Macklowe Divorce - Judge Orders Art Collection to be Sold

Fellow appraiser Xiliary Twil, ASA sent me some links on the recent court decision for New York City real estate developer Harry Macklowe and his wife Linda. From earlier posts, the divorce has been going on for some time and there have been disputes between he couple of the value of the collection, some say worth $700 million. According to reports, Linda gets to keep 15 works of art which have sentimental value to her and pay Harry $20 million. There is agreement on the value of these pieces.

During the divorce proceedings Linda said the art collection was worth $625 million while Harry ad his legal team believed the value was $788 million. The Art Market Monitor reports the higher valued works followed by the differences in values and are listed below. The valuation differences as being rather great, so it would be interesting to see the differing appraisals and how they came to their value conclusions.

Andy Warhol Nine Marilyns $50m
Alberto Giacometti, Le Nez $35-65m
Michael Heizer Track Painting 1967 $150k-$1.7m
Robert Irwin, Untitled (1965-6) $2m v $8.5m
Jeff Koons Vest with Aqualung $10m - $11m
Jackson Pollock, Number 17 $35m  v $15m

The rest of the collection are lower valued works, also with no agreed upon value and will be sold at auction per the judges order and proceeds to be divided.

The Real Deal reports
In the end, the judge overseeing developer Harry Macklowe’s bitter divorce ordered his fortune split down the middle.

Nearly 12 months to the day after the bitter court proceeding ended, Judge Laura Drager ordered Linda and Harry Macklowe to sell their contemporary art collection, worth approximately $700 million, and split the profits evenly because the two sides could not agree on how much it is worth.

“It is an extraordinary collection and the achievement of a lifetime’s work,” she wrote in a 64-page decision, first reported by the New York Post.


Drager’s ruling comes nearly a year after the conclusion of a 14-week trial that chronicled the Macklowes’ years of marital strife along with the ups-and-downs of one of New York City’s most storied developers.

In divvying up the couple’s vast fortune, Drager took a scalpel to the assets (and debt) accumulated over a lifetime:

· Linda can keep $40 million worth of art but will pay Harry a $20 million credit.

· Linda can also keep their $72 million condo at the Plaza Hotel, but must pay Harry a $36 million credit.

· Harry will retain ownership of $82 million worth of commercial property, including 737 Park Avenue, but has to pay Linda $41 million.

· They will split $62 million in cash held in several bank accounts;

· Harry will keep “Unfurled,” a $23 million yacht, but they will share $16 million in debt on the boat

· Linda may keep $3.8 million in jewelry, a $409,000 silver collection and $85,000 worth of books

· Harry will hold title to vehicles valued at $385,000

Linda and Harry Macklowe split in June 2016 after the developer left his wife for his now-fiancée Patricia Landeau. Harry reportedly offered Linda $1 billion to walk away, a claim she rejected. Their bitter and pubic divorce trial kicked off in September 2017.

Throughout the proceedings, lawyers for both sides tried to downplay what’s been described as a $2 billion fortune tied to Linda Macklowe’s art collection and Macklowe Properties’ storied 13 million-square-foot portfolio.

On the witness stand, Harry Macklowe — at turns charming and calculating — cast shade on his own projects, namely 432 Park Avenue and 1 Wall Street. While an accounting expert hired by his legal team testified his companies “lose money every year,” Macklowe pegged his net worth at negative $400 million. That was largely due to deferred capital gains on the $2.8 billion sale of the GM Building in 2008.

During the trial, Linda and Harry bickered over the value of their art (she said $625 million, he said $788 million) and their condo at the Plaza (she said $55 million, he said $107 million). Linda also filed a separate lawsuit, later dropped, alleging that Harry and his partners at 432 Park Avenue were trying to force her to close on a $14.4 million condo at the tower that had been downsized without her knowledge.

As part of the divorce proceeding, Harry’s attorney, Peter Bronstein, argued that if Linda takes half of the marital assets, she ought to shoulder some liability. “Mr. Macklowe is trying to get his business back on its feet,” he said. “He’s had to borrow money, get pieces of deals.”

