BMO Family Office
Whether you've been eyeing a vacation home on the shore or an urban retreat close to the city center, look no further than your walls to pay for it. Well, not your walls exactly, but the art that's hanging from them. Your art collection — and other high-value assets — can help you secure the financing you might need for a big purchase.
How? Artwork, along with other types of assets, can be used as collateral for a loan to purchase property, invest in a business or to buy more art. In fact, there are no limitations on how you use the proceeds.
“Leveraging art is an opportunity to monetize an illiquid asset, preserving existing liquidity and expanding the source of inexpensive debt capital for personal or investment use," Jim Minich, managing director of capital advisory services at BMO Family Office, a subsidiary of BMO Financial Group, says.
Consider how a client of Minich's used his art collection — comprised mainly of Picassos — as collateral to swoop up a $12 million Manhattan co-op. The borrower repaid the loan within three years from his own cash flow, but in the meantime he got to enjoy both his art and the city views.
Before you enlist the help of your Picassos, there are a few things to consider.
Borrow against your assets
Art financing falls into a type of borrowing called custom credit facilities, which allow borrowers to leverage their high-value assets to meet their cash flow needs. You can use art as collateral, as well as other types of assets like stocks, bonds and cash.
Best of all, you don't need to part with your cherished Pollocks or de Koonings to access the financing. Your collection can continue to bring you enjoyment. And if you use an investment account as collateral, there's no requirement to sell any securities. You can keep your investment strategy in place.
The timing may be right to consider this type of financing, says Minich. According to a report by UBS and Art Basel, art prices grew 12% in 2017 alone. Stocks, meanwhile, have hit all-time highs recently. With the recent appreciation, you could have a greater ability to turn your assets into capital.
How much you borrow depends on the type of asset you use as collateral. The more liquid—and less volatile the asset class—the more you can borrow against it.
For example, most custom credit facilities will allow you to borrow up to 95% of the value of a cash account, roughly 80 to 85% of the value of bond holdings and about 70% of a diversified stock portfolio. With art, your borrowing is typically limited to 50% of appraised value.
The loans are generally due within three years, though most banks will allow you to renew at the end of the term. Bear in mind that monthly payments are interest only and the loan amount will be due in full at the end of three-year period—unless you renew. You must therefore plan accordingly to ensure that you'll have ample liquidity to repay the loan.
Using assets as collateral has multiple advantages over conventional borrowing.
First, asset-based borrowing often costs less than what you would expect to pay for a mortgage. Rates, which are based on the London Interbank Offered Rate (LIBOR), fluctuate and are reset monthly.
There’s a faster approval process, which can shave months off closing if you are looking to buy real estate. It can take as little as 30 days to get approval from the time of application, compared to two or three months for a traditional mortgage. That could make all the difference between snagging a dream property in a hot real estate market or not.
Appraisals and due diligence
While the property you wish to buy won't need to go through appraisals, other aspects of borrowing remain the same. First, you will be required to submit a personal financial statement, tax returns and other proof of cash flow to demonstrate you ability to pay the loan back.
In addition, your art will need to be appraised for value by a qualified art appraiser retained by the bank.
Once you have the loan, know that your artwork—just like any other asset you use for this type of financing—must be appraised each year. If the value falls, you will be asked to pay down the loan so that your loan-to-value ratio remains at 50% (and the thresholds we discussed earlier in the piece for the other asset types).
“For that reason, borrowers should have access to other sources of liquidity to meet possible margin calls," Minich explains.
Even if you are borrowing to buy real estate, bear in mind that tax deductibility works differently for asset-backed borrowing than it does for mortgages, says Minich.
“Deductibility is determined by the use of proceeds," he explains.
If you use the proceeds to buy a property for personal use or another personal purpose, then the interest can't be deducted. That changes if the money is used for investments or to invest in a business. Then the interest is considered a business expense, and it can be deducted. Bear in mind, though, that with the recent tax overhaul, the deduction may be limited.
Consult with your tax advisor to understand how these rules relate to your particular tax situation.
Your love and appreciation should always be the utmost consideration in how you use and display your art collection. Just remember that the art on your walls can also pull double duty and help you secure financing for life's other enjoyments.
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