thesis final copy-aisi wang
TRANSCRIPT
ART AS COLLATERAL: AN OVERVIEW OF THE PRACTICE AND THE MANAGEMENT
OF ASSOCIATED RISKS
by
Aisi Wang
Advisor: Prof. Tom McNulty
Department of Art and Art Professions
Steinhardt School of Culture, Education and Human Development
New York University
M.A. Final Project
Visual Arts Administration
Spring 2016
Wang
2
Abstract
Art as Collateral: An Overview of the Practice and the Management of Associated Risks
Aisi Wang
Visual Arts Administration
Spring 2016
This thesis considers the evolution of the market for loans for which fine art serves as the
underlying asset (collateral). The study is justified by the observation that the current market
presents some optimal conditions for fine art loan collateralization. Over recent decades, lenders
and borrowers alike have become increasingly sophisticated in their understanding of the forces –
both positive and negative – that can impact the success of the loan transaction. The benefits of
art-secured financing for various types of lenders and borrowers are identified and described, as
are the various major product offerings. Finally, credit risks and title risks are examined in some
detail, reflecting their impact on the viability of the art-secured financial transaction.
Wang
3
TABLE OF CONTENTS
ACKNOWLEDGEMENT ............................................................................................................ 5
LIST OF ILLUSTRATIONS ....................................................................................................... 6
CHAPTER 1: INTRODUCTION ................................................................................................ 7
1.1 INTRODUCTION ....................................................................................................................... 7
1.2 LITERATURE REVIEW .............................................................................................................. 8
Art as an asset class .................................................................................................................. 8
Art Risks and Valuation Drivers .............................................................................................. 9
Art Price Indices ..................................................................................................................... 10
The Credit Default Risk ......................................................................................................... 11
Presale Estimates and Downside Risk. .................................................................................. 12
1.3 LIMITATIONS ........................................................................................................................ 13
CHAPTER 2: THE MARKET FOR ART AND FINANCE .................................................. 14
2.1 THE ART MARKET ................................................................................................................ 14
Art Market Performance......................................................................................................... 14
Significant Market Trends ...................................................................................................... 17
2.2 ART AND FINANCE ................................................................................................................ 19
Art Collecting as a Financial Tool ......................................................................................... 19
Major Sectors in Art and Finance .......................................................................................... 20
CHAPTER 3 ART-SECURED FINANCING .......................................................................... 22
3.1 PRODUCTS IN ART-SECURED FINANCING .............................................................................. 22
Art-secured Financing in the Credit Market .......................................................................... 23
Types of Art Loans ................................................................................................................. 26
Wang
4
3.2 LENDING PRACTITIONERS ..................................................................................................... 29
Banks ...................................................................................................................................... 29
Auction Houses ...................................................................................................................... 31
Specialized Lenders................................................................................................................ 34
CHAPTER 4: RISKS AND RISK MANAGEMENT .............................................................. 36
4.1 CREDIT RISK ......................................................................................................................... 37
Collateralization and the Default Risk ................................................................................... 37
Downside Risk and Presale Estimates ................................................................................... 38
Measuring the Downside Risk with Buy-ins.......................................................................... 39
Art Credit Default Swaps ....................................................................................................... 42
4.2 THE TITLE RISK .................................................................................................................... 43
The Uniform Commercial Code ............................................................................................. 44
UCC Article 9 and Section 9-319 Consignment Provisions .................................................. 45
UCC Article 2 and the Applicability of Section 2-326 and 2-403 ......................................... 47
CHAPTER 5: CONCLUSION .................................................................................................. 49
BIBLIOGRAPHY ....................................................................................................................... 51
Wang
5
ACKNOWLEDGEMENT
I would like to express my gratitude to my advisor, Tom McNulty, for his support,
patience, and encouragement throughout my thesis research. His technical and editorial advice
was essential to the completion of this research. He has taught me innumerable knowledge and
insights on the subjects of this study as well as the workings of academic research in general.
Wang
6
LIST OF ILLUSTRATIONS
Figure 2.1 The Global Art Market: Value and Volume of Transactions
Figure 2.2 Global Auction Market 2005-2015
Figure 2.3 Market Share by Value of the Fine Art Auction Market: 2000-2015
Figure 2.4 Global Market Share of the US, UK and China 2006 to 2015
Figure 3.1 KPIs
Figure 3.2 Art Loan Lenders by Interest Rate
Figure 4.1 Hammer Ratio for French Impressionist Paintings
Figure 4.2 Hammer Spread and Fitted Lognormal, Recognizing Buy-ins
Table 3.1 Lenders and Borrowers for Different Types of Art Loans
Wang
7
Chapter 1: Introduction
1.1 Introduction
Taking art as an asset class is no longer a hidden agenda in the art world. According to
Deloitte/ArtTactic’s 2014 report on the art and finance market, 76% of art collectors are buying
art with an investment view1. This number is up from 53% in 2012, implying that the asset aspect
of art is gaining legitimacy among collectors. As an increasing number of Ultra-High Net Worth
Individuals (UHNWIs) are buying and investing in art and collectibles, the financial market is
driven to offer wealthy clients new products. Prior studies on practices in taking art as an asset
class largely investigated art as investment and its performance associated with constantly
improving art indices. Nevertheless, global art buying trends demonstrate a continuous
accumulation of wealth in art, signaling the opportunity for practitioners in both art and finance to
provide a greater variety of art and wealth management services, such as wealth protection, estate
planning, leverage, and value enhancement.
Consequently, the need and demand for art secured lending has increased, because art
secured lending has two merits that other art financial services are unable to deliver: it is an
effective way of enabling art collectors to access equity value in their art collections without
having to sell them, and art lending makes it possible to restructure collectors’ capital into new art
acquisitions or attractive business opportunities, or to refinance existing loans. Market research
conducted in 2015 by Skate’s on the global art-loans market confirms the trend with a
conservative estimate a $100 billion addressable market size for art-secured lending2.
Banks and auction houses have previously been cautious when considering art collections as
collateral for loans. This has largely been because of risks and uncertainty associated with art,
such as liquidity, valuation risk, defective ownership, authenticity risk, and borrower default risk.
The risks could potentially upset the lender by minor issues such as net loss due to high
1 “Art & Finance Report,” accessed [April 4, 2016],
http://www2.deloitte.com/content/dam/Deloitte/at/Documents/Tax/art-finance-report.pdf. 2 “Skate’s Report on Global Art-loan Market,” accessed [April 4, 2016],
http://www.skatepress.com/wp-content/uploads/2015/08/Skates_Global_Art-Loans_Report_July_2015.pdf
Wang
8
transaction costs and high storage costs of art or critical issues such as leaving the lender with a
worthless asset or an asset to which it has no access.
In response to the ample space for art-loan growth, developments in the art insurance
industry have been introduced to protect lenders from these types of risks and to potentially open
up opportunities for a much larger art secured lending market in the future. On the other hand,
many specialized lenders have emerged in the past few years, providing alternatives for borrowers
who have limited access to traditional lenders.
This thesis identifies and analyzes various roles in art-secured financing, emphasizing two
critical risks from the lenders’ perspective by assessing risk levels and speculating risk
management approaches, relating the practice of art lending to a greater social context. In
addition, as applied research, this thesis also demonstrates forthcoming developments in the
practice of art collateralization.
This thesis is organized as follows: Chapter 1 features the literature review and
methodology statement; Chapter 2 provides a highlighted assessment of the art market and
addresses the current market for art and finance; Chapter 3 introduces art-secured financing in
detail, from product offerings to motivations and limitations of major types of lenders in the
market; Chapter 4 examines the risks associated with art-secured financing and analyzes
corresponding risk management approaches; and Chapter 5 summarizes the paper’s most
important points.
1.2 Literature Review
Art as an asset class
The perception of works of art is no longer limited to aesthetic consumption that returns
nonmonetary viewing benefits. Findlay3 explains that private banking clients worldwide try to
involve themselves in the art world to present as culturally literate and financially sophisticated.
3 Michael Findlay, The Value of Art: Money, Power, Beauty (Munich: Prestel, 2004), 22.
Wang
9
Gerlis4 demonstrates that art is inevitably an asset class, as it had been the source of income for
several intermediaries such as dealers, auction houses, and the artists themselves. Indeed, Parks’5
study on the Medici Family fortune reveals that the nature of artworks as capital assets dates
back to the 15th
century. In addition, many studies show that works of art can yield a return from
their appreciation in value over time, like other financial assets, with a theoretical and empirical
standpoint beginning with Anderson6 and Stein
7. Anderson differentiates the commercial effects
from psychic effects of art collecting by comparing rate of return on art to that of stocks. Stein
constructs the first art index over the 1946-1948 period, signifying a systematic approach to
taking art as an asset class.
Art Risks and Valuation Drivers
Strategic asset allocation accompanies anything that promises returns, and the Modern
Portfolio Theory (MPT) developed by Markowitz8 suggests that any capitalized asset with
targeted returns should be expected to be associated with proportional risks. When evaluating risk
and uncertainty in the art world, Robertson9 considers the major factors to be liquidity, market
inefficiency due to unparalleled information disclosure, and the valuation risk of art. Robertson
indicates that the art market does not conform to the Efficient Market Hypothesis (EMH), as the
prices do not reflect all published and unpublished data. Coffman10
confirms that purchase
prices for art are rarely quoted when bargained artworks are resold on the organized market, and
intermediaries with more knowledge regularly gain higher profits with lower exposure to risk.
Additionally, as Shleifer11
and Hagstrom12
observe, the risks of an inefficient market are also
4 Melanie Gerlis, Art as an Investment? A Survey of Comparative Assets (London: Lund Humphries, 2014), 67. 5 Tim Parks, Medici Money: Banking, Metaphysics, and Art in Fifteenth-century Florence (New York: W.W. Norton, 2005), 23. 6 Robert C. Anderson, “Paintings as an Investment,” Economic Inquiry: 13-26. 7 John P. Stein, “The Monetary Appreciation of Paintings,” Journal of Political Economy: 1021. 8 H. Markowitz, “Portfolio Selection,” The Journal of Finance 7(1) (1952): 77-91. 9 Iain Robertson, “The Current and Future Value of Art,” in Understanding International Art Markets and Management, ed. Iain
Robertson (London: Routledge, 2005), 228. 10 Richard Coffman, “Art Investment and Asymmetrical Information,” Journal of Cultural Economics: 1-24. 11 Andrei Shleifer, “Inefficient Markets: An Introduction to Behavioral Finance,” Journal of Institutional and Theoretical
Economics, (1999): 369-374. 12 R.G. Hagstrom, “The Essential Buffett: Timeless Principles for the New Economy,” Choice Reviews Online, (2001).
Wang
10
derived from the fact that prices in the art market instantaneously adjust to updated information
available when rational arbitrageurs in the market pursue information disclosure.
The valuation risk associated with art is a more complex issue. Robertson indicates that
unobservable price characteristics, supply and demand factors for different markets, and
institutional interventions result in art prices with greater uncertainty. Skaterschikov13
also
references unobservable price characteristics, such as artist name, size, and year of production, as
art valuation drivers, but these drivers are considered insignificant when determining accurate
price ranges for artwork valuation purposes. Skaterschikov argues that provenance and irrational
premiums are the ultimate factors involving a judgment call. Robertson agrees with
Skaterschikov, validating these factors as influences on the supply and demand sides of the art
market. Conclusions of Becker14
, Bongard15
, Moulin16
, and Bowness17
also reflect Robertson’s
and Skaterschikov’s concepts that the price of a work of art is determined by interactions between
art market participants with various goals.
