The Income Approach to Valuation


In the last column, we discussed the Cost Approach to valuation as one of three approaches an appraiser can chose in writing an appraisal which includes all of the essential “Elements of a Correctly Prepared Appraisal.”

Another valuation approach is the Income Approach. Although this approach is more frequently used by business valuers than appraisers of personal property, it is an approach that all appraisers should consider – especially as the world of fine arts becomes increasingly linked to that of big business.

Briefly, the Income Approach establishes the value of a work of art by determining how much income an object can generate for its owner over a certain period. This is especially applicable when an image or a specific work of art is leased or rented to produce income. Picasso handbags and Miro T shirts, created from images of specific paintings, are two examples that come to mind immediately.

The Income Approach should only be employed when the appraiser is valuing a business enterprise and should never be applied when a normal piece of fine or decorative art is being appraised. The following example should clarify this point.

In a hypothetical scenario, Mrs. Smith has donated a Rembrandt to a major art museum and has contracted with an appraiser to prepare a donation appraisal, which will allow Mrs. Smith to deduct the painting’s full fair market value when she files this year’s tax return.

She is thrilled to learn from the appraiser that, based on an analysis of recent sales of similar Rembrandts, an appraised value of $10 million can be justified easily. Delighted with this information, she can’t wait to tell her sister-in-law, Mrs. Jones.

However, she is less than delighted when her sister-in-law tells her that both she and the appraiser are fools. “Don’t you realize,” Mrs. Jones explains to her, “that once the Museum is given title to your painting, they will be able to use its image on note cards, posters, ash trays, scarves, calendars, postcards and T shirts? Your Rembrandt must be worth at least $200 million.”

Horrified with this news, Mrs. Smith confronts her appraiser. But the appraiser patiently explains that what Mrs. Smith has donated is a work of art only and must be valued as such. A higher valuation may be justified if she were a publisher and had donated a silk screen master or a lithographic stone of a Rembrandt painting, from which all sorts of commercial products could be made. In this particular case, the only appropriate valuation approach, however, is one in which the painting is valued as a painting created by Rembrandt, who, surely, had never dreamed that his image would, centuries later, have a commercial life of its own.

In the occasional case where the appraiser feels that it is appropriate to apply the Income Approach, the appraiser must also have a complete knowledge of copyright law. And, unless the art appraiser has been trained as an economist or an accountant, it would be advisable for the appraiser to write the appraisal in collaboration with a business valuer. Just as it would be impossible for a business valuer to appraise the holdings of an art gallery or the inventory of a manufacturer of fine art products without the help of an appraiser of fine arts, it is equally impossible for the art appraiser to write an appraisal using the Income Approach without the help of a business valuation expert.

The next column will discuss the third approach to valuation, the Comparative Market Data Approach.

For a complete list of the “Elements of a Correctly Prepared Appraisal” please contact the Appraisers Association of America.

This article appeared in the Antiques and The Arts Weekly, April 28, 1995, page 42 and was written by Victor Wiener.