Collateral Loan

Art Plays A Growing Role As Collateral

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A booming art market has many investors viewing their collections in a new way—as cash machines.

With art prices rising for several years now, many collectors find themselves in the enviable position of owning art that has increased substantially in value. But many don’t want to sell their art to access that wealth.

Fortunately for them, banks and smaller, specialist lenders increasingly are offering loans secured by the borrower’s art. A survey last year by Deloitte and ArtTactic Ltd., an art-market research firm, found that 40% of private banks said art-secured lending would be a strategic focus in the coming year, up from just 13% in 2012. And almost half of all art collectors surveyed said they would be interested in such a service.

“On the one hand, we’re seeing that collectors are increasingly demanding ways to provide some liquidity and free up capital,” saysAnders Petterson, managing director of London-based ArtTactic and co-author of the report. “And on the other hand, we’re starting to see more willingness among banks to offer this type of lending.”

For collectors, the amount they can borrow, the risk the loan entails and the interest rate all depend on what type of loan they get. Here’s what potential borrowers need to know.

A host of smaller lenders, such as Borro, Art Capital Group and Falcon Fine Art, have started offering nonrecourse loans, which don’t require the borrower’s personal guarantee. “With nonrecourse lending, the only asset that is the security for the loan is the artwork itself,” says Paul Ress, founder of Right Capital Ltd., which offers advisory services and arranges nonrecourse loans. “Obviously, in those instances the creditworthiness of the individual is much less important than the art itself.”

Mr. Ress says the private banks typically offer much lower rates on recourse loans, because the lender’s risk is lower and the banks view the service as part of an overall relationship with a wealthy client. Borrowers may be able to get rates as low as 2% or 3%, he says. For nonrecourse loans, interest rates vary widely but typically range from 8% to 16%, Mr. Ress says.

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