Art Price Indices
Art price indices are constructed to track the financial performance of art as a
heterogeneous good. Goetzmann and Spiegel18
verify the heterogeneity of art by demonstrating
that art only sells occasionally; no two works of art are identical, there are only a small number of
buyers per work; and art pieces include a private value component. Most studies concerning the
development of price indices examine the risk-return relations between art investment, investment
in other financial assets, and the overall market. Mei and Moses19
, Goetzmann20
, and Pesando21
13 Sergei Skatershchikov. Skate's Art Investment Handbook: The Comprehensive Guide to Investing in the Global Art and Art
Services Market (New York: McGraw-Hill, 2006), 16. 14 H.S. Becker, Art Worlds (Berkley: University of California Press, 1982). 15 W. Bongard, “Kunst Kompass,” Capitol. 16 R. Moulin, The French Art Market: A Sociological View (New Brunswick, NJ: Rutgers, 1987). 17 A. Bowness, The Conditions of Success (London: Thames & Hudson, 1989). 18 W. Goetzmann and M. Spiegel, “Private Value Components and the Winner’s Curse in an Art Index,” European Economic
Review 39: 549-55. 19 Jianping Mei and Michael Moses, “Art as an Investment and the Underperformance of Masterpieces,” The American Economic
Review 92(5) (2002): 1656-68. 20 William N. Goetzmann, “Accounting for Taste: Art and the Financial Markets over Three Centuries,” The American Economic
Review 83(5) (1993): 1370-76.
Wang
11
use the repeat sale methodology (RSM) to estimate returns in the art market. However, Collins et
al.22
criticize this approach, claiming it is biased for its limited selection of samples. They apply
the hedonic approach to regress the price of each art piece on its characteristics. Hodgson and
Vorkink23
, de la Barre et al.24
, Renneboog and Spaenjers25
, and Bocart and Hafner26
agree on
applying hedonic regression to control variations due to observable differences between
heterogeneous art pieces. They all debate, to some extent, whether RSM can only be viewed
as a nested case of hedonic regression, as it analyzes only identical goods sold through time.
McAndrew and Thompson27
accept both approaches, as the general conclusion has been that art
investment has a low correlation with broad markets and provides a more favorable average
risk-adjusted financial return. Robertson28
remains concerned about most art price indices,
because they often carry strong tertiary market results, although many developing market tertiary
activities are ignored and private sales remain unrecorded.
The Credit Default Risk
To qualify as loan collateral, it must be possible for banks and financiers to quantify the
credit risk involved with any asset. Beaver studies the correlation between financial ratios and
propensity to default in companies, inspiring the quantitative modeling of credit risk29
. Altman
formalizes Beaver’s model in a multivariate framework through classification30
. Merton
21 James E. Pesando, “Art as an Investment: The Market for Modern Prints,” American Economic Review 83(5) (1993):
1075-1089. 22 A. Collins, A.E. Scorcu, and R. Zanola. “Sample Selection Bias and Time Instability of Hedonic Art Price Indexes” (Quarderi –
Working Papers), DSE 610 (2007): 1-19. 23 D.J. Hodgson and K.P. Vorkink, “Asset Pricing Theory and the Valuation of Canadian Paintings,” Canadian Journal of
Economics/Revue canadienne d'économique, 37 (2004): 629–655. Accessed April 4, 2016.
doi: 10.1111/j.0008-4085.2003.00241.x 24 M. de la Barre, S Docclo, and V. Ginsburgh, “Returns of impressionist, modern and contemporary European paintings
1962-1991,” Annales d’economie et de Statistique, 35 (1994): 143-181. 25 Luc Renneboog and Christophe Spaenjers “Buying Beauty: On Prices and Returns in the Art Market,” Management Science
59(1) (2013): 36-53. Accessed April 4, 2016. doi:10.1287/mnsc.1120.1580. 26 Fabian Y.R.P. Bocart and Christian M. Hafner, “Volatility of Price Indices for Heterogeneous Goods with Applications to the
Fine Art Market,” Journal of Applied Econometrics 30(2) (2013): 291-312. Accessed April 4, 2016. doi:10.1002/jae.2355. 27 Clare McAndrew and Rex Thompson, “The Collateral Value of Fine Art,” Journal of Banking & Finance 31(3) (2007): 589-607.
Accessed April 4, 2016. doi:10.1016/j.jbankfin.2006.01.012. 28 Robertson, “Current and Future,” 228. 29 W. Beaver, “Financial Ratios as Predictors of Failure,” Journal of Accounting Research 5 (Suppl.) (1966): 71-111. 30 E. Altman, “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy,” Journal of Finance 23 (4),
589-609.
Wang
12
introduces the credit risk associated with interest rates through his structured form model based on
option pricing31
. On the other hand, Frye argues that credit risk is driven by the state of the
economy32
. Kao provides an overview on the theory and approaches of the above credit risk
models33
. Crouhy et al. compare the models and suggest applications to predict risk level34
.
Presale Estimates and Downside Risk.
Ashenfelter explores the institutional details of art auction markets and notes that the daily
functioning of the auction sector plays an important role in price formation and price reporting
processes of art35
. He describes the format of “ascending price” auctions, in which bidding starts
low and keeps increasing until it meets the final “hammer price”. McAndrew and Thompson are
particularly interested in the “reserves” of auction process, recognizing them as selling prices
below which the consignor will not allow the work to be sold. As such, they indicate that reserve
prices act as a clearing mechanism in which works of art can only be bought in by the auctioneer
rather than sold if reserve prices are not met36
. Ashenfelter, Graddy, and Stevens examine sale
records and reserve prices across various auctions, indicating that the reserve price is a constant
proportion of its subjected estimated price37
. Ashenfelter et al. estimate the reserve price to be
near 75% of the low estimate using a random effects probability model38
. This result serves as a
parameter that enables downside risk analysis in relation to the bias between the auction presale
estimates of artwork and achieved market prices. Studies that contribute to this niche area of
31 R. Merton, “On the Pricing of Corporate Debt: The Risk Structure of Interest Rate,” Journal of Finance 29 (1974): 449-470. 32 Frye, J. “Collateral Damage,” in Credit Risk Modeling: The Cutting-edge Collection: Technical Papers Published in Risk
1999-2003, ed. M. Gordy. (London: Risk Books, 2003), 115-120. 33 D. Kao, “Estimating and Pricing Credit Risk: An Overview,” Financial Analysts Journal 56(4) (2000): 50-66. 34 M. Crouhy, D. Galai, and R. Mark, “A Comparative Analysis of Current Credit Risk Models,” Journal of Finance 24
(2000): 59-117. 35 Orley Ashenfelter, “How Auctions Work for Wine and Art,” The Journal of Economic Perspectives 3(3) (Summer, 1989):
23-36. 36 Clare McAndrew and Rex Thompson, Pre-sale Estimates, Risk Analysis, and the Investment Quality of Fine Art, Unpublished
Manuscript (2003). 37 Orley Ashenfelter, K. Graddy, and M. Stevens, “A Study of Sales Rates and Prices in Impressionist and Contemporary Art
Auctions,” University of Oxford Working Paper (2003): 1-28. 38 Ashenfelter, Graddy, and Stevens, “Sales Rates and Prices,” 1-28.
Wang
13
research include McAndrew and Thompson39
, Ashenfelter et al.40
, Ashenfelter and Graddy41
, and
Ekelund et al.42
.
Several studies question the accuracy and bias of presale estimates. Although mixed results
are observed across various sectors of art, the fine art sector shows an empirical upward bias.
Milgrom and Weber suggest that the “ascending price” auction model is “honest” for sellers43
.
Ashenfelter reiterates Milgrom and Weber’s conclusion by showing that presale estimates are
highly correlated with the price actually received44
. Beggs and Graddy challenge the above,
finding that while honesty may hold in general, there are systematic under and over predictions in
certain circumstances and genres45
. Mei and Moss investigate the “Masterpiece Effect,” where
expensive paintings tend to under-perform their art market anticipation46
. In their later study, Mei
and Moss further analyze art auction price estimates, indicating that there is an apparent upward
bias for ultra-high/high price paintings47
—the artwork discussed in this dissertation.
1.3 Limitations
This study was conducted between Fall 2015 and Spring 2016. All data are gathered from
market reports and materials released before April 2016. Due to the broadening of the practice and
ever-emerging innovations in the niche market of art-secured financing, this study highlights only
matured and representative roles in each layer of analysis. The practitioners are assessed based on
limited publicized information due to their status as privately owned companies.
39 Claire McAndrew and Rex Thompson, “Are Presale Art Auction Estimates Unbiased? Some Affirming Evidence,” Southern
Methodist University Working Paper (2004): 1-31. 40 Ashenfelter, Graddy, and Stevens, “Sales Rates and Prices,” 1-28. 41 Orley Ashenfelter and K. Graddy, “Auctions and the Price of Art,” Journal of Economic Literature 16 (2003): 763-786. 42 Robert B. Ekelund, Rand W. Ressler, and John Keith Watson, “Estimates, Bias and ‘No Sales’ in Latin-American Art Auctions,
1977-1996,” Journal of Cultural Economics 22(1) (1998): 33-42. 43 Paul R. Milgrom and Robert J. Weber, “A Theory of Auctions and Competitive Bidding,” Econometrica 50(5) (1982): 1089–
1122. Accessed April 4, 2016. doi:10.2307/1911865. 44 Ashenfelter, “How Auctions Work,” 23-36. 45 Alan Beggs and Kathryn Graddy, “Declining Values and the Afternoon Effect: Evidence from Art Auctions,” The RAND
Journal of Economics 28(3) (1997): 544-65. 46 Mei and Moses, “Art as Investment,” 1656-68. 47 Jianping Mei and Michael Moses, Are Investors Credulous? Some Preliminary Evidence from Art Auction, Unpublished
Manuscript (2002).
Wang
14
Chapter 2: The Market for Art and Finance
2.1 The Art Market
The term “art market” is often discussed but ambiguous in definition. At its most basic, an
art market is the physical or figurative venue in which art is dealt. Historically, art transactions
have taken place outside the framework of what is now referred to as an art market. Examples
include patronage from the Roman Catholic Church in the European Middle Ages48
and the
porcelain trade from East to West initiated by the English East India Company in the 17th
century49
. Over time, the art market has developed into a global economic infrastructure,
informed by sociopolitical relations and financial vehicles through which art is traded and
exchanged. Subsequently, classifications for today’s art market are conducted through various
lenses that penetrate enormous aspects of the art field. Therefore, this study does not intend to
work within a delineated spectrum of the art market, but will rather take as its subjects of
analysis the market performance and global trends of the current art market.
Art Market Performance
According to the most recent Art Market Report released by The European Fine Art
Foundation (TEFAF), the global art market reached a total of $63.8 billion in 201550
. Although
this number is slightly less than the $68.2 billion total in 201451
, it is important to remember that
2014 saw the market’s highest ever recorded level, and the sales volume in 2015 is still above the
years between the sharp fall in 2009 and the peak of 201452
. This result is observed by TEFAF
from a longitudinal analysis on the yearly total value and volume of transactions between 2005
and 2015 (Figure 2.1). Skate’s Annual Art Investment Report 2015 also confirms the positive
48 F.W. Kent et al., eds., Patronage, Art, and Society in Renaissance Italy (Oxford: Oxford University Press, 1987). 49 Margaret Medley, The Chinese Potter: A Practical History of Chinese Ceramics (Oxford: Phaidon Press, 1976): 13, 101, 102. 50 Claire McAndrew, “Key Findings and Summary,” TEFAF Maastricht Art Market Report (2016): 15. European Fine Art
Foundation, Accessed April 4, 2016. 51 Claire McAndrew, “Summary of Key Findings,” TEFAF Maastricht Art Market Report (2015): 21. European Fine Art
Foundation, Accessed April 4, 2016. 52 McAndrew, TEFAF Maastricht Report 2015, 22.