In November, as both sides waited for Judge Drager’s decision, the developer closed on a $750 million construction loan from Deutsche Bank for 1 Wall Street, as The Real Deal reported.

For more than a year, the developer had been negotiating with JPMorgan Chase to finalize an $850 million loan for his office-to-residential conversion slated to hold 566 units. During that time, Macklowe’s equity partner, Qatari billionaire and former prime minister Sheikh Hamad Bin Jassim Bin Jaber al-Thani (HBJ) also transferred his stake to former Qatari emir Hamad Bin Khalifa al-Thani (HBK). After the late-stage switch from J Morgan to Deutsche Bank, HBK is planning to contribute $100 million in additional equity.
Source: The Real Deal 


3rd Exposure Draft USPAP 2020-2021

The Appraisal Standards board or the Appraisal Foundation has released its 3rd exposure draft for the 2020-2021 edition of USPAP.  The executive summary of changes is listed in the block quote.

Per the AF and ASB "All  interested  parties are encouraged to comment in writing to the ASB before the deadline of February 1, 2019. Respondents  should  be  assured  that  each  member  of  the  ASB  will  thoroughly  read  and  consider all comments.

Comments are also invited during the ASB Public Meeting on February 8, 2019 in Scottsdale, AZ.Written comments on this exposure draft can be submitted by mail and email.Mail:
Appraisal Standards Board
The Appraisal Foundation
1155 15th Street, NW, Suite 1111
Washington, DC 20005
Email: asbcomments@appraisalfoundation.org"

For the full exposure draft, follow the source link below.

The ASB executive summary
This  Executive  Summary  is  intended  to  be  a  brief  discussion  of  each  section  in  the  document.  Because some readers may not have an interest in every section of the document, the Executive Summary gives an overview to help readers find the sections related to their specific interest(s).
For  detailed  information  on  proposed  revisions  and  the  reasons  for  the  proposals,  the  ASB  encourages  readers  to  review  the  rationale  as  well  as  the  specific  changes  being  proposed.  As  always, the ASB requests readers to submit any relevant comments.

Section 1 – STANDARDS (Reporting Options and Comments in Standards Rules)

Reporting Options

The  ASB  proposes  significant  revisions  to  STANDARDS  2,  8,  and  10.  Rather  than  limiting  appraisal reports to either a one-size-fits-all or the current two-sizes-fit  -all reporting options, the ASB  proposes  a  model  that  reduces  the  specificity  without  diminishing  the  USPAP  reporting  requirements.  The  Board  also  proposes  the  elimination  of  required  appraisal  report  labels  and  specific  warning  language  but  proposes  reporting  rules  that  require  clear  and  conspicuous  disclosure  of  any  restrictions  on  the  use  of  an  appraisal  report.  The  ASB  also  proposes  some  parallel changes to STANDARDS 4 and 6 as appropriate for consistency.
Comments in Standards Rules

In the First and Second Exposure Drafts the ASB proposed several actions related to Comments in  the  Standards  Rules.  These  actions  included  deleting  some  Comments  that  had  duplicate  requirements clearly stated elsewhere and incorporating others directly into the Standards Rules. The  responses  to  the  First  and  Second  Exposure  Drafts  indicated  these  actions  were  helpful  in  increasing  the  clarity  of  USPAP.  In  response  to  stakeholder  input,  this  Third  Exposure  Draft  includes a proposal to revise the structure of the long Comment following the Certifications and to reinstate some of the Comments that had been proposed for deletion.

After  considering  responses  to  the  First  and  Second  Exposure  Drafts  regarding  proposed  modifications to the Disclosure Obligations section of the SCOPE OF WORK RULE, the ASB now  proposes  to  add  language  to  the  Disclosure  Obligations  section  of  the  SCOPE  OF  WORK  RULE to address the flexibility afforded the appraiser in the disclosure of scope of work.

