Getting More from Your Gauguin
By Kelly Kearsley
As fine art becomes a more common alternative asset class, investors are increasingly interested in how they can capitalize on the value of their collections—without giving them up. Art-secured loans provide an opportunity.
“Art loans can provide a form of return on your investment without having to part with the art or pay capital gains on a sale,” says Steve Sanak, director of private banking at BBVA Compass.
Indeed, 41 percent of art collectors who were surveyed in Deloitte’s 2013 Art and Finance Report say they’d consider using their art as collateral for a loan. They noted that they would use the borrowed funds to purchase additional works of art, invest in the stock market or other business ventures or refinance existing loans.
Short terms, low rates
Sanak says that art loans are usually secured by a collection of works (rather than a single piece) to ensure the diversity of the collateral portfolio. One collector, for example, recently used a portfolio of Picassos to obtain a $12 million loan for a Manhattan apartment.
Borrowers aren’t limited to museum-quality art masterpieces. In fact, individuals have obtained loans using their collections of valuable antique swords and rare baseball memorabilia, Sanak says.
Art-secured loans are most often structured as interest-only loans with customized, flexible terms based on a client’s credit profile. The interest rates for such loans have been attractive recently, because of the current low interest rate environment and the financial stability of the individuals who tend to seek art loans.
Considerations for collectors
For all their appeal, art loans do come with some risk, including the possibility of losing your art collection if you default. Sanak offers some considerations for art collectors looking to turn their illiquid collections into cash:
- Work with an art advisor or professional. It can be useful to have someone you trust advising your art purchases, sales and even borrowing—especially if you are new to the art market, Sanak says. Your art advisor can provide guidance on valuation and ensure that you never unknowingly purchase or try to borrow against a piece of stolen artwork. “It’s always important to understand the history and ownership of any piece,” he says.
- Loans depend on appraisals. Private banks and art-lending services typically offer borrowers up to 50 percent of the value of the collection they plan to use as collateral. You’ve likely had your works appraised, but expect the bank or lending institution to require a third-party appraisal of the collection to verify the valuation.
- Be aware of loan terms. Many banks reserve the right to reappraise a collection based on changes in the art market, Sanak says. That could pose trouble for collectors. If the value of their collateral portfolio has dropped, they may need to repay the difference between its current market value and what they have borrowed. “You want to build in some leeway in case the market moves,” he says.
- Underwriting is still a factor. Though collecting fine art is typically reserved for the wealthy and ultra wealthy, lenders will still want to investigate a borrower’s credit scores and ask for income documentation before determining how much they will lend and at what interest rate. Your collection and other assets may be at risk. Most private banks offer their loans on full recourse, Sanak says. That means that if the borrower is unable to repay the loan, the bank will sell the collateral collection. If art sells for less than the value of the loan, the bank could also potentially demand repayment from the borrower’s other assets.
The above content is provided for informational purposes only. Neither BBVA Compass, nor any of its affiliates are providing investment, tax, legal, or accounting advice. Consult your individual tax, legal, insurance or accounting professional for advice regarding your particular circumstances. Loans with BBVA Compass are subject to eligibility, underwriting, and approval, including credit approval.