Wang
15
trend of the art market. The Skate’s market research report notes that the value of the top 10,000
most expensive art pieces sold with public records increased by 10% in 201553
. The report
further indicates that the threshold price, which is the lowest price point in Skate’s top 10,000
rating, increased by 9.6% in 201554
. The above statistics suggest a continuous increase in art
prices, and affirm the stability of the global art market.
Figure 2.1 The Global Art Market: Value and Volume of Transactions
Source: Arts Economics (2016)
The driving force of art market performance is auction sales, partly because 47% of global
art market sales come from public auctions55
, but more importantly, dealers and other agents set
the price levels of the remaining 53% (private sales), and their values derive from data culled
from auction and previous retail sales values. After a half decade long recovery from the
trickle-down effect of the global financial crisis and economic recession, the global auction
market has reclaimed the prosperity of 2007 and remained steady and strong (Figure 2.2). Fine
art sales, which include sales of paintings, sculptures, works on paper, and new media arts, have
dominated the auction market in the past decade. In 2015, fine art accounted for an average of
53 “Skate’s Annual Art Investment Report 2015,” accessed [April 4, 2016]. 54 Skate’s, “Skate’s Annual 2015,” 2.. 55 McAndrew, TEFAF Maastricht Report 2016, 27.
Wang
16
69%56
of the total value sold in top-tier auction houses57
. Within the fine art sector, Modern Art
(works by artists born between 1860 and 1920), Post-War Art (works by artists born between
1920 and 1945), and Contemporary Art (works by artists born after 1945) are the leading
categories over the last 15 years, with Post-War and Contemporary Art (combined) achieving the
greatest market share by value in the fine art auction market (Figure 2.3).
Figure 2.2 Global Auction Market 2005-2015
Source: Arts Economics (2016) with data from Auction Houses, Artnet and AMMA.
Figure 2.3 Market Share by Value of the Fine Art Auction Market: 2000-2015
Source: Arts Economics (2016) with data from Artnet
56 McAndrew, TEFAF Maastricht Report 2015, 27. 57 A top-tier auction house is defined by The European Fine Art Foundation as being one with turnover in excess of €50 million
or more than 250 employees.
Wang
17
Geographically, the global art market remains dominated by the three major art markets of
the United States, the United Kingdom, and China, which together account for 83% of total
sales58
. As shown in Figure 2.4, the United States is the largest market by value in the past
decade, a temporary challenge by China in 2011 notwithstanding. From 2012 to 2014, China has
replaced the United Kingdom as the second largest art market worldwide. In 2015, China lost 3%
market share due to a sales contraction in both value and volume; therefore, the United Kingdom
reclaimed second place in terms of global market share.
Figure 2.4 Global Market Share of the US, UK and China 2006 to 2015
Source: Arts Economics (2016)
Significant Market Trends
While private sales through dealers and public sales through auction houses remain the
principal channels for art transactions, the proliferation of art fairs in recent years has created a
more complex sales structure. Art fairs break the traditional art market structure by creating a
competitive environment for collectors. Dealers benefit by the sheer number of collectors who
travel to peruse the offerings of a great many world renowned galleries; their scaled down on-site
inventory, coupled with the large base of collectors present, sets the stage for a level of
commerce that is midway between the rapid-fire auction scenario and the slower, more deliberate
sales conducted in commercial galleries. There are reportedly at least 180 major art fairs with
international elements as of 201459
; minor fairs with national foci, media specialization
(photography, etc.), and/or sector specificity (e.g., Outsider Art) are blooming alongside. In
58 McAndrew, TEFAF Maastricht Report 2015, 23. 59 McAndrew, TEFAF Maastricht Report 2015, 157.
Wang
18
2014, the top 22 fairs selected by TEFAF generated visitors in excess of $1 million, pushing
transactions at art fairs to the second largest revenue source (40% of total) after in-gallery sales
for private dealers60
. Moreover, the trend shows no sign of slowing according to Skate’s, a
leading art business intelligence group. Skate’s major art fairs reports show no year-on-year
decline in visitors in the second quarter of 201561
.
Online art businesses are another greatly visible and widely discussed trend in the current
art market. Largely driven by an expanding global base of buyers, participants in the commercial
art sector such as dealers, auction houses, and other agents have developed online presences and
engaged in e-commerce in recent years. Traditional offline ventures such as Sotheby’s Auction
House and Gagosian Gallery have extended their businesses into the online marketplace. New
companies that are standalone and online-only have also emerged to offer innovative art-related
services; examples of this business type include Artnet, Artsy, and Lofty. Moreover, many
companies have collaborated and partnered on online platforms, adding new layers of sellers and
intermediaries to the art market. In addition to a wider global reach, the online art market also
generates notable sales value. TEFAF conservatively estimates an online art sale of $4.7 billion
in 2015, which accounts for approximately 7% of global art sales62
. However, online art sales by
value are not predicted to see significant growth in the near future. This is mainly because in
2015, 97% of the sales made through online companies were for artworks worth less than
$50,00063
.
Noteworthily, trends in the aggregate size and distribution of the art market closely
correlate to patterns of global wealth, as High Net Worth Individuals (HNWIs)—i.e., individuals
with investable wealth greater than $1 million—represent the major buying force of the art
market in terms of value. Estimates of the distribution of wealth in 2015 from Credit Suisse show
that less than 1% of the world’s adult population owns 45% of global wealth64
. Furthermore,
60 McAndrew, TEFAF Maastricht Report 2015, 157. 61 “Skate’s Art Fairs Report, Summer 2015,” accessed March 27, 2016,
http://www.skatepress.com/art-market-reports/skates-art-fairs-report-summer-2015. 62 McAndrew, TEFAF Maastricht Report 2015, 45. 63 McAndrew, TEFAF Maastricht Report 2015, 51. 64 McAndrew, TEFAF Maastricht Report 2015, 187.
Wang
19
World Wealth Report 2015 from Gap Gemini and RBC Wealth Management suggests that
HNWIs allocates on average about 10% of their investment on arts and collectables65
. Therefore,
patterns of global wealth are strong indicators of art market trends due to HNWIs’ purchasing
power.
2.2 Art and Finance
While art market professionals study collecting patterns of HNWIs as major art collectors,
wealth managers and financiers also join the emergence of art as a financial asset class to provide
their expertise.
Art Collecting as a Financial Tool
Historically, acquiring arts and collectibles has been principally recognized as consumption
out of passion rather than as a means of financial planning. This is mainly because art pieces are
heterogeneous, each having unique aesthetics. Unsurprisingly, their high values make the most
valuable works subject to acts of fraud and/or forgery. Artwork is not highly liquid compared to
some other assets, and art assets are difficult to trade in the short-term due to high transaction
costs. However, the wealth management community considers art an attractive financial tool
over the long run, as it is a store of value and a hedge against inflation that generates positive real
returns66
fueled by an explosion of art prices. This viewpoint is proven by a study based on data
from over 1.2 million fine art auction sales, in which an 11.6% real return is observed from
2002-200767
. In addition to a potential profit, art provides benefits that qualify it as a preferable
financial tool. Foremost, as previously mentioned, art provides a hedge against currency
devaluation and inflation. Additionally, art is proven to have low correlation with other financial
65 Cap Gemini and RBC Wealth Management, “World Wealth Report 2015,” accessed March 28, 2016,
http://www.luxesf.com/wp-content/uploads/2015/08/World_Wealth_Report_2015_Web.pdf. 66 Real return is the annual percentage return realized on an investment that is adjusted for changes in prices due to inflation or
other external effects. 67 Renneboog and Spaenjers, “Buying Beauty,” 36-53.
Wang
20
assets such as bonds, stocks, gold, and oil68
, making art a good investment for a diversified
portfolio. Furthermore, art assets enjoy favorable tax treatment either through direct tax
deductions or charitable donations (as discussed in Chapter 3). More importantly, art assets are
able to act as leverage for additional financial resources, which is referred to as taking art as
collateral for financing.
With a financial management viewpoint, Baird Asset Management, a leading international
firm in the financial service industry, observes that there are three types of collectible buyers,
differentiated by their motivations for art collecting: pure collectors, collector/investors, and pure
investors69
. To be more specific, collectors who aim to build a collection for enjoyment are
recognized as pure collectors; collector/investors have the same drive to collect as pure
collectors, but simultaneously seek monetary returns; and, investors in art collecting are solely
motivated by profit opportunities with no passion for the art. Under this division,
collector/investors and investors in art view collection in financial terms, viewing art collecting
as a financial tool. According to the Art & Finance Report 2014 conducted by Deloitte and
ArtTactic, 76% of art collectors buy art for collecting purposes but with an investment view70
.
This group matches what Baird defines as the collector/investor, which occupies the majority of
the collector population. The wealth management community subsequently responds to this new
demand on an appreciable level, with 88% of family offices and 64% of the private banks
surveyed placing financial planning around art as their strategic focus71
.
Major Sectors in Art and Finance
Although the phenomenon of art as a financial asset class seems is in its early stage, a tacit
relationship between art and finance has existed for centuries. The development of art wealth
management services among financial institutions and art specialists is available at a holistic
68 Gerlis, Art as an Investment, 22. 69 Christopher G. Didier, “Picasso, St. Guadens or Lafite: Does Passion Have a Place in Wealth Management?” Baird Wealth
Management (November 2009): 3, accessed April 4, 2016. 70 Deloitte and ArtTactic,” Art and Finance 2014,” 16. 71 Deloitte and ArtTactic,” Art and Finance 2014,” 12.
Wang
21
scale. With each at a different level of maturity, the following three sectors conclude major
practices in this intersectional field.
1. The Art Advisory Sector
Complexity is a fundamental theme of the art market, which is characterized by the lack of
market transparency and regulation, deficiency in price valuation mechanisms, and the illiquid
nature of art. Art advisory services function as intermediaries to navigate the notoriously difficult
art market for a broad spectrum of practices combining art and finance.
A successful execution in this sector requires that art advisory services cover the whole
lifecycle of art wealth and form partnerships between companies specializing in different aspects
of the art and finance industries. Art advisors are concerned with collectors’ cultivation activities,
such as educational panel discussions and art sponsoring; art collection management, such as
consolidated reporting, philanthropy advice, and art-related inheritance and estate planning; and
sophisticated art and finance integration, such as art insurance, art investment fund, and art
financing.
2. The Art Investment Sector
Investors constantly seek assets that diversify their financial portfolios. Especially in an
economic downturn, assets that have low correlation to traditional investable assets are in
increasing demand. In 2008, when global equity markets fell sharply, the art market continued to
be strong with only a lagging downturn in certain sectors in 2009. Largely fuelled by this
outcome, art assets are now viewed as a viable and attractive alternative investment, and
investors are becoming more confident than ever about strategically allocating wealth in art
investment products.
Products in art investment services are encompassed in art investment funds (or art funds),
which are investment trusts that aim to generate financial returns through the acquisition and
disposition of works of art. Similar to equity funds that invest in stocks, art funds apply a diverse
array of strategies to seek arbitrage opportunities in the art market and maximize capital gains to
redistribute profit to investors.
