Why Art Loans Are Popular With The Ultra-Rich

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Art lending is big business. Deloitte put the industry in the US alone at an estimated 17 to 20 billion US dollars, an increase of 13.3 percent from the previous year.

As the art market continues to grow in value and geographic reach, the amount of money borrowed for art will also increase. But rich people have always collected art. Why are they so eager to borrow money now?

Industry leaders cited several factors driving lending growth, such as the changing demographics of the US and global collector base, the high value of private art collections as works have become more expensive, and a historically low interest rate environment that makes it attractive to borrow pursue other business opportunities.

“The value of art has risen more than anyone ever thought, and people suddenly have a lot of value on their wall,” said Suzanne Gyorgy, Managing Director, Art Advisory & Finance at Citi Private Bank. “I think it’s just become commonplace … why not take some of the value out and take some opportunities to invest or buy more art?”

Who borrows and how much?

The majority of art loan customers are, according to them, very wealthy individual art collectors a report from the European Fine Art Fair with a dealer share of almost 10 percent of the borrowers. At the big banks like US Trust, Citi or Morgan Stanley, almost all borrowers are private individuals. At boutique lender Athena Art Finance, on the other hand, around half of customers are art dealers, said Andrea Danese, Athena President and CEO.

This is in large part because a bank’s art loan is usually one of the many services offered to wealthy clients; a bank can also grant business loans or mortgages or help with asset management and estate planning and therefore knows the client and the size of her assets. Boutique lenders like Athena or the finance departments of Sotheby’s or Christie’s have more in-house expertise to just draw or evaluate the art and are less interested in the overall risk profile of a borrower itself. It also means boutique lenders can get a loan for a new client in just two weeks, Danese said.

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This results in different types of loan: A non-recourse loan in the area of ​​art lending is a loan in which the work of art is the sole security. If the borrower is insolvent, the lender can take possession of the art but cannot pursue the borrower for other assets. At banks, the loans are usually recourse loans. Even if art is the primary security, the bank essentially takes on the lender’s overall risk profile. In the United States, when a work is loaned out, a lien is levied on it and the work can remain in the borrower’s possession, as that lien gives the lender the right to collect it in the event of non-payment.

Because boutique lenders have fewer options in case the loan goes awry, their interest rates are usually higher – the LIBOR (the London Interbank Offer Price, a global base rate) plus 650 to 700 basis points (or 6.5 to 7 percentage points) at Athena, said Danese, while it is closer to LIBOR plus 200 basis points for banks, which also have the advantage of cheaper capital.

In this high-touch universe, there is no standard loan, said bankers, whose terms and interest rates depend on the respective work of art and, in the case of banks, on the creditworthiness of the borrower as a whole. Most lenders loan out up to 50% of the value of the artwork, so a painting valued at $ 10 million is eligible for a loan of up to $ 5 million. Lenders across the industry said default rates are typically very low, almost negligible.

“People don’t want to lose their art,” said Danese.

Why do these people need money?

Fine art collectors often come from the finance and real estate industries, said Evan Beard, National Art Services Executive at US Trust, Bank of America Private Wealth Management (and an Arty employee). of debt or leverage to make even more impressive profits is part of everyday life. Taking out a loan for their art is a natural next step for these collectors, Beard said. He added that the sheer value of some people’s collections has made it almost too good to resist – when there is $ 10 million or $ 100 million worth of art hanging on the walls of a $ 6 million house it is natural to use some of that value labor in the form of investable capital.

But why does a centimillionaire or billionaire need more money? Many art distributors have described their clients as opportunistic – when they see a good business opportunity or the chance to buy a great work, they want access to capital quickly. An art lender just needs to evaluate the art and sign a contract compared to, for example, a mortgage lender who may need extensive credit checks, salary history, and the like.

Beard said, in his experience, borrowers are motivated by an arbitrage game. Financiers or private equity titans know that there is a business opportunity out there with a certain rate of return, and they are happy to borrow against their art, knowing that their return is greater than their cost of capital.

The second main reason collectors borrow for their art is simply to buy more art. “It’s a way to buy art without having to disturb your life,” said Beard, noting that this money is often used for big guarantees at auctions or for a serious purchase at Art Basel.

The third driver is the desire for more capital – what Beard calls “dry powder”. At this late stage in the US economic expansion, customers think the economy is easily overheating and they want cash on hand to take advantage of any opportunities that might arise in the event of a trade war or recession or similar event. Some of his borrowers have medium-term lines of credit against their art, about $ 10 million lines of credit that they can draw on over the next three years.

Of course, a mogul can also get into trouble and need liquidity quickly. Sometimes the artificial loans are used to raise funds to meet a margin call on a stock or bond portfolio, Danese said. Andrew Moment, president of Emigrant Bank Fine Art Finance, said the most common reasons are similar to the “three Ds” auctioneers often cite – death, debt and divorce – fourth adding a desire to diversify assets.

What if there is a recession and the art market collapses?

Art distributors are generally optimistic about their future prospects for the reasons listed above. Even if the economy as a whole experiences a downturn, the industry should still do well as people borrowed for different reasons in bull and bear markets.

“There are reasons for credit that stretch across business cycles,” said moment. “In good times, people could borrow to expand their business; In bad times, the same borrower could buy a competitor whose business is affected by local market conditions and he or she can use the value of art to fund his or her business acquisition. ”

Danese agreed that the art rental business was theoretically “market neutral” but said it was very difficult to say where the economy is currently in the business cycle.

“I’ve never experienced so much uncertainty,” he says, although he is of the opinion that the art market in general is still on the upswing.

At the beginning of the year a working paper circulated: “Art as security“Tried to correlate regional economic cycles with art rental using data on liens on works of art. The paper’s authors, William N. Goetzmann and Milad Nozari, noted that the demand for art loans increased at the regional level during the economic downturn. However, several lenders said that larger loan deals often go unregistered or, when they are, camouflaged through the use of letterbox companies. Danese also cautioned against finding correlations between a niche industry of $ 17 billion to $ 20 billion and the U.S. market $ 20.4 trillion economy, Goetzmann acknowledges that his data set may be incomplete. (While $ 17-20 billion is small relative to the U.S. economy, it’s about a quarter of the $ 63.7 billion Total value of the global art market, according to an estimate by Art Basel and The Art Market by UBS | 2018.)
One thing is clear: the S&P 500 basket of stocks is probably on the longest bull run of all time, and the interest is from close to zero to almost two percent in the past two years. This has had two somewhat conflicting effects. Beard said that since money is no longer “free” (that is, loaned at very low interest rates), people are switching from their stock and bond portfolios to the arts because the risk of a margin call is lower. He added that the Elimination of a control loophole which allowed tax payments to be deferred when profits from the sale of works of art are invested in more works of art, has now made borrowing more attractive than selling.

Gyorgy agreed with Beard’s assessment, noting that art loans rose in popularity during the crisis ten years ago because they were much less volatile than loans backed by a stock portfolio that picked up during the market turmoil of that time. However, she noted that the higher the LIBOR, the less attractive the arbitrage opportunities. At Citi, art rental is also growing internationally – she’s seen Asian collectors eager to get involved.

“It has done consistent business over a period of 35 years,” György said since then Jeffrey Deitch set up the bank’s art departmentwho marries the world of art and finance. “It’s also a great relationship business because our customers are usually with us for a very long time.”
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