Your art collection may not be as illiquid as you think. It is possible to raise cash by borrowing against works of art. Although some banks do not offer art-secured loans because of the inherent difficulties in valuing and authenticating art, as well as the moveable nature of works, other banks and the major auction houses increasingly offer art-secured loans if certain requirements are met.

While the terms and conditions on which banks and other lenders will extend credit secured by works of art can vary significantly from lender to lender, typically banks and other institutional lenders are more willing to issue an art-secured loan if the institution has a long-standing relationship with the borrower or if the borrower has other assets, such as marketable securities, that can also serve as additional collateral for the loan. Major auction houses may be willing to lend to borrowers with whom they do not have an already-established relationship in order to bring in future business on the auction house side.

The documentation governing art-secured loans varies, but most loan agreements may include some or all of the following elements to protect the lender:

  • The loan-to-value ratio of an art-secured loan typically is between 40  and 60 percent. If the lender is a bank or other financial institution, the borrower will be required to obtain an annual qualified appraisal at the borrower’s expense. If an auction house is the lender, it usually will determine the value without additional charge.  
  • Art-secured loans tend to be of a shorter duration and at a higher interest rate than other loans, such as real estate loans, although they usually will be at a lower interest rate than a comparably sized unsecured loan.
  • Loans from auction houses may have interest rates that are higher than those of similar loans from banks and other financial institutions. In addition, the borrower may be required to use the auction house for any future sale of a work of art serving as collateral. 
  • Some lenders may accept certain specific works of art as collateral, while others may require a borrower to pledge the borrower’s entire art collection or a significant portion of a borrower’s collection as collateral. Some also may require that the loan be secured by other collateral in addition to artwork.
  • Most lenders accept as collateral only the works of recognized artists with a demonstrable fair market value and are unlikely to lend against other collectibles. Typically, each single item of artwork serving as collateral must have a minimum fair market value, and sometimes the value of one or a few works cannot have a value in excess of a percentage of the total value of the collateral. If the borrower’s entire collection is serving as the collateral, items with a lesser value may be disregarded for purposes of determining whether the required loan-to-value ratio is satisfied.
  • In the United States, lenders usually allow the borrower to keep possession of the art if a UCC Financing Statement is filed to perfect the lender’s security interest in the art. UCC Financing Statements are public documents that list the names of the lender and the borrower and include a general description of the collateral. If the art is in storage or displayed in a gallery, however, the lender may also require an agreement with the storage company or gallery under which the lender’s security interest in the art is recognized. For those borrowers with privacy concerns, it may be possible to complete the UCC Financing Statement without specifically referencing the work of art, but this must be negotiated on a case-by-case basis with the lender. In order to protect the identity of the borrower, the borrower may be able to own the artwork through a single-member limited liability company, and the limited liability company may be able to enter into the loan and pledge the entity’s interest in the artwork as the collateral. 
  • In other countries that do not allow lenders to register security interests, lenders are less likely to allow the borrower to keep possession of the works of art. New insurance products are available to protect the lender, which may give borrowers in these situations a means of keeping the art on their walls.
  • Typically, the borrower will not be able to move (e.g., from home to storage), lend or sell a work of art without first obtaining lender consent, although this consent can sometimes be obtained for a specified set of locations (for example, vacation homes) and reflected in the loan documents executed at the outset of the loan. If a work of art is sold with lender consent, the borrower usually will be required to apply the sale proceeds to the outstanding loan balance. With respect to loan agreements secured by an entire art collection, it may be possible to provide that the sale of a single work of art does not require lender consent if the total fair market value of the remaining collateral after the sale would satisfy the lender’s required loan-to-value ratio. If the lender’s required loan-to-value ratio cannot be met after the sale of a work of art, the borrower may need to pledge additional collateral or pay down all or a portion of the loan. The borrower also may be able to enter into a 1031 exchange of the art with adequate notice to the lender and the lender’s cooperation. The substitute work will become part of the collateral.
  • With respect to works purchased from a dealer, some dealers are requiring buyers who wish to resell works to do so through the dealer.  While it is unclear whether this restriction is legally enforceable, in any event, it may impair the ability of the lender to sell the collateral in the most appropriate market in the event of default.
  • The borrower will be required to maintain insurance for the collateral for the term of the loan.

Art-secured loans may be a significant new source of liquidity for major art collectors who are willing to comply with a lender’s requirements. If you have any questions regarding art-secured loans, please contact any one of the members of our Fine Arts group.