Wang
22
Other art investment services are offered to support art fund operations, some of the
examples include art fund monitoring, art fund selection, investment viability research, portfolio
management, art fund structuring, and art securitization.
3. The Art Financing Sector
The contemporary scope of art as a financial asset class has contributed to the soaring
value and volume of art trading, which subsequently provides significant impetus for the
development of art financing. Art financing (also referred to as art-secured lending/financing and
art as collateral) is the practice in which individuals, institutions, or business entities borrow
money against their works of art. This practice essentially liquidizes the traditionally illiquid art
asset by unlocking the value of the collateralized works of art without selling them.
By targeting at the liquidity risk of fine art, art-secured financing provides additional
stability to the art market. For instance, when financial urgencies present, art wealth owners have
the alternative to source money from borrowing against art based on its market value rather than
selling the art at an irrational price. For fine art buyers, the potential to finance a purchase
enables buyers to seize market opportunities at their best, increasing the accountability of art
prices in the market. As a result, successful practices in art-secured financing add depth to the art
market; therefore, subjects of this study analyze the practice and its involved risks to help explain
art-secured financing.
Chapter 3 Art-secured Financing
3.1 Products in Art-secured Financing
Today’s product offerings in art-secured financing have been largely shaped by lessons
learned in the past. Lenders in the booming art market in late 1980s, when art-secured financing
was initially formalized, endured tremendous difficulties following the market crash in the early
1990s. In recent years, with greater market transparency provided by online databases and a
Wang
23
steadily strong art market performance, fine art financiers have returned to the market with
art-secured financing products that are better structured and more mature. Art-secured financing
products, or art loans, are essentially asset-based financial loans that take art as collateral. As an
instrument in the credit market, an art loan can be secured by either the art assets alone or by
adding extra recourse to the borrower’s full credit. In addition, a myriad of loan structures and
business models are available to address various needs for borrowers.
Art-secured Financing in the Credit Market
As previously mentioned, art-secured financing, or art loans, falls under the category of
asset-based lending in the credit market. The underlying asset (in our case, art) gives value to the
loan, and that value is subject to appreciation or depreciation (increase or decrease in market
price in the case of art assets) over time according to market forces. The underlying asset is also
the collateral that serves as a security to the lender. In another words, if the borrower defaults or
violates the promised repayment agreement, the lender can seize the collateral and attempt to
recoup their lending costs and losses. Because the borrower is in debt to the lender when
asset-based lending is active, the borrower is also called the debtor and the lender is called the
creditor in this discussion. Furthermore, due to its nature in the credit market, the art loan is often
interchangeably referred to in this study and many others as art-secured lending/financing,
art-backed lending/financing, art-secured/art-backed loan, or loan taking art as collateral.
The amount of capital available from an art loan, or the borrowing base, is determined by
the value of the collateralized art as well as the assigned advance rate. The advance rate, which is
referred to as the loan-to-value (LTV) ratio in loan risk assessment, reflects the maximum
portion of the collateral’s value that the lender can issue as loan capital. For example, if a
collateralized painting is appraised at $1 million of collateral value, and the loan risk assessment
derives an advance rate of 45%, then the maximum capital the borrower can receive is $450,000.
This is calculated as:
Advance Rate = 𝐴𝑑𝑣𝑎𝑛𝑐𝑒 𝐴𝑚𝑜𝑢𝑛𝑡
𝐴𝑝𝑝𝑟𝑎𝑖𝑠𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝐶𝑜𝑙𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑖𝑧𝑒𝑑 𝐴𝑟𝑡
Wang
24
Borrowing Base = Appraised Value of Collateralized Art x Advance Rate
Loan-To-Value Ratio = 𝐿𝑜𝑎𝑛 𝐴𝑚𝑜𝑢𝑛𝑡
𝐴𝑝𝑝𝑟𝑎𝑖𝑠𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝐶𝑜𝑙𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑖𝑧𝑒𝑑 𝐴𝑟𝑡
Borrowing Base = Appraised Value of Collateralized Art x Loan-To-Value Ratio
The advance rate and LTV is updated regularly to reflect changes in the value of the collateral.
Therefore, a periodic reevaluation is often employed to adjust the borrowing base.
In the case of taking art as collateral, LTVs and advance rates ranging from 25% to 60%
are observed from researchable lenders in the current market72
. Compared to LTVs clustered
within the range of 70%-80% from loans based on other assets73
, the much lower rates with
greater variation of LTVs in art loans reflect the risky nature of art assets, meaning the value of
art assets is relatively more likely to see greater fluctuations. In addition, conservative rates also
disclose the lenders’ discretion on the effectiveness and efficiency of liquidating the art collateral
upon default.
The uncertainty of art price fluctuation also induces an ongoing debate on approaches to
appraise the value of underlying art collateral. One trend is to apply Fair Market Value (FMV) to
art loans and address risk through LTV and advance rate. The Fair Market Value (FMV) is the
price that property sells for on an open market between a willing buyer and willing seller, with
neither being required to act and both having reasonable knowledge of the relevant facts74
. The
adoption of FMV is commonly seen in art loans from lenders who also possess selling divisions
in their businesses, such as auction houses, in which the FMV also serves as selling estimates
when the loan is terminated with sale of the collateralized art (as discussed in the following
sections). On the other hand, specialized lenders who only practice art financing oppose the
72 Skate’s, The Global Art Loans Market Report: Art Lenders Directory (New York: Skate’s Press, 2015): 2. 73 Nick Timiraos and Annamaria Androitis, “Mortgage Lenders Ease Rules for Home Buyers in Hunt for Business,” Wall Street
Journal, April 18, 2014, accessed April 8, 2016, http://www.wsj.com/news/articles/SB10001424052702304626304579509463522046346?mod=WSJ_hp_LEFTWhatsNewsColle
ction. 74 IRS, “Determining the Value of Donated Property,” Publication 561, April 2007, accessed April 9, 2016,
https://www.irs.gov/publications/p561/ar02.html#d0e139.
Wang
25
adoption of FMV, because fire sales upon borrowers’ defaults often have insufficient time on an
open market, reducing the assets’ exposure to potential buyers and hindering the opportunity to
realize the appraised fair market price. Therefore, specialized lenders adopt the liquidation value,
or fire sale value, which is much lower than FMV assuming that the liquidation is compelled and
executed in an exposure period less than market normal. As a result, either FMV or liquidation
value is reasonable depending on the type of lenders and the type of art loans. Additionally, the
issued loan capital (borrowing base) is determined on both collateral value and the associated
advance rate and LTV. The ultimate borrowing base should reflect all considerations of potential
risks, no matter which valuing approach is applied, when appraising the collateral value.
The term length, or tenor of art loans is generally expressed in months and days. Tenors on
asset-based lending are normally decided by the lifespan of the underlying asset. For example,
housing mortgages have tenors ranging from 15 years to 40 years, reflecting the fact that houses
are most likely to amortize at a dramatic level after 15 to 40 years from the loan issued. In the
case of art as collateral, tenors range from 1 to 60 months depending on the type of art loan
applied. The relatively short tenors on art loans do not respond to the lifespan of art, because art
does not amortize due to its esthetic value; rather, the short tenors are assigned due to the volatile
price of art.
Interest rates on art loans are largely influenced by the overall credit worthiness of the
borrower and the loan structure. In cases when borrowers have lower than expected credibility in
relation to the requested amount of loan capital, lenders often offer recourse loans to secure their
interests without a soaring interest rate. A recourse loan is guaranteed by the borrower’s full
credit in addition to the art collateral. It allows the lender to liquidate the borrower’s unpledged
assets with, or even prior to, the underlying asset in case of default. A nonrecourse loan, on the
other hand, is solely secured by the art collateral. Due to the illiquid nature of art assets, lenders
in a nonrecourse art loan undertake much higher risk than those in a recourse art loan in default
scenarios. Therefore, a higher interest spread is assigned to nonrecourse loans to protect the
lender’s interest. Although varying by client and loan size, recourse loans offered by Citi Private
Wang
26
Banks carry interest rates at 2%-3%, whereas interest rates on nonrecourse loans from Tutela (a
specialized lender) start at 8%75
.
Types of Art Loans
Art loans are structured to support various transaction motives. Collectors may borrow
against art to finance new acquisitions. Art dealers may use business lending to expand working
capital. Speculators may constantly leverage art assets to fund other investments. While the most
common art loans are in the form of term loans, bridge loans, and lines of credit, innovative
lending practices such as sell-leaseback and other customized loan programs have emerged to
accommodate needs enabled by art assets.
1. Term Loan
A term loan is a regular loan for a specific amount of capital. It is repaid in regularly
scheduled payments over a set period of time. Each repayment amount is fixed and consists of both
principal and interest in order to retire the debt at the set maturity date. The interest rate can be
either fixed or variable, and is dissimilar to different types of lenders (as discussed in Chapter 3.2).
Art-secured term loans are commonly extended for a period between 1 to 5 years, whereas a few
lenders offer tenors up to 10 years. Term loans are widely used by art dealers to raise working
capital, as well as by art foundations and museums to fund operating expenses and long-term
projects. Individuals and corporate collectors can use term loans to fund new acquisitions and
other investments, re-finance existing debts, and generate supplement cash flows.
2. Line of Credit
A line of credit is a loan arrangement with a maximum loan balance for the borrower to
withdraw. The credit balance can be drawn down at any time as long as the borrower does not
exceed the maximum set in the agreement. The advantage of a line of credit over a regular loan
is that interest is charged only on the used amount, which represents cost savings for borrowers
who do not spend the loan amount all at once. Lines of credit are extended to businesses,
75 Skate’s, Art Lenders Directory, 2.
Wang
27
individuals, and special purposes. Interest rates, tenors and repayment schedules are varied based
on the goals of borrowing. For example, a gallery may obtain a line of credit to fund its
participation in international art fairs. The line is to be withdrawn as the expenses occur on the
project, and the outstanding balance will be repaid when the business cycle of art fairs ends. A
general-purpose line of credit may have a more regular repayment schedule, but it all depends on
the use cycle of the loan. Thus, lines of credit may have irregular repayment schedules, and the
tenors may revolve. Interest rates range from 2% to 20% based on the type of lender and the
loan’s purpose.
3. Bridge Loan
A bridge loan is usually a short-term loan that provides temporary cash flow to “bridge the
gap” between times when financing is needed. It serves as interim financing for individuals and
businesses for many different situations. A popular type of bridge loan in art-secured lending is
in the form of an advance, which constitutes a settlement in advance of a transaction. For
example, a collector has consigned a work of art for an auction sale in the short-term future but is
in need of urgent liquidity. An advance is set up to provide him/her with money prior to the sale
of the art and is repaid by the proceeds of the eventual sale. The advance is essentially a bridge
loan and is often referred to by many lenders as bridge-to-sale. Bridge loans are also commonly
used in estate settlements. For example, people who have inherited an art collection often
encounter large estate and other inheritance taxes that are usually due within a short period of
time. Inheritors of modest means can raise money quickly through bridge loans, settling the
estate and then repaying the loan after the art is sold. Bridge loans are typically extended for 6 to
18 months with higher interest rates than other types of art loans.
4. Innovative Art Loans
Inspired by major forms of art loans and their features, many innovative practices in
art-secured financing are tailored to provide services to owners of art. Sale-leaseback is one of
the trendy forms that have emerged in recent years. A sale-leaseback is a transaction in which the
owner of an art collection sells the collection to a specialized financier and then simultaneously
Wang
28
leases the collection back at a yearly rate. This kind of transaction can often finance up to 80% of
the appraised value of the art collection and offer the option to lessees to buy back the collection
at any time during the lease. This form of financial arrangement is best for corporate collectors
and real-estate types of borrowers, because it reduces investment and maintenance costs in
non-core business assets and liberates cash in exchange for executing a lease. Moreover, the
leasing feature favors corporate collectors in particular, because lease payments are subject to
qualify as a tax-deductible expense.
