Original article from The Wall Street Journal wsj.com
IT USED TO BE ENOUGH of a triumph to own a bottle of Château d’Yquem or to have a painting such as Picasso’s Le Rêve on the wall. But in the complex world of wealth management, even fancy belongings may be a means to an investment end. At least they are now that banks and auction houses are offering clients more multimillion-dollar loans where everything from vintage cars to luxury watches to famous paintings is accepted as collateral.
The wealthy have always been able to rely on their own properties, as well as commodities such as gold bars, to convince banks that they qualify for heavy borrowing. But a niche in borrowing with alternative collateral has been on the uptick, creating a new form of creative financing, and at some fairly decent loan rates. Indeed, some banks are offering these loans at rates as low as 2 percent.
Instead of taking out a traditional construction loan for his 24-story condo project called the Bellini, for example, wealthy Miami property developer Martin Margulies managed in 2012 to secure an $80 million loan with his collection of 59 artworks, which included pieces by Jackson Pollock, Mark Rothko, Cy Twombly and Jasper Johns. Margulies declined to give the interest rate that he was charged on the three-year loan, but it was “very favorable,” he says. “At the time, banks were not lending against condominium projects, and I thought it was an opportune time to move forward,” adds the real-estate mogul and avid art collector.
Jose Sirven, a partner with the firm Holland & Knight who worked on the deal, says the unusual collateral helped Margulies save on a host of taxes and on the insurance fees that come with traditional financing. Plus, it resulted in “less intrusive” monitoring of the construction project, says Sirven. “The lender will not have the same level of concern, because at the end of the day, the ultimate backstop is the art.”
Wine-backed loans have been pretty popular too: In about two years, London-based Bordeaux Cellars—which bills itself as the largest wine dealer offering lending against bottles of vino—has already offered roughly $50 million in loans, secured against $150 million worth of fine wine.
But whether it’s based in art or wine, this kind of financing comes with its set of strings attached. Some lenders, including Bordeaux Cellars, will hold a borrower’s assets under their own name until a loan gets repaid. Others will restrict borrowers from lending their own artworks to museums during the loan period. (For his part, Margulies, the property developer, wasn’t given such restrictions.) What’s more, banks and other financial institutions only lend a portion of the asset’s total worth in the first place. That becomes a bigger issue if the value of that wine or art collection falls, because when the bank reviews the loan, the wealthy borrower will be forced to pay it down or add more collateral.