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The Dark Art of Appraisal

November, 2010 (Bloomberg Markets) -- A small band of evaluators is driving the prices for paintings and sculpture as the market rises.

As the fine art market rebounds from a two-year slump, investors should consider what happened when two established appraisers were called upon to place a value on Hole and Vessel II, an abstract sculpture by Anish Kapoor.

The artwork, made of polystyrene, cement and earth and standing about 3 feet tall (0.95 meter), resembled a giant red pine cone -- or a sea anemone -- with a hole at one end. After the sculpture was accidentally discarded by a warehouse employee in London and presumably destroyed, the two appraisers provided a judge with wildly different valuations in 2007, Bloomberg Markets magazine reports in its November issue.

Ben Brown, a London gallery owner who had sold some of Kapoor’s pieces, rhapsodized over the sculpture’s elegance and curves, what he called its sensuous suggestion of a female body. He pegged its value at 580,000 pounds ($904,000).

Michael Thomson-Glover, co-owner of appraisal firm Stancliffe & Glover Ltd. in London, found the bumpy sculpture to be clumsy and somewhat absurd. “I said it looked like a lactating raspberry,” Thomson-Glover says. He put its worth at only 250,000 pounds.

High Court Justice Nigel Teare’s verdict: You’re both wrong. He called into question the appraisers’ expertise and objectivity.

“I have had the benefit (and enjoyment) of expert evidence,” he wrote in his 2007 ruling. “Mr. Brown’s views were colored by his personal likes and dislikes. Mr. Thomson- Glover, on the other hand, had no knowledge of the market for Kapoor’s works.”

Record Prices

The justice set the value at 371,250 pounds, based on the price of another Kapoor, Mother as a Ship, that sold in 2004.

Despite such judgments, art buyers the world over find themselves beholden to the opinions of a small coterie of appraisers. Their valuations are helping to drive the market as it rises, with Pablo Picasso’s Nude, Green Leaves and Bust -- a curvy-lined painting of his mistress Marie-Therese Walter -- selling for a record $106.5 million in May.

Working at large banks, auction houses and small firms, appraisers exert influence in every corner of art finance. In a secretive market where accurate information is scarce, these experts guide high-end collectors in setting sale prices, making tax deductions, buying insurance and establishing collateral for loans.

While the appraisers’ reach is broad, their valuations are influenced by everything from their personal tastes to the desire to make higher commissions, says Philip Hoffman, chief executive officer of the $100 million Fine Art Fund Group Ltd. in London.

Fudged Valuations

“Appraisers give a lot of meaningless valuations,” says Hoffman, who relies on the ones he trusts to value his funds’ holdings. “Their work can be based on fashion and connoisseurship. The art world is complicated, and valuation is a part of that.”

Appraisers who negotiate the sale of artwork sometimes jack up valuations to boost their commissions, says Lewis Baer, owner of decorative-arts gallery Newel LLC in New York. Auction house experts play a different pricing game, regularly giving low-ball values in catalogs with the hope of creating bidding wars.

Adding to the variation in pricing, appraisers fudge valuations submitted to the U.S. Internal Revenue Service so clients pay less tax on inherited art and get bigger deductions on donated works. The IRS says that from 2006 through 2008, a majority of audited estate and gift tax appraisals understated the worth of the art by an average of 44 percent.

Knowing Motives

Thomson-Glover, who worked for 27 years selling and valuing art at Sotheby’s in England and Italy, says appraisers have leeway in setting prices higher or lower without violating laws or professional ethics.

“When there’s a range of values, it’s perfectly reasonable to be conservative,” Thomson-Glover says. “We do a valuation for tax purposes, which is as low as the market will allow. Then, if we’re trying to sell it, we want to achieve a maximum value because we’re working on a percentage.”

Art buyers should know the motives of appraisers to avoid getting played, says Howard Rachofsky, a former partner at hedge fund Regal Asset Management. A major Dallas-based collector, Rachofsky, 66, owns about 600 post-World War II works by artists such as American painter and photographer Richard Prince and Italian Alighiero Boetti, maker of embroidered maps of the world. Rachofsky exhibits them in a house that architect Richard Meier designed with towering windows to illuminate the collection.

Ethics Code

When buying art, Rachofsky hires his own appraisers and pays them a set fee to provide a reality check on valuations from dealers, which can be as much as 30 percent higher.

“Dealers, if they have an artist they want to promote, they will give valuations that are higher than they should be,” he says. “That’s when you want to get an independent appraiser to say: ‘The dealer is telling me this. Where’s the market?’”

While artists are hitting records this year, such as the 29.7 million pounds for J.M.W. Turner’s Modern Rome -- Campo Vaccino, the market hasn’t regained all the ground lost since the global credit crackup. Prices for the most expensive artworks gained 17 percent from January through July, yet are still a third lower than their October 2008 peak, according to an index by London-based Art Market Research.