Many other products and services associated with art loans are developed to target various
cross-sectional areas. Some examples include insurance trusts borrowed against the trustee’s art
collection to pay for the trustee’s life insurance policy, and charitable contributions are arranged
through art loans, enabling donors to retain ownership of their art and receive possible tax
deductions. The following table provides a broad view of types of lenders and borrowers
associated with the major types of art loans. The three types of major lenders are discussed in
detail in the next section.
TYPE OF LOAN TYPE OF LENDER TYPE OF BORROWER
Term Loan Banks
Auction Houses
Specialized Lenders
Individuals
Art Dealers
Museums and Foundations
Line of Credit Banks
Specialized Lenders
Individuals
Art Dealers
Trust and Estates
Museums and Foundations
Bridge Loan Auction Houses
Specialized Lenders
Individuals
Art Dealers
Lease-back Agreement Specialized Lenders Corporate Collectors
Hotel/Real Estate Collector
Table 3.1 Lenders and Borrowers for Different Types of Art Loans
Wang
29
3.2 Lending Practitioners
Art-secured financing integrated within banks and auction houses have dominated the
current market by value; however, specialized lenders that practice stand-alone art lending have
emerged rapidly over recent years to acquire market shares by offering diversified services.
Although each type of lender obtains competitiveness from its core function, limitations apply.
In addition, due to opaque finances and nuanced operations, limited information is accessible for
a more comprehensive analysis on lenders’ practices.
Banks
Private banks and wealth management divisions of commercial banks have long
approached art loans as additional commercial loan products for existing clients. Given the lack
of established players in this jointed segment, some private banks and wealth management
offices have employed the niche play to differentiate themselves from other banks and to create a
holistic view of their clients’ wealth. Art loans from private banks and wealth management
offices are normally extended to existing clients who have qualified as private banking clients
and who have placed significant assets under management with the bank. Therefore, art loans
from banks are typically offered as full recourse loans against the general credit of the client,
with a slight premium to the respective client’s interest margin for other secured loans76
. One
exception is Emigrant Savings Bank, a subsidiary of Emigrant Bank, which is a pioneer among
traditional bank lenders in that it offers art loans without requiring clients to have other assets
under the bank’s management. Emigrant Savings Bank also differs from other traditional bank
lenders in product offerings, minimum loan sizes, and loan terms.
Although terms vary between banks and clients, most well-established private banks and
wealth management offices issue loan sizes of $5 million or more77
. Some of the leading
practitioners in this group include Citi Private Bank, US Trust (the Bank of America Private
76 Skate’s, The Global Art Loans Market Report: Type of Art Loans and Other Market Practice (New York: Skate’s Press,
2015): 7. 77 Skate’s, Type of Art Loans, 7.
Wang
30
Wealth Management), Deutsche Bank, J.P. Morgan Private Bank, and Royal Bank of Canada.
Moreover, a few banks such as Citi Private Bank, US Trust, and Privatbank Berlin require the
minimum value of collateralized collection to be $10 million, with each piece being valuable
works of fine art by a well-known artist78
. Because borrowers financing at this scale are most
likely to be the best clients of the banks, interest rates applied on their art loan transactions are
typically based on the London interbank offered rate (LIBOR)79
and the prime rate80,81
.
Renewable lines of credit and fixed term loans with LTV up to 50% are the most common art
loans issued by bank lenders.
It is noteworthy that UBS, a renowned Swiss global financial service, closed its art-lending
business a few years ago due to the complexity in effecting the pledge over art assets. This case
uncovers several obstacles for banks practicing art-secured lending, despite the fact that banks
generally enjoy unrestrained funding and the most credit-worthy borrowers. To be more specific,
banks tend to avoid employing an in-house art specialist team (with the exception of Citi Private
Bank, which established its Art Advisory and Finance Service in 1979), as maintaining an
in-house team is capital intensive and challenging from an expertise perspective. In other words,
the scope of expertise and experience of in-house art advisory services must be comparable in
quality to the financial offerings delivered by the banks, which may induce tremendous cost and
diminish the profitability of an art lending operation. Moreover, most traditional bank lenders
outsource required art-related services separately to support different stages of art-lending
practice while protecting the banks’ interests. Outsourcing further complicates art-lending
practice in private banks and wealth management offices, because risks in valuation and
management of the underlying art assets inevitably increase, whilst loan terms have to stay
favorable to maintain wealthy and credit-worthy clients.
78 Skate’s, Art Lenders Directory, 2. 79 LIBOR is the world’s most widely used benchmark rate that some of the leading banks charge each other for short-term loans.
It serves as the reference rate for debt instruments, including government and corporate bonds, mortgages, student loans, and
credit cards. LIBOR is usually lower than the prime rate in real-time. 80 The prime rate is the interest rate that commercial banks charge their most credit-worthy customers. It is the lowest interest
rate that banks offer commercially. 81 Clare McAndrew and Suzanne Gyorgy, Fine Art and High Finance: Expert Advice on the Economics of Ownership (New York:
Bloomberg Press, 2010): 124.
Wang
31
Auction Houses
As of June 30, 2015, Sotheby’s financial segment is reportedly the world’s largest lender in
art-secured financing, according to accessible information82
. This achievement may come
alongside the overall strong performance of auction businesses in recent years, as auction houses
offer loans in the form of consignment-based advances to link transactions from the agency
segment and the finance segment. These art loans are ancillary to consigned works of art, where
the borrowers are contractually committed to sell the works through the agency segment of the
auction houses in the near future and to pay off the loan with proceeds upon the eventual sale.
The consigner advance loan may have emerged due to the seasonality of the auction market, in
which principal sales are held biannually in the second and fourth quarter of the year. Advance
loans, which lend money to prospective consignors prior to the sale of the art, benefit clients in
need of emergent liquidity83
and the auction houses who see more business for their agency
segment. Auction houses also issue term loans for general purposes as their art-secured financing
segment vertically integrates into their organization. As Sotheby’s self-identifies in its 2015
Annual Report, the auction house’s finance segment is a competitive niche lender in the
art-secured financing market, because “through a combination of its art expertise and skills in
international law and finance, it has the ability to tailor attractive financing packages for clients
who wish to obtain immediate access to liquidity from their art asset.”84
Although the client’s overall credit worthiness remains a factor in considering whether to
issue a loan to a client, the loan terms are determined by the value of the art itself. It is an
outcome of the vertical connection between the two segments within an auction house, where
values appraised by the finance segment for loan purposes are obliged to reflect the presale
estimates by the agency segment when consignor-advanced loans mature or term loans default.
82 Skate’s, The Global Art Loans Market Report: Existing Market Size and Segmentation (New York: Skate’s Press, 2015): 4. 83 This is commonly the case because the supply side of the auction market has mostly been driven by death, debt, and divorce.
See Richard M. Smith, “The Art of Auctions: Christie's CEO Edward Dolman,” Newsweek (February 11, 2010), accessed April 12,
2016, http://www.newsweek.com/art-auctions-christies-ceo-edward-dolman-74999. 84 Sotheby’s, Annual Report 2015 (New York: Sotheby’s, 2016), accessed April 12, 2016,
http://investor.shareholder.com/common/download/download.cfm?companyid=BID&fileid=881557&filekey=17B2C0B6-51EA-
42AF-AE18-6D2DD7C34ADB&filename=2015_annual_report.pdf.
Wang
32
Christie’s and Sotheby’s generally offer an advance rate and LTV between 40% and 50% and
refer to the artwork’s average or low estimates for auction or private sale in deciding the
appraised base value85
. The interest rate charged by auction houses varies from loan to loan.
According to an interview with a senior executive at a major auction house in New York86
,
consignors’ advances are sometimes issued at a 0% interest rate during peak selling seasons to
anchor consignments for the agency segment, and revenues in these cases are only generated
from set-up and termination fees and the seller’s commission upon sale. Normally, art loans
issued by auction houses are priced at prime plus a 2% to 3% premium regardless of loan type87
.
In recent years, some auction houses, such as Sotheby’s, intend to carry a variable market rate of
interest to remain competitive with traditional bank lenders and non-bank specialized lenders
(this type of lender is analyzed in later sections)88
.
Compared to traditional bank lenders and specialized art loan providers, the principal
limitation of auction houses in operating art-secured financing may lie in their source of capital,
or funding facilities, for art loans. Prior to 2014, Sotheby’s predominately funded its finance
segment with operating cash flows from its agency segment. This business model is believed to
restrict the finance segment’s aggregate capability to underwrite art loans and affects the rate of
return of Sotheby’s overall operations. In order to expand financial services without costing
liabilities for its agency segment, Sotheby’s began to debt-finance its loan portfolio by
establishing a dedicated revolving credit89
facility in 201490
. The separate capital structure
allows the finance segment of Sotheby’s to borrow from a line of credit backed by a syndicate of
lenders led by General Electronic Capital, which has funded a substantial portion of pre-existing
loans and will fund further the growth of art lending activities91
. This debt-funding strategy has
85 McAndrew and Gyorgy, “Fine Art,” 123. 86 Angelo K.H. Chan, “Art as Collateral: Seeking Returns from Lending vs. Owning,” PhD Dissertation, New York: Sotheby’s
Institute of Art, accessed April 14, 2016,
http://ezproxy.library.nyu.edu:2048/login?url=http://search.proquest.com/docview/1728065256?accountid=12768. 87 McAndrew and Gyorgy, “Fine Art,” 123. 88 Sotheby’s Annual Report 2015, 6. 89 Revolving credit is a type of loan that allows a company to borrow, repay, and reborrow as needed over the life of the loan
facility or agreement. It is commonly structured without a scheduled repayment, and on an interest-only basis. 90 Sotheby’s Annual Report 2015, 7-8. 91 Katya Kazakina, “Sotheby's Boosts Art-Loan Financing With $1 Billion Line,” Bloomberg.com, June 23, 2015, accessed April
15, 2016, http://www.bloomberg.com/news/articles/2015-06-23/sotheby-s-boosts-art-loan-financing-with-1-billion-line.
Wang
33
proven effective according to Sotheby’s Financial Segment KPIs (Figure 3.1), in which the
Finance Revenue Margin92
increased from 8.1% in 2014 to 8.9% in 201593
. Although funding
structures of all other auction house lenders that are privately held remain inaccessible, it is
reasonable to conclude from Sotheby’s case that in-house funding capital may restrict the
expansion of art-secured lending for auction house lenders, and debt-financing may be a feasible
solution to this limitation.
Figure 3.1 KPIs
Source: Sotheby’s 2015 Annual Report
92 Represents the annualized margin of total client paid and intersegment finance revenues in relation to the Average Loan
Portfolio. 93 Sotheby’s Annual Report 2015, 33-34.
