Are Galleries Overleveraged - yazzy's at www.williamverdult.com

According to New York Magazine in the summer of 1992, stickers began appearing on Soho storefronts. FOSSIL TYPE: GALLERY, they read. It was a project by artist Lois Nesbitt to flag galleries that had closed. Soon after, the gallery where she showed a map of those spaces closed too. In the early nineties, more than 70 New York galleries went out of business.

Could it happen again? No, say many observers—today’s art market is too global, too rich, even too smart to suffer such a wrenching setback. All the same, one shouldn’t forget that the art market’s biggest climb ever has been based in part on a growing pile of dealer debt. Dealers have borrowed against inventory to fuel bigger shows, art-fair exhibits, and satellite galleries all over the world.

Debt doesn’t mean insolvency, of course—often just the opposite, as healthy businesses use the capital to expand. But, because gallery loans use art as collateral, a big dip in the art market can cause that backing to evaporate. As one European dealer says, “Some dealers are leveraged up to their eyeballs.”

To cover themselves against such a drop, lenders charge a hefty interest rate—as much as 5 percent above the prime rate. They also usually demand art priced at double the amount being borrowed as collateral. In other words, prices would have to fall 50 percent before the gallery (or the lender) got into real trouble, and if your collateral is a Rothko, that isn’t likely to happen. Contemporary art, however, is a dicier proposition. Back in the nineties, the resale markets for some artists evaporated completely. Overnight, some loans became essentially worthless.

Now the questions is like other real estate are galleries overleveraged?

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