Leon Black, then CEO of Apollo Global Management, at the Milken Institute Global Conference in Beverly Hills, California on May 1, 2018.
Patrick T. Fallon | Bloomberg | Getty Images
A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for wealthy investors and consumers. Register to receive future editions, straight to your inbox.
A $484 million art loan guaranteed by billionaire Leon Black and disclosed in the latest Epstein files shines a spotlight on one of the art world’s most dynamic and lucrative areas.
According to a March 2015 document released as part of the Epstein files, Black obtained the Bank of America loan backed by artwork. While not unusual for major private bank clients, the loan made headlines because of its scale and exotic collateral, which included blue-chip works by Picasso, Giacometti, Titian, Matisse and others.
Art lending, however, has become an increasingly valuable tool, both for wealthy collectors and wealth management companies trying to manage their wealth. The global art loan market is now estimated at between $38 billion and $45 billion, according to a report by Deloitte and ArtTactic. The market is expected to reach $50 billion by 2028, growing at around 12% per year.
Adam Chinn, managing partner of International Art Finance and a longtime art finance expert, said art loans are a way for collectors to get money from paintings that they can also continue to admire on their walls.
“It’s the best of both worlds,” Chinn said. “You can monetize an otherwise non-revenue-generating asset. And it’s always nice to watch.”
Far from signaling a lack of funds, art loans are typically used by the wealthy to provide liquidity, leverage financial investments, and avoid hefty tax bills. Private banks often make art loans to high-profile clients at low interest rates, knowing that the client has hundreds of millions, or even billions, in other assets in the event of default. The interest rate on Black’s loan in 2015 was 1.43 percent, according to the document.
Most of the art lending market is dominated by auction houses, particularly Sotheby’s Financial Services, as well as specialist lenders like International Art Finance.
Scott Milleisen, global head of lending at Sotheby’s Financial Services, said collectors used the sale proceeds for a wide variety of purposes. The company now lends on classic cars as well as works of art.
“Many of our clients borrow against their art collections to invest in businesses, pursue new art acquisitions or unlock cash flow without selling the works they love,” Milleisen said.
Chinn said many of today’s collectors are leaders in the private equity and hedge fund industry. Since they are accustomed to using leverage to boost their wealth in their investments and businesses, they view leveraging their art collections as a natural extension. Chinn estimates that the total value of art held in private hands is between $1 trillion and $2 trillion. With arts loans making up a tiny fraction of the total — well under $50 billion — he said the industry still has plenty of room to grow.
“Art is the most underexploited asset on the planet,” he said.
Art loans also generate lucrative tax benefits. The sale of a work of art attracts a capital gains rate of 28% – a higher rate for collectibles than other categories – as well as a net investment income tax of 3.8%, bringing the maximum rate to 31.8%. Sale in certain states also triggers state taxes.
An art loan, even at today’s high rates, generally around 8 to 9%, is still much more effective than paying a tax. Additionally, borrowers can usually keep the artwork on their walls.
The art lending industry also benefited from a 2017 tax change that eliminated the use of so-called 1031 exchanges in the art market. This practice allowed art collectors to avoid capital gains tax by exchanging one work for another. Without this benefit, many collectors have turned to loans to provide liquidity without tax penalties.
Chinn said that given the recent rebound in the art market and falling interest rates, art loans are poised to continue their strong growth.
“The art market is a strange market,” he says. “But if you look at every other asset class, they end up being fractionated and securitized and leveraged. It’s just the nature of the universe.”