Art Can Be Collateral: Loans Based on Works of Art
By Jason R. Berne, Esq.
The global search for liquid cash is leading many to look to their art collections for more than mere beauty. This NY Times article told these stories of collectors looking to sell art collections. Most owners of valuable art – corporations, families, foundations, museums – think art’s value can only be accessed through a sale. In fact, often owners choose not to sell, but instead borrow against their art. In many instances, clients borrow in order to purchase more art (for example, to be able to snap up a work suddenly or rarely on the market) or to take advantage of other investment opportunities they see in the stock market or real estate. In our experience, loans made with art as collateral are primarily to high net-worth individuals, galleries, trusts, and museums as a service to their existing private client or trust customers, but we have also seen businesses use their art collections as collateral (or in parlance of the finance world, monetize their assets).
Here are a few things to think about if you want to monetize your art and keep it too.
Paperwork. Make sure insurance, appraisal and provenance documentation is up-to-date. To protect their interest in the collateral and protect against fraud, lenders take several steps, including:
- requiring recent appraisals from approved appraisers or auction houses (which often include evidence of provenance),
- being named on the borrower's insurance policy (in case the collateral is stolen or damaged), and
- UCC filings (to put other potential lenders on notice that the collateral is encumbered).
What Counts. Lenders active in this market typically make loans against specific works, multiple works, or a whole collections. And, not just works of fine art – we have also helped people borrow against books, maps and antiquities. Not every bank will lend against art, but those that do usually offer a variety of financing options, including term loans (which become due on a specific date) and revolving loans or lines of credit (which allow money to be paid back and reborrowed during the life of the loan). The amount of the loan varies but is usually somewhere between 45-60% of the market value of the collateral.
Keep Possession If You Can. Often, the art owner can keep the art on the wall or the pedestal, as long as restrictions are followed limiting when a work can be moved (e.g., only following prior approval), where it can be moved (only to approved locations - usually domestic, but sometimes to galleries or museums), and how it can be moved (only in approved manners). When a borrower is up-front and clear what they want to do with their art, lenders can often make accommodations.
More Common Than You’d Think. Of course, like all secured debt, the bank will insist on a filing with the state under the Uniform Commercial Code. Some borrowers are particularly sensitive to public filings that show they have used their art as collateral, however, there are ways to avoid including individuals names in the filings and most lenders will work with a borrower if this is a particular concern. One banker we've worked with confided that while borrowers are sometimes afraid of what their peers would think, they'd be surprised to find out how many of their peers are have already done exactly the same thing.
