Peter Brigham TEP, Managing Director and Karolina Blasiak, Art Advisor, at Rosemont Art Advisory, outline what to look out for when considering art-secured lending for STEP magazine.
A pledged Andy Warhol in the living room, a Rothko in the hallway, a Richard Serra in the garden: fine art is a powerful financial asset that is often regarded as a key part of an overall wealth management strategy. And as the art market continues to claim a valuation in the tens of billions of US dollars,1 the amount of capital available to lend against art is likely to continue to grow.
Deloitte’s Art & Finance Report 20172 estimates the global art and collectable wealth of ultra-high-net-worth individuals to stand at USD1.62 trillion, with the potential to grow to USD2.71 trillion by 2026. Sixty-nine per cent of wealth managers surveyed for the report said they were looking to incorporate art into their overall wealth reporting, signalling a stronger focus on art as a viable asset class in the private wealth management community.
Art-secured lending may be viewed as an effective way to enable collectors and investors to access the equity value in their artworks without having to sell them, and has a great appeal to many art collectors. As such, practitioners should familiarise themselves with the background and processes involved in the practice.
Until recently, wealthy individuals and families have mainly been investing in art by directly purchasing works for their investment value. This has created a need for a more sophisticated approach to managing art-related wealth, and many new art players and investment products3 are emerging to address clients’ needs for dedicated solutions in the art space.
Between the US and European art markets, only a handful of lenders provide art financing based solely on the value of the art and have total freedom on the use of proceeds. In these so-called ‘non-recourse loans’, only art serves as collateral; no other asset class is considered. As this type of loan relies entirely on the art piece, it is important for those providing and arranging the loans to partner with experienced art advisors or have in-house art capabilities.
Indeed, despite the growing art market trend, multiple challenges remain when dealing with art. For example, the lack of transparency can make collectors apprehensive about art trades, while other issues around ownership, liquidity and forgery have become increasingly apparent.4
It is therefore critical that anyone wanting to succeed in art lending is able to perform thorough valuations and due diligence.
COMPLIANCE AND OWNERSHIP
Art-secured lending is, by its nature, not a mass-market product, not least as the art collections being used as collateral will all be unique in their scope and inventory.
Along with the standard financing considerations pertaining to art or physical assets (appraisal, loan-to-value ratio, insurance, location and storage, fees), a particularly important area of focus for art-secured lending is that of compliance and ownership. Practitioners must ask: what is the extent of the lender’s documentary compliance requirements?
Lenders will have differing requirements depending on, for example, the anti-money laundering rules in their home jurisdiction and their own internal risk management.
For example, they may refuse a loan to beneficial owners based in high-risk jurisdictions. They will also look to identify the origin of the funds used to purchase the artwork, as well as checking all the relevant paperwork to verify the ownership.
Some lenders will insist on simple ownership structures with which they are familiar, such as personal ownership by one owner only or a local onshore corporate vehicle. Others will lend to zero-tax corporate vehicles, partnerships or trusts, but will need to ensure that they are comfortable with the legal structure and obtain the necessary supporting documents, which may be more or less cumbersome depending on how it is structured. The lenders may even require third-party tax and/or legal opinions on the structure.
It was in the 17th century, during the Dutch Golden Age, when Baltic merchant Herman Becker had the idea to extend loans secured by artworks to local artists like Rembrandt van Rijn and Jan Lievens. While it has taken some 350 years for this idea to mature into something one could begin to call an industry, we believe that a regulated, standardised art-backed lending industry will help grow the global market and, consequently, the economy.
1 An estimated USD56.6 billion in 2016, according to Art Basel and UBS’ The Art Market, 2017
2 The report can be found on Deloitte’s website
3 Including private banks; boutique lenders, such as asset-based lenders; hedge funds and family offices; and auction house finance.
4 In January 2018, it was revealed that 20 out of 21 paintings shown at a celebrated Modigliani exhibition were counterfeits, ind.pn/2qYYvJ1
Article originaly published in Step magazine
Credit Pictures: STEP