Art Investment Glossary

Absentee Bid: An offer on a lot submitted prior to an auction that allows a bidder to participate in the bidding process without being physically present at an auction.

Appraisal: The process of estimating the value of works of art, comparing data from multiple sources such as art auction houses, private and corporate collectors, curators, art dealer activities, gallerists, experienced consultants, and specialized market analysts.

Art Fund: Privately offered investment funds dedicated to the generation of returns through the acquisition and disposition of works of art. They are managed by a professional art investment management or advisory firm that receives a management fee and a portion of any returns delivered by the fund. All art funds utilize some form and degree of a traditional “buy and hold” strategy, but art funds differ in their aggregate size, duration, investment focus, investment strategies, and portfolio restrictions.

Art Lending: The practice of issuing loans that are partially or entirely collateralized by works of art.

Bid: A prospective buyer’s indication or offer of a price they are willing to pay to purchase property at auction. Bids are usually in standardized increments established by the auctioneer.

Blockage Discount: The money discount assigned to a group of artworks by a single artist when that group of works is to be released to market as a group rather than individually. A blockage discount adjusts the fair market value of the works downward because of the risks of depreciation when a large volume of art is released into the market all at once.

Buy-In: An auction lot may be bought-in when bidding fails to reach the designated reserve price.

Buyer’s Premium: An advertised additional charge imposed on the buyer, uniformly imposed and largely non-negotiable, added to the highest bid to determine the total contract price.

Capital Gains Tax: A tax on the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The tax rate on long-term gains from the sale of certain assets, including stock, was reduced in 2003 from 20% to 15% (for individuals, whose highest tax bracket is 15% or more). The reduced 15% tax rate on capital gains, previously scheduled to expire in 2008, was extended through 2010 as a result of the Tax Increase Prevention and Reconciliation Act signed into law by President Bush on May 17, 2006. In 2010, President Obama signed a law extending the reduced rate on eligible dividends until the end of 2012. However, the capital gains tax rate for collectibles, including art, has remained 28% throughout this period.

Catalogue Raisonné: A complete listing of all works by an artist known at the time of compilation, including an identifying catalog number for each work listed, as well as information such as provenance, current location and/or exhibition history.

Collateral Value: The estimated fair market value of an asset that is being used as loan collateral, generally determined by an appraisal from a qualified expert.

Condition Report: A report indicating any damage or unusual characteristics relating to a work of art. The type and location of damage are explained in detail to ensure a complete examination.

Consignment: The transfer of possession, but not the title of an item from an owner to a third party for the purpose of sale. The third-party will sell the property and returns the proceeds to the owner, usually less a commission.

Consignee: A gallery or auction house to whom property is entrusted by the consignor or seller for the purpose of sale.

Consignor: A person, authorized agent or entity that entrusts a property to a gallery or auction house for the purpose of sale.

Consignor Advance/ Bridge Loan: A loan secured by art that is scheduled to be sold. The proceeds from the planned sale are used to repay the loan, with the balance of proceeds being returned to the client.

Estimate: An approximate calculation of degree or worth of a work of art. When quoting the value of an artwork, appraisers often take into consideration specific characteristics such as date, medium, size, technique, style, condition, and/or rarity.

Fair Market Value: Price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having a reasonable knowledge of relevant facts.

Full-Recourse Loan: A debt not backed by collateral from a borrower. This type of debt allows the lender to collect from the debtor and the debtor’s assets in the case of default as opposed to foreclosing on a particular property or asset as with a home loan or auto loan. Nonpayment of recourse debt allows the lender the right to collect assets or pursue legal action.

Guarantee: The minimum price agreed between the auction house and a seller for which a lot may sell. The auction house must pay the seller the minimum price, whether or not the lot is sold. If the lot is sold for a price in excess of the guarantee, the excess is either paid to the seller or divided between the seller and the auction house, depending on their individual arrangement.

Hammer Price: Price established by the last bidder at the auction and acknowledged by the auctioneer before dropping the hammer.

Lien: A non-possessory security interest granted over an item to secure the payment of a debt.

Loan-to-Value (LTV) Ratio: A lending risk assessment ratio that lenders examine before approving a loan. The LTV determines how much of a property is being financed and is calculated by dividing the property’s value by the value of the outstanding loan.

Non-Recourse Loan: A debt that is secured by a pledge of collateral, but for which the borrower is not personally liable. If the borrower defaults, the lender can seize the collateral, but their recovery is limited to the collateral. Thus, non-recourse debt is typically limited to 50% or 60% loan-to-value ratios, so that the property itself provides “overcollateralization” of the loan.

Provenance: The history of a work of art, including its creation and ownership, used to help establish its authenticity. Documents used for provenance include sales receipts, auction and exhibition catalogs, gallery stickers on the painting, letters from the artist, statements from people who knew the artist or circumstances of the painting.

Purchase Price: The hammer price plus the buyer’s premium and any other applicable fees or taxes.

Replacement Value: The cost of replacing the artwork with a same or similar work, and of the same or similar substrate, image size, and edition. Commonly used in insurance coverage for fine art, it represents the amount of money that would be required to be paid in the marketplace to replace a property with one of like kind and quality.

Reserve Price: The minimum price that a seller is willing to accept for a property to be sold at auction. In New York City, the law requires auction houses to identify lots that carry a reserve, which they typically do in the sale catalog. The reserve amount can remain confidential, but may not exceed the low estimate assigned to the work.

Seller’s Commission: The commission received by the auctioneer, acting as an agent of the consignor, equal to a percentage of the final bid price for a work of art, generally based on a graduated scale.

Term Loan: An asset-based short-term loan payable in a fixed number of equal installments over the term of the loan.