Wang
34
Specialized Lenders
While banks and auction houses favor clients and loans within a very specific and narrow
range, specialized lenders in art-secured financing have emerged in recent years to target
borrowers who seek more diverse options in art loans. As nonbank entities, specialized lenders in
art-secured financing often provide non-recourse loans solely against the appraised value of the
art collateral rather than the credit worthiness of the borrowers. Moreover, loan sizes offered by
this group of lenders are relatively small (in the art market), which range from $100,000 to $5
million compared to thresholds of $1 million in major auction house lenders and $5 million in
leading traditional bank lenders94
. Additionally, since the specialized lenders most likely assess
only the marketability and ownership of the collateral, art loans from these entities are usually
issued in a timely manner. In this regard, specialized lenders are particularly attractive to
borrowers who are rich in valuable art assets but lack in certain requirements from banks and
auction houses, and/or fine art owners who are in need of urgent cash flow. Typical examples
include people who have inherited an art collection and who want to leverage the collection’s
value to settle estate and inheritance taxes, and gallery owners who need additional liens of
working capital to run their businesses.
Similar to other types of lenders, most specialized lenders likewise extend LTVs on art
loans to up to 50% of the appraised value of the collateral95
. However, interest rates offered by
these entities are considerably high compared to those of bank lenders and auction house lenders,
and are drastically diverse within the spectrum of the specialized lenders group. As observed in
Figure 3.2, with recent entrants to this niche market and art loans of similar types and tenors,
Borro charges interest rates at 12% to 30%, whereas Falcon Fine Art spreads the rate from 8% to
10%. Although other factors count, the drive of such high and dissimilar interest rates lies in the
funding structures of the lenders. Specialized lenders have varied sources of funding with
different levels of cost. For example, Falcon Fine Art, a subsidiary of the British Falcon Group,
94 Skate’s, Type of Art Loans, 7. 95 As previously mentioned, specialized lenders commonly use liquidation value rather that fair market value in appraising art
collateral.
Wang
35
which has over 20 years of experience in structured finance and asset-based lending, is funded
directly by British Falcon Group’s balance sheet96
. This explains the up to 10% interest rate by
Falcon Fine Art, where in-house funding is relatively inexpensive. On the other hand, Borro is a
startup financial technology company that promises returns to its 10 venture capital investors
from six rounds of equity financing97
. Borro essentially establishes a leveraging facility that
passes down the high cost of funding to art loan borrowers through interest.
Figure 3.2 Art Loan Lenders by Interest Rate
Source: www.skatepress.com
Another often discussed but inconclusive cause of the exorbitant interest rates involves a
strategy called “loan-to-own”. The strategy is often observed among pawnbrokers, where loans
are structured to induce default in exchange for greater gain from selling the collateral. A study
on secured lending and default risk has proven that a combination of low collateral requirements
and high interest charges discourages the repayment of loans98
. Consequently, specialized
lenders may aim to employ usurious interest rates to encourage default, resulting in an ultimate
gain of at least 50% of the collateral’s value plus substantial interest revenue.
96 Alasdair Whyte, “Falcon Fine Art,” Private Art Investor, October 8, 2014, accessed April 17, 2016,
http://www.privateartinvestor.com/art-finance/falcon-fine-art-we-have-the-money-and-we-are-ambitious-789/. 97 CrunchBase, “Borro,” CrunchBase, April 8, 2016, accessed April 17, 2016,
https://www.crunchbase.com/organization/borro#/entity. 98 A.W.A. Boot, A.V. Thakor, and G.F. Udell, “Secured Lending and Default Risk: Equilibrium Analysis, Policy Implications
and Empirical Results,” The Economic Journal 101(406) (1991): 458.
Wang
36
Chapter 4: Risks and Risk Management
Lenders holding art as collateral confront multifaceted risks from the nature of art and its
market, as well as from the essence of collateralization. As previously mentioned99
, works of art
are heterogeneous, illiquid, and intrinsically valuable. The art market is characterized by market
segmentation, information asymmetry, and behavioral anomalies. As an asset class, fine art poses
the same types of risk as those associated with other types of assets. Collateralization adds
another layer of complication by placing fine art in the credit market.
This paper addresses risks associated with art-secured financing in two classifications:
financial and non-financial. Financial risks include credit issues associated with taking art as
collateral and fluctuations of fine art prices caused by art market volatility. Non-financial risks
include various uncertainties, such as authenticity, storage quality, security, ownership, and the
character of the borrower, among others.
Financial risks associated with fluctuations of fine art prices have been frequently
discussed in studies of taking art as an asset class. Art indices have been constructed in the past
few decades to track and interpret fine art prices. Standard financial risk metrics have also been
applied to lead hedges against several anticipated market volatilities. Therefore, this paper
focuses on credit risk in the financial risk category, as credit risk in regard to art-secured lending
is a relatively underdeveloped area. For the non-financial risk category, this paper emphasizes
the title risk among all others, as the loss induced is financially devastated and physically
irreversible at the same time100
. For both focused risk analyses, this study takes the lender’s
perspective.
99 See 1.2 Literature Review, “Art Risks.” 100 Although any non-financial risk can cause unfavorable losses, sophisticated insurance products are available to either cover
the financial loss or transfer the risk. However, in the case of title risk, the time-consuming legal dispute generates extravagant
legal fees in addition to the loss of ownership of the property, even if the property loss is covered by title insurance.
Wang
37
4.1 Credit Risk
When art assets underlie secured loans, the credit risk of collateralization spontaneously
embeds the risk of art. This section identifies the collateral shortfall caused by the downside risk
of art as one of the core credit risks for art secured lending. It further demonstrates customized
risk quantification models that incorporate “buy-in” records. Lastly, art credit default swaps
(ACDS) are introduced as risk management products for lenders holding art as collateral.
Collateralization and the Default Risk
The use of collateralization in the credit market is fundamentally a response to adverse
selection and moral hazard101
. In a market characterized by contracting parties’ inevitably having
asymmetric information, lenders regularly offer average-priced loan contracts to sort out
borrowers of different risk levels. Borrowers with low risk can more readily find cheaper
alternatives, and will therefore likely shun the offer, while those borrowers who agree to the
terms are evidently higher risk, thus, resulting in adverse selection. Moreover, moral hazard
holds that the borrower’s incentive to repay is tested through his/her willingness to pledge as
much collateral as the lender requires. As a result, collateralization carries inherent risks of
lending, as it secures the adversely chosen loan contracts and serves as an incentive mechanism
of repayment.
Correspondingly, a study on credit control in imperfect markets suggests that lenders ration
credit rather than raise the interest rate in order to incorporate negative adverse selection and
incentive effects102
. To approach the proposed rationing, lenders must quantify two essential
elements of credit risk: the probability of default (PD) and the loss given default (LGD). The PD
estimates the likelihood that a borrower fails to meet his/her/its loan obligations, whereas the
LGD calculates the fraction loss due to default. In the past four decades, these two credit
parameters have been frequently used in credit risk assessment models on collateralizable asset
101 J.E. Stiglitz and A. Weiss, “Credit Rationing in Markets with Imperfect Information,” American Economic Review (1981). 102 J.E. Stiglitz and A. Weiss, “Incentive Effects of Terminations: Applications to the Credit and Labor Markets,” American
Economic Review (1983).
Wang
38
classes103
. In other words, the risk management of collateralization relies on quantifying PD and
LGD associated with the underlying asset class.
A detailed analysis of the PD, which derives from the obligator’s capacity to repay the debt
in accordance with contractual terms104
, is beyond the scope of this paper. The focus of the
analysis of risk and risk management in taking art as collateral is in the assessment of LGD. In
other words, in the context in which borrowers pledge fine art as collateral on loans, credit
default risks occur when the borrowers sell the collateral105
to repay the loans as well as when
sale proceeds are insufficient to cover the loan balance once liquidation occurs. The latter issue,
which is generally referred to as collateral shortfall, drives the current discussion.
Downside Risk and Presale Estimates
Loans are extended as a portion of the appraised value of the collateral. The collateral
shortfall results from a decline in the appraisal-based value of the collateral to the price realized
at the point of sale. Thus, assessing the downside risk in association with the appraisal is crucial
in estimating the collateral shortfall.
The appraised value of an asset is usually achieved through transaction records of similar
assets. In the case of art assets, a method termed the “comparative-market-data-approach” is used
to determine appraised value. This method uses as data the prices realized by recent sales of
works that are similar to the subject property in as many facets (e.g., medium, scale, etc.) as
possible, to arrive at the subject work’s fair market value106
. Furthermore, to appraise the fair
market value for loan purposes, the method generally refers to recent auction prices107
. As such,
the downside risk of the price of art has often been discussed in relation to the functioning of
auction business, and therefore, the formation of presale estimates. Presale estimates are
evaluations of prices that will possibly be achieved at auction. Presale high and low estimates are
103 See 1.2 Literature Review, “The Credit Risk.” 104 Michael LaCour-Little and Yanan Zhang, “Default Probability and Loss Given Default for Home Equity Loans,” Office of the
Comptroller of the Currency, Economics Working Paper 2014-1 (June 2014). 105 Either voluntarily or by force. 106 See Chapter 3, 3.1, Products in Art-secured Financing, for the use and definition of fair market value. 107 Elizabeth von Habsburg, Rachel Goodman, and Claire McAndrew. Art Appraisal: Fine Art and High Finance (New York:
Bloomberg Press, 2010), 42.
Wang
39
intended as ranges within which the winning bid is expected to fall. The low presale estimate is
of particular interest, because it encompasses the opinion of the auction house specialist (who is
the market expert) and, more importantly, the reserve set by the seller. Given the fact that sales
records are created only when the buyer’s offer exceeds the seller’s implicit reserve, McAndrew
and Thompson argue that the empirical sales data for art appraisal contains a positive bias
relative to market demand108
, which ultimately induces the downside risk of art prices. Several
other researchers have also investigated the correlation between the market price of artwork and
contemporaneous presale estimates. Overall, researchers have observed a consistent upward bias
between presale estimates and the long-term performance of artwork in the fine art sector109
,
confirming a systematic correlation between these two indicators of value. Consequently, given
the calculated reserve price at 75% of the presale low estimate110
, the proven correlation has set a
ground for quantification analysis of downside risk based on presale estimates.
Measuring the Downside Risk with Buy-ins
The conclusion from the above is that the quantification of downside risk can be achieved by
measuring systematic deviations of auction sale prices from presale estimates. McAndrew and
Thompson construct a hammer ratio distribution to analyze downside risk. The hammer ratio is
simply the hammer price (the winning bid) over the mean of high and low presale estimates.
The hammer ration is calculated as:
Hammer Ratio (HR) = 𝐻𝑎𝑚𝑚𝑒𝑟 𝑃𝑟𝑖𝑐𝑒 (𝑃)
𝑀𝑒𝑎𝑛 𝑜𝑓 𝐻𝑖𝑔ℎ 𝑎𝑛𝑑 𝐿𝑜𝑤 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒 (𝑀)
This equation examines the proportion of the achieved market price to the average expected price.
The calculated value reveals whether a deviation (either upside or downside) exists, as well as the
size of the possible deviation. For example, a hammer price (P) of $1.5 million with a mean high
and low estimate (M) of $2 million will result a hammer ratio (HR) of 0.75. In this case, the 0.75
HR, which is less than 1.00, indicates a downside deviation of 0.25, meaning the hammer price is
108 McAndrew and Thompson, “Collareral Value,” 589-607. 109 See 1.2 Literature Review, “Presale Estimates and Downside Risk.” 110 See 1.2 Literature Review, “Presale Estimates and Downside Risk.”
Wang
40
25% less than the expected price of the artwork. Therefore, a distribution can be constructed to
observe the tendency of the “price error” by incorporating the data from a selected group of
auction records and their corresponding presale estimates. Figure 4.1 shows an example of such a
distribution derived from a sample of French Impressionist paintings over the period of January
1985 to December 2001.