In  earlier  exposure  drafts,  the  ASB  proposed  to  move  the  following  important  Comment  from Standards   Rules   1-1,   3-1,   5-1,   7-1,   and   9-1, and   add   a   slightly   edited   version   to   the   COMPETENCY RULE. In response to comments to the Second Exposure Draft, the ASB now proposes to move the unedited Comment, as follows, into the COMPETENCY RULE.
“Perfection is impossible to attain, and competence does not require perfection. However, an appraiser  must  not  render  appraisal  services  in  a  careless  or  negligent  manner.  This  Rule  requires an appraiser to use due diligence and due care.”
This  particular  Comment  currently  appears  only  in  the  development  Standards,  but  it  has  been  pointed  out  that  it  should  also  apply  to  reporting.  Moving  it  into  the  COMPETENCY  RULE  reduces duplication and, at the same time, broadens the applicability of this important Comment since the COMPETENCY RULE applies to both development and reporting in all disciplines.

Section 4 – DEFINITIONS 
Based  upon  responses  received  from  the  First  and  Second  Exposure  Drafts,  the  ASB  proposes  some modifications and additions to the DEFINITIONS in order to help readers better understand USPAP. Both exposure drafts proposed to include USPAP terms that differ from or are not found in popular English dictionaries and also, in a few instances, to indicate which popular dictionary definition is meant to be used if there are multiple definitions.

Section 5 – Other Edits to Improve Clarity and Enforceability of USPAP
The Board proposes several edits for clarity and consistency. The edits are related to the following three terms or phrases:
1.Accept an assignment
2.At the time of the assignment
3.Intangible Items
In response to comments received from the Second Exposure Draft, the proposed DEFINITION of “At the time of the assignment has been modified.”

Section 6 – Proposed Revisions to ADVISORY OPINION 1, Sales History
The  Board  is  proposing  edits  to  provide  additional  detail  related  to  an  appraiser’s  obligation  to  analyze the sales history of the subject property. In addition, the Board is proposing corresponding edits  that  will  be  made  if  the  changes  to  USPAP  contained  in  this  Third  Exposure  Draft  are  adopted.

Section 7 – Proposed Revisions to ADVISORY OPINION 2, Inspection of Subject Property
The  Board  is  proposing  edits  to  reflect  changes  in  the  marketplace  related  to  an  appraiser’s  inspection of a property. In addition, the Board is proposing edits that will be made if the definition of INSPECTION contained in this Third Exposure Draft is adopted.

Section 8 – Proposed Revisions to ADVISORY OPINION 3, Update of a Prior Appraisal
The Board is proposing edits that clarify an appraiser’s obligations regarding confidentiality when performing an update of an appraisal using the “incorporate by reference” option.

Section  9  – Proposed  Revisions  to  ADVISORY  OPINION  28,  Scope  of  Work  Decision,  Performance, and Disclosure
The Board is proposing clarifying edits to Illustration 2, and to include an additional illustration regarding  a  scope  of  work  problem  related  to  real  property.  In  addition,  the  Board  is  proposing  corresponding edits that will be made if the changes to USPAP contained in this Third Exposure Draft are adopted.

Section 10 – Proposed Revisions to ADVISORY OPINION 31, Assignments Involving More than One Appraiser
The Board is proposing edits that will be made if the definition of SIGNIFICANT APPRAISALASSISTANCE contained  in  this  Third  Exposure  Draft  is  adopted.  Additional  edits  are  being  proposed if the edits to Standards Rules 2-3, 4-3, 6-3, 8-3, and 10-3 in the Third Exposure Draft are adopted.

Section  11  – Proposed  Revisions  to  ADVISORY  OPINION  32,  Ad  Valorem  Property  Tax  Appraisal and Mass Appraisal Assignments
The Board is proposing to add an Illustration 5, capturing information proposed for deletion from a Comment to Standards Rule 5-5(a), which the Board concluded was more advisory in nature and better placed in this Advisory Opinion. Additional edits are being proposed based on the potential changes to USPAP in this Third Exposure Draft.

Section 12 –ADVISORY OPINION 38, Content of an Appraisal Report
The Board is proposing a new Advisory Opinion that will replace Advisory Opinions 11 and 12 if the proposed edits to USPAP in this Third Exposure Draft are adopted.

