Shirin Marquart, Head of Art Financing, Westend Bank AG
A pledged Dan Flavin in the hallway, a pledged Isa Genzken in the dressing room, a pledged Andy Warhol in the gallery—until now, this was only possible in the USA; in Europe, the beautiful collateralized artworks had to languish in storage.
In response to overwhelming client demand, Westend Bank has taken on the challenge of bringing art-secured lending up to its full potential in Europe. Artworks loaned as collateral can now remain in the borrower’s possession, and as a result there is greater flexibility for art collectors and gallerists who reap the many benefits this kind of financing brings.
Art lending allows collectors and gallerists to realize liquidity without having to make unfavorable sales to satisfy short-term cash-flow concerns. Through this form of bridge financing, collections can be expanded and investment returns can be optimized through leverage effects. The loans are non recourse, exclusively secured by high-quality artworks; the borrower does not assume liability other than legal title in the artworks and their authenticity. Possible risks such as embezzlement, theft, or damage are covered by insurance.
Two leading art lending markets have prevailed over the last few years: firstly, the US market, which is dominated by major banks and auction houses, and secondly the European market, primarily served by specialized providers of art financing. The basic principle is the same. However, the difference so far has been that the US art lending market can use the artworks as security regardless of where they are located so that the works may remain in the possession of the borrowers.
Not so in Europe: owing to the different legislative regimes, gallerists or collectors have needed to relinquish physical possession of the artworks that served as collateral and the lender would then store them in the warehouse of a fine art shipper and packer. There were some exceptions to this, for example in the UK artworks could at least be displayed at loan exhibitions in a non-commercial context. Art lenders have been working on a solution for a long time to create a balance between competitive advantage and risk management.
Westend Bank has taken up this challenge and has developed an insurance and legal solution that permits lending transactions using high-quality artworks transferred by way of collateral without taking physical possession of the artworks as a pledge. In contrast to the UCC Filing in the USA and the chattel mortgage in the UK, this set-up does not require entry into a public register for transactions outside of the United States and the United Kingdom. —Based on thorough legal processes, the offering can be made available to clients worldwide; initial international client cases have proven to be a success. This new art financing method will be a game changer for the European art lending market and will surely lead to considerable growth.
The advantages are obvious: borrowers do not have to part with any artworks from their collection, gallery owners can still choose collateralized items from their inventory for art fairs, and investors can showcase their works of art in international exhibitions, which will increase the value of the pieces. Furthermore, fragile works and bulky sculptures are no longer exposed to risky transportation and can remain in situ.
Art-secured lending will never be a mass market product. The individual financing needs of each borrower will be different, and of course their collections will all be unique; art lending is therefore not a standardized process. Each transaction must be treated individually with a tailored solution considering customer requirements and the respective legal situation.
Expert knowledge in all areas is essential, along with trustworthy and long-term client relationships and balanced risk management. The offering of Westend Bank includes fixed and variable loans and credit facilities, from €500,000 to more than €20 million. Loans are secured by high-quality works of renowned contemporary artists. The loan to value ratio is usually around 40% and the terms range from 6 months to 5 years.
In summary, the nascent market for art-secured lending is growing steadily and meeting the demands of the art market for professional financing. Clients can now use this leverage and are still able to enjoy their Dan Flavin or Andy Warhol at home or in the gallery.
Article published in the Deloitte Art & Finance Report 2017