resisted estate and gift tax valuation discounts for fractional undivided interests in works of art. But in 2013–2014, the US Tax Court and Fifth Circuit Court of Appeals decided that the IRS no-discount position was wrong.1

Fractional Interests in Visual Art and Restrictions on Sale and Use

The decedent, Elkins, owned undivided fractional interests in 64 works of contemporary art. The remaining interests in such works were owned by Elkins's children. Before Elkins's death, he entered into a “Cotenants' Agreement" with his children as to 61 of the works, which provided in paragraph 7 that “An item of Property [any of the 61 works of art subject to such agreement] may only be sold with the unanimous consent of all of the Cotenants."

The Tax Court Reasoning

The Tax Court examined two issues: first, whether the paragraph 7 restriction on sales was a restriction on the right to sell or use property within the meaning of Internal Revenue Code Section 2703(a)(2) and, second, the amount of the discount to be applied to decedent's fractional interests in the art. On the first issue, the Tax Court decided that IRC Section 2703 applied:

With exceptions not here relevant, section 2703(a)(2) instructs that “the value of any property shall be determined without regard to any restriction on the right to sell or use such property." Whether paragraph 7 of the cotenants' agreement is a restriction on decedent's right to sell the cotenant art or is a restriction on his right to use the cotenant art is not important. It is clear that, pursuant to paragraph 7 of the cotenants' agreement, decedent, in effect, waived his right to institute a partition action, and, in so doing, he relinquished an important use of his fractional interests in the cotenant art. While, as we shall explain, it makes little or no difference to our conclusion as to the value of the art, we shall, in determining the value of each of the items of cotenant art, disregard any restriction on decedent's right to partition.2

The Tax Court allowed a 10% valuation discount—rejecting the Estate's 45% discount as unrealistically high—reasoning as follows:

Petitioners [the Estate] argue that the Elkins children would spend whatever was necessary to retain their minority (or 50%) interests in the art. It is much more likely, however, that, given their undisputed financial resources to do so, they would be willing to spend even more to acquire decedent's fractional interests therein and thereby preserve for themselves 100% ownership and possession of the art. The question is how much more.

We believe that a hypothetical willing buyer and seller of decedent's interests in the art would agree upon a price at or fairly close to the pro rata fair market value of those interests. Because the hypothetical seller and buyer could not be certain, however, regarding the Elkins children's intentions, i.e., because they could not be certain that the Elkins children would seek to purchase the hypothetical buyer's interests in the art rather than be content with their existing fractional interests, and because they could not be certain that, if the Elkins children did seek to repurchase decedent's interests in the art, they would agree to pay the full pro rata fair market value for those interests, we conclude that a nominal discount from full pro rata fair market value is appropriate.

We hold that, in order to account for the foregoing uncertainties, a hypothetical buyer and seller of all or a portion of decedent's interests in the art would agree to a 10% discount from pro rata fair market value in arriving at a purchase price for those interests. We believe that a 10% discount would enable a hypothetical buyer to assure himself or herself of a reasonable profit on a resale of those interests to the Elkins children.3

The Fifth Circuit Agrees that the IRS Position on Valuing Fractional Interests is Wrong

On appeal, the Fifth Circuit Court of Appeals described the Tax Court decision as follows:

The Tax Court rejected the Commissioner's zero-discount position, but also rejected the quantums of the various fractional-ownership discounts adduced by the Estate through the reports, exhibits, and testimony of its three expert witnesses—the only substantive evidence of discount quantum presented to the court. Instead, the Tax Court concluded that a “nominal" fractional-ownership discount of 10% should apply across the board to Decedent's ratable share of the stipulated FMV of each of the works of art; this despite the absence of any record evidence whatsoever on which to base the quantum of its self-labeled nominal discount.

