COLLECTIONS AS COLLATERAL & ART LENDING

Art lending is one of the fastest growing areas in the financial sector. As art values for blue chip and contemporary art have increased over the past several years, the amount of money borrowed against art is on the rise. Collections can be used as collateral to gain liquidity for other financial opportunities. In addition to fine art, other types of tangible assets such as jewelry, sports memorabilia, classic cars and other valuable collectibles can also be used as collateral.

How are art loans structured?

• Most financial firms will lend up to 40-60% of the appraised value of the collection.
• Term of loan can vary from 1 to 10 years.
• The interest rate is commonly based on LIBOR plus a spread; however, the rate will depend on whether the loan is a recourse or non-recourse loan.
• For a recourse loan, the financial institution is underwriting the borrower’s overall risk portfolio plus the collection for collateral. In recourse loans, the borrower must give a personal guarantee of repayment. If the borrower defaults and the object pledged as collateral is of insufficient value for the financial institution to recover the full amount of its loan, then the lender can make a claim on the borrowers’ other assets.
• For a non-recourse loan, the artwork is the sole collateral and if the borrower is unable to pay, the lender can take possession of the object but cannot pursue the borrower for any other assets.

Why is an accurate valuation important?

Assessing the value of the art is an integral step in the art lending process. The artwork should be researched and valued for fair market value (FMV) or marketable cash value (MCV) by a USPAP qualified appraisal firm such as Pall Mall Art Advisors without bias. Independent appraisers are a necessary component of the art lending process and being affiliated with a large auction house does not guarantee a credible appraisal.

How do you begin the collateralization process?

Understand value: Pall Mall Art Advisors (PMAA) prepares fair market value and marketable cash value appraisals, which can be used by lenders to facilitate a structured loan using these assets as collateral. Appraisal documents are available in both hard copy and digital format and are easily accessible through our interactive collection management system.

Find the best lender: Finding the best lending institution to provide the collateral can be difficult. PMAA has relationships with both recourse as well as non-recourse lenders and can help you to find the best match for your lending needs.

Selecting assets for collateral: PMAA will review your assets and provide recommendations as to which items in a collection are most appropriate to be used as collateral to meet the requirements of the lending institution.

For many collectors, artwork and collectibles can be more than a passion; the financing of a collection can offer the opportunity for liquidity while providing fiscal flexibility.