Clients
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Research

  Strategic Management of
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  Macroeconomic Facts
  Microeconomic Facts &
Risks

  Some Other Risk Factors
  Blockage Discounts &
Capital Gains

 
Public Commentary

  Chelsea Now
    Vol. 3, #16
  Art + Auction
    March 2009


Some Other Risk Factors

Among other factors taken into account as needed to quantify risk are the relative rates of success and failure of actual venues, of particular artists or schools, and the timing of potential sales (or acquisitions) within defined market cycles.

The quantification of sales, buy-ins, and specific prices - including pre-sale estimates and hammer prices - the imputing of reserve prices (the confidential minimum price which the auctioneer and seller agree must be achieved) that typically differ among auctioneers, and other benchmarks play a role in the computations.

The specific financial profiles of clients are taken fully into account, as are other economic, financial, and statistical indicators that may be relevant under specific circumstances. These factors combine to define the comprehensive financial risk uniquely for each client, and for each object, school of objects, or collection.

Blockage Discounts & Capital Gains

In these two areas, the use of a subset of the methods used to conduct a full financial risk analysis is advisable.

The technical term "blockage discount" denotes the measurable effect on a precisely defined marketplace - for instance, the market for a single artist or a narrowly defined school - when there may be a relatively large influx of works available for sale. (This can happen when an artist dies and the estate must be settled.)

Valuers and chartered surveyors (in the United Kingdom) and appraisers (in the United States) typically fail to utilize sufficient amounts of data, or in some cases even relevant kinds of data, when computing blockage discounts. The same omission is characteristically true when they attempt to assess capital gains (or capital losses) for gift tax and estate tax purposes.

In both instances, the Inland Revenue (in the United Kingdom) and the Internal Revenue Service (in the United States) have sufficient resources at their disposal to resolve these challenges.

The resulting errors can be material.

 For blockage discount computations, the typical amount of a discount, using incomplete data or less than rigorous methodology, appears generally to range between 30% and 35%. However, techniques consistent with economic and financial standards used in other sectors, indicate that a correct range lies between about 15% and 95%. And in some defined instances, a market premium can be fair and reasonable, rather than a discount.

 Concerning the computation of capital gains, the failure to include sufficient or relevant data can lead to the materially incorrect assessment of tax liability. Because of distinct challenges in the collection of transaction data pertaining to the decorative arts - the annual market for which is about twice the value of the global fine arts marketplace - this field is especially vulnerable to imprecision.

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