Mortgaging Your Michelangelo: Lending Against Fine Art
03.25.22
Some remember Rembrandt van Rijn as the greatest master of the Dutch Golden Age, a foundational figure in Western art history known for his withering self-portraits and raw brushstrokes. Others are more absorbed by his financial legacy, tirelessly tracking his profligate spending, infamous bankruptcy, and ingenious financial exit strategies.
“Rembrandt was a stubborn, socially inept shopaholic,” concluded one biographer, whose book details the twenty different legal disputes that entangled Rembrandt throughout his lifetime. Sued by a cousin seven times removed for squandering his wife’s legacy, Rembrandt’s representative responded glibly at trial: “Without any praise, he and his wife have immense and inexhaustible riches, for which they never tire of thanking the Almighty Lord!”
Even Rembrandt’s vast riches, however, could not match the costs of his collecting mania, exorbitant mansion, and bloodthirsty relations. Impervious to his mounting debts, Rembrandt answered to no patron’s whims. One contemporary recalled how Rembrandt was commissioned to depict a customer, his wife, and children: “When Rembrandt was half-way through with the portrait, his beloved pet monkey died, and because he had no other canvas at hand, he painted the dead animal in the portrait. His clients naturally objected, but Rembrandt refused to paint out the monkey, so he lost the commission.”
This behavior was not atypical, and by 1654, Rembrandt became one of the first documented artists to collateralize his own collection in a desperate bid for liquidity. The sacrifice proved too late: in 1656, the bailiffs descended, “squeez[ing] through the piles of rubbish, left from the property of the ruined wastrel, bumping into an elephant tusk, then on the Carpathian saddle, and the collection of Rembrandt … sloppily perched on the shelves.”
“The indifference of Rembrandt to the books,” argues Simon Schama, yet another biographer, “seems all the more strange that he experienced a genuine passion for their physical appearance and did not tire of depicting them on his canvases, turning them into something like monuments and awe-inspiring reminders of the times.”
Today, Rembrandt’s last Hail Mary — collateralizing his artworks — is becoming a normalized practice within the art world, a market that has grown at a clip of 8.5% CAGR from 1950–2021, according to Sotheby’s Mei Moses Art Indices. Why the sudden demand for art-secured loans?
Why Borrow Against Fine Art?
The typical modern borrower is not a madman artist staving off his creditors: new demand for fine art lending is driven primarily by gallery owners who need inventory financing and by the explosion in ultra-high net worth individuals looking to park their extra cash somewhere. Increasingly, many financial institutions acknowledge the need to recognize fine art as a separate asset class and to incorporate it into broader wealth management offerings.
Andrea Danese, co-founder of Athena Art Finance, one of the largest self-financed lenders offering nonrecourse loans secured by art, believes there is potentially $150 billion worth of art that could be collateralized. Athena typically charges annual interest rates of 7 to 9 percent (including origination fees) and offers loans of at least $1 million for a duration of six months to seven years, with a maximum of a 50% loan-to-value (LTV) ratio.
When asked to describe his target market, Danese identified three distinct groups: “First, there are billionaires who put the money into private equity deals, where they make 20 to 25 percent. Then there are the collectors with, say, $30 million of art they leverage to buy another piece. And thirdly, there are the art-rich and cash-poor in their 70s and 80s who don’t want to sell because of the capital gains or estate taxes.”
Selling art directly is often the least attractive option, since sellers have to contend with slow auction timelines, high selling fees, state and local taxes, and, in some cases, relinquishing a treasured family heirloom. One lender described a potential borrower as a guy who simply “had a big tax bill and said, ‘Geez, I don’t want to sell anything, but I’ve got to pay the tax.’” Increasingly, museum-quality artworks have proven themselves to be convenient credit-lines in times of short liquidity.
Why Lend Against Fine Art?
The appeal of the business may be even stronger for lenders. Alan Snyder, founder of Shinnecock Partners, a boutique money-management business with its own art-lending arm, Art Lending Fund, considers art-secured lending a “Jesus Christ Superstar” investment in that it is “high yield, safe and not locked up for years.” One of the first to recognize how “commercial banks shun[ned] dealers and galleries due to the general absence of audited financial statements and their reluctance to take on hard asset loans versus more traditional cash flow lending,” Snyder was eager to help fill the void.
