Guarantee Spree: Auction Sellers Are "Just Nervous"

Do the sellers at the series of major fall art sales beginning tomorrow in New York know something that the auctioneers don't?

They are unloading property with an extraordinarily high estimated value at the upcoming evening sales of Impressionist, modern and contemporary art. But at the same time, many of these sellers have also exacted an extraordinary amount of protection on the downside---guaranteed prices that the auction houses have pledged to pay them, whether or not the bidding reaches the level of the guarantee. These wary sellers don't seem to mind that if prices soar, they stand to forfeit a large cut of the excess amount above the guarantee.

"They're just nervous," said Emmanuel Di-Donna, senior vice president for Impressionist and modern art at Sotheby's. "There's no reason to be. There's so much money around."

But these sellers may be reacting cautiously to signs of a possibly weakening economy.

Brett Gorvy, international co-head of contemporary art at Christie's, revealed that guarantees for his sale total some $70 million. For the Impressionist/modern sale, he said, "we probably have about $150 million to $180 million in guarantees."

"We've been very aggressive in going after business," said Gorvy. "We've been aggressive in the guarantees we've put forward and aggressive in targeting certain collectors....The guarantee is often totally in the auction house's favor: We have risk if we don't sell the painting, but if we do sell the painting, the reward is huge"---10 to 50 percent of the amount exceeding the level of the guarantee.

Sotheby's experts declined to reveal to me the dollar totals of their guarantees, but Kelly Crow of the Wall Street Journal reported that "at least $40 million" was guaranteed in the contemporary sale. Di-Donna said that Sotheby's cut of the amount in excess of the guarantees is 15 to 40 percent. The exact percentage is negotiated based on the size of the guarantee: A higher guarantee (which creates more risk for the auction house) translates into a higher reward for the auction house, if that price is exceeded. Di-Donna said that Sotheby's guarantees are "usually around the low estimate."

Some 47 of the 167 works being offered at Sotheby's two evening sales have guarantees. Christie's has granted guarantees for 49 of the 168 works in its two evening sales.

"Guarantees used to be very rare," according to David Norman, head of Impressionist and modern art at Sotheby's, New York. They were requested mainly "by estates and museums that had to have certainty." Now that their availability has become common knowledge, they have become "a more common part of the negotiation at the high level of the market."

With the recent strength in the market, Norman said, the auction houses' gamble in offering guarantees has been paying off. "The challenge for us is to predict if there's going to be a market change," he acknowledged. Any work that Sotheby's guarantees, he said, has to be one that "we are willing to own [in the event that the bidding falls short]....The real guarantee you have is the quality of the painting."