Would you pay more for art if you knew it was possible to borrow money against its value? In the end, purchasing art can be a costly business, and art collectors are usually not willing to part with their art. Collectors who do decide to sell will soon realize that art is not a liquid asset. If you were able to borrow against the price of your Picasso or other artwork, the better. If you could get that money inexpensively and then channel it into something with a better yield, art could begin to appear attractive to invest in.
The reality is the fact that artwork is difficult to appraise and difficult to prove and very only a few banks in the mainstream want to lend against the art. Some banks will provide loans secured by art at extremely affordable rates of 2.5 percent to 3% for ultra-wealthy collectors like Steve Cohen. Steve Cohen owns a collection of art estimated to be worth $1 billion.
Collectors of this caliber (and let’s face it there aren’t many collectors) are able to use these low-cost loans to purchase properties businesses, or even other art pieces, but there’s one major drawback, and that’s that in order to get these loans in the first place, banks must keep other assets at the institution which could be used to repay the loan. They are basically taking out loans against their entire collection, and not only an art collection. Auction houses like Sotheby’s as well as Christie’s also provide loans at competitive rates provided you’re buying or selling artwork through these auction houses.
There is the option to obtain a general-purpose, non-recourse loan that is only secured by the value of your work through one of the specialists in the market. Rates of interest here vary from low single digits up to more than 20%, however, the majority of lenders will only be looking to make loans of greater than $500,000, and generally will only loan 40% of the artwork’s value. It is, therefore, necessary to possess an artwork worth a minimum of $1.25 million in order to be considered.
Certain firms like Borro provide short-term loans on lower-value art and collectibles. However, they will charge interest rates that range from 35 percent and an astonishing 83 percent annually. There are also the so-called loan-to-own lenders who wager that the borrower will not be able to fulfill the conditions of their loan, so they can then sell their artwork and retain the proceeds for their own use.
Take all of these lenders together and the current amount of art market for lending is estimated at PS6 billion ($9.6 billion) per year according to Deloitte and ArtTactic’s 2013 Art & Finance report that was released this month. If you take into account that worldwide sales of art in 2014 were estimated to be $63 billion which isn’t anything in any way.
The report estimates that the art secured lending market could double in size thanks to new insurance options for art which allow collectors to keep artwork they borrowed on their walls.
If their artwork is in the US Collectors already have the ability to make this happen. In the Uniform Commercial Code, lenders are able to charge the collateral for art at a person’s residence, however in the majority of regions of Europe (except France, Belgium, and Spain) as well as in other art centers, such as Hong Kong, lenders cannot make charges against artworks which is why borrowers have to surrender their artwork to their lender in the course of the loan. This isn’t very appealing.
However, today, a few insurance firms are offering new services to safeguard the lender from the risk of borrowing from the owner of the artwork. If the borrower gives interest on the art collateral to anyone other than themselves, leaves with the art, or refuses to surrender it in case of default, insurance companies will compensate the lender’s loss.
Does this really lead to the rapid expansion of the market for art loans, however? It is Dr. Tim Hunter, the chief of Falcon Group’s new division for art, Falcon Fine Art which was just opened in London The firm is planning to allow customers who reside in England, Wales, and potentially other countries, on a case-by-case basis, to retain possession of their artwork.
It’s certainly a deviation from the normal, yet the company doesn’t rely on insurance to cover the risk. “Allowing clients to keep possession of their artworks is an important part of our model, but we’re not relying on any external product that may or may not be able to insure this service,” Hunter, who is an art adviser Hunter He is also an art adviser. He spent 16 years working at Christie’s where he served as the director of its senior level in the Old Master and British Pictures department, as well as a director in the department of Impressionists and Modern department, and the head of 19 19th century European Art. “Falcon Group has been executing asset-backed financing for the past twenty years, and I’ve 20 years of experience within the world of art. At the end of the day, there’s no shortcut to knowing your customer.”
Falcon Fine Art plans to provide clients with non-recourse loans for up to three years with the option of extending and being financed through Falcon Group’s balance sheet. The terms of the loan will be contingent on the kind of artwork, Hunter says interest rates are likely to be in the single-digits and loan-to-value ratios will be at 40%.
Yet, Merjen Novosel, financial expert of PaydayNow, another art finance firm based in the United Kingdom that connects borrowers, be it professionals or private collectors with individuals with high net worth who would be willing to loan, believes in the latest insurance offerings for lenders of art are one of the most intriguing innovations in the field. Check out paydaynow.net now!
“They will permit more borrowers to retain the collateral, and the differential insurance that will be available soon and will protect lenders from losses in the capital should an artwork needs to be sold but doesn’t provide the full amount that the lender is willing to pay. The theory is that it should not be too costly provided you’ve conducted the proper due diligence in the beginning.”
PaydayNow, which is set to open its first office in Luxembourg is a funder of asset-backed non-recourse loans ranging from PS500,000 to PS5 million ($800,000 and $8 million) with rates ranging between 8% to 13 percent. The typical loan-to-value ranges from 35 percent to 45%, and PaydayNow is currently trying to integrate several lenders together in individual loans in order to reduce the risk. Ress believes that when more businesses begin offering loans to artists and loans for art, there will be a greater commonality across the marketplace that will lower prices for both borrowers and lenders as well.
Right now, though, organizing art loans is a complex business, because art is a complex investment. Ress and Hunter say that each loan takes between four or six weeks to put together that including the time required to gather all the paperwork regarding the title of the artwork as well as its value, authenticity, and its provenance. The valuation process is highly subjective and controversial, and the prices of art are fluctuating.
“Valuation can be so variable when it comes to art,” Ress says. Ress. “We always form an internal view on what we think the valuation should be, obtain an independent view for the borrower, and insist that the lender obtains their own valuation too.” However, He states that lenders are often only able to lend 30 percent of the worth of some modern works.
This is why art lending remains a niche. There’s an ever huge amount of money wrapped to art all over the globe yet there’s no number of lenders who are eager to service this market. So, it’s no chance of a threefold rise in lending to art anytime soon.
The latest update: Borro claims that it doesn’t charge its borrowers interest up to 6.99 percent monthly (or 83 percent on an annualized basis) and also that the number was published on its website incorrectly. In the US the maximum interest rate that Borro borrowers can earn located in California is 4.99 percent per month (59 percent annually) The maximum rate for the different states is 3.99 percent per month (47 percent annually). ).