Section  13  – Proposed  Retirement  of  ADVISORY  OPINION  4,  Standards  Rule  1-5(b); ADVISORY OPINION 11, Content of the Appraisal Report Options of Standards Rules 2-2, 8-2, and 10-2; and ADVISORY OPINION 12, Use of the Appraisal Report Options of Standards Rules 2-2, 8-2, and 10-2

The Board is proposing the retirement of AO-4 as the existing guidance is viewed as narrowly-focused, and is more appropriately housed where it also currently exists in the USPAP Frequently Asked Questions.

As  stated  above,  AO-11 and  AO-12  will  be  retired  and  replaced  with  AO-38  if  the  proposed  revisions to USPAP contained in this Third Exposure Draft are adopted.
Source: The Appraisal Foundation 


UBS Investor Watch Pulse Report

The Associated Press recently posted an article on a UBS Investor Watch Pulse Report (Art in Motion) from UBS Global Wealth Management.  The report was released during Art Basel. The reports note a growth in online purchases, nearly doubling from 2017, growing interest in women artists, and collectors looking to purchase but reluctant to sell.

The UBS site does not yet have the Art in Motion report posted. I will keep checking and post when available.

The Associated Press reports
UBS Global Wealth Management released today a new report that unveils the majority of art collectors are going online and using social platforms to stay at the forefront of the art market year round. Released during Art Basel in Miami Beach, this special Investor Watch Pulse Report, titled “Art in Motion,” studies the attitudes and behaviors of fine art collectors in the U.S. with at least $5m+ in investable assets.

Art collectors increasingly comfortable buying art online

The percentage of art collectors who have purchased art online before they’ve seen it in person has more than doubled in the past year (26 percent in 2017 vs. 58 percent in 2018), while 63 percent of collectors polled have gone on the internet to participate in an online auction.

What’s more, art collectors are beginning to feel the pull of social media, using it as a resource to help them follow the art market closely. Among the collectors, 67 percent follow an artist on social media, while 65 percent have seriously considered buying art after first seeing it through their social media platforms.

“The technological trends changing the economy are increasingly changing the art market,” said Karl Ruppert, Market Head of Florida Private Wealth Management at UBS Global Wealth Management. “There are potential opportunities presented through future growth of the online art market to attract new buyers at different price levels, which is beneficial to the health of the overall market. For gallerists, fairs, auction houses, artists and collectors, digital tools will be a key area of growth over the next five years.”

Women artists on the rise, and so are the investments in them

Women artists are increasingly being recognized for their standout contributions along with breaking their sales records — which hasn’t gone unnoticed among collectors. Almost three-in-five collectors see the artist’s gender as a determining factor when purchasing a piece, and 70% plan on purchasing works by women in the next year.

“While male artists continue to lead overall sales within the market, we found clients are increasingly recognizing that women artists are undervalued,” said Ruppert.

Collectors ready to buy, but cautious to sell

Collectors are eager to grow their art collection with half stating they’re always looking to add new pieces, and 34 percent are opportunisitically searching. Moreover, 58 percent are ready to make an addition in the upcoming calendar year, while 64 percent of fine art collectors are gearing up to spend more than $100k on their new additions in 2019.

More than half (58 percent) of these wealthy art enthusiasts view their collections as their most prized possessions. Not surprisingly, collectors are only willing to sell up to a third of their collection.

Passing along the passion: Concerns for art inheritance

When it comes to passing along their passion pursuit to the next generation, 58 percent of art collectors are worried their heirs won’t know how to care for the collection and 57 percent are concerned about taxes when passing on to the next generation.
Source: Associated Press 


Millennials and Antiques - Growing Interest?

The Telegraph recently ran an interesting article on a growing interest in antique and vintage furniture from millennials due to the sustainability rather than the past interest in fast furniture. With low price points fro many antiques, at times lower than Ikea, according to many in the auction trade, millennial interest is growing, and it is expected to continue.

Perhaps that interest in sustainable furniture will grow into real collector interest as well. With that it might move the needle from just buying antique and vintage furniture to collecting.

