Fort Worth: The Internal Struggle of Art Valuation

Another day, another American billionaire opening a private museum. This time, it's Blackstone vice chairman J. Tomilson Hill, whose personal ego comple––er, arts complex will reportedly open in Chelsea in the autumn of 2017. But since I think you, dear readers, need another in-depth analysis of this trend less than a healthy teenager needs a colonoscopy, I want to dial in on a particular detail in Robin Pogrebin's story about Hill's project. Why? Because, in its own way, this detail exemplifies a trend just as rampant and fundamental to understanding the art industry's inner working as the larger private-museum phenomenon. 

The detail in question is this one (emphasis mine):

"The gallery will draw mostly from the Hill collection, VALUED AT MORE THAN $800 MILLION, which includes prime examples of Modern and contemporary art, as well as old masters."

Valuations get casually tossed off like this in the context of larger stories all the time, especially when it comes to private collections. But, since they're generally immaterial to the thrust of the reporting, two vital questions about these estimates are rarely asked: Valued by whom? Based on what? The answers once again reveal just how exceptional and absurd this industry is––and will always be.

In the abstract, art is what economists call a "positional good." To quote Noah Horowitz in The Art of the Deal (not to be confused with the largely fabricated Trump best-seller), that term means that an artwork's monetary value owes to its "rarity and the social prestige of ownership." And the latter of those components, in my view, primarily gets woven out of industry mythology, plus tastemakers' and institutions' (often biased) opinions.

The end result is that an artwork––like, say, a piece of jewelry or real estate––can never be assigned an objectively verifiable, intrinsic value. Its worth can only ever be estimated in relation to other, similar objects of the same type. This is why sales comps are so crucial to the industry. The surest way to value a particular Christopher Wool painting (of which J. Tomilson Hill owns 14, by the way) is to benchmark the piece––or, if you're wearing a tweed sportcoat with elbow patches, "consider its positionality"––against other recently acquired Christopher Wool paintings. Otherwise, you're essentially trying to conjure a number out of a Denver rodeo pen, AKA thin air and bullshit.

But who was Pogrebin's source for the $800 million valuation on Hill's collection? The answer is undoubtedly Hill himself. Few other people actually know the number, and I doubt any of those others would ever divulge it to a reporter without Hill's permission. In fact, this is usually how valuations pop up to flesh out stories about private collectors. And naturally, it almost always sounds better––for both the collector and the writer––if those valuations are as high as possible. 

I don't mean to imply that Hill's valuation has no supporting documentation. It's just that any supporting documentation––particularly the most widely used kind––can only ever be questionable in its own right.

Like any other serious collector, Hill undoubtedly carries a fine-art insurance policy on his holdings. A key component of establishing such a policy is setting valuations for the works it will cover. And insurance valuations, in turn, tend to originate from one, or both, of two sources: a tally of the collector's purchase prices, and a professional appraiser's opinion about their current fair-market value.

From the standpoint of objectivity and verifiability, each of these methods presents its own problems. In the former case, collectors overpay for artworks all the time. Auction acquisitions are particularly dangerous in this respect, given that the entire format is designed to encourage ill-advised, pride-fueled bidding wars. But private deals can be equally predatory in the wrong circumstances. (Just ask Dmitry Rybolovlev.) Either way, the point is the same: Just because someone convinced a sucker to overspend on a piece, that doesn't mean that better-informed and/or cooler-headed insiders would necessarily validate the estimate––unless, of course, they had extra incentive to do so. 

And that idea leads us to the complication of using an appraiser. In many, if not most, cases, an appraiser will review the purchase invoices as part of his process, before applying his own dual knowledge of the canon and the market to decide on fair-market values for the works in question. But even if he substantially discounts the purchase prices, that doesn't change who's paying him to undertake that evaluation process: the private collector! So why would the appraiser ever deliver final estimates that displeased his employer(s), as long as he can make at least the ghost of an argument that those estimates are reasonable? Show me a hyper-principled, hyper-independent appraiser, and I'll show you an appraiser dying for more business. 

Private collectors don't always hire appraisers to establish insurance values. In many cases, they simply run the numbers internally, overestimating (further), if desired, to help anchor the numbers higher for more protection. (Side note: The appraisal process is no less biased in auction houses, either.)

But if client-provided appraisals tend to be so fraught, why do insurance companies accept them? Because fine-art policy premiums rise with the coverage limits. So if a private client wants to inflate the estimates for every work in his collection, his insurance carrier will be all too happy to accommodate him. After all, it just means more money in their pockets month after month. 

That is, until a covered artwork eventually gets damaged, destroyed, or lost, and the private collector files a claim. But then guess what happens? That's right, the insurance company brings in ITS OWN APPRAISER to evaluate!

Now, this second appraiser can't suddenly say, "The original estimate (AKA the 'pre-damage retail replacement value') was too high, so the carrier should only pay X on this claim." That would come across as fraudulent. After all, the insurer accepted a regular premium payment based on that original estimate for the entire length of the policy prior to the loss. But what the second appraiser can and will do is determine a 'percentage loss in value' due to the incident in question. And that process is just as suspect as the one used by the collector to arrive at the original valuation.  

The good news for the collector is that the percentage loss in value gets taken off the estimate set by his own appraiser when the policy was established (or updated). In that sense, he benefits from anchoring his numbers high. The bad news for the collector is that the second appraiser calculates the percentage loss in value based on his own entirely subjective reading of A) the marketplace, and B) the actual damage––both of which will inevitably be influenced by the fact that he's collecting his check from the insurance carrier, who wants to sacrifice as little money on the claim as it can reasonably justify.

So by this mechanism, the insurer can use its appraiser to either compensate for an overvaluation, or simply minimize its pay-out to the collector, once something goes wrong with a particular piece. And it can do so entirely within the bounds of the law––just as the collector can, to some degree, use his own appraiser to legally warp the pre-damage estimate in the first place. Cue protracted, painful settlement negotiations between the two parties.

To circle back to Pogrebin's story, then, valuations for private collections appear in art-media reporting in much the same way as (equally dubious) valuations for the overall art industry: Reporters have no better options than to rely on a deeply compromised estimating process. Nothing about the industry or the wider world will change based on which side prevails in any given fine-art insurance dispute. But the opaque and subjective (if not outright absurd) process of pricing artworks has huge consequences for how collectors and the general public relate to the discipline. As long as its worth is determined within a fortress of solitude––one garrisoned exclusively by wealthy insiders with vested interests––art cannot be a mass medium, and the parties battling for control will retain incentive to distort the numbers to their own self-serving financial and social ends. 

Keep this in mind the next time a gaudy private-collection estimate appears between two commas in a reported story on the arts. I assure you there will be plenty of opportunities to do so in the near future. Fort Worth is strong, and it's not going anywhere. 

*Note: This post was updated to more accurately reflect the details of insurance carriers' re-appraisal processes after claims are made on covered artworks.