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Personal Risk Matters

Hanging Up Your Art as Collateral? Tips for a Smooth Loan Process

Monday, August 31, 2020

The art market has been a worthwhile investment strategy for decades. In the last 10 years alone, it has grown 141% and its global value is $64.1 billion. With the economic volatility we have seen in 2020, there has been an increase in investors turning to their art as collateral (subscription required). In addition to the financial benefits, with an art loan you can typically keep your collection in place while accessing your line of credit.

For clients who are considering an art loan, here are three tips to help make that process more efficient.

Work with specialists. From the works themselves, to storage, display, and ongoing care, everything about art is nuanced and requires specialized knowledge. Choose your advisory team wisely starting with your financial institution. Following the art-as-investment trend, several banks created dedicated art practices that have in-depth knowledge of the art world including the financial aspects that would influence a collection’s value. These banks often provide specialized services and have a better understanding of the distinctive works that may be part of your collection.  

The same thought process applies to transit and storage companies.  During the bank’s evaluation, they will consider the location of the collection and the companies or individuals with which it may come in contact. Transit losses tend to be larger. It’s important to work with companies that are well vetted and specialized in this area to protect your assets from damage and to give the bank assurance that the collateral is safe.  

Keep your valuations current. Establishing the value of your collection is one of the first steps to securing a loan. The lender will likely require its own appraisal to reflect current market values and information,  but it can help to come prepared with a recent valuation. Because the value of art fluctuates depending on the type of art, we typically recommend clients review their collection annually to assess which pieces may need new appraisals. Some may need new appraisals every year and other pieces may not require one for several years.

Having recent appraisal information will not only make the process smoother, it can also inform your decision on which pieces may be more likely to hold weight in the bank’s eyes. Many prominent art advisory firms, such as Gurr Johns, Pall Mall, or Winston Art Group, are currently offering virtual appraisal services to ensure that client needs are being met while social distancing measures are in place.

Prioritize a comprehensive insurance review. A comprehensive insurance review by your broker will help ensure that your policy limits are current and the coverage is as broad as possible. It is also critical to verify that the contract that protects the assets is aligned with all parties of the art loan.

A standard insurance contract may not be the best contract to protect a high valued collection especially given the recent fluctuations in art values. It may go without saying, but if you have a significant art collection, it’s essential to work with an insurance broker that is well-versed in art-backed collateral loans and can offer access to insurers that specialize in fine art and collectibles. They will deliver advice and consultation to mitigate risks in addition to providing insurance options. The better protected your assets, the more favorably a bank will view them in consideration of a collateral loan. It’s also important to review your insurance on an annual basis at a minimum or when making changes to your collateral loan or collection.

Plan Ahead

Obtaining any bank credit is often time sensitive and many firms are doing things a bit differently right now to ensure the health and safety of clients and associates. Doing your research and having these foundations in place will help the transaction go smoothly.

Ginny Hunter

Senior Vice President, National Client Executive and Fine Art Specialist, Marsh McLennan Agency Private Client Services