{"id":421,"date":"2012-04-01T10:36:35","date_gmt":"2012-04-01T17:36:35","guid":{"rendered":"http:\/\/www.danziger.com\/articlesnews\/?p=421"},"modified":"2012-04-01T10:36:35","modified_gmt":"2012-04-01T17:36:35","slug":"in-lien-times","status":"publish","type":"post","link":"https:\/\/danziger.com\/?p=421","title":{"rendered":"In Lien Times"},"content":{"rendered":"

Art can be valuable collateral, but pitfalls await lenders and collectors alike.<\/strong><\/em><\/p>\n

SINCE ART AND MONEY go together like peanut butter and jelly, it\u2019s little wonder that many banks (including a number of our firm\u2019s institutional clients) have shown an increasing appetite for making loans secured by art.\u00a0 So Anton\u2019s call to us came as not surprise.<\/p>\n

Anton was a hungry banker cooking up a plan to launch an art lending business.\u00a0 He had read about loans to Wall Streeters like Michael Steinhardt and Nelson Peltz, secured with blue-chip works of art-as well as to such institutions as New York\u2019s Metropolitan Opera, which reportedly pledged two murals in connection with a loan from JPMorgan Chase.\u00a0 Anton was licking his chops over the prospect of charging hefty fees and handsome interest rates.\u00a0 How could his plan go sour?<\/p>\n

We told Anton that some commercial lenders have indeed done well in this area, with lower rates of default on art loans compared with other asset classes.\u00a0 Art loans also appeal to collectors, who can often borrow more cheaply against their art than against other assets.\u00a0 Moreover, art-backed borrowing is an attractive alternative to selling works, which may involve high capital gains taxes (the federal rate goes up to 28 percent on art and antiques), not to mention considerable transaction costs.<\/p>\n

But we didn\u2019t want to sugarcoat the difficulties involved in lending against art, so we gave Anton some practical advice to chew on.\u00a0 First, and perhaps most important, banks in this area go to great lengths to confirm that would-be borrowers are beyond reproach in terms of not only credit history but also character.\u00a0 Many art loans never get past this initial stage.<\/p>\n

Assuming the borrower passes muster, the bank then goes about establishing that the art to be pledged is authentic.\u00a0 Whereas a lender making a loan secured by a building won\u2019t often find that the real estate is not \u201creal.\u201d Banks lending against art may discover that their loans are secured (as it were) by fakes.\u00a0 To avoid this, lenders typically rely on auction house specialists, a handful of recognized independent appraisers, and, where needed, other experts in the field.\u00a0 Lenders usually want an authentication done specifically in connection with the loan, even if a work was recently purchased through a major auction house or was authenticated in the past by an expert.\u00a0 The borrower customarily pays for this process, whether or not the loan actually closes.<\/p>\n

Next, the bank establishes the value of the collateral.\u00a0 Most institutional lenders are unwilling to make a loan for more than about 50 percent of an artwork\u2019s appraised value \u2013 but even here, an unsophisticated underwriter can get into the soup if he relies on a half-baked appraisal.\u00a0 We know of at least one banker who won\u2019t accept valuations given by even the major auction houses because he believes they face a potential conflict of interest: a duty to provide an accurate appraisal versus an incentive to please a collector-who may be an important client-with a high one.<\/p>\n

Then comes the sticky part of the underwriting process: establishing that the would-be borrower actually owns the art.\u00a0 We routinely review purchase invoices, deeds of gift, wills, and other supporting documentation, and we check independent databases, such as the Art Loss Register, to see whether a work has been reported stolen.\u00a0 We also run a Uniform Commercial Code (UCC) lien search that allows us to search states\u2019 reports to reports to determine whether the proposed collateral has any liens filed against it.\u00a0 Still, unexpected problems involving title and ownership can arise.\u00a0 Many people don\u2019t realize that UCC filings contain a cornucopia of fascinating information \u2013 such as an artwork\u2019s true owner, if it has been consigned to a gallery \u2013 that is then published on states\u2019 Web sites.\u00a0 (In fact, some of our savvier dealer clients use UCC filings to locate desirable works and motivated sellers.)<\/p>\n