Figure 4.1 Hammer Ratio for French Impressionist Paintings
Source: McAndrew and Thompson (2007)
As shown, the downside deviation is captured in the range of 0.00 -1.00 on the horizontal axis (or
the left tail of the distribution), as it includes transactions in which prices realized are lower than
expected. As such, lenders holding art as collateral are able to develop downside risk metrics to
estimate the size of the collateral shortfall of the underlying art/art collection over a given period of
time.
For the purpose of art-secured lending, McAndrew, Smith, and Thompson further argue that
the analysis of hammer ratio distribution is insufficient in measuring downside risk. They suggest
that a more accurate distribution should consider the phenomenon of “buy-ins” at auction. The
buy-ins are works that fail to attain the seller’s reserve at auctions and are therefore bought in
house by the auctioneers. The inclusion of buy-ins is critical in evaluating downside risk, because
the foremost risk of an intended sale is the risk of failing to sell. In other words, an artwork, once
Wang
41
purchased at/above reserve price, is not guaranteed to exceed the same reserve in a later sale.
Consequently, the data omitting buy-ins contains a selection bias, in which a time series of
hammer price, or successful sale price, understates the downside risk of lending against art.
Therefore, by incorporating buy-ins, a new distribution is constructed to observe the relationship
between presale estimates and potential sale price. Building on the previous example with the
buy-in rate of 28% of the sale volume and 16% of the sale value111
, the new distribution is
illustrated in Figure 4.2.
Figure 4.2 Hammer Spread and Fitted Lognormal, Recognizing Buy-ins
Source: McAndrew and Thompson (2007)
As observed, the new distribution is superimposed over the original distribution with a much larger
left tail. It suggests that in addition to artworks that achieve less than expected, artworks that do
not sell at auction also present downside risk. As a result, a greater overall downside risk is
revealed in the distribution.
As demonstrated above, the modified hammer ratio distribution with consideration of
buy-ins enables a more accurate assessment of downside risk. Lenders and financiers can therefore
integrate this tool into a fuller scale financial model, achieving anticipation and quantification of
the collateral shortfall. Furthermore, given the quantifiability of the credit risk, derivative products
are designed for lenders to practice risk management to a fuller extent.
111 These values are from the original study in McAndrew and Thompson, “Collareral Value,” 589-607.
Wang
42
Art Credit Default Swaps
The present Basel Accords—agreements set by the Basel Committee on Bank Supervision
(BCBS)112
—require banks to adequately estimate and report all risks associated with changes in
asset price113
. Given the fact that monitoring the risk of art assets is challenging, bank lenders of
art loans are unwilling to hold the risk on their balance sheet and therefore use art credit default
swaps (ACDS) to transfer the risk to a third party. Other types of art loan lenders are also
involved in risk management practice depending on the details of the art loan.
An ACDS is a particular type of swap first proposed by Campbell and Wiehenkamp114
. In
the credit market, a swap is a contract between two or more parties that the buyer of the swap
makes payments to the seller until the contract is terminated by a credit event. In return, the
seller provides monetary protection on the par value115
of a specified reference asset if credit
events occur. Such protection may be a set termination price and/or all interest payments that
would have been made by the buyer. In an ACDS, the art loan lender is the protection buyer and
the protection seller is someone with an interest in buying the reference asset, where the
specified reference asset is the artwork or the art collection held as collateral on the loan. A
credit event in an ACDS is most likely to be that the borrower defaults on the art loan with a
collateral shortfall. Upon occurrence of the credit event, the swap contract is terminated and the
third party (the protection seller) is obliged to pay a settlement to the lender (the protection
buyer). The settlement in an ACDS contains at least an exchange of collateralized art assets for a
predetermined price specified in the contract plus the associated collateral shortfall.
For art loan lenders, ACDSs encourage art collateralization by fully transferring the
unwanted credit risk exposure. For the counterparties in ACDSs, the derivative contracts enable
112 The Basel Committee on Bank Supervision is the primary global standard-setter for the prudential regulation of banks and
provides a forum for cooperation on banking supervision.
Bank for International Settlements, “About the Basel Committee,” September 30, 2015, accessed April 29, 2016,
http://www.bis.org/bcbs/about.htm. 113 J.P. Morgan and National Association of Pension Funds Limited, Derivatives and Risk Management Made Simple (London:
National Association of Pension Funds Limited, 2013). 114 Rachel A.J. Campbell and Christian Wiehenkamp. “Chapter 4: Credit Default Swaps and an Application to the Art Market: A
Proposal,” Credit Risk: Models, Derivatives, and Management (Boca Raton: CRC Press, 2008): 53-66. 115 Par value means stated value or face value.
Wang
43
the probability of acquiring valuable artwork at a fraction of the cost in exchange for a low
premium. Some of the counterparties include art investment funds, art museums, speculative
investors in art, and individual/corporate art collectors.
4.2 The Title Risk
Due to the lack of transactional standards and transparency in art dealing, ownership
defects have evolved in the art world and are transmitted to art collateralization. Both buyers and
sellers of art tend to conceal their information as a means of maximizing their own benefits116
.
Therefore, transaction records are often discrete and incomplete, which makes it nearly
impossible to demonstrate an unbroken chain of title to works of art in absolute terms.
Title insurers subsequently target market incompetence, providing insurance guarantees on the
fair market value of the object plus defense costs. However, such title insurance often functions
inefficiently for pervasive title dispute in art-secured lending that involves multiple agents on
one or both sides of a transaction. As a result, understanding the legal provisions that protect
lenders’ interests best help manages the title risk.
As Bloom117
explains and the Michal Cohen case118
suggests, the informality of art
transactions can cause uncertainty as to whether a seller or a dealer has sufficient rights to pledge
a work of art as collateral for a loan. Nicyper and Gipson119
and Medelyan120
have also
examined questions concerning lenders’ rights vis-à-vis works of art. The Uniform Commercial
Code (UCC), which is the legal provision most often applied to commercial transactions
(including art), assures that determinations of who, among lenders, buyers, sellers, and
116 Buyers may want to minimize the purchasing price through disclosing their purchasing power, whilst sellers may conceal
their reasons of deaccession, which are often distressed, to maximize the selling price. 117 Bloom, “Buyers Beware: Protecting Against The Risk of Purchasing Stolen Art,” Entertainment, Arts and Sports Law
Journal 13(2) (Summer 2002). 118 T. Robertson, “Theft Case Threatens the Art of the Handshake,” Boston Globe, May 22, 2003. 119 Nicyper and Gipson, “Rights of Lenders Accepting Works of Art as Collateral,” Entertainment, Arts and Sports Law Journal
17(1) (Spring 2006). 120 Valerie Medelyan, “The Art of a Loan: When the Loan Sharks Meet Damien Hirst’s ‘$12-Million Stuffed Shark,’” Pace Law
Review 35 (2014): 643.
Wang
44
consignors, has superior rights in works of art will be processed with analysis of various
provisions.
This analysis considers situations in which “person A” (who might be the owner of a work
of art and who intends to sell it) transfers the property (or the work of art) to “person B” (who
might be a dealer or other intermediary who facilitates transactions of the work of art), and
“person B” transfers the work of art to “person C” (who might be a lender accepting the art as
collateral or a buyer who then pledges the art as collateral).
The Uniform Commercial Code
The UCC is a comprehensive collection of codified and standardized laws developed
through the joint efforts of legal scholars from the National Conference of Commissioners on
Uniform State Laws, the American Law Institute, and the American Bar Association. It
harmonizes the law of sales and other commercial transactions in all 50 states, the District of
Columbia, and the territories of the United States of America. More specifically, when there are
two consecutive transfers of a good, the UCC set rules determining the respective rights of the
parties.
In cases in which works of art are pledged as collateral for loans, UCC provisions elucidate
sales of goods, rights of secured lenders, and rights arising out of consignments to dealers. UCC
sections 9-319, 2-326, and 2-403 set out the rights of lenders who accept works of art as
collateral. Section 9-319 may apply when the transfer from the owner to the dealer is a
consignment, and sections 2-326 or 2-403 may apply when a transfer is confirmed to be a sale or
for an intended sale. If the works of art are delivered to a dealer for “sale or return121
”, or if the
transfer is an entrustment, ensuing resolutions will require careful analysis of multiple provisions
from UCC Article 9 and UCC Article 2.
121 Refers to a sale to a merchant where the merchant wishes to return the goods he/she cannot sell.
Wang
45
UCC Article 9 and Section 9-319 Consignment Provisions
UCC Article 9 provides rules governing transactions, regardless of their form, that involve
a debt with a creditor’s interest (or the “security interest”) in the debtor’s personal property122
.
Under Article 9, the creditor may repossess and sell the property (generally referred to as
“collateral”) to fulfill the debt if the debtor defaults. To be more specific, provisions from section
9-319 particularly concern a secured creditor’s rights in relation to consigned goods.
UCC Section 9-319 applies exclusively to creditors of, and people who purchase from, a
consignee. As previously mentioned, the provisions address situations in which “person A” (who
might be the owner of a work of art and who intends to sell it) transfers the property (or the work
of art) to “person B” (who might be a dealer or other intermediary who facilitates transactions of
the work of art), and “person B” transfers the work of art subsequently to “person C” (who might
be a lender accepting the art as collateral or a buyer who then pledges the art as collateral). In the
analysis of section 9-319, the primary determination is whether the transfer from “person A” to
“person B” is a “consignment”. This situation is the premise upon which to apply section 9-319,
and three criteria need to be affirmed:
a. The Nature of the Transaction
UCC section 9-102(a)(20) defines that a “consignment” is most importantly a transaction in
which “person A” delivers property to “person B” “for the purpose of sale”123
. It indicates
that person B will obtain section 9-319 rights to the property only if the transfer is made to
person B with both person A and person B understanding that the property will be sold.
Additionally, the nature of the transaction must not “create a security interest that secures an
obligation.”124
This means that, in the situation of an art transaction, if the purpose of the
transfer from person A to person B is to pledge the work of art as security or collateral for a
loan, then the transaction is not considered a “consignment” under UCC Article 9.
b. “Merchant” Requirements
122 UCC§ 9-109(a)(1) (2010) 123 UCC§ 9-102(a)(20) (2010) 124 UCC§ 9-102(a)(20)(D) (2010)
Wang
46
In order to establish a “consignment”, UCC section 9-102 also requires person B, who is
receiving the property (e.g., the work of art), to be a “merchant” who (i) deals in goods of the
kind being transferred under a different name from that of person A; (ii) is not an auctioneer;
and (iii) is not generally known by his/her creditors to be substantially engaged in selling the
goods of others125
. In the case of art transactions, the “merchant” might be someone who
buys, sells, or otherwise deals in works of art with the above conditions fulfilled.
c. Type of Goods Requirements
The establishment of “consignment” under Article 9 further requires that the transferred
property must not be “consumer goods” immediately before delivery126
, where “consumer
goods” is defined in Article 9 as “goods that are used or bought for use primarily for personal,
family, or household purposes.”127
In addition, the aggregate value of the transferred
property is required to be at least $1,000 at the time of delivery.128
If the above criteria are satisfied, the transfer from person A to person B is a qualified
“consignment” under UCC Article 9. The provisions of section 9-319 can be applied to
determine whether person A (e.g., a consignor) or person C (e.g., a creditor to consignee)
has a superior interest in the transferred property (e.g., a consigned property).
