The Rich Can't Sell Their Art, So They're Borrowing Against It

The team, which the bank is continuing to invest in, has 12 specialists in the art market across credit, wealth planning and philanthropy. The bank’s clients that already have loans keep them, while utilization has remained around 70% this year, according to Watson.

“The retention and strong utilization is reflected in the balances outstanding, which have remained strong,” he said.

Bank of America structures these loans on a variable rate, so over time the cost of capital could decrease if rates fall. The interest rate is based on the secured overnight financing rate, plus a spread, Watson said. So as rates get cut, loans like this are even more likely to increase.

Citigroup, which estimates its share of the market at 10% to 15%, has a steady base of art-lending clients because rates on art loans are still favorable compared to other loans, according to Fotini Xydas, head of art finance at Citi Private Bank.

“Even though rates are higher, art is a very stable asset over the long term, compared to other assets in terms of volatility,” she said.

How Art Loans Work

Art loans function as lines of credit, so clients draw on them and pay them back as they can. They’re only available to the wealthy, given the nature of the collateral. The larger the collection, the more flexibility there is for the borrowers.

To qualify at Bank of America and Citigroup, a collection usually needs to be worth at least $10 million, which secures a loan of $5 million or more. Bank of America typically offers 50% loan to value, with each piece worth a minimum of around $100,000.

The terms run from around one to three years, with an option to renew, and clients can still keep their pieces protected at home as long as its within the US. Citigroup looks for a minimum value of $200,000 per piece.

JPMorgan bases its loan sizes on the value of the collection and strength of the borrower. The bank looks for diversity of pieces, ensuring they are of “museum quality,” Lingle said. It also does a financial analysis on borrowers to make sure they can service the debt.

One Citigroup client who had collected several pieces from Pablo Picasso and Claude Monet used them to secure a line of credit to cover taxes tied to estate planning, another common use of this product.

Another private equity principal wanted a line of credit to help fund a capital call. Bank of America facilitated a $10 million loan for one borrower worried about market volatility, using his collection of post-war and contemporary art as collateral.

“There are margin calls, death, divorce and bankruptcy, so we have endless interest for lending,” said Philip Hoffman, the founder of The Fine Art Group, an art advisory and finance specialist that competes with the banks.

(Credit: Adobe Stock)