ARTnewsletter Archive

Auction-House Guarantees Hit Record $1 Billion

Sotheby’s and Christie’s are heading into the upcoming fall auction season with a record level of guarantees—reportedly as high as $1 billion and mainly for property to be offered at Impressionist, modern and contemporary art sales in New York this November.

NEW YORK—Sotheby’s and Christie’s are heading into the upcoming fall auction season with a record level of guarantees—reportedly as high as $1 billion and mainly for property to be offered at Impressionist, modern and contemporary art sales in New York this November.

According to an Aug. 23 filing with the U.S. Securities and Exchange Commission (S.E.C.), Sotheby’s reported outstanding guarantees of $378.1 million for property to be offered “primarily in the second half of 2007” that collectively carries a mid-estimate sale price of $400.2 million. Furthermore, Sotheby’s said, additional auction guarantees have been made to potential sellers that, “if contractually finalized” on top of the aforementioned $378.1 million, would bring the auction house within $25 million of a board-approved limit of $500 million. Sotheby’s did not comment on its previous auction-guarantee limit.

In comparison, Sotheby’s said that outstanding guarantees, related to property with a mid-estimate sale price of $209.8 million, totaled $172.6 million at the end of September 2006. The house noted that these properties would be offered for sale in the fourth quarter of 2006 and the first half of 2007.

“Our approach has been successful,” Sotheby’s CEO Bill Ruprecht said in a statement to ARTnewsletter. In each of the last fifteen years we have made money on guarantees. We believe we take a conservative approach to risk. We have taken the same approach in 2007, with significant guarantees in the first half which were very successful.”

As a privately owned company, Christie’s does not release detailed financial information, but spokesman Toby Usnik told ARTnewsletter that “we are in a competitive space with competitive figures.” Christie’s international cohead of postwar and contemporary art Brett Gorvy recently said guarantees for Christie’s upcoming postwar and contemporary sale alone are running at $130/140 million—on par with guarantees extended for its previous sale on May 16 (ANL, 5/29/07, pp. 4-5).

Amid intense competition for consignments, both auctioneers acknowledge that they have increased the number of guarantees made to sellers. One source, who formerly had worked at Christie’s, told ARTnewsletter the current level of guarantees represents a marked shift from the way business historically has been conducted at the houses. Noting that a decade ago, guarantees were “extremely rare and very tough to do,” the source says the houses were unable to extend such credit to their clients at that time.

With guarantees, the auctioneer promises to pay the seller a minimum amount on the artwork, usually somewhere below the low estimate, regardless of how it performs at auction. If the work sells for less than the guaranteed minimum, the house must pay the difference between the sale price and the amount of the guarantee.

If the artwork has failed to sell, however, the auction house takes possession of the work and has the right to sell it later in order to cover its costs. On the upside, if the work exceeds the minimum, the auctioneer gets to share in the excess. (In some transactions, known as third-party guarantees, the house finds an outside person, typically a dealer, to share a portion of the risk and expense.)

However, some art-world experts take a skeptical view of auction guarantees. Roland Augustine, codirector of Luhring Augustine gallery and president of the Art Dealers Association of America (ADAA), told ARTnewsletter, “In their fervor to gain market share, the auction houses have continued these huge guarantees that further encourage the speculative nature of the art market—and I’m surprised they wouldn’t be slightly more conservative, knowing the fragility of the global situation.”

Augustine adds, “If they really get hurt, then surely in the spring they will have to pull back, and that’s music to my ears. They have wreaked havoc on the markets for artists we’ve cultivated for years and years by offering and encouraging such liquidity.”

According to Sotheby’s Aug. 23 filing, the current limit was established by the board after assessing the performance of the company’s auction guarantees in the first half of 2007 and “further reviewing the last 14 years of auction-guarantee experience.”

In each year during that 14-year period, as well as in the first six months of 2007, Sotheby’s explains, “the company has realized a profit on its auction-guarantee portfolio.” The house recently reported second-quarter and six-month results that it called the highest in its history (ANL, 9/4/07, pp. 3-4).

Last spring Sotheby’s, Christie’s and Phillips de Pury and Company took in a total of $1.49 billion—up sharply from $894.5 million in spring 2006 and a sizable bump up from the $1.38 billion total garnered last fall.

Many in the art world have been forecasting a correction—estimates run from a low of 5 percent to as high as 50 percent. Billionaire collector Eli Broad went public in August with the prediction that “the art market will soften, and an adjustment in values will take place, but it may not happen for six months to a year.”

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