The Telegraph reports
A boom in antique sales has been driven by eco-conscious millennials who are rejecting “fast furniture”, auction houses have said.

While the enduring image of a young person in their first home is the assembly of cheap flat-pack tables and wardrobes, many members of the younger generation are rejecting this stereotype and filling their houses with antique finds from auctions.

And with auction houses setting up special sales for first-time bidders, featuring lower-cost items, some pieces are even cheaper than what can be found in IKEA.

Benedict Winter, a specialist in furniture and works of art at Christie’s auction house told The Telegraph: “We've definitely seen a growing trend in  young people who are interested in our sales at Christie's.

"It definitely helps that people care about green furniture, and this combined with the history and the craftsmanship really appeals to 21st century people.

"The trend is towards sustainability and less of a throwaway culture and that's definitely been reflected in our auction sales.

"We have so many sales a year with low starting points for beginner collectors. The lowest lots start at £300 which is entry level stuff."

 Christie's said they have had many new young customers thanks to Instagram and other social media sites
Christie's said they have had many new young customers thanks to Instagram and other social media sites CREDIT:  PAUL GROVER
International search engine Barnebys, which monitors 2,000 auction houses on its website which hosts more than one million items daily, has found a similar trend to be true.

Their furniture sales have risen by 32 per cent in the last 12 months, and the company believes this is due to young people searching for sustainable furniture for their homes.

A spokesperson said that their search tracking is picking up info that this interest is coming from people aged 18-45, which is a  steady and growing increase that has happened over the last few years.

Pontus Silfverstolpe, co-founder of Barnebys, said: “Today we can say that everyone who works in the auction world is working in the world’s most sustainable industry. Changes in consumer behaviour, led by millennials is driving this new interest in using renewable pre-owned items.

“They know that antiques are better for the carbon footprint. We clearly see an increased interest from the younger generation of buyers who want unique, personal and quality items that last over time.

“It is just not sustainable for our world to continue to consume as we do today, and have done over the last few decades. So, today, many of the younger generation actively choose to furnish their homes with pre-owned furniture, which surprisingly is often cheaper than even Ikea furniture.”

Also driving this trend is the Instagram aesthetic; people hungry for inspiration often land on the idea of buying photogenic vintage pieces.

Mr Winter added: “At Christie's online is a great aspect, people can read the stories about the pieces on our website, and on social media there is a huge trend of decorative arts and furniture, that's by people of the younger generation and sales completely are driven by that.

"I've actually emailed people from Instagram who have turned out to be bidders and buyers in our sales.”
Source: The Telegraph 


Art Market and the Bank Secrecy Act

Fellow appraiser Maureen Heenan, ISA AM sent me an interesting opinion piece from the Wall Street Journal. The post discusses money laundering and encourages regulators to promote reporting of suspicious activity in the fine art financing, similar to the Bank Secrecy Act of 1970 and to promote transparency. Art market insiders say money laundering is infrequent.

The Wall Street Journal reports
In April 2014, a subsidiary of the Sotheby’s auction house lent more than $105 million to Jho Low, a business associate of the Malaysian prime minister’s stepson. As collateral, Mr. Low offered Sotheby’s 17 paintings, including a van Gogh and two Monets. The art, worth twice as much as the loan, had been purchased by Mr. Low and an accomplice using a web of offshore bank accounts. Sotheby’s had unknowingly assisted in laundering proceeds of an alleged multibillion-dollar fraud that ultimately ensnared Swiss and American banks, a Saudi oil company and Malaysian and Emirati sovereign-wealth funds.

Sotheby’s is hardly alone. With $64 billion in annual sales, the often opaque art business is an attractive arena for money launderers. Subjective pricing creates an ideal environment for criminals to legitimize illegal funds or get money across well-protected borders. It is long past time for the U.S. to treat art and antiquities like any other major market and require participants to report suspicious activity and keep thorough records on clients and transactions.

Art sales and auctions are famous for secrecy. It isn’t uncommon for a party to a multimillion-dollar art transaction to be anonymous, sometimes because of legitimate concerns about financial privacy and suppression of political art. Galleries and auction houses collect basic information on their buyers and sellers, but the vetting is usually far less intense than for similar-size bank transactions. For criminals, the art world’s comfort with secrecy provides a layer of protection against investigation into their finances.

