Chang Dai-chien's 'A Master's Secrets Unveiled,' .... Investments in real estate securities can be subject to fluctuatio
worth knowing
Your Art Collection as Loan Collateral Use the art you own to borrow the funds you need — all without a single work leaving your walls By John Arena
Fine art is a powerful financial asset that
Art and Liquidity
may be considered as part of your overall
As a fine art collector, you no doubt have a very clear sense of what drew you to each piece in your collection. You may even be able to talk in depth on the personal history and creative influences of the artists whose works you own. Yet if you are like many collectors, you may only vaguely be aware that you can use art as collateral for a loan. By borrowing against your artwork, you may create liquidity to take advantage of a broad range of financial opportunities. You might think about:
wealth management strategy such as using your collection as collateral to gain liquidity for other financial opportunities.
• Acquiring additional artwork • Financing business goals • Taking advantage of other opportunities As a client of U.S. Trust, you have access to a qualified team of credit specialists who can help you borrow against your art collection while you maintain possession of every piece. Your collection Deep aesthetic interest and passion may be your main motivations for buying fine art. Yet your collection may be valuable in financial as well as emotional terms. You are no doubt aware of how the individual pieces have changed in value over time. Indeed, if recent auctions of major artworks are anything to go by, we are in a period of increasing activity in art markets.*
About the Author John Arena is a senior credit executive in U.S. Trust’s Credit & Banking Group.
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WO R T H KN OWING
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yo ur ar t c ollec tion as loan c ollater al
The (Rising) Price of Art
The concept of art for art’s sake may motivate some painters. But once a piece leaves the studio, price often becomes an important factor — in many cases more so with time. This is evident in how some famous works of art have increased in value over the years. Here are some notable sales in 2013: • Jackson Pollock’s ‘Number 19,’ selling for $58.3 million. • Roy Lichtenstein’s ‘Woman with Flowered Hat,’ selling for $56.1 million. • Jean-Michel Basquiat’s ‘Dustheads,’ selling for $48.8 million. • Chang Dai-chien’s ‘A Master’s Secrets Unveiled,’ selling for $42 million. • El Greco’s ‘Saint Dominic in Prayer’ sold for $13 million. • Barnett Newman’s ‘Onement VI’ sold for $43.8 million. • Gerhard Richter’s ‘Domplatx, Mailand’ sold for $37.1 million. • Paul Cezanne’s ‘Les Pommes’ sold for $41.6 million. • Amedeo Modigliani’s ‘L’Amazone’ sold for 25.9 million. Sources: www.sothebys.com and www.christies.com, 2013.
Recent appreciation in the art market may favorably affect the potential collateral value of your collection. While there are collectors who have ready access to liquidity, we have found that others tend to be fully invested most, if not all, of the time. They often have little money available to focus on other opportunities and must consider liquidity when the opportunity arises. A fine art loan may be an effective way to generate the cash, which can be used to fulfill other goals. Approval process The process of borrowing is straightforward. Your U.S. Trust® advisor, in tandem with a credit specialist, will assess your overall financial profile to help identify opportunities for you to borrow against your art. A proposal will then be provided to you outlining a borrowing structure for your consideration. From there a professional appraiser will be engaged to determine the value of your collection that will be used for borrowing. The loan amount is generally limited to 50% of the appraised value. Because the value of art fluctuates, the art used as collateral will be appraised annually, while remaining on your walls. The loan, once approved, will be documented and closed with all the requisite information such as bill of sale, insurance certificates, appraisal and so forth. The funds will then be disbursed so you may execute against your opportunity. Not every collector and collection qualifies for art lending from U.S. Trust. Typically, a borrower must have a collection with an overall value of $10 million or more. Also, collections usually must have diversified holdings among artists and time periods, although we have selectively made art loans based on one particularly strong piece of art. Our customary proposition is to lend against a diversified collection rather than one piece of art. Loan advantages You might use the funds to acquire additional artwork or make another type of investment. Borrowing against a potentially appreciating asset (like a lot of fine art, recently) for other assets which may also appreciate can have financial advantages such as positive leverage to achieve asset diversification. What you may pay in interest on an art-related loan is generally less than the fees for an unsecured loan.