We agree in large part with the Tax Court's underlying analysis and discrete factual determinations, including its rejection of the Commissioner's zero-discount position (which holding we affirm). We disagree, however, with the ultimate step in the [Tax] court's analysis that led it not only to reject the quantums of the Estate's proffered fractional-ownership discounts but also to adopt and apply one of its own without any supporting evidence.4

For the Fifth Circuit, “This entire appeal thus begins and ends with the question of taxable value of Decedent's fractional interests in those 64 items of non-business, tangible personal property [the visual art] that were jointly owned in varying percentages by Decedent and his three children …" The Fifth Circuit went on to describe the following restrictions decedent and his children placed on the art by means of the Cotenant's Agreement—including each co-owner's right of possession for a specified number of days during a 12-month period. And, “More pertinent to this appeal, that agreement prohibited the sale of an interest in any work by a co-owner without the prior consent of all."5 The Fifth Circuit did not address consent-to-sale and other restrictions beyond saying they were “pertinent." It is therefore difficult to know how important these restrictions would be, as opposed to discounts inherent in fractional ownership itself, such as those for lack of marketability, lack of control, and the cost and inconvenience of partition.

The Estate's expert witnesses testified in the Tax Court that any hypothetical willing buyer would demand significant fractional ownership discounts in the face of becoming a co-owner with the Elkins children, given their financial strength and sophistication, their legal restraints on alienation and partition, and their determination never to sell their interests in the art. By contrast, the IRS produced no expert testimony as to the amount of discount that should be allowed for a fractional interest, other than an expert who testified that there was no “recognized market" for partial interests for works of modern art. Indeed, the Fifth Circuit quite reasonably noted that the IRS expert's testimony that there is no recognized or established market for fractional interests in art, lends support, not for a zero discount (as the IRS argued), but for a greater discount.6

IRC Section 2703 Requires that Value of Any Property Be Determined Without Regard to … Any Restriction on the right to Sell or Use such Property … Unless Terms Are Comparable to Similar Arrangements Entered into … in Arms' Length Transaction.

As noted above, the Tax Court decided that IRC Section 2703(a)(2) required it to disregard, for purposes of valuation, the no-partition restriction contained in the Cotenants' Agreement. In spite of stressing in its opinion that the no-sale restriction was “… pertinent to this appeal…",7 the Fifth Circuit did not address Section 2703 at all.

Fifth Circuit Appears to Consider Express Restrictions on Sale and Use, But its Reasoning Addresses Only the Effect of Fractional Interests on Value.

We are then left to conclude from the Tax Court opinion, which addressed the IRC 2703 no sale/partition and the Fifth Circuit opinion which did not, that IRC 2703 may apply to require a court to disregard such restrictions but, in any case, that art value for estate and gift tax purposes will chiefly be affected by discounts inherent in holding a fractional, as opposed to a whole, interest in the decedent's art.

Where the law will settle on the appropriate percentage, or range of percentages, of the valuation discount for fractional interests in art remains to be seen. But, art owners who are willing to relinquish, to children or grandchildren, partial ownership (and, perhaps, in addition, some control of sales and possession) have the possibility of obtaining substantial estate tax savings.
Ssource: artnet news 


The Changing World of the Art Advisor

The NY Times just posted an interesting article on art advisors, how many are new faces are moving into the profession and the influence they have.

Here is a quick qoute "Many of these advisers are changing the profession — aggressively pursuing trophy art, wielding greater power in negotiations and in some cases acting more like fast-moving dealers than high-minded consultants. It is not yet clear what effect the latest gyrations of the financial markets will have on the art market, but in good times one big sale can reap millions of dollars for an adviser."

Definitely worth taking a few minutes to read as I think there are a lot of parallels to the appraisal profession.

The NY Times reports
Amy Cappellazzo jolted New York’s art world recently when she left her powerful position as chairwoman of Christie’s postwar and contemporary department to become a private art adviser, quickly brokering sales like Christie’s $82 million sale of a Rothko painting this spring.

