Leon Black, then CEO of Apollo Global Management, at the Milken Institute Global Conference on May 1, 2018 in Beverly Hills, California.
Patrick T. Fallon | Bloomberg | Getty Images
A version of this article first appeared in CNBC’s Inside Wealth newsletter by Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions directly to your inbox.
A $484 million art loan collateralized by billionaire Leon Black and disclosed in the latest Epstein files highlights one of the art world’s fastest-growing and most lucrative sectors.
According to March 2015 documents released as part of the Epstein files, Black received a loan from Bank of America backed by his artwork. Not unusual for a top private banking client, the loan made headlines for its size and exotic collateral, which included blue-chip works by Picasso, Giacometti, Titian and Matisse.
But art lending has become an increasingly valuable tool for both wealthy collectors and asset management companies competing to manage properties. The global market for art loans is currently estimated at $38 billion to $45 billion, according to a report from Deloitte and ArtTactic. The market is expected to exceed $50 billion by 2028 and grow at approximately 12% annually.
Adam Chin, managing partner of International Art Finance and a longtime art finance expert, said art loans are a way for collectors to extract cash from paintings that they can continue to enjoy on their walls.
“It’s the best of both worlds,” Chin says. “You can monetize assets that wouldn’t otherwise produce income, but still look great.”
Far from indicating a lack of funds, art loans are typically used by wealthy individuals to provide ready cash, leverage financial investments, and avoid high taxes. Private banks often make art loans to top customers at low interest rates, knowing that the customer has hundreds of millions or even billions in other assets in case the loan defaults. The loan interest rate for Black Americans in 2015 was 1.43%, according to the document.
The art financing market is largely dominated by auction houses, particularly Sotheby’s Financial Services, as well as specialist lenders such as International Art Finance.
Scott Milleisen, global head of lending at Sotheby’s Financial Services, said collection agencies use the proceeds for a variety of purposes. The company now finances classic cars as well as art.
“Many of our clients borrow against their art collections to invest in their businesses, pursue new art purchases, or release cash without selling pieces they love,” Miraisen said.
Chin said many of today’s collectors are top leaders in private equity and hedge funds. They are accustomed to using leverage to increase their wealth in investments and business, so they see leverage in their art collections as a natural extension. Chin estimates that the total value of art in private hands is between $1 trillion and $2 trillion. Art loans are a small portion of the total, well under $50 billion, and the industry has plenty of room to grow, he said.
“Art is the most underutilized asset on earth,” he says.
Art loans also generate favorable tax benefits. Selling a work of art incurs a capital gains rate of 28%. This is a higher tax rate for collectibles than other categories, with a net investment income tax of 3.8%, bringing the top rate to 31.8%. Selling in certain states also incurs state taxes.
Art loans are much more efficient than paying taxes, even with today’s high lending rates (usually around 8% to 9%). Additionally, renters usually have the ability to display art on their walls.
The art lending business also benefited from the 2017 tax reform that eliminated the use of so-called 1031 exchanges in the art market. This practice allowed art collectors to avoid capital gains taxes by exchanging one work for another. Without this benefit, many collection agencies have turned to loans to provide liquidity without incurring tax penalties.
Chin said art financing is poised for continued strong growth, given the art market’s recent recovery and lower interest rates.
“The art market is a strange market,” he says. “But if you look at all the other asset classes, they end up becoming fragmented, securitized and leveraged. That’s just the nature of the universe.”