Targeting gallery owners who aren’t put off at the thought of placing their wares in storage (up to 30% of a gallerist’s collection is not on display), Snyder admits that it “warms [his] black heart the most” to take possession of the art for the duration of the loan. Placing the art in storage gives the lender complete control over storage conditions, including temperature, humidity, light, etc., and it allows for maximum protection against chewing pets, wayward children, and vandalizing adults.
“I think lending money against a Picasso, a Bacon, or a Roscoe is so attractive because you can create a short-duration portfolio, giving you flexibility,” said Snyder. “What we’ve done is created a portfolio with an average duration of four months. We take delivery of the collateral — it’s in a bonded warehouse with the UCC-1 filed against it, so we’re a senior secured creditor attached to the art — so if a borrower were to default, we don’t have to chase the collateral. Compare that to lending against equipment, lending against a car, lending against a company, receivables and inventory that you have to liquidate… It’s pretty nifty.”
After three years of operating and putting out roughly $115 million in loans, the Art Lending Fund has yet to experience a default (“It just means that someday we will,” says Snyder). In one of its most successful deals to date, the fund extended a one-year $825,000 loan on a $1.5 million Georgia O’Keefe sculpture. The dealer found a new buyer within six weeks and paid four months’ interest as a prepayment penalty. Shinnecock earned 3.7% on its original investment in 41 days.
Risks of Fine Art Lending
“Trophy art might be a fool-proof investment only if the buyer can guess which works will still be considered trophies seven years later.”
— Don Thompson, The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art
One of the most interesting parts of art-secured lending is the underwriting process: determining the market value of the work and hoping it sticks for the duration of the loan. “Several banks have told me, ‘Alan, you’re dumb, why don’t you give them a five-year term loan if they’re going to hold the art for five years?’” said Snyder. “And I say to my friends that are bankers, ‘Are you nuts? I’m not making a five-year bet on the value of the art.’”
Valuation is not a scientific process and includes subjective factors such as quality, historical importance, and beauty. “Tastes change. Some art keeps its fascination and allure, while some does not. Artists go in and out of fashion,” warns Clare McAndrew, one of Bloomberg’s leading art consultants. “While these trends are not completely arbitrary and unpredictable, they require expertise and a deep familiarity with the art world in order to attempt to predict them.”
While some dealers stick by hard and fast rules (“Paintings with cows never do well. Never,” offers private dealer David Nash), there is some element of volatility to it. More predictable indicators of value include provenance (the history of ownership, exhibition, and publishing for a particular piece), recent sales history, rarity, and medium.
Even provenance, however — historically, one of the hardest elements to prove — is not above forgery. Such was the case with British purveyor John Drewe and painter John Myatt, who successfully forged and sold over 200 “masterpiece” paintings from 1986 to 1995, using household emulsion paint, K-Y Jelly, and bogus provenances. “It’s one of the most extensive frauds in the visual arts,” said Glenn Lowry, director of the Museum of Modern Art. “What distinguishes this case is how methodical Drewe was, and how well he understood the process of validation. His manipulation of the system is as interesting and troubling as the forgeries themselves.”
While hard numbers on the percentage of fraudulent artworks sold are difficult to come by (dealers and auction houses are incentivized to keep them private), experts claim that “depending on the period and the painter, between 10 and 40 percent of pictures by significant artists for sale are bogus, or so overrestored as to make them the equivalent of fake.”
Still, such physical vulnerabilities (Drewe bribed museum attendants to gain access to and corrupt their record books) are less of a concern with digitization. Online record keeping, including price databases, past sales history, and auctions have all made it easier for lenders to judge value.
Where Now?
Younger generations, in particular, are drawn to art as an investment vehicle rather than a show piece. “It’s not the same mindset as, ‘you’re going to own something forever,’” said Charles Stewart, CEO of Sotheby’s. “There’s a view that you buy something, and then when you want something else or are done with it, you sell it and reoffer it. Things take on more of an investment mindset. So, that creates opportunity for some of these financial services.”
Many lenders chart the next opportunity as reselling art loans to investors. Yieldstreet, which owns Athena Art Finance, has sold nearly $40 million in loans to investors (backed by the likes of Andy Warhol and Roy Lichtenstein), with a targeted net return of 9.5%.
“We are really creating a credit market around art,” said Cynthia Sachs, managing director at Yieldstreet. “People talk about art as an asset class. But you can’t have an asset class without a credit market.”
About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at inquiries@colbeck.com.
