Finance

Art Less Valuable for Detroit's Bankruptcy Exit Than Previously Thought

by | July 10, 2014
 

By Mark Stryker

The first formal valuation of the entire city-owned collection at the Detroit Institute of Arts finds that the roughly 60,000 pieces of art are worth between $2.8 billion and $4.6 billion.

However, the report by the New York art investment firm Artvest Partners says that if the collection was actually liquidated to raise cash in Detroit's historic bankruptcy, it would likely bring far less money -- between $1.1 billion and $1.8 billion.

The report, which was commissioned by the city and the DIA, promises to play a central role in next month's bankruptcy trial that will decide the fate of the museum's world-class collection.

The report will be a linchpin in the city's arguments against some of its largest creditors who are pushing for a sale of art. Taken in full, the report suggests that a forced sale of art to pay municipal debt would be easier said than done and not prove nearly as lucrative as many believe.

According to the meticulously detailed 72-page expert witness report, the lower projections of $1.1 billion to $1.8 billion reflect a variety of conditions in the world's art market, including a stagnation of prices in major sectors outside of post-war and contemporary art. It also notes a likely impact of flooding the market.

In addition, it included various discounts that would be dependent on whether the works were sold quickly over a few months or slowly over years. The certainty of legal challenges that could block art from sale and keep the case tied up in court for years are also likely to depress prices, the report says.

The report notes that the low-end projection could fall even further -- to $850 million -- if litigation succeeds in removing especially large swaths of the collection from possible sale.

The report also rejects as implausible a variety of creditor-backed plans to sell art and the ideas for monetizing the collection suggested last year by Christie's auction house.

Impractical sale

The report was delivered to Detroit emergency manager Kevyn Orr and DIA officials on Tuesday and was provided by the city to the Free Press for review. Creditors who requested judicial notice were also scheduled to receive it by Wednesday.

"It's one thing to say in the abstract that the art is worth billions, but it's another thing if you look at the factors if you actually tried to sell it," said Orr spokesman Bill Nowling. "The report gets at whether it's even feasible and gives us scenarios of how a sale might unfold. It makes a good argument that you just can't do it from a practical standpoint."

Officials from the bond insurers Syncora and Federal Guarantee Insurance Co. -- two of the city's largest creditors who have pushed hardest for a sale of art to recover more than a billion dollars in losses -- were not available for comment.

The report discloses that Artvest is being paid $112,500 for the work and that company personnel called as expert witnesses at the trial or depositions will be paid $6,000 for the day or $3,500 for a half day. The costs will be shared equally by the DIA and the city, said Nowling.

Creditors are certain to scour the report for details that might help their case, and bankruptcy experts have told the Free Press that creditors are likely to line up their own expert witnesses to bolster their arguments.

The Artvest report is a more comprehensive valuation of the DIA collection than last year's city-commissioned report from Christie's, which said that the 2,800 artworks at the museum bought directly with city funds had a market value of less than $900 million. Only the city-purchased artwork was considered by Christie's because sale of those pieces would be less legally protected than art that was donated to the DIA or purchased with other funds. Christie's did not consider the logistical or legal realities of trying to sell the art.

How report was made

Founded in 2009, Artvest Partners is a well-known company that advises attorneys, dealers, insurers, collectors and other art world professionals. Cofounder and principal Michael Plummer, who has decades of experience in the art investment business, wrote the report.

In preparing the report, Plummer incorporated Christie's previous estimates and used a similar methodology as the auction house to evaluate the rest of the collection, comparing works with similar works and making adjustments based on size, quality, historical significance, desirability, scarcity and other factors.

Artvest employed a number of consultant specialists who did supplemental research and viewed the works in person or through a high-resolution image. The company also relied on scores of current and historical art market financial reports and analyses, catalogs, newspapers and other sources.

The report says that to maintain objectivity, Artvest officials did not talk to DIA officials during the evaluation but communicated through the museum's lawyers.

Orr's office and the city's bond insurers remain at odds over the value of art and whether it can and should be sold to satisfy debt. The Artvest report also comes as city pensioners are casting key ballots due Friday on the so-called grand bargain pension deal at the heart of Orr's restructuring plan. The deal funnels the equivalent of $816 million in foundation, state and DIA-raised funds into shoring up pensions while transferring ownership of the museum to an independent nonprofit and shielding the art from sale.

"The grand bargain is dedicated solely to the pensioners, and it's a sure thing," said DIA chief operating officer Annmarie Erickson. "This report projects how difficult an actual sale of art would be, how long it would take and how uncertain the outcome is."

At the trial, Judge Steven Rhodes will decide if Orr's plan is fair and equitable to all classes of creditors and whether the plan's revenue and expense projections are feasible for the city. The legality of a forced sale of art is expected to be argued in court.

Syncora and Financial Guarantee Insurance Co. have argued that the grand bargain unfairly favors pensioners and that the art is worth billions more than the $816 million in third-party cash that represents the value of the museum in Orr's plan. Creditors are likely to point to Artvest's high estimate of $4.6 billion -- nearly 5 1/2  times the $816 million -- as evidence that Orr's plan lowballs the value of the art.

A key to healthy city

Neither creditors nor the judge in a municipal bankruptcy can force the sale of assets. But if Rhodes refuses to confirm the city's plan at trial -- or if individual pensioners vote down the plan -- the consequences could push Orr to propose a sale to raise more cash. However, in the wake of the Artvest report, Nowling said that the city "has no plans to sell art even if the grand bargain falls apart."

Though DIA leaders heartily endorse the report, the museum's legal position remains that the art cannot be legally sold, because it's held in a charitable trust, a position endorsed in a formal opinion by Michigan's attorney general. Still, bankruptcy experts have told the Free Press that the charitable trust exemption may not hold up in bankruptcy court.

The DIA has also argued that a robust museum remains key to a healthy post-bankruptcy Detroit and that when creditors lent money to the city, there was never an expectation they could sell art to recover potential losses.

The Artvest report also explicitly endorses the museum's long-held view that selling even a few of its most valuable core works would drive away potential audiences and donors, scuttle its ability to raise critical endowment funds and doom its tricounty tax support.

Selling art, the report says, would "ultimately force the closure of the DIA due to a loss of economic sustainability, resulting in a full liquidation."

(c)2014 the Detroit Free Press

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