Every week, Artnet News brings you The Gray Market. The column decodes important stories from the previous week—and offers unparalleled insight into the inner workings of the art industry in the process. 

This week, appraising the present….

Moments Frozen in Time

Within the art market, there is a cosmos of issues that are much denser than they appear. Among them are appraisals, a typically dry yet increasingly important component of doing business in the 2020s. But a strange collision between this semi-niche specialty and the biggest scandal still orbiting the art trade this summer once again highlights the importance of understanding more than the surface layer of our evolving industry. 

The collision happened on April 26, 2023 at the New York edition of the Art Business Conference. I was moderating a panel discussion on art finance there, and an odd thing happened about 30 minutes into the hourlong session: someone in the audience stood up and interrupted the conversation among my panelists and me because that person felt there was a larger question about value, procedure, and ethics that needed to be addressed. That person was art advisor Lisa Schiff. 

Unless you were just released from a monthslong stint in a wifi-free biosphere, you already know that Schiff was sued for running what the attorneys for plaintiffs and longtime clients Candace Barasch and Richard Grossman claimed was a Ponzi scheme about three weeks after the conference. (A second lawsuit followed days later.)

I’ve been thinking about her extreme record scratch of an interaction with my panelists practically every workday in the two months since news broke about the first suit. Thanks to Art Market Minds, the organizer of the conference, I was able to get the audio of that moment. Here was Schiff’s concern:

“I had an auction house appraise a client’s collection for a bank loan, and you took something that had more museum shows and cataloging, that had aesthetic and critical value alongside investment value, but that isn’t trading at auction right now and marked it down in half. And that really scared the shit out of me. Like, what’s happening? Because aesthetic and critical value have to be attached to investment value. And when we start to fetishize them the way they’re being fetishized in the marketplace now, they start to split apart even if it’s there.”

Here in July 2023, I’m conflicted about how to parse this monologue. Schiff stopped making public statements immediately after Barasch and Grossman’s suit landed, and almost two months later, speaking with the press for any reason, in any capacity, on any subject, while multiple civil suits and federal and state investigations are still underway would be highly inadvisable for someone in her position. 

All of which means there was no real chance of having the type of open conversation with her this summer that I likely could have had if I’d written this column in the Art Business Conference’s immediate aftermath. More to the point, she can’t try to publicly defend or clarify her statement above, let alone respond to the unvarnished opinions of other art professionals I’ve talked to in the time since. That seems, if not a little unfair, then certainly less than ideal to me as a journalist. 

Right to Left: Lisa Schiff, Candace Barasch, Sascha Bauer, Carol Bove, and Gordon Terry at an event in 2014. Photo: Will Ragozzino/BFA

At the same time, the subsequent accusations of fraud have elevated Schiff’s would-be interrogation of value at the conference from an odd public side note to a potentially newsworthy event in itself. She gave the quote above in an auditorium full of her peers in the business with a microphone in her hand. In fact, she was so eager to make these points in front of that audience that she couldn’t even wait until the designated Q&A portion of the panel discussion started to do it. She wrote an op-ed for Artnet News in June 2022 that took a similar perspective on the issue of appraisals and valuation for loan purposes, meaning she had all the time she needed (and the help of an editor) to ensure that she was arguing her point of view in exactly the terms she wanted. As such, her ideas are fair game.

Despite the unorthodox circumstances, the reason I ultimately decided to move forward with this column is that Schiff’s portrayal of appraisals, professional appraisers, and the nascent business of fine-art loans is fundamentally misguided and misleading if taken at face value. So, here are a few bedrock principles to ground your understanding of appraisals.

1. Appraisals Take Different Forms When Executed for Different Purposes.

When the average person thinks of appraisals, they tend to think of appraisals of fair market value (FMV). The Internal Revenue Service defined FMV as follows in its January 2023 guidance on determining the value of donated property: “The FMV is the price that property would sell for 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.” 

In other words, an appraisal of fair market value is an estimate of the price at which two equally well informed parties could strike a deal without extenuating pressures like, say, the need to liquidate assets to pay creditors ASAP. Within the U.S. art market, FMV is often used to assess the tax deduction a donor receives for gifting artwork to a nonprofit institution, as well as for some estate-planning purposes.

However, although Schiff never used this term in her Art Business Conference speech, the opening of her comment-as-ostensible-question (“I had an auction house appraise a client’s collection for a bank loan…”) made it clear that she was targeting a different type of appraisal: what’s known as an appraisal of marketable cash value (MCV).