Tobias Meyer, the regal chief auctioneer of Sotheby’s auction house, also surprisingly stepped down from his podium less than two years ago to become an adviser.

Guy Bennett, once a top Christie’s expert, now counsels the Qatar Museums and its chairwoman, Sheikha al Mayassa bint Hamad bin Khalifa al-Thani.

For decades, art advisers were a small club of professionals who personally helped build collections for clients, using their scholarship and connoisseurship. Their role was to consult and offer expertise, rarely to make deals. Bernard Berenson, the Harvard-trained art historian, was a famed counsel to the collector Isabella Stewart Gardner.

“I’m not anxious to have you own braces of Rembrandts, like any vulgar millionaire,” he wrote to her in 1900.

Amy Cappellazzo, in her home in Manhattan, left her job as a top executive at Christie’s to become a private art adviser. Credit Piotr Redlinski for The New York Times
But the rapidly changing art market — characterized by soaring prices, high fees and a host of wealthy new buyers from Wall Street and abroad — has prompted scores of new players to jump into the pool, from young art-world arrivistes to former auction-house executives with an abundance of expertise and connections. “It’s the Wild West,” said Abigail Asher, who has been an adviser for 25 years. “It’s like being in a gold rush mining town. We have been the miners for years and a lot of people are just showing up now.”

Many of these advisers are changing the profession — aggressively pursuing trophy art, wielding greater power in negotiations and in some cases acting more like fast-moving dealers than high-minded consultants. It is not yet clear what effect the latest gyrations of the financial markets will have on the art market, but in good times one big sale can reap millions of dollars for an adviser.

Many veteran advisers view their new competition with concern. Some practitioners are too inexperienced to provide good counsel, they say, or use tactics that they warn threaten to sully the profession, like dealing on the side, or demanding broker’s fees from both their clients and the galleries that sell to them.

“There is a new breed,” said Wendy Cromwell, president of the Association of Professional Art Advisors, “an independent contractor — kind of like black ops, like a hired gun — who can get you what you need in a tough, changing environment.”

No organization tracks the number of art advisers, who do not need a license to operate. But in one small indication of the field’s growth, the Association of Professional Art Advisors has 140 members, a third of whom have joined in the last four years. And interviews with art-world professionals say that the numbers are swelling well beyond that.

“I get pitched things from ‘art advisers’ every week,” said James R. Hedges, a collector. “They are increasingly acting as private dealers, rather than true independent advisers.”

Even financial professionals have gotten into the act. Karen Boyer studied art history but had little professional art experience when she quit the hedge-fund business and has run an art advisory from her Manhattan apartment since 2010, with Wall Street collectors among her clients.

“My clients are very analytical and treat art like any other investment,” Ms. Boyer said.

Some advisers are paid on retainer, or perhaps a rate of, say, $150 to $300 an hour — fees that do not rise or fall based on the price of the art they recommend.

But increasingly advisers work on commission, typically earning perhaps 5 percent to 10 percent of the purchase price — leading to big returns when prices soar into the tens of millions of dollars. Such sales are usually private, but according to court papers and state records, Ben Heller, an adviser to J. Ezra Merkin, a prominent Wall Street financier and collector who had invested with Bernard L. Madoff, earned $26.5 million in fees in 2009, on the sale of a $310 million art collection filled with Rothkos.

That’s an exponential hike in pay for top auction-house specialists, who typically earn a base salary of $350,000 to $1 million, plus bonuses.

Cristin Tierney, a Chelsea dealer and art adviser who once worked at Christie’s, said that an adviser who sold a $10 million painting would likely clear a fee of $500,000. “And your overhead is very low,” she said. “At Christie’s, you are only getting a percentage of that $500,000.”

Unsurprisingly, many new advisers are auction-house alumni, giving Sotheby’s and Christie’s reason to worry about the potential defection of top talent.

The demand for advisers has grown in part because newly rich collectors need help navigating an increasingly transactional, famously opaque art market.