The variability of art pricing is another lure. The price of a work of art is determined by individual taste and hard-to-quantify trends. In a rudimentary example of money laundering, a person transfers money by overpaying someone else for goods. Customs officials and law enforcement are constantly analyzing pricing data to spot this type of behavior, and it is relatively easy when the costs of goods are easy to compare. Art transactions are harder to investigate because hardly any two prices, or pieces, are alike.

Even in the world of luxury goods, art and antiquities sales are curiously opaque. Dealers in precious metals, jewelry, high-end cars and private planes are all regulated by the Treasury using the same standards used to regulate banks, casinos and securities brokers.

Real-estate developer Aristos Aristodemouhas described the sale of artwork as “the only market that is unregulated.” At least that’s what he allegedly told a crooked stock trader in December 2017 as he explained how to purchase art and resell it, obscuring the origin of illicit funds so that it could be moved to the U.S. Working with British art dealer Matthew Green, Mr. Aristodemou, his nephew Panayiotis Kyriacou and the trader concocted a scheme to do just that using a Picasso painting valued at $9 million. One problem: The crooked stock trader was an undercover Federal Bureau of Investigation special agent. The Justice Department indicted Messrs. Aristodemou and Kyriacou and four associates in March on charges of money laundering and securities fraud.

Art-industry insiders insist that money laundering through art is rare. And stand-alone prosecutions for money laundering that involve art are rare, because prosecutors generally address the activity in the context of crimes that are easier to prove, such as tax evasion or fraud. But even if money laundering through art weren’t occurring—which it is—the art market’s vulnerability to such crimes is obvious enough that something must be done to address it.

The first step is to apply the Bank Secrecy Act of 1970 to dealers of art and antiquities. The BSA establishes standards for anti-money-laundering controls, record-keeping and reporting of suspicious activity to the government. Rep. Luke Messer (R., Ind.) introduced a bill in May that would extend the BSA to art dealers but it remains stuck with House Financial Services Committee and is unlikely to become law. Even without legislation, the Treasury secretary has authority under the USA Patriot Act to introduce similar requirements by regulation.

Officials at the Treasury Department’s Financial Crimes Enforcement Network should be specially trained to supervise implementation of the BSA on art-related businesses. Art-industry associations should do their part by investing in secure technology to record transactions worth more than $10,000. This would reduce the cost of compliance with any eventual regulations and improve “provenance research”—verifying ownership of a work of art.

Critics of art regulation have argued that increased reporting requirements and controls could be used by the government to suppress politically motivated art. But the overwhelming majority of records would remain in the hands of private individuals and companies. Increased record-keeping and reporting comes with a cost, but auction houses and dealers already have much of the information they need to satisfy banks, insurers and the Internal Revenue Service. Compliance software used by banks could easily be adapted for use in the art business.

By embracing the BSA and a new generation of reporting technology, the American art market has the potential to become more transparent, secure and efficient. Many American businesses will soon need to comply with European Union regulations that are stricter than the BSA, making this a good time to evolve.

Criminals will always look for places to launder money. The art industry should do everything it can to convince them to look elsewhere.
Source: The Wall Street Journal 


Art Lending

The Art Newspaper takes a look at the growth in art lending. The article notes that in 2017, based upon the Deloitte ArTactic report, there is between $17 billion and $20 billion in outstanding art loans. Keep in mind, that most of that artwork at some point needed to be appraised. So here again we see opportunities for appraisers to make contact with lending institutions which specialize in fine art as well as with financial planners who may recommend borrowing against fine art.

The article quotes Citi Private Bank's Private Bane Art and Advisory head  “Our client base in the US is strong and growing. Most notable is the increase in the size of the art loans. Ten to 15 years ago, typical art loan facilities were in the tens of millions; today it’s increasingly common to offer art loans facilities in the hundreds of millions. Business is growing dramatically in Asia and Latin America as well.”

