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May 1, 2014

Art Covenants Detroit and DIA

Detroit is in bankruptcy and looking to monetize assets. At the same time it is looking to keep the art collection stored at the Detroit Institute of Art (DIA) in tact. It has famous art works and it is one of the major attractions in the city along with the Detroit Tigers, Red Wings and Lions.

One vehicle proposed to raise cash is using.art covenants. A simple explanation of an art covenant is it has some of the same traits as common shares of a publicly traded stock in a company like General Motors. A major difference is that the shares of General Motors stock are easier to sell. To the best of my knowledge there are no active public markets for art covenants.

When someone owns shares in General Motors they do not have access to the assets of General Motors. Whether the price of General Motors stock rises or falls depends on the rate of return that General Motors experiences on their assets and the markets perception of how General Motors will do in the future. In addition, the rate of return depends on the markets perception of the risk associated with holding GM stock and on how quickly the shares can be converted to cash if need be. Fine art is less liquid than shares of stock of a publicly traded company and therefore an investor in art covenants has a right to demand a greater return because he is not able to enjoy the aesthetic value of the Michael Angelo.

I am no art expert, am not an expert in projecting rates of return on art work and certainly art covenants. Clearly if someone is interested in art covenants he is only in it for the appreciation value of the art.
"Research we completed recently and presented in August 2013 at the European Finance Association conference shows investors would be wise to be wary. The returns of fine art have been significantly overestimated, and the risk, underestimated. Our research, based on the most complete auction database, BASI (Blouin Art Sales Index) shows the true annual return of art as an asset class over 1972 to 2010 was closer to 6.5%, instead of the 10% that the index shows. Moreover, holding an art fund in your portfolio does not increase the chances that the portfolio will outperform."  Research: Is Art a Good Investment?, Stanford Graduate School of Business, October 21, 2013
The city of Beverly Hills, California has used art covenants as a means of  improving the general ambiance of the city. When a developer seeks a commercial building permit the city requires him to purchase a piece of art and display it in the building for public enjoyment and he simultaneously enters into a covenant with the city stating he will safeguard the art and if he decides to sell the building the artwork will remain in the building. I have spoken with a city official and they are pleased with the program and hope to be making some minor adjustments to it. Detroit's art covenant would contain different language.

My conclusion is the city of Detroit should not rule out the use of art covenants to monetize some of its artwork and of course they should be comparing this approach to other alternatives.

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