And for these buyers, advisers — once considered largely messengers between collectors and sellers — are increasingly empowered at auctions, galleries and art fairs. “We’re seeing them become more the negotiator than they traditionally might have been,” said Lisa Dennison, the chairwoman of Sotheby’s North and South America.

The best are wooed with elegant dinners, early notice of forthcoming offerings and private showings. “Ten years ago we didn’t watch them closely but now we are courting the most important ones assiduously,” said Victoria Siddall, the director of the Frieze art fairs in New York and London.

Many dealers and gallerists are also acting as advisers, violating a principle of the advisers association, which holds that its members should not own sizable amounts of art for sale. The rule is intended to avoid the suggestion that advisers are pushing clients to invest in the same artists, thus raising the value of their own collections, or profiting by selling collectors art they own. Ms. Cappellazzo, who is not a member of the association, says that one can both own and advise. Her company with the experienced art adviser Allan Schwartzman — Art Agency, Partners — provides multiple services, including the opportunity to invest alongside them in their art fund.

“I don’t think you can eliminate conflicts in the art world,” Ms. Cappellazzo said. “All you can do is be transparent.”

Some new advisers say that complaints about the expanded ranks seem born of jealousy, or fear of competition, and that it is unfair to suggest they play fast and loose with the rules.

“I see more and more compliance, more disclosure,” said Stephane C. Connery, who left Sotheby’s in 2012 to become an adviser and dealer. “For people coming out of the auction houses, there is a degree of professional rigor in the training.”

Because the pace of buying has accelerated, high-powered advisers or dealers like Sandy Heller and Jeffrey Deitch can push their collectors to the front of the line by using their connections with other collectors, dealers and auction houses. “Very sophisticated advisers will find you a Johns, they will find you a Twombly,” said Donald B. Marron, a financier and collector, referring to the artists Jasper Johns and Cy Twombly. “They’re very quickly turning into dealers.”

Some longtime art advisers also said they had learned from the new breed, like how to stage better public exhibitions of their collectors’ works.

But Ms. Asher said that some newer advisers do not understand all the basics of the profession — like the need to have a collector as a client.

She was recently approached, she said, by a new adviser who was interested in a $10 million painting in a collection she represented. Negotiations quickly broke off, though, when it became apparent that the new adviser never had a buyer and simply wanted to try to lock up the work.

“There are hundreds of people who now call themselves art advisers,” she said, “but walking someone around an art fair does not make you an adviser.”

Among the most questionable developments, according to the advisers association, is that some insist on collecting two fees when they help arrange a sale — one from their client and another from the gallery selling the work.

Some galleries think they must accept the practice to curry favor for the future. But a collector can never be sure whether the work is being recommended on its merits, or because of the gallery bonus. And if advisers with a conflict of interest don’t disclose it to their clients, they can be legally liable for breaching their fiduciary duty.

Elizabeth Szancer, a longtime art adviser and curator who works with the collector Ronald S. Lauder, said that such lapses dilute the meaning of the term art adviser and that the trade should stay true to its principles.

“We really have to hold our ground,” she said.
Source: The NY Times 


Banks Teaching Children of Wealthy How to Invest in Art

Bloomberg ran a very interesting article on how banks are interacting with the children of wealthy clients, and one of the main approaches is to teach about investing in art.  The article is really about how banks are working to maintain clients and build next-generation clients.  But what is interesting here is that there could be a valid approach for appraisers to work with banks in educating young collectors.  If more banks are looking at art as a way to solidify relationships with younger clients, there should be opportunities for qualified appraisers to assist, and also build relationships with banks and clients.

Bloomberg reports
The team went all in on Kate Moss.

One evening last month at Citigroup Inc. in downtown Manhattan, a group of 20-somethings spent $95,000 in a bidding war for a black-and white photo tapestry of the fashion model’s face. They were confident that the work by the prominent New York artist Chuck Close was worth the price.