The UCC and related case law occasionally produce ulcers for the unwary when creditors like banks square off against consignors of art to galleries. \u00a0A consignor who fails to make a timely UCC filing risks losing a work altogether if he hands the piece over to a gallery that is subject to a blanket lien, since the lender could use the consignor\u2019s art to satisfy an earlier debt.\u00a0 This was essentially what happened in the 2003 U.S. bankruptcy court case In re: Morgansen\u2019s Ltd<\/em>., which involved a shop in New York that sold antiques, jewelry, and collectibles, mostly on consignment.\u00a0 After the shop went bankrupt, the court found that the consigned goods were subject to the claims of the shop\u2019s creditors.<\/p>\n

Banks are likewise cautious when it comes to accepting art as collateral in loans to galleries.\u00a0 Under the UCC, a lender may lose its security interest if a pledged artwork is sold by the gallery (the lender would still have a claim on the proceeds, but they may be spent before the lender can recoup them).\u00a0 Memories of lending disasters past involving art collectors, such as Ralph Esmerian, or dealers like Larry Salander \u2013 both now in prison \u2013 give some bankers heartburn.\u00a0 So some lenders have no thirst for making art loans to galleries.\u00a0 OR if they do make such a loan, they insist that the pledged works be held in a third-party storage facility.<\/p>\n

Several American banks, Emigrant Bank Fine Art Finance and U.S. Trust among them, don\u2019t generally take physical possession of a work owned by individuals so long as the art is in the U.S. and the location is agreed upon in writing.\u00a0 But lenders occasionally find themselves in a pickle when trying to gain access to an artwork.\u00a0 We recently saw a case in which the borrower\u2019s wife refused to let a bank representative into an apartment the couple co-owned, even though her husband had given the bank right of entry.\u00a0 To be prudent, we require a spouse to agree in writing to grant access to the home if the borrower defaults; similarly, if a work is held in storage, we have an agreement on file confirming that the bank can get into the warehouse.<\/p>\n

Another critical area of concern for lenders is the exit strategy if a loan should go bad, especially since art is a fundamentally liquid asset.\u00a0 Even a great picture may fail to sell on a given day at auction, and if a work is thus \u201cburned,\u201d the lender may be saddled with an unsaleable asset.\u00a0 To minimize market risk, banks generally don\u2019t lend against a single work but instead insist on several pieces \u2013 ideally in different genres \u2013 as collateral.\u00a0 In the most famous recent case of an art loan going spectacularly south, celebrity photographer Annie Leibovitz borrowed $24 million from Art Capital Group, which reportedly took a security interest in, among other things, Leibovitz\u2019s Greenwich Village town houses, a country home, and the copyright to every photograph she had taken or ever would take.\u00a0 In 2009 Art Capital Group sued her for breaching the terms of their loan agreement; the parties eventually settled.<\/p>\n

Anton now saw that the art-loan business is no picnic, so we told him about the cherry on top for smart art underwriters: Every borrower not only pledges artwork as collateral but also gives an unconditional personal guaranty on the loan, granting full recourse against all the borrower\u2019s unencumbered assets.\u00a0 Anton digested what we told him and then had an epiphany:\u00a0 \u201cArt loans are really personal loans secured by art as additional collateral!\u201d\u00a0 Exactly, which is why the borrower\u2019s character is always critical to a successful loan.\u00a0 When done correctly, art lending can be a sweet transaction for both bank and borrower.\u00a0 When done wrong, however, it\u2019s a recipe for disaster.<\/p>\n

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SINCE ART AND MONEY go together like peanut butter and jelly, it\u2019s little wonder that many banks (including a number of our firm\u2019s institutional clients) have shown an increasing appetite for making loans secured by art. So Anton\u2019s call to us came as not surprise.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-421","post","type-post","status-publish","format-standard","hentry","category-articles"],"_links":{"self":[{"href":"https:\/\/danziger.com\/index.php?rest_route=\/wp\/v2\/posts\/421","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/danziger.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/danziger.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/danziger.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/danziger.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=421"}],"version-history":[{"count":0,"href":"https:\/\/danziger.com\/index.php?rest_route=\/wp\/v2\/posts\/421\/revisions"}],"wp:attachment":[{"href":"https:\/\/danziger.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=421"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/danziger.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=421"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/danziger.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=421"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}