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Art finance involves buying and selling works of art, with services including appraisal, insurance, market research, and art-secured loans. Art financing is marketed to high-end clients by private banks, auction houses, and consulting firms. Art loans are a risky investment, with lenders often requiring reappraisals and charging high interest rates.
Art finance is the financial services industry related to the buying and selling of works of art. Services include art appraisal, personal shopping services, art insurance, market research, curatorial services, and art-secured loans. Art financing is also known as art consulting.
Art financing services are generally provided by private banks, auction houses, and consulting firms. They are marketed to high end clients who are art collectors or sometimes directly to artists. Independent art financing consulting firms advise clients on purchase and sale transactions, special purpose investments, wealth transfer, and the restructuring of art businesses and collections. Art financing became a major industry in the 1980s as the popularity of investing in fine art grew. Investment in art purely for financial gain has also grown, especially on the international stage.
The term art financing can mean the process of acquiring art through financing, or the practice of using works of art as collateral for a loan, known as art lending. Art loans are often purchased by people who want to leverage an existing art collection to finance new purchases. They are also used for art owners looking to acquire cash to cover a debt, or art dealers who need funds to purchase new works.
Sometimes art loans are structured like a reverse mortgage. This allows an art owner to receive monthly payments against the value of a piece of art, instead of selling the piece outright. This allows the owner to avoid paying a capital gains tax.
Art loans are a delicate financial investment. Determining the absolute value of any work of art is almost impossible. Many factors play a role in determining the value of a work of art. These factors can change dramatically over time, making lending money against art a risky practice.
Lenders may place many provisions in an art loan document to reduce potential risk. The lender may require a reappraisal of the artwork being used as collateral at some point during the loan term. If the value of the work has decreased, the lender can request more guarantees or require a partial repayment of the loan.
To defend against a reduction in the value of art, many lenders will not advance more than half the value of a piece. Lenders also often charge high interest rates on art loans, typically three to four points above the prime rate. Interest rates can be as high as 18% in some cases.
Smart Asset.
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