Borrowing against the family Warhol? Your retirement fund will thank you

In March, Christie's auctioned off important Chinese art from the Fujita Museum collection, selling a record-setting $262 million worth of art. The auction reaffirmed that art retains its value as an asset against which its owners can borrow.

Do you own a serious piece of art or an art collection that you want to monetize in retirement?

In the low-profile, high-end world of “art lending,” you borrow against your paintings, sculptures, or other pieces from a bank or art auction house. You can keep your collection hanging in your house or in a museum and still mint money for retirement.

Art lending works like this: A private bank or other lender stakes you some money against your collection – typically up to 50 percent of the value. So, for example, a $1 million painting by a blue-chip artist could fetch a $500,000 loan, at interest rates starting at LIBOR  (London Interbank Offered Rate) plus 2 percent annually.

The art-lending business has grown exponentially with the hot auction market. Just this year, Christie’s hosted a record-setting auction in New York for the Fujita Museum collection of Chinese art, which earned about $300 million, about 10 times estimates.

According to Deloitte’s Art & Finance Report 2016, the U.S. art-secured lending market ranges from $15 billion to $19 billion, with private banks dominating and reporting a 13 percent five-year growth rate in loans.

And more collectors and auction houses are starting to view art with an eye toward an investment return: In 2016, for example, Sotheby’s bought the Mei Moses Art Indices, a database of repeat auction sales that is considered much like the Standard & Poor's 500 index for art.

Why borrow against your collection? Privacy is one terrific reason.

“When borrowing against art, investors want to leverage their collection on their walls or in museums where you’ve lent your pieces,” says Peggy Goldfarb,  a U.S. Trust private client adviser in Philadelphia who has helped clients with art-lending strategies. "Sometimes, you want to invest in a business, or have a philanthropic goal. Or perhaps you want to acquire more pieces and want the cash." 

The Great Recession highlighted the value of a low-volatility asset such as art. Unlike securities, which are valued every minute, art is generally valued once a year.

In turbulent market times, “it’s a real asset that provides solace and peace of mind,” Goldfarb added.

Another reason? Discretion.

“When a client gets a mortgage, there’s a public record. Borrowing with art means the world doesn’t know you’re a borrower. It’s very discreet,” she added.

In the case of U.S. Trust, loans generate against well-known artist names.

“Sometimes, people ask to lend against their toy-soldier collection, and that doesn’t work; stamp collections don’t, either,” Goldfarb said.

On the other hand, she was willing to lend against a Stradivarius violin owned by a lawyer at a large firm. Interest rates “depend on our existing relationship with the client,” she said.

That’s the rub: Most private banks lend against art if you have big assets in their accounts already. However, there’s an expanding list of third-party lenders: Pioneered by Citibank, U.S. Trust, and Emigrant Bank, the business now includes start-ups such as Borro.com, Athena, and Art Capital Group.

U.S. Trust, a unit of Bank of America, is still the dominant player in the art-lending market. It will host an invitation-only panel discussion, “Effectively Managing a Fine Art Collection,” from 5:30 to 7:30 p.m. Wednesday, May 17, at the James A. Michener Art Museum in Doylestown. The panel will feature Evan Beard, national art services executive at U.S. Trust. For more information, contact Eric Abel at 610-567-4735 or at eric.abel@ustrust.com.

Beard said third-party art lenders do more “pure” deals based on the price of the art, but they don’t consider the broader relationships with longtime clients of the bank.

"Most of our competitors view lending against an asset like art as an accommodation for top existing clients," he said. "They’re not out there looking for collectors, whereas we know there are some very nice collectors in the Philadelphia region.”

What about downsides? There have been plenty in the art world: price manipulation, unclear commissions, conflicts of interest, and forgeries, art experts warn.

The local auction house Freeman’s in Center City is looking at the possibility of longer-term art lending as a growth area, according to Tom McCabe, who is in charge of business development there.

Sometimes, an estate has to sell an art collection. “But if you’re still living, you have more options, such as … taking out an advance” against a piece of art.

“We do some advances, since the auction process can take six months or longer," McCabe said. "It’s a service whereby Freeman’s can provide cash up-front as an advance, whereas art loans are structured as loans with terms of one to five years.”

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