An essential pillar of modern culture, art continues to hold a special place in the hearts of many. Not only is this true of seasoned collectors, who have spent their entire lives acquiring valuable works, but it is also the driving force prompting new collectors to engage with the market.
Irrespective of where you are in your journey, BNY can help. As you continue to refine your eye, finding art and artists that not only speak to your personal tastes but grow in importance as time goes on, inherent risks and opportunities will arise. Understanding how your collection can transcend its primary function will help you pursue your passion in a financially sound way.
The Beauty of Versatility
Although you collect art because it’s your passion, it also plays another vital role: it’s a critical component of your balance sheet.
A finely tuned balance sheet is not only a reflection of high-performing assets but also liquidity and leveragability. Some assets are relatively liquid, offer moderate returns and can function as collateral for a line of credit. In comparison, other assets have high expected returns but little to no liquidity and cannot be used as collateral for a credit facility.
A properly built art collection can greatly enhance your balance sheet because it has high return expectations despite being considered generally illiquid; and most importantly, it’s leverageable, allowing collectors to extract liquidity while minimizing tax consequences.
While many collectors leverage their existing collections to procure new works, leveraging art through fine art financing can also alleviate capital concerns stemming from unexpected life events.
Leveraging Art Lending for the Unexpected
It’s no secret that the “three Ds” (death, debt and divorce) are the most common catalysts that prompt collectors to sell at inopportune times, when they have to meet unexpected expenses. Further exacerbating this issue is the fact that collectors lost certain tax benefits in 2017, when the Tax Cuts and Jobs Act (TCJA) eliminated “like-kind exchanges” for art but not real estate.
The change in legislation combined with the previously low interest-rate environment has accelerated the art lending market, helping it grow into the roughly $34bn marketplace it is today1.
While collectors have certainly used these facilities to respond to the “three Ds”, art lending can be harnessed for broader uses, such as opportunistic “dry powder” liquidity for capital investments.
Getting the Most Out of Your Collection
Estate matters are not always the driving force. Many reasons associated with needing greater cash flow can prompt passionate collectors to part with their most cherished works. But, as previously stated, selling may not be the answer.
Aside from selling something that not only gives you joy but functions as an extension of who you are, selling can also erode the liquidity you were seeking in the first place due to auction house fees and other unanticipated costs.
Therefore, fine art financing may not only provide you with the means to add more pieces to your collection, but it can also help you generate cash flow for meeting capital calls, investing in capital-intensive opportunities, and most importantly, for when life happens.
The Year Ahead
With so many major art fairs, exhibitions and openings across the country and the globe, there will be ample opportunity to engage with the art community. BNY Wealth would love to meet you.
If you have questions about financial matters regarding your collection, BNY would be happy to help you take your collection to the next level.
