Art collecting is not new. Art lending and financing is relatively new. It is quickly growing to be a sizable business niche. Art lending was estimated at $17 to $20 billion in 2017 in the U.S., a significant rise from the prior year (per Deloitte). Why the sudden and rapidly growing interest in art financing?
Two primary factors are 1) the skyrocketing values of private art collections as some works have become very expensive, and 2) historically low-interest rates that make it attractive to borrow to pursue other opportunities.
According to Art Advisory & Finance at Citi Private Bank, “The value of art has increased more than anyone ever thought it would, and people all of a sudden have a lot of value hanging on their walls...why not take some of the value out and take advantage of some opportunities to invest, or to buy more art?” When there’s $10 million or $100 million worth of art hanging on the walls in a $4.5 million home, it makes sense to put that investable capital to work. A financier or private equity titan, knowing there’s a business opportunity will be very happy to borrow against their art to get a rate of return higher than their cost of capital.
When there’s $10 million or $100 million worth of art hanging on the walls in a $4.5 million home, it makes sense to put that investable capital to work.
It makes sense. Leveraging an asset that has seen a huge capital gain is simply putting free money to good, productive use. Selling would be a far less good idea. The elimination of the 1035 Exchange rule the elimination of a tax loophole that allowed deferment of tax payments if profits from the sale of artwork are invested in more artwork increases the attractiveness of borrowing versus selling. Paying loan interest is always better than paying a tax on the capital gain. While the interest on a loan is far less than the tax on a gain, loans have to be repaid so art financing is to be used with thoughtfully - like any other financing.
Sometimes collectors will leverage something they own so that they can acquire some other “must have” work. Depending on the work, the artist, and the price paid there may be significant upside, financially as well as spiritually.
Specialty, boutique lenders like Athena or the finance arms of Sotheby’s or Christie’s have in-house expertise to underwrite or evaluate art. They are less interested in the overall risk profile of a borrower and more so in the value and marketability of the works being leveraged and/or acquired. so they can get non-recourse loans done that banks can’t, and they can do it faster. A non-recourse loan in the art lending world is one in which the artwork is the sole collateral. In case of default, the lender can take the art, but cannot pursue the borrower for other assets. Bank loans are recourse loans, so although the art is the primary collateral, the bank has to underwrite based on the overall risk profile. Since boutique lenders have fewer options in case the loan goes south, they charge a couple of points more than banks would on loans. As with almost everything in the world of High Net Worth dealings very little is standardized. Terms and borrowing rates are customized dependent on the work of art in question, and on the creditworthiness of the borrower overall. Most lenders will lend up to 50% of the appraised value of the artwork. Across the industry, default rates are very low, almost negligible. Art people are loathe to lose their art.
Another major reason collectors take out loans against their art is to buy more art. This money is often used for big guarantees at auctions or to make a serious purchase at the major art fairs. They see a business opportunity, or a chance to buy great work, they want access to capital fast. Art lenders can do fast. They only need to value the art and write up a contract. Traditional lenders need extensive credit checks, salary history, et cetera.
Can art financing solve problems or unlock value for you and your family? Maybe. Lenders are very interested in safety of capital and liquidity, so only “blue chip” artists with a well determined market are considered. You should review and appraise your collections and see what opportunities might await you there.
William S Jiggetts