TEFAF Maastricht 2019. Photo: Loraine Bodewes. Courtesy of TEFAF.

Within the Uniform Standards of Professional Appraisal Practice (USPAP)—the set of ethical and procedural standards approved by Congress for use in appraisals of personal property (including artwork), real estate, businesses, and more— marketable cash value is defined as follows (italics mine): “​​The value realized, net of expenses, by a willing seller disposing of property in a competitive and open market to a willing buyer, both being reasonably knowledgeable of all relevant facts, and neither being under constraint to buy or sell.”

In other words, the big difference between FMV and MCV is that the latter deducts all the costs required to sell an artwork by reputable means. Those costs would include everything from necessary incidentals like packing and shipping to seller’s fees and/or commissions—a combination that could easily eat up 10 to 20 percent of the sale price. 

The reason art-secured lenders (including Sotheby’s, via Sotheby’s Financial Services, and Christie’s, via Christie’s Art Finance) fixate on appraisals of MCV is simple: it’s their financial responsibility to understand how much money they’re likely to end up with if a collector defaults on their loan. In that case, the loan agreement dictates that title to the artwork put up as collateral can be transferred to the lender, meaning the lender is likely to try to recoup its money by selling the artwork. (Typically, the lender would consign the work to auction, but private sales through reputable fiduciaries can also be an option in cases of default.)

Rebecca Fine of Athena Art Finance, one of my panelists at the Art Business Conference, did an admirable job of trying to explain these nuances to Schiff in the room, but ultimately the parties had to agree to disagree. (Or at least, that was the transition I used to end the exchange.)

But it’s also worth noting that art-secured lenders aren’t the only entities requesting appraisals for MCV. This valuation method also plays a big role in estate planning and so-called “equitable distribution” scenarios, most often meaning divorce settlements. Basically, anytime someone needs a no-nonsense accounting of what they or their client realistically stand to pocket after all the necessary intermediaries and service-providers on an art sale have been paid in full, they want to know the MCV.

A third major type of appraisal is what’s known as retail replacement value. Blessedly, it’s the simplest of the trio. USPAP (which, fyi, appraisal professionals typically pronounce “yooz pap”) defines it as “​​the amount it would cost to replace an item with one of similar and like quality purchased in the most appropriate marketplace within a limited amount of time.” 

Appraisals of retail replacement value tend to be the highest of the three types of appraisals discussed above based on the assumption of a compressed time frame. (As usual, if you need anything fast, get ready to pay a premium for it.) They are almost exclusively used for insurance purposes, so they tend to provoke a little less consternation than FMV or MCV.

To be clear, misunderstanding appraisal jargon is neither a crime nor evidence of one. (I myself wrote a poorly informed piece about the subject years ago that relied too heavily on experiences with a few shady appraisers I’d dealt with in my gallery career.) Scrupulous art professionals who facilitate and relay appraisals tell me that they have to almost constantly remind their clients what the hell these different terms actually mean, and thus why the valuations on the documents are what they are. Despite the important differences between appraisal types, however…

Camera (Nikon Model D5200) with 24 mm lens, used by Bill Cunningham (circa 2012). Photo courtesy of the New-York Historical Society.

2. Every Appraisal Is (Only) a Snapshot of an Artist’s Market.

Once again addressing “the appraisals needed for loans,” (aka marketable cash value), Schiff wrote the following in her earlier-mentioned 2022 Artnet News op-ed about “meme art” allegedly destroying what the headline termed “all logic in the art market”:

“No longer is a work’s fair market value (FMV) occasionally assessed in order to properly insure one’s collection. Instead, there is a new, ‘real time’ assessment happening that only factors in recent auction history… It suggests that after every auction, your artwork needs to be re-quantified, leaving a lot of real art incapable of generating a loan. And while real collectors usually buy for love, they certainly care if their $1 million artwork is suddenly worth $500,000.”

Sounds pretty dire when put like that, doesn’t it? 

To be blunt, though, this is how markets work. They’re dynamic! They respond to changes in demand for the good in question, no matter how swift or severe those changes may be! (American readers, just think back to the difference between the market for hand sanitizer and toilet paper in April 2020 versus today.) And if someone is tasked with rigorously appraising the value of anything, including an artwork, then they have to take any and all market shifts into account from the macro level to the micro level. 

