Rare cars, a bottle of Château d’Yquem or a painting by van Gogh. Fancy belongings could become an important source of collateral.
IT USED TO BE ENOUGH of a triumph to own a bottle of Château d’Yquem or to have a painting such as Picasso’s Le Rêve on the wall. But in the complex world of wealth management, even fancy belongings may be a means to an investment end. At least they are now that banks and auction houses are offering clients more multimillion-dollar loans where everything from vintage cars to luxury watches to famous paintings is accepted as collateral.
The wealthy have always been able to rely on their own properties, as well as commodities such as gold bars, to convince banks that they qualify for heavy borrowing. But a niche in borrowing with alternative collateral has been on the uptick, creating a new form of creative financing, and at some fairly decent loan rates. Indeed, some banks are offering these loans at rates as low as 2 percent.
Instead of taking out a traditional construction loan for his 24-story condo project called the Bellini, for example, wealthy Miami property developer Martin Margulies managed in 2012 to secure an $80 million loan with his collection of 59 artworks, which included pieces by Jackson Pollock, Mark Rothko, Cy Twombly and Jasper Johns. Margulies declined to give the interest rate that he was charged on the three-year loan, but it was “very favorable,” he says. “At the time, banks were not lending against condominium projects, and I thought it was an opportune time to move forward,” adds the real-estate mogul and avid art collector.
Jose Sirven, a partner with the firm Holland & Knight who worked on the deal, says the unusual collateral helped Margulies save on a host of taxes and on the insurance fees that come with traditional financing. Plus, it resulted in “less intrusive” monitoring of the construction project, says Sirven. “The lender will not have the same level of concern, because at the end of the day, the ultimate backstop is the art.”
Wine-backed loans have been pretty popular too: In about two years, London-based Bordeaux Cellars—which bills itself as the largest wine dealer offering lending against bottles of vino—has already offered roughly $50 million in loans, secured against $150 million worth of fine wine.
But whether it’s based in art or wine, this kind of financing comes with its set of strings attached. Some lenders, including Bordeaux Cellars, will hold a borrower’s assets under their own name until a loan gets repaid. Others will restrict borrowers from lending their own artworks to museums during the loan period. (For his part, Margulies, the property developer, wasn’t given such restrictions.) What’s more, banks and other financial institutions only lend a portion of the asset’s total worth in the first place. That becomes a bigger issue if the value of that wine or art collection falls, because when the bank reviews the loan, the wealthy borrower will be forced to pay it down or add more collateral.
Not surprisingly, the value of a loan that a bank provides will vary by the asset. When it comes to gold, loans tend to amount to 80 percent of the metal’s worth, but that figure can drop to 70 percent for luxury watches, jewelry and other accessories. When it comes to those rare bottles of wine, the loan-to-value ratio can be even harder to swallow: 35 percent. Art Finance Partners, a New York-based firm that offers loans against art, antiques and other “unconventional” assets, says it inspects every piece of work before it offers anyone a loan, while J.P. Morgan Chase says it has a “select list” of art appraisers that it works with, and Bank of America requires art to be appraised in person—every year.
Even so, banks and auction houses are encouraging some of these loans, particularly for art. U.S. Trust, the private-wealth-management arm of Bank of America that oversees around $350 billion in assets, says its portfolio for art-backed loans grew 25 percent in both 2012 and 2013, while Sotheby’s, which does a smaller business, says its loans had nearly doubled from 2011, to $457 million, by the end of 2013. Private banks provide loans of about 50 percent against artworks. In U.S. Trust’s case, a typical borrower would already have a collection worth at least $10 million, says John Arena, the firm’s fine art product credit executive.
To be sure, not every exotic asset has a large collectors market, making it difficult for financing firms to assess the value of all expensive knickknacks. “We don’t mind quirky as long as there is a liquid market,” says Chris Krecke, a senior executive at Art Finance Partners. But today, the list of accepted collateral has expanded: Think Steve McQueen motorbikes, Fender guitars and stretches of timberland.
Even super yachts and high-speed aircraft have raced onto this list. At U.S. Trust, where these kinds of alternative loans jumped in popularity last year, a private jet can now be used to secure a loan that is worth up to 80 percent of the airplane’s value. (Newer and more spacious models, of course, command a higher loan-to-value ratio.) “We are trying to bank wealthy families, and the aircraft is the secondary part of the relationship,” says Kevin Moyer, a Bank of America credit executive who also works with U.S. Trust’s clients. These types of loans can range from $3 million to $56 million in value. In other words, perhaps just enough to enjoy a new Picasso or van Gogh for that burgeoning art collection.