Art Financing Overview: Art financing is the extension of credit using art as collateral. Some major financial institutions, notably Citigroup, offer it as a special service to attract and retain high net worth clients. Other players in this field are independent firms such as Art Finance Partners and Art Capital Group. Due to the illiquidity of the collateral, interest rates on art loans are high, sometimes in excess of 20%. In a high-profile 2009 case, celebrity photographer Annie Liebovitz defaulted on a $24 million loan from Art Capital Group secured by her work.
Auction Reserve Prices and Price Guarantees: Wealthy individuals often use art as an alternative investment. When putting their holdings up for auction, they often use one of two devices to protect against getting an unacceptably low price:
- Setting a reserve price
- Obtaining a guarantee from the auction house
If a reserve price is set, the object will be sold only if a bid in excess of that amount is received. With a guarantee, the auction house will buy the work for the stated amount if there are no bids greater than that figure.
Offering guarantees was an increasingly popular way for auction houses to induce art owners to place their holdings up for bid in the years running up to 2007, when art prices peaked. In 2008 and 2009, leading auctioneers Sotheby's and Christie's have lost a combined $63 million on guaranteed art that failed to sell. Accordingly, they and their smaller competitors have backed away from offering guarantees.
Art Assure: Art Assure is a company being launched in 2010 by 1980s corporate raider Asher Edelman, who has long experience as an art collector, art gallery owner and art museum benefactor. He partially inspired the character Gordon Gekko played by Michael Douglas in the 1987 movie "Wall Street." Art Assure is designed to offer guarantees to sellers at auction. Initial plans call for charging a fee that equals 5-10% of the guaranteed price. This is, in essence, an insurance premium. If the work sells for above the guaranteed price, Art Assure keeps the fee. If not, the seller pockets the guaranteed price less the fee, and Art Assure will sell the work at another time or place when it feels that it can recoup its outlay, and hopefully turn a profit. Art Assure runs a risk that it will be unable to dispose of the work at a profit in a timely fashion.
Edelman intends to guarantee much less expensive works than those to which auction houses traditionally extended this service. He believes that there will be greater opportunity for profit from increasing volume in this fashion.
Edelman's venture is not without controversy, however. Unlike auction houses, he is not going to disclose his private guarantees. Also unlike auction houses, he will not recuse his firm from bidding on objects that it has guaranteed, if another client asks the firm to bid on his or her behalf. He does offer assurances that he will not enter bids simply in an attempt to raise the price of an object above the amount guaranteed by Art Assure. Other participants fear that this lack of disclosure on the part of Edelman and Art Assure will lead to abuses.
Source: "The Art World's Gordon Gekko," The Wall Street Journal, 1/29/2010
