Art collectors are often unable to display their entire collection in their homes. They keep part of it in storage, or they lend it to museums. Why not leverage artworks in storage or hanging on museum walls by borrowing against them? Art finance is a growing industry. Citibank pioneered art finance in the 1970’s. Last year, Michael Plummer of Artvest Partners in New York estimated the art lending market at USD 7 billion. Since then, new lenders have entered the market.
A handful of international private banks offer art loans, in particular Deutsche Bank, Citi, JP Morgan, US Trust and Royal Bank of Canada. Some banks such as US Trust will offer art loans in the US only. Others will offer loans in the US and in Europe, for example Citi and Deutsche Bank. Some international private banks are now looking to offer art finance in Hong Kong and Singapore.
Loans by private banks are typically full recourse. This means that if, in a distress situation, the art collateral sells for less than the total amount due, the bank will seek to recover the balance from the borrower. Private banks will not offer art loans below a certain amount which can be relatively high (e.g. USD 5 million). They normally extend art loans to clients only. In other words, the borrower must qualify as a private banking client and place significant assets under management with the bank.
Emigrant Bank Finance Art Finance, a subsidiary of Emigrant Bank in New York, is unusual because they offer art loans at prices not wholly dissimilar to those charged by the international private banks, yet they do not require assets under management. They lend for periods of between one and 10 years. The minimum loan amount is USD 1 million. They will lend against a wider range of art assets than most private banks. In 2012, they started offering art loans in Europe.
Specialist lenders offer non-recourse loans at higher rates of interest. These lenders generally rely exclusively on the collateral, rather than on the borrower’s net worth. Loans tend to be for shorter periods. The loan amount can be as low as a few thousand pounds sterling. Lenders in that category include Art Finance Partners, Art Capital Group, Montage Finance and Medallion Financial Corp in the USA, and borro in the UK.
The auction houses offer advances over auction proceeds. These loans are ancillary to consignments of artworks for sale by auction. Auction houses occasionally offer loans against art not consigned for sale, although they tend not to lend for the sake of it, unless there is the prospect of a sale (auction or private) at some future date.
Art finance is not simply for collectors. Art dealers can benefit too. Unless the art dealer can offer real estate as security, he may find it difficult to raise funds, as most banks do not regard art inventory as satisfactory collateral. Loans secured by art stock can offer the financial flexibility to expand the business or re-finance other debts.
The art finance industry is more developed in New York than anywhere else in the world. There are two main reasons for this. The first is that in the USA, the lender may register its security interest in the art on a public register under the Uniform Commercial Code (UCC), thereby putting the world on notice that the art is subject to a charge. Having perfected its security interest through registration, the lender is able to let the borrower keep possession of the art. The second reason is New York’s position as both an art and financial capital, attracting a population of collectors who regard their art collection as an investment as well as a passion and expect to be able to leverage their art like their other assets.
In Europe, although there is a higher ratio of asset rich/cash poor collectors than in the USA, art finance has been available on a limited basis. The concept of art as an asset class is a fairly new phenomenon. There is a psychological barrier amongst the older generation of collectors, and those with inherited wealth, to treating art as an instrument of finance. There is no uniform system of registration of charges over chattels such as the US Uniform Commercial Code. Each European country has its own system. The English system of bills of sale is archaic and unsuitable to 21th century banking. As a result, lenders against art often require possession of the art to perfect their security interest. Nonetheless, recent years have seen a greater number of lenders offering art finance in Europe. Art is increasingly being accepted as a separate asset class. The value of art collections has increased dramatically in the last 10 years. Historical sales data is more widely available, thereby helping lenders with the valuation process. The cost of selling art has continued to increase, especially at auction. Younger collectors are more open to leveraging their art collection, particularly if it is not hanging on their walls. These factors have made art finance more attractive to both lenders and Europe-based borrowers.
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