That’s why there was a collective gasp when Tash Perrin, a senior vice president at Christie’s, revealed that the work didn’t sell when it was last auctioned in 2013.

The sale and money that the 40 participants used to bid with was fake, but the lesson on valuing and buying art was real. The attendees, from wealthy families in 18 countries, are poised to inherit enough money in coming years to purchase some of the items they were shown at the event -- from Cartier earrings worn by Elizabeth Taylor to a Bjork album cover photograph. For firms like Citi Private Bank, teaching them how to invest in art is one tool to help retain the heirs when the family wealth is passed on to them.

“You don’t have the birthright to the next generation’s wealth,” said Money Kanagasabapathy at Citi Private Bank, who directs such events for clients’ children. “We want to continue to have the relationship with the family.”

Next Generation

In the past, wealth managers haven’t been so successful at keeping younger clients. On average, firms have seen almost half of the assets leave when a family’s wealth is being handed to the next generation, according to the latest figures from a report on global private banking by consulting firm PricewaterhouseCoopers.

Banks are trying to reverse that trend because an estimated $36 trillion is expected to transfer to heirs in U.S. households alone from 2007 to 2061, according to a 2014 study by the Center on Wealth and Philanthropy at Boston College. The figure swells when including billionaires worldwide, a majority of whom are over age 60 and have more than one child.

The U.S. economic recovery also has accelerated parents’ desire to prime children for what’s coming, said Arne Boudewyn, a managing director in Wells Fargo & Co.’s Abbot Downing unit.

“Company valuations are higher than in past years, including family-owned and controlled companies,” said Boudewyn, whose clients generally have at least $50 million. “Many families who never seriously contemplated selling are now fielding offers they can’t refuse.”

Training Camps

Citi Private Bank’s event included a session on buying art because the asset class is increasingly seen as an investment, with global art sales hitting a record in 2014 as new collectors drove up prices for trophy works.

Yet art is an illiquid investment and difficult to value, as the team betting on Kate Moss found out. The millennials spent $95,000 of their fake $100,000 allotment on the piece in the mock auction.

Other banks including Credit Suisse Group AG, Deutsche Bank AG, UBS Group AG and Coutts, a unit of the Royal Bank of Scotland Group Plc, run training camps for clients’ children. Held in countries including Singapore and Switzerland, the programs usually span several days to more than a week and participants often fly in from around the world. The seminars -- which cover topics such as sustainable investing, philanthropy, entrepreneurship or how to protect your family reputation and brand online -- are free to attend while clients generally cover their own travel and accomodation.

Reviewing Art

During the Citi Private Bank event, experts from Christie’s helped participants review a mock catalog of about a dozen works. They advised each team on criteria to determine value: a work’s quality, rarity, condition and history of ownership.

Attendees then bid on pieces that have been, or will be, auctioned including an Andy Warhol polaroid print of Giorgio Armani and a pair of ear clips by Seaman Schepps formerly owned by the Duchess of Windsor. Perrin then showed the teams what the works really sold for so they could see if they spent their money wisely.

Wells Fargo’s Abbot Downing and U.S. Trust, a unit of Bank of America Corp., have a financial education curriculum with individual coaching instead of boot camps. Some parents or grandparents require heirs to take it before telling them how wealthy they are and what they will inherit, said Chris Heilmann, U.S. Trust’s chief fiduciary executive. In June, the bank added a program for teenagers as young as age 13.

The young adults who attended Citigroup’s event have jobs and even some master’s degrees, but their parents want them to hone skills that are unique to their wealth -- such as bidding on a Picasso or taking over a family business, said Kanagasabapathy.

“There is no tolerance today for an incapable CEO,” he said.

Wealth managers like Citigroup said they hope the trainings will strengthen both family profits and bank loyalty.

“It’s easier to retain a client than to get a new one,” he said.
Source: Bloomberg