The Best Way Creating Liquidity Value of Your Art Collection – Borrow

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Unlocking the Value of Your Art Collection

Art collectors have high value inaccessible in their art collections.  If they need to access of this value, they do not have to sell their art to create liquidity – Borrow.  They can borrow funds and retain possession for their art.

There are big advantages to borrowing – avoiding selling cost, capital gain and taxes.  It could be up to 65+ percent.  These combination can make it VERY expensive to sell.

What is the alternative to access its liquidity?  Borrow.

For example:  A collector sells his art for $US 10 million. Assuming selling costs of 20 percent (20 percent of $US 10 million = $2 million) and an original cost of $US 1,000,000 for the art.

  • Funds realizes a before-tax profit: $US 7 million.
  • Net to collector:  $US 4.2 million  (this profit is subject to capital gains tax. Assuming a rate of 40 percent (28 percent federal plus 12 percent state), the collector pays $2.8 million in capital gains tax, and nets $4.2 million.
  • Net to heirs:  $US 2.1 million (these net proceeds are subject to estate taxes at the collector’s death. Assuming a 50 percent rate, the heirs receive only $2.1 million — on art sold for $US 10 million! This represents a loss of 79 percent across a single generation, and underscores the cost of selling art.)

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By selling during his lifetime, the collector pays 2 levels of tax: capital gains and estate. By borrowing to create liquidity, the collector can keep the art during his lifetime and have his estate benefit from a step-up in tax basis. This enables collectors to pay just one level (estate tax) rather than two. In this example, the collector could borrow as much as $US 5 million (up to half the art’s value) and keep his art. Art collector would be responsible for debt service on the loan, but he would also benefit from any appreciation on his art.

What art collectors do with the proceeds?  These are few:

  • Entrepreneurs frequently borrow against their art to invest in their existing businesses or new ventures
  • People also borrow against their art to make charitable contributions, pay medical expenses, and fund divorce settlements.
  • An art-based loan is a low-cost option for art collectors in need of cash flow who can enjoy their art while making scheduled payments.
  • In these uncertain economic times, art collectors also borrow to avoid the risk of having their art “bought in” (or “burned”) at auction, which makes it difficult to sell for years to come.
  • Faced with estate taxes that must be paid within a short time frame, executors frequently liquidate art collections quickly. But borrowing funds to pay estate taxes and administration costs makes it possible for executors to maximize the value of the estate’s assets by selling the art over time, thus avoiding a “fire sale.”
  • Many arrange lines of credit and term loans to invest more art.
  • Some whose wealth is concentrated in art borrow funds to invest in other asset classes, such as stocks, bonds, real estate, oil, gas, private equity, and hedge funds, thereby diversifying their holdings.

Consult your financial adviser, accountant, attorney, or estate planner while making these decisions.

  • Does art collector want the flexibility of a line of credit or a term loan of 3-10 years?
  • Does art collector want a six-month loan to fund short-term liquidity needs?
  • Or an advance against art that art collector plans to sell later this year?

CONTACT US… Collectors interested in arranging financing should contact us for free consultation.  We will assist to identify the borrowing need, determine what type of financing makes the most sense, and facilitate the appropriate lender.  Please note minimum appraisal report is at $US 5 million.

Related resources at Amazon Corner:

  1. Fine Art and High Finance: Expert Advice on the Economics of Ownership
  2. Structured Finance and Insurance: The ART of Managing Capital and Risk
  3. The Art of Buying Art: An Insider’s Guide to Collecting Contemporary Art
  4. The Art Business
  5. Art as an Investment
  6. Risk and Uncertainty in the Art World
  7. The Explosion of the Art Market in the 21st Century

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Financial Instrument Loans

Topics

  1. Financing Terms
  2. Underwriting Process
  3. Financial Instrument Quality
  4. Payment Instruments
  5. Traded Instruments
  6. Borrowers

financial instrument

Financial Instrument Loans are secured by financial instruments such as a) standby letters of credit (“SBLC”), b) negotiable debt or c) equity securities. These loans are primarily underwritten based on the quality of the underlying financial instrument, and in case of a default by the borrower, LENDER has full recourse to the financial instrument collateral to recover any loan amount outstanding.

This form of financing is especially suitable for special situations such as cross border transactions or instances where the borrower requires a third party guarantee to qualify for the level of financing sought.

Financing Terms

Loan Amount

60% to 80% of the financial instrument value. Minimum loan amount is $US 500,000.

Currency

USD, CAD, EUR

Collateral

Collateral usually takes the form of a Standby Letter of Credit from investment grade bank. A debt or equity security may also be acceptable as collateral if there is a sufficiently liquid secondary trading market in the security.

Interest

10% to 15%, payable upon loan disbursement.

Payment Terms

Interest deducted from loan disbursement. Principal due in single lump sum upon loan maturity.

Extensions

Extensions available by mutual agreement, subject to extension of financial instrument.

Underwriting Process

The Financial Instrument Loan is underwritten primarily based on the quality of the financial instrument. Borrower credit-worthiness and/or project feasibility take secondary importance. LENDER will undertake customary legal and financial due diligence on all material aspects of the financing transaction including but not limited to the collateral, the borrower/project and the use of funds.

Financial Instrument Quality

In assessing the quality of the financial instrument LENDER draw on multiple sources of data/information including but not limited to:

• corporate credit ratings and political risk ratings issued by the major ratings agencies.
• legal opinions on the contractual terms of various instrument.
• the advice/opinions of industry subject matter experts and practitioners.

Payment Instruments

Financial instruments which can be called upon to payout the lender in case of a loan default are defined as Payment Instruments for underwriting purposes. Payment Instruments generally consist of a) standby letters of credit (SBLC’s), b) bank demand guarantees (BG’s) and c) other third-party guarantees. The Payment Instrument is preferred over the Trading Instrument as loan collateral.

In order to assess the suitability of a Payment Instrument as loan collateral, the following analysis is performed:
• Assessment of the credit worthiness of the issuer/obligor that is undertaking to make payment under the instrument in case of loan default
• Analysis of the contractual terms of the instrument and determination of which conditions (if any) need to be met in order to receive payment under the instrument.

Traded Instruments

Financial instruments which cannot be called upon but instead must be sold by the lender to recover outstanding monies in case of a loan default are defined as Traded Instruments for underwriting purposes. Traded Instruments generally consist of debt and equity securities such as bonds, treasuries and stocks. The Traded Instrument is less preferred than the Payment Instrument as loan collateral.

In order to assess the suitability of a Traded Instrument as loan collateral, the following analysis is performed:
• Determine if the instrument is freely tradable, and if a market exists in the instrument.
• Determine the liquidity of the instrument by assessing how much time it would take to sell the instrument in order to recover outstanding monies in case of loan default.

Who are borrowers?

The following scenarios represent a few applications of Financial Instrument Loans.

• An investor may make foreign investments without transferring funds to the investment country, or liquidating assets in their home country. The investor accomplishes this by pledging assets in their home country to obtain an SBLC, and having LENDER provide a loan in the investment country.
• A project owner who does not qualify for bank financing may secure a “guarantor” (able to issue an SBLC) and thereby obtain project financing.
• A new subsidiary may obtain financing for its operations by having its parent company provide an SBLC.


If you are interested, please contact us

Daniel Nguyen

DAJK Group

daniel586@sbcglobal.net

+562.301.7231

3592 Rosemead Blvd

Rosemead, California 91770

Los Angeles – USA