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Such loans can also be preferable to selling artwork at an inopportune time — for example, when you are exhibiting your collection. You may also have a deep aesthetic or emotional connection to certain pieces and would not wish to put them up for auction. On top of that, with a loan rather than a sale, you may avoid having to deal with taxes on art sales, which are not afforded the same favorable tax treatment as other asset classes. You maintain ownership of the collateralized artwork and usually will still be able to display the pieces as you normally would. They can hang on your walls or, with appropriate insurance, guarantees and other agreements in place, may be lent for display in a gallery or museum. Next steps If you think it’s time to use your art collection to create liquidity, speak with your private client advisor and/or one of our credit specialists. U.S. Trust credit specialists have a broad knowledge of artists and their work, as well as the financial and business aspects of the art world. They can draw upon relationships with several major auction houses and independent appraisers to help you value your personal collection and identify pieces that may be suitable as collateral for a loan or line of credit. To learn more about how to create liquidity via your collection, please visit ustrust.com/art.
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Fine Art Lending at U.S. Trust
General guidelines include: • Appropriate for: Art collectors with an internationally recognized collection valued at $10 million or more. • Loan amount: No minimum loan size. Advances up to a maximum of 50% of the appraised value of the art collateral pledged. • Facility types: Renewable lines of credit up to three years. • Pricing: Floating rate based on a spread over the 30-day LIBOR index. Your Art Collection As Legacy
It’s important to determine what role art will play as part of your portfolio of assets while you are alive. But it’s just as critical to consider what you would like to see happen to your collectibles when you are gone. Preparing for that now can safeguard the legacy of your collection in the future. U.S. Trust has special expertise and resources in this area, and we can help clients who appreciate and collect art to navigate financial and estate planning issues so they can reap the most benefits from their collections. Talk to your advisor about our companion article, Worth Knowing: Art Collection As Legacy.
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* Source: NewYorkTimes.com, 2013. This report is provided for informational purposes only and was not issued in connection with any proposed offering of securities. It was issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not contain investment recommendations. Bank of America and its affiliates do not accept any liability for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. The information in this report was obtained from sources believed to be accurate, but we do not guarantee that it is accurate or complete. The opinions herein are those of U.S. Trust, Bank of America Private Wealth Management, are made as of the date of this material, and are subject to change without notice. There is no guarantee the views and opinions expressed in this communication will come to pass. Other affiliates may have opinions that are different from and/or inconsistent with the opinions expressed herein and may have banking, lending and/or other commercial relationships with Bank of America and its affiliates. This publication is designed to provide general information about ideas and strategies. It is for discussion purposes only, since the availability and effectiveness of any strategy are dependent upon each individual’s facts and circumstances. Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy. You should carefully read your account agreement to be sure that you understand your risks and obligations. Diversification does not ensure a profit or protect against loss in declining markets. Credit facilities may be provided by Bank of America, N.A., Member FDIC, or other subsidiaries of Bank of America Corporation, each an Equal Opportunity Lender. All collateral are subject to credit approval and may require the filing of financing statements or other lien notices in public records. Asset-based and securities-based financing involves special risks and is not for everyone. When considering an asset-based and/or securities-based loan consideration should be given to individual requirements, asset portfolio composition and risk tolerance as well as capital gains, portfolio performance expectations and investment time horizon. For any loan with securities collateral, the securities or other assets in any collateral account may be sold to meet a collateral call as provided in the definitive loan documents and the client is not entitled to choose which securities or other assets will be sold. A complete description of the loan term will be found in the individual credit facility documentation and agreements. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties, such as rental defaults. Alternative investments are intended for qualified and suitable investors only. Alternative investments such as derivatives, hedge funds, private equity funds and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity and your tolerance for risk. Alternative investments are speculative and involve a high degree of risk. U.S. Trust operates through Bank of America, N.A., and other subsidiaries of Bank of America Corporation. Bank of America, N.A. and U.S. Trust Company of Delaware (collectively the “Bank”) do not serve in a fiduciary capacity with respect to all products or services. Fiduciary standards or fiduciary duties do not apply, for example, when the Bank is offering or providing credit solutions, banking, custody or brokerage products/services or referrals to other affiliates of the Bank. Bank of America, N.A., Member FDIC. © 2013 Bank of America Corporation. All rights reserved. | ARDE767A | WP-07-13-0546 | 00-21-3917NSB | 09/2013 100% post-consumer content.