The increase in art lending, and other commercial activity involving fine art is one of the reasons the International Society of Appraisers set up their Private Client Services program to specifically train their appraisers in dealing with high net worth clients, private bankers providing art loans, estate planners etc. This Art Newspaper certainly reinforces the decision of ISA to train their appraisers in appraising for financial transactions. The upper middle and upper end of the market is where the money is, and it is also where the opportunities for qualified appraisers are.

The Art Newspaper reports
Warhol or a Wool hanging on your wall may give you great pleasure, but it used to be that art gave you no monetary return—unless you sold it.

No longer. Today that work of art can remain on your wall and at the same time give you cash in hand, allowing you to buy more art, inject some money into your business, cover a guarantee at auction or pay off an urgent tax demand.

Borrowing against art poses specific problems because of its portability, its heterogeneous nature and difficulty in establishing a reliable price. And yet, according to a report published last year by Deloitte and ArtTactic, in 2017 the global total of loans outstanding against art was eye-popping: between $17bn and $20bn.

“Perhaps the biggest driver of growth in this field has been a mindset shift by collectors who once viewed their art purely as a hobby or aesthetic pursuit and now view it as a strategic asset,” writes Evan Beard, a national art services executive at US Trust, in the first Tefaf Art Finance Report, published earlier this year. US Trust has a stunning $6.7bn out in loans secured against art, and other private banks such as Citi or JP Morgan have loan books that also run into the billions of dollars.

“You will probably find that many of the US-based names in Artnews’s top 200 collectors list have borrowed against their art holdings,” Beard says.

While precise figures are difficult to obtain, according to a number of players in the market the vast bulk—in excess of 80%—of the art-secured lending business is in the US.

And it is a buoyant sector: “Our client base in the US is strong and growing,” says Suzanne Gyorgy, the head of Citi Private Bank’s Art Advisory and Finance. “Most notable is the increase in the size of the art loans. Ten to 15 years ago, typical art loan facilities were in the tens of millions; today it’s increasingly common to offer art loans facilities in the hundreds of millions.” And while the US is strong, Gyorgy says, “Business is growing dramatically in Asia and Latin America as well.”

“Americans are so much more accustomed to borrowing,” says Barbara Chu, a partner at Emigrant Fine Art Finance, the art lending arm of Emigrant Bank: “And there are cultural biases against borrowing in some countries; people are generally averse to debt in the UK and Germany.” She adds: “Our financing offers another option for people to monetise their offshore assets.”

The biggest loan books are held by private banks, such as US Trust, with departments servicing their clients by giving recourse loans against their art holdings. But for others, there are specialist boutique lenders offering both recourse and non-recourse loans, and here is where there are a number of newcomers in the field: the London-based Fine Art Group moved into this area two years ago, TPC Art Finance just one year ago. The auction houses are also more than willing to lend against art and the main player, Sotheby’s, has a $1.1bn war chest with which to do so.

Almost all of the firms will lend against 40% to 50% of the appraised value of the artwork; some will take possession, others not. In the US, Uniform Commercial Code (UCC) filings identify works of art with a lien against them, and in many cases this means that the borrower can continue to enjoy their artwork and not see it crated off into storage. Elsewhere in the world, where no UCC exists, lenders generally want to hold the art until the loan is paid off.

UCC filings are publicly available, and a quick browse through some of the lenders reveals a wide spread of owners who have leveraged works. The Turkish trader Yomi Rodrik, for example, has borrowed against nine works by the likes of Rudolf Stingel, Anselm Kiefer, Takashi Murakami and Jean Dubuffet from Athena Fine Art Financing, launched three years ago by Carlyle Group with $280m in funding (but now seeking a buyer). Omanut Holdings borrowed against 25 works, including Keith Haring, Mark Grotjahn and KAWS, from TPC Art Finance. Art dealers who have taken loans—among them Pace, Mitchell-Innes and Nash, Kasmin and Gagosian—can also be found in the filings.

