Auction house Sotheby’s reports a surge in customers who are borrowing using their fine art or jewelry as collateral [www.sothebys.com/en/articles/creating-liquidity-from-art-during-challenging-times]. Many auctions necessarily have been postponed due to the pandemic, although that has been offset to some extent by a record number of online auctions conducted by Sotheby’s.
One major reason for such borrowing identified in the article is the need for funds to pay estate taxes, given the uncertainties of successfully liquidating a collection in such volatile times. At the other extreme are those who expect that there will be some relative bargains coming available in the art market, and who want to have ready access to cash to take advantage of them. The art market generally does not correlate precisely with the stock market, but it will lag. The art market dropped about 20% after the 2008-09 recession, for example, before coming back strongly.
Loans against fine art will have a loan-to-value ratio (or LTV) of 40% to 60%. Factors that go into determining the suitable ratio include the diversity of the collateral, the price points, the potential for blockage discounts if many items have to be sold at once, and the depth of the market demand for the pieces.
Borrowers need to be aware of how often the value of the collateral will be reappraised. A loan against art will work the same way as a loan against stocks. Should the value of the art fall, there will be a margin call. In that event, the borrower will have to provide a repayment or additional collateral to secure the loan.
At The Trust Company of Kansas, we help people. We promise to minimize the burden of wealth management and bestow the freedom to enjoy everything else. The officers at The Trust Company of Kansas are always willing to discuss your financial goals with you and help you to create a plan that is well-aligned with your wishes. Clients at The Trust Company of Kansas have a more diversified portfolio so they never are faced with liquidation or borrowing funds to liquidate art pieces. If you have specific questions, please contact us at (800) 530-5254 or visit tckansas.com/contactus, and one of our Certified Trust and Financial Advisors will be happy to assist you.