So, what’s the state of the art market in general right now? What about the market for the particular genre the artist works in? What about for this one specific artist within those larger contexts? What about for works by this one specific artist from the same or similar series, of the same or similar dimensions, of the same or similar subject matter, color palette, materials, condition, and on and on and on? Linda Selvin, the executive director of the Appraisers Association of America, said in a phone interview that templates offered by her organization tend to run about 20 pages before any information is filled in; completed appraisals frequently double that length. 

As for the reliance on auction results, good appraisals are about making an argument and backing it up with evidence of unconstrained demand. The alleged transparency of auctions is oversold to the general public all the time, but the confusion created by financial guarantees, presale withdrawals, and other murky tactics doesn’t change the fact that auctions remain the one art-sales channel where every transaction comes out of unbridled, unrestricted competition amid the market’s roiling. 

Christie’s 20th/21st Century: London Evening Sale, February 28, 2023. Courtesy Christie’s Images Limited 2023..

Bills of sale for private resales could also be useful (and sometimes are), but the fact is they are vastly more difficult for appraisers to source because the private market is (duh) more private. Even if appraisers could reliably source documentation of primary-market transactions, they wouldn’t necessarily be very valuable. Why? Because galleries artificially prevent each of their artists’ retail prices from descending, and they sell to carefully selected buyers rather than making deals with whoever is willing to pay their price. 

Back to Schiff: the dissonance in her portrayal of marketable cash value is that MCV is the one and only type of appraisal that is sensitive to market changes. In reality, all appraisals are—including FMV, despite the implication in her op-ed that it acts as some kind of evergreen counterweight to prisoner-of-the-moment accounting. Selvin (who, in one of the indelible moments in my career as a moderator, called for the mic to publicly defend appraisers’ honor from where she was seated only a couple of rows behind Schiff in that fateful Art Business Conference auditorium) gave me this overarching appraisal guideline: “You don’t necessarily want to predict for the future because you have to talk about the present.”

Regardless of whether an appraiser is working to suss out FMV, retail replacement value, or MCV, then, the actual price the current owner paid for an artwork isn’t a particularly weighty data point. What matters above all is where the value stands today. There is no obligation for a rigorous appraisal of any type to stay within a given range of the current owner’s purchase price. If the market for that object has changed a lot since then, well, in the words of singer-songwriter Craig Finn, you can’t tell people what they want to hear if you also want to tell the truth.

A sizable decline in appraised value (like, say, the 50 percent drop that Schiff referenced at the conference and in her op-ed) isn’t necessarily an indication of villainy or ignorance. The most innocent version is just a consequence of changing taste. Even if a collector bought an artwork for a well-assessed FMV two, five, or 25 years ago, the intervening period could reveal that the transaction took place at the absolute top of the market for that artist’s work. If they didn’t have staying power, a painting with a legit FMV of $100,000 at auction in 2003 might only be appraised at a small fraction of that amount in 2023. It sucks, but it happens!

The sinister version, on the other hand, would be if an intermediary of some kind were to, say, purchase work from a gallery on behalf of a client for one price but then lard on an unusually hefty fee before invoicing their client for the same artwork. In such a hypothetical case, even if an artist were to have maintained a reasonably stable market between then and now, an exacting appraisal would almost assuredly reflect a sizable delta between the owner’s acquisition price and the current appraised value.

Whether in an innocent or a sinister scenario, any of the three types of appraisals discussed earlier would imply to the owner of the work that they were hosed by their intermediary. But the crucial point is that MCV will make it look like they got hosed the worst, because MCV is by definition the most conservative of the three appraisal types. (Remember, it’s not what the buyer would pay; it’s what the seller would be left with after covering all those expenses, commission, and other fees.) 

Purely for conversation’s sake, then, it’s not hard to see why an intermediary who either didn’t fully understand the nuances of appraisals, didn’t like the results relative to the prices they’d been charging, or both, could fixate on MCV as some fresh hellspawn of art-market financialization. In reality, though, MCV is just a sober, educated, risk-conscious reading of today’s market for a short list of pragmatic purposes. Anyone who wants to last at the upper levels of the 21st century art market would be wise to choose their perspective on the issue with care.

That’s all for this week. ‘Til next time, remember: value and values aren’t the same thing, but boy oh boy can they impact each other sometimes.