Interest rates vary wildly depending on a number of factors. At one end of the spectrum are the private banks, who can offer very favourable rates—from the mid-single figures—to their clients, who have other assets beside art; some will only lend over $5m, with a minimum term for at least a year. And remember that a $5m loan means the work of art must be worth at least double that. Most lenders, as well, prefer to lend against a collection rather than a single piece.

Then there are the specialised lenders, who are likely to charge interest in the upper single figures; some, such as TPC, Falcon Fine Art, are the lending arm of a bank or finance company. “Non-banks” such as Sotheby’s will lend up to 60% of the low auction value at around 8% interest, but generally will do so against future consignment of the work(s) for sale.

At the other end of the scale are short-term, lower-value lenders such as Borro Private Finance, with offices in London, New York and Los Angeles, which might give a loan for just £100,000 for three months, but at 1% to 2.5% interest per month.

Outside the US, according to Dr Tim Hunter of Falcon, “the market is massively underdeveloped”. He identifies a number of reasons: the absence of UCC, the varying laws in different countries and cultural differences. But things are changing, says Freya Stewart of the Fine Art Group, which lends in the $500,000 to $150m range: “In Europe, younger collectors have a different view of the concept of leveraging assets; they are far savvier than the older generation and see this as a smart thing to do.” However, some borrowers may be entering too enthusiastically into loan agreements. This year there have been cases of overleveraging, for example the US art dealer Anatole Shagalov, who has taken loans against art but has allegedly defaulted on some purchases. An outlier, perhaps, but the consequence of what some see as a very frothy art market.
Source: The Art Newspaper


More on Blockchain and Fine Art

Here is an interesting article recently published in Forbes on the growth and interest in blockchain technology within the art market and the interest from Christie's in using and growing the technology.

Forbes reports

The art world witnessed an extraordinary auction on November 13th at the Christie’s Auction House in New York. Not only the collection of the late Barney A. Ebsworth raised over $300 million, setting the new world auction records for Edward Hopper and Willem de Kooning, but also for the first-time-ever, the results of the major auction sale were recorded using blockchain technology. To do so, Christie’s has collaborated with Artory, the leading independent blockchain-based registry for the art market built on Ethereum Blockchain.

Artory’s Registry, built on the public blockchain, creates a system for vetting, memorializing and protecting transactional data, while simultaneously allowing the artwork’s owner to stay completely anonymous. One of the critical differences between Artory and similar services is that the company uses third-party vetted service providers, such as auction houses, to supply the data for their registry, creating a reputational guarantee that the information is correct.

Weeks before the auction Richard Entrup, CIO at Christie’s, commented in a press release: ‘Our pilot collaboration with Artory … reflects growing interest within our industry to explore the benefits of secure digital registry via blockchain technology.’

However, things weren’t as optimistic just a few years ago. In 2016 when Jason Rosenstein, CEO of Portion, a decentralized online auction house for luxury goods and rare collectibles, spoke with Christie's and Sotheby’s auctions about a potential collaboration, both weren’t ready to explore adding this technology to their authentication process. Both auction houses suggested that their brand and reputation ensured the authenticity of the works of art and didn’t feel necessary to use a decentralized database.

Today, Portion offers an open market exchange of digital and physical works with a mission ‘to cater to younger collectors by partnering with notable brands and establishing relations with living artists.’

So, why Christie’s moved closer towards the use of the blockchain technology and collaborated with Artory to record the data from the Ebsworth sale?

The success of Bitcoin cryptocurrency and the attention to the blockchain it provoked, may be one of the reasons. Jason Bailey, the founder of Artnome and an advisor to Portion suggests that ‘the lack of good data has led to a major problem with forgery and misattribution,’ and the fact that Christie’s used ‘blockchain for the Ebsworth collection is an early step towards data transparency and improved provenance.’ Bailey also suggests that ‘the art market currently fails to support most working artists in any meaningful way.’ Portion and similar services provide an opportunity for the artists to get royalties for the works of art they create.

Does it mean that all auction houses will now add blockchain tools to record auction data routinely? A lot will depend on the extent to which the big art market players, including Sotheby’s, will adopt this technology in their operations and we are yet to observe how long it will take.
Source: Forbes