Art as Collateral

I have covered art as collateral in the past on the AW Blog from traditional lenders with art programs right down to specialists in the mode of pawnbrokers. This is an excellent article on the topic of art loans and art as collateral from The Art Newspaper by Philip Davis and Graham Ludlam. The authors suspect that art based lending has increased by 40% - 50% in the last six months as collectors look to increase liquidity during the economic decline. It appears more and more collectors and institutions are looking for ways to monetize their collections, be it to cover existing obligations or form new investments and entrepreneurial ventures.

Davis and Ludlam state lenders typically look at 5 main decision points when lending with art as collateral.

• Lenders are looking for clear title (we have discussed this issue previously on the AW Blog and the importance of knowing if title to the property is clear.
• Authenticity
• Valuation and Marketability
• Purpose of the loan
• Jurisdictional Issues (Both national and international)
  

The article states Historically, the use of works of art to secure loans has been somewhat infrequent. Art was seen as everything a banker disliked—volatile, not liquid, far from homogeneous and with no enforceable documents of title. Such deals that did exist in this area took a rather standard approach whereby specific works were pledged as collateral, with the lender requiring physical possession of the item. By the very nature of a work of art’s aesthetic appeal, it is not very difficult to see that parting with possession of the work is not an attractive option for a borrower, though its advantages are obvious as far as the lender is concerned.
The article continues As part of its due diligence, the lender will need to be assured that the borrower is the legal owner of the work of art offered as collateral. Evidence of title may be built up from the provenance, wills, trust deeds, deeds of gift, purchase invoices and the like. Demonstrating legal ownership of a work of art can, however, sometimes be difficult. A fully documented and unbroken chain of title is not always available but, even where it is, unforeseeable problems can exist. A lender will therefore be very cautious if complex issues of title need to be unravelled.

To read the full article, click HERE.