Almost anybody can be an art appraiser. They operate without any government licensing and only some of them receive certification from professional organizations such as the New York-based Appraisers Association of America. The trade group’s more than 700 members had to take appraisal courses and pass written exams to join. Members are bound by a code of ethics that bars them from having any financial interest in an artwork they appraise.

Sotheby’s Institute

Many such as Thomson-Glover, 62, learned the trade mostly on the job. He got a degree in philosophy from the University of Cambridge in 1970 and then took a yearlong course in appraising and selling art at Sotheby’s in London. Two decades later, Sotheby’s Institute of Art in London began granting master’s degrees in art business, including courses in appraising, in conjunction with the U.K.’s University of Manchester.

The auctioneer hired Thomson-Glover in 1972, where he cataloged European and Asian ceramics. Transferring to Florence, he honed his eye for valuing everything from Renaissance paintings to antique furniture. A member of the Royal Institution of Chartered Surveyors, which includes art appraisers, Thomson-Glover co-founded his own firm in 2000.

Appraisals don’t come cheap. Thomson-Glover charges a flat fee of 100 pounds an hour for appraisals and bills as much as 20,000 pounds for a single job. When he’s handling the sale of the work, he also gets a commission of as much as 10 percent.

Sculpture in Garbage

With the Kapoor sculpture, Thomson-Glover faced the challenge of valuing a work that no longer existed. In 2004, Swiss collector Ofir Scheps bought Hole and Vessel II as a gift for his wife, paying $35,000 in a private transaction. Before taking delivery of it, Scheps had it stored in a crate at a warehouse in London. The 440-pound (200-kilogram) crate containing the sculpture was mistakenly put in the trash during a renovation, spurring Scheps to sue the company.

The appraisers, as is often the case, had only sketchy pricing information to use. Both Thomson-Glover and Brown disregarded the $35,000 that Scheps had paid as grossly below market value. That left them to compare Hole and Vessel II with other sculptures by London-based Kapoor, 56, a native of India and a prolific artist.

Valuing ‘Voids’

His stainless-steel Cloud Gate, a 33-foot-high work that resembles a shiny blob of mercury, is the showpiece of Chicago’s Millennium Park. He plans to create a sculpture for the 2012 Olympics in London that will be taller than the Statue of Liberty.

The appraisers honed in on two Kapoor pieces as the most comparable to Hole and Vessel II, partly because they sold at auction in 2004 -- the same year the sculpture was discarded. One, Mother as a Ship, which looks like a blue canoe, sold for $321,600. The other, Untitled 1984, which appears to be a red, wall-mounted daisy, went for $142,400. To determine whether Hole and Vessel II was worth more or less than the two other sculptures, the appraisers resorted to their own aesthetic judgments.

The assessments, it turned out, partly hinged on their opinions of the so-called voids, or the concave holes in Kapoor’s work. While the circular opening in Hole and Vessel II is about 1 foot in diameter, similar to the hole in the middle of the daisy in Untitled 1984, the void in Mother as a Ship spans the 7-foot length of the boatlike work. After looking at photos of these sculptures, Thomson-Glover surmised that Hole and Vessel II had a lower value, much like Untitled 1984, due partly to their similar voids.

‘Sensuous’ Sculpture

Brown disagreed. He said the void in Hole and Vessel II, which he said could be compared to a vagina, helped make the sculpture more sexy than Untitled 1984.

“Isn’t that slightly sensuous?” Brown says. “That means I think the market will go for it.”

He concluded that the cone-shaped sculpture was worth as much as three times the flowerlike work.

It’s unfortunate when appraisers have to estimate market values of pieces based on aesthetics, such as the sexiness of their voids, rather than on prices of very similar work, says Todd Levin, director of Levin Art Group in New York.

“You’re reduced to a discussion of only connoisseurship, which sadly does not always reflect the price of an artwork,” he says. “A valuation can come from anybody, and that’s why it’s like the Wild West.”

Ultraviolet Light

Some appraisers also peddle the art they value, and profit from higher sale prices. Viola Raikhel-Bolot, co-founder of art advisory firm 1858 Ltd. in London, appraises for a flat fee and charges an additional 10 percent of the price if she handles the sale.

One deal began last year when Raikhel-Bolot went to a warehouse outside London to appraise paintings owned by a wealthy client and help determine which ones to sell. She stood by as a man in white cotton gloves pulled a 130-year-old oil painting of a harem scene from a wooden box inside a packing crate.

The appraiser examined the work by Italian Orientalist painter Fabio Fabbi with ultraviolet light to help confirm its age and condition. After also reviewing the sale history, she realized her client, whom she declined to name, had drastically overpaid when giving a gallery about 100,000 pounds for the art a decade earlier.

Private Viewing

“A record for a similar painting when he bought this wasn’t anywhere near this,” says Raikhel-Bolot, 32, who received a bachelor’s degree in business and art history from California State University, Northridge.

