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How to Unlock Capital in Your Collection

In the eye of the beholder, art can be a reflection of beauty and ideas. For the collector, it can also serve a different purpose: as a financial asset.

painting with a red background

Since 2000, the global art market has tripled in size to become a $67 billion-a-year industry.1 Its expansion can be attributed to several factors, including global economic growth, low interest rates and relative geo-political stability. But perhaps the most potent influence of late has been a philosophical shift among collectors, an increasing number of whom view the art they own not only as an expression of their passion, but also as a financial asset.

To be sure, art has long been a source of aesthetic pleasure and a key expression of an owner’s legacy. Yet more and more of today’s collectors — often working in market-driven industries like hedge funds, private equity and real estate — are seeing it as a source of strategic capital.

As a result, art lending has seen a growth trajectory similar to that of the art market, with total art loans rising from just a couple of billion dollars to somewhere between $17 billion and $20 billion over the past decade, according to Deloitte.2 During this rise, collectors have found creative ways — and reasons — to unlock and redeploy capital from their collections, all while keeping art on their walls. Here, are five innovative ways collectors are doing so, along with a few real-life examples.

“More and more of today’s collectors — often working in market-driven industries like hedge funds, private equity and real estate — are seeing art as a source of strategic capital.”

1. Artful arbitrage

Many of today’s collectors also manage hedge funds and private equity, so they are steeped in the idea of putting capital to work rather than locking it up in a noninterest-bearing asset — which is what most art is. To this end, these collectors may employ an arbitrage-like strategy that involves borrowing against their art and redeploying that capital into opportunities that they hope will generate a higher return than the interest paid on the debt.

PRIVATE BANK PROFILE: One private-equity executive who is a client of the Bank of America Private Bank recently used his art to generate the liquidity he needed to finance the acquisition of a network of restaurant franchises. In doing so he was able to remain fully invested in his private-equity fund and avoid an unfavorable tax assessment. What’s more, by choosing to leverage his art rather than take a margin loan, he avoided a potentially expensive margin-call option.

ART-IFACTS: THE NUMBERS BEHIND A GROWING GLOBAL MARKET

$67.4 billion global art sales in 2017
88% combined shared of the three largest markets - the u.s, china and the u.k
$29.1 billion global sales at public auction in 2018
46% share of global dealer sales (by value)made at art fairs
$6 billion estimated online sales in 2018 - 9% of total global art sales
$17-20 billion estimated size of the global art lending market

2. Strategic gifting

There are different tax treatments if collectors sell, gift to heirs or donate their collections to a museum during their lifetime or at death — and proper planning can help them realize related tax efficiencies. Even so, some 60% of collectors currently do not incorporate art into their wealth planning strategies, potentially creating undesirable tax consequences when, say, they decide to give art to the next generation.3 Proper planning is key.

PRIVATE BANK PROFILE: As art collections have risen in value, we’ve seen more collectors incorporating art loans in their legacy planning. One client recently arranged for an art loan to pay estate taxes, which provided the heirs with the flexibility to sell the art at a more opportune time than immediately after the client’s death. The estate benefited from the step-up in cost basis (the rise in the value of the art work since purchase) and avoided the undesirable consequences of selling quickly in what is called a “fire sale,” which often leaves money on the table.

3. Creating business capital

Some collectors are taking an entrepreneurial approach by obtaining a credit line against their art collection and using it as a working-capital line for a closely held business. This allows collectors to redeploy capital from their art into ventures like expanding their business, paying bonuses or acquiring another company.

PRIVATE BANK PROFILE: Recently, the owner of a health care business needed capital to build cancer treatment centers. He put a credit facility against his art collection and used it as a real estate development line to fund the construction project. The art is now housed in the new medical facilities for the patients to enjoy.

picture of a living room

4. Acquiring real estate

More than a few real estate developers have discovered that when a good investment opportunity is on the line, art loans, under the right circumstances, have the ability to provide access to capital quickly. Needing only the valuation of their art and a contract from the lender, the approval process can often be less involved than other, more traditional methods of project financing.

PRIVATE BANK PROFILE: A client who was major art collector discovered that several other bidders were interested in a piece of real estate he was pursuing that was adjacent to a development he owned. Rather than securing a traditional loan, he saved time by financing a loan with his art, which allowed him to purchase the adjacent property while his competitors were still waiting for funds.

5. Buying art with art

Not only can art loans provide collectors with the liquidity they need to buy more art, but they may also help them:

  • Avoid dipping into savings or selling securities.
  • Bypass tax consequences that may accompany the sale of stock.
  • Experience less volatility than they would with other loans because art works tend to be valued yearly, not daily.
  • Limit the level of risk among different asset classes on a balance sheet.
  • Stay clear of the standard 28% capital gains rate and 3.8% surcharge on sales of art and collectibles.

PRIVATE BANK PROFILE: We have clients who use a credit facility linked to their art collections to guarantee a minimum sale price for an artwork (a standard practice for many auction houses that is becoming more common among third parties). This can help improve the chances of a sale, for which the guarantor may receive a fee. During a recent auction season, one client used his art line to guarantee a minimum price of $20 million for a post-Impressionist work; and while it sold for $22 million to another bidder, the client was nevertheless happy to be paid the $400,000 fee.

For more information on using art as collateral, please contact your personal advisor.

BANK OF AMERICA PRIVATE BANK ART SERVICES

Evan Beard, Art Services Executive, Bank of America Private Bank

Evan Beard,
Art Services Executive,
Bank of America Private Bank

For more than 150 years, Bank of America Private Bank (formerly U.S. Trust) has helped individuals and institutions realize opportunities that have a positive impact on future generations and communities. As part of Bank of America’s commitment to continuing this heritage, we offer extensive art services. This includes uniquely tailored solutions for collectors and institutions navigating the complex challenges surrounding the art world. For individuals, we lend against collections to unlock capital, design estate plans specific to art and assist with arranging for the sale of artworks at auction. For institutions, we provide comprehensive advisory services, including institutional investment management by our Chief Investment Office. Our range of capabilities, alongside our commitment to the arts, helps us deliver a broad combination of services to our clients.

To learn more about the art planning and lending services offered by Bank of America Private Bank, visit privatebank.bankofamerica.com/art.

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