To help her client recoup his loss, Raikhel-Bolot tapped her network of dealers and collectors for a fix on recent private sales of similar works. She also got an auction house to do its own assessment. She set her valuation at about 100,000 pounds, on the high end of the auctioneer’s estimate.

“We operate in the interests of our clients within a fair and realistic market price,” she says. “If not, the person on the other side of the sale is going to say, ‘Is she nuts?’”

Early this year, Raikhel-Bolot met with a Middle Eastern collector of Orientalist art for a private viewing of the painting at his hotel in London’s Mayfair district. She showed him her written appraisal. Then, to boost the price even more for her client, Raikhel-Bolot told the buyer that the valuation was conservative.

“We said we thought it was slightly higher,” she says. He agreed to pay 115,000 pounds. “This really worked for my client, selling above the high estimate,” Raikhel-Bolot says.

‘Marketing Tool’

At auction houses, specialists use the opposite sales tactic. They set low price estimates for art prior to auctions to lure more bidders, says Paul Provost, 45, who runs Christie’s International’s trust, estates and appraisal department in New York. Provost, who received a doctorate in art history from Princeton University in New Jersey, has spent most of his 15 years at Christie’s corralling art for consignment and putting together sales.

“An auction estimate is really a marketing tool; it’s not a formal valuation you would use for financial planning,” says Provost, whose auction house earns a sales commission of as much as 25 percent.

That marketing strategy helped produce the two biggest auction sales of this year. In February, Sotheby’s specialists estimated Walking Man I, a life-size bronze artwork in the shape of a stick figure by Swiss sculptor Alberto Giacometti, would go for 12 million pounds to 18 million pounds.

Bidding War

Hong Kong-based real-estate developer Joseph Lau joined a bidding frenzy with at least five other collectors. Eight minutes into the February sale in London, billionaire collector Lily Safra surprised many in the audience with the size of her winning 65 million pound bid made over the phone, according to dealers with knowledge of the sale. That price was four times the auction house’s estimate.

Three months later, a Picasso topped the Giacometti. Christie’s told prospective buyers that it estimated that Picasso’s Nude, Green Leaves and Bust would sell for $70 million to $90 million.

In the auction, eight bidders battled almost nine minutes for the lavender-hued painting. Some wielded numbered paddles in the auction room at Rockefeller Center in New York, and others bid anonymously through Christie’s employees at a phone bank along the wall where the Picasso hung.

Citigroup’s System

“With our estimate, we had some people playing at $60 million, because they thought they could buy it there,” Provost says. “If we had put an estimate of $100 million to $150 million, we may have had a hard time selling it.”

An unidentified buyer took the painting for $106.5 million.

Citigroup Inc. appraisers say they have a secret weapon that produces more accurate market valuations for clients. Suzanne Gyorgy, director of art advisory and finance at Citigroup’s private banking unit, and her staff in New York collect pricing information from private offerings and sales around the world.

The spreadsheets of data, available only to Citigroup art advisory employees, include the geographic locations of sales as well as lists of buyers who are interested in particular artists. Using the spreadsheets, appraisers target countries where a work from a client’s collection might fetch the highest price. For instance, certain contemporary artists have been commanding higher prices in Asia and the Middle East than in the U.S. this year.

Cracking Down

Gyorgy, 55, received a degree in fine art from Brooklyn’s Pratt Institute and worked in museums and galleries in New York and New Jersey before joining Citigroup in 1999. Her Manhattan office walls are covered with signed prints by German artist Max Ernst and other pieces from the bank’s collection.

“The advantage we have comes from knowing the supply and demand,” says Gyorgy, whose bank makes an undisclosed commission on her clients’ deals. “You have to talk to a lot of people.”

The U.S. government has begun to crack down on appraisers who play too loose with the numbers. Three times a year, the IRS uses a panel of appraisers from galleries and museums to review art valuations worth hundreds of millions of dollars that taxpayers submit with their returns. In 2006, the panel found that 78 percent of valuations submitted by collectors for work they had given to charity overvalued the donated works.

That year, Congress stiffened penalties for appraisers who produce bogus valuations for the IRS. New federal rules, expected by 2011, say taxpayers who submit valuations after donating art must use an appraiser who is certified by a trade group or has college-level training.

Second Opinion

The restrictions don’t cover valuations for estate taxes or buying and selling art, leaving room for shenanigans to thrive, Newel’s Baer says. As appraisers massage the numbers, investors would do well to follow Rachofsky’s advice and get a second opinion before buying or selling a work. However, in the newly frenetic global market, judging the value of an appraisal -- and the person who made it -- may be as hard as divining the worth of the art itself.

Vernon Silver is a Senior Writer for Bloomberg Markets in Rome. Vsilver@bloomberg.net. With assistance from Scott Reyburn in London.

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