The determination under section 9-319 is dependent upon which party has perfected his
security interest. Perfection of a security interest is processed by either (i) possession of the
property or (ii) filing a UCC financing statement to notify the secured party’s interest in the
property. Between which, the second instrument is especially principal for consignors to protect
their interests in transferred property, because the overall plan of the UCC generally favors good
faith purchasers and encourages notice filing of security interests. Courts explain that a consignor
who has not been paid for the property he/she transferred to another for sale “could always have
availed itself of greater protection” by filing a UCC Financing Statement and thereby recording
125 UCC§ 9-102(a)(20)(A) (2010) 126 UCC§ 9-102(a)(20)(C) (2010) 127 UCC§ 9-102(a)(23) (2010) 128 UCC§ 9-102(a)(20)(B) (2010)
Wang
47
its interest129
. Therefore, courts in general reject claims of ownership by consignors who have
failed to file a UCC financing statement due to a protection to the debtor’s creditors who may be
misled by the discrete reservation of title to the consigned property.
UCC Article 2 and the Applicability of Section 2-326 and 2-403
If the Article 9 consignment definition is not satisfied, sections 326 and 403 under UCC
Article 2 may provide alternative legal theories for creditors in transactions involving loans for
which works of art are accepted as collateral. Section 2-326 supplements Article 9’s definition of
“consignments” by applying it to “sale or return” transactions in which the goods are “delivered
primarily for resale” to another party and “may be returned by the buyer even though they
conform to the contract,”130
In other words, in a “sale or return” transaction, an owner (person A)
delivers his/her artwork to person B (i.e., the dealer) with a primary intent to let person B resell
the artwork to a third party. As such, a “sale or return” transaction is likely, but not necessary, to
qualify as a UCC Article 9 consignment. Furthermore, Section 2-326 rules in favor of the
creditor to person B (i.e., person C) when the transferred property is sold in a “sale or return”
transaction, while person B holds the property in possession. Therefore, when the “consignment”
criteria in UCC 9-102 and 9-319 cannot be met, section 2-326 can serve as an alternative for
upholding creditors’ rights in consigned artworks.
Like section 2-326, section 2-403 favors creditors over sellers when resolving competing
claims for title. However, not all subsections under section 2-403 apply to lenders who receive
works of art as collateral. Subsection (2) of section 2-403 provides some coverage for situations
in which the end recipient (person C) of the artwork is a code-defined “buyer in the ordinary
course of business.” A “buyer in the ordinary course of business” is defined in the UCC Code as
a person who buys goods from a person who is in the business of selling goods of that kind131
.
The Code also requires the buyer be in good faith without knowing that the sale violates the
129 Mitsubushi Consumer Elecs. AM., Inc. v. Steinberg’s, Inc. (In re Steinberg’s, Inc.) 266 B. R. 8, 11 (Bankr. S. D. Ohio 1998) 130 UCC§ 2-326(1)(b) (2002) 131 UCC§ 1-201(9)(2002)
Wang
48
rights of another person in the goods. Additionally, the definition explicitly excludes buyers who
acquire the goods as a security for a financial debt132
. As a result, section 2-403(2) is not
applicable to lenders. Therefore, cases encompassing competing ownership claims when works
of art are taken as collateral generally consult UCC section 2-403(1).
Section 2-403(1) concerns two critical criteria when providing legal theories in discussion
of good title. The provision requires that (i) a seller (person A) delivers the work of art to a
dealer (person B), referred to as the “transaction of purchase,” and (ii) the dealer is able to
transfer a good title to a buyer or a lender (person C) who is qualified as a “good faith purchaser
for value.” Consequently, to determine whether a lender (person C) has superior rights in title
against an unpaid seller (person A), a two-phase analysis needs to be conducted.
a. The “Transaction of Purchase” Criterion
Under section 2-403(1), the seller-to-dealer transaction need not be a direct sale and
purchase to constitute a “transaction of purchase.” The UCC broadly includes any “taking by
sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue,
gift, or any other voluntary transaction creating an interest in property” in the definition of
“purchase.”133
Moreover, the dealer (person B) receives the ability to transfer good title to a
good faith purchaser, even if the dealer acquired the art through a dishonored paycheck134
or
false or fraudulent pretenses.135
The determination of a “transaction of purchase” is based on i) whether the transfer from
person A to person B is voluntary and ii) if the artwork is delivered for the purpose of sale.
As a result, involuntary transfer such as theft is not a “transaction of purchase”, which
therefore does not grant person B legal rights to transfer the title of artworks. Similarly, if the
artwork is delivered to person B for storage, restoration, or framing, the transaction is not
considered a “transaction of purchase,” because the transfer is not associated with purchase
and sale.
132 UCC§ 1-201(9)(2002) 133 UCC§ 1-201(29)(2001) 134 UCC§ 2-403(1)(b)(2002) 135 UCC§ 2-403(1)(d)(2002)
Wang
49
b. The “Good Faith Purchaser for Value” Criterion
UCC section 2-403(1) considers buyers who do not know of, or who are not knowingly
involved in, an improper scheme prior to acquiring the work of art from the seller, a good
faith purchaser. The UCC also indicates a “good faith136
” buyer or secured creditor should be
able to identify obvious red flags in transactions involving dishonesty, even if the buyer does
not have direct knowledge.
When both of the above criteria are satisfied, a resolution on competing ownership claims
that refers to UCC section 2-403(1) generally supports innocent purchasers over unpaid buyers.
Similar to disputes in UCC Article 9, the judgment “rests on the premise that it is cheaper for an
owner to take precautious against to a defrauder than it is for a purchaser to research the chain of
title of every good he purchases,”137
as one court explained.
Chapter 5: Conclusion
Art collateralization is becoming an inevitability given the current market climate. There
are many good reasons for considering art as a new asset class aside from its aesthetic returns.
Art is attractive from a financial point of view as a means to hedge currency inflation over the
long run. In addition, art offers diversification to the investment portfolio, as it shows low
correlation with other investable assets such as stocks and bonds.
The steadily strong art market has escalated the price of fine art and inspired art
financialization. Many external forces such as globalization, online databases, and the
accumulation of wealth contribute to the growth of the fine art market, and push forward the
emergence of many initiatives that seek to securitize artwork, including taking art as collateral.
As HNWIs show a growing interest in buying art with an investment view, private banks
and wealth managers incorporate the concept of collectible assets into the overall asset
136 UCC§ 1-201(20)(2001) (defining “good faith” as “honesty in fact and the observance of reasonable commercial standards of
fair dealing.”) 137 Welch v. Cayton, 183 W. Va. 252, 257, 395 S.E.2d 496, 501(1990).
Wang
50
management strategy, realizing the liquidation of art assets, tax-saving, and sophisticated estate
planning. Auction houses take advantage of their agency sectors, integrating art collateralization
as part of the vertical business channel in which art loans and art sales are able to mutually
benefit each other. Lenders specializing in art loans are also evolving, penetrating the niche
market by providing loans with low barriers and introducing innovative loan products.
Rigorous financial disciplines with modifications for art assets enable the quantifiability
and management of the downside risk associated with art-secured lending. Financial engineering
creates derivative products to improve market efficiency by transferring the risk of lowering
interest paid for loans taking art as collateral. When title disputes present, the UCC favors
lenders in general. As a protection to lenders who may be misled by the discrete reservation of
title to the consigned property, the code theoretically rejects claims of ownership by consignors
who fail to file a UCC Financing Statement.
This paper explores the merits and hedgeable risks involved in art-secured financing,
demonstrating viability and encouraging the practice of art loans. However, the current trend of
financialization of the art market, which is characterized by a lack of transactional standards and
transparency, ultimately impacts the liability of all market participants, including art loan
lenders, collectors (borrowers), and advisory intermediaries. Therefore, it is imperative to
address more uncertainties in the niche market of art-secured financing. This paper leaves these
questions for future research.
Wang
51
BIBLIOGRAPHY
Altman, E. “Financial Ratios, Discriminant Analysis and the Prediction of Corporate
Bankruptcy.” Journal of Finance 23 (4), 589-609.
Anderson, Robert C. “Paintings as an Investment.” Economic Inquiry: 13-26.
Ashenfelter, O. and Graddy, K. “Auctions and the Price of Art.” Journal of Economic Literature
16 (2003): 763-786.
Ashenfelter, O., Graddy, K., and Stevens, M. “A Study of Sales Rates and Prices in
Impressionist and Contemporary Art Auctions.” University of Oxford Working Paper
(2003): 1-28.
Ashenfelter, O. “How Auctions Work for Wine and Art.” The Journal of Economic Perspectives
3(3) (Summer, 1989): 23-36.
Bank for International Settlements. “About the Basel Committee.” September 30, 2015. Accessed
April 29, 2016. http://www.bis.org/bcbs/about.htm.
Becker, H.S. Art Worlds. Berkley: University of California Press, 1982.
Beaver, W. “Financial Ratios as Predictors of Failure.” Journal of Accounting Research 5
(Suppl.) (1966): 71-111.
Beggs, A. and Graddy, K. “Declining Values and the Afternoon Effect: Evidence from Art
Auctions.” The RAND Journal of Economics 28(3) (1997): 544-65.
Bloom, “Buyers Beware: Protecting Against The Risk of Purchasing Stolen Art.” Entertainment,
Arts and Sports Law Journal 13(2) (Summer 2002).
Bocart, Fabian Y. R. P. and Hafner, Christian M. “Volatility of Price Indices for Heterogeneous
Goods with Applications to the Fine Art Market.” Journal of Applied Econometrics 30(2)
(2013): 291-312. Accessed April 4, 2016. doi:10.1002/jae.2355.
Bongard, W. “Kunst Kompass.” Capitol.
Bowness, A. The Conditions of Success. London: Thames & Hudson, 1989.
Boot, A.W.A., Thakor, A.V., and Udell, G.F. “Secured Lending and Default Risk: Equilibrium
Analysis, Policy Implications and Empirical Results.” The Economic Journal 101(406)
(1991): 458.
Cap Gemini and RBC Wealth Management. “World Wealth Report 2015.” Accessed March 28,
2016.
Wang
52
http://www.luxesf.com/wp-content/uploads/2015/08/World_Wealth_Report_2015_Web.pd
f.
Campbell, Rachel A.J. and Wiehenkamp, Christian. “Chapter 4: Credit Default Swaps and an
Application to the Art Market: A Proposal.” Credit Risk: Models, Derivatives, and
Management. Boca Raton: CRC Press, 2008: 53-66.
Chan, Angelo K.H. “Art as Collateral: Seeking Returns from Lending vs. Owning,” PhD
Dissertation. New York: Sotheby’s Institute of Art. Accessed April 14, 2016.
http://ezproxy.library.nyu.edu:2048/login?url=http://search.proquest.com/docview/172806
5256?accountid=12768.
Coffman, Richard. “Art Investment and Asymmetrical Information.” Journal of Cultural
Economics: 1-24.
Collins, A., Scorcu, A.E., and Zanola, R. “Sample Selection Bias and Time Instability of Hedonic
Art Price Indexes,” Quarderi – Working Papers, DSE 610 (2007): 1-19.
Crouhy, M. Galai, D., and Mark, R. “A Comparative Analysis of Current Credit Risk Models.”
Journal of Finance 24 (2000): 59-117.
CrunchBase. “Borro,” CrunchBase. April 8, 2016. Accessed April 17, 2016.
https://www.crunchbase.com/organization/borro#/entity.
Deloitte and ArtTactic. “Art & Finance Report.” Accessed April 4, 2016.
http://www2.deloitte.com/content/dam/Deloitte/at/Documents/Tax/art-finance-report.p
df.
de la barre, M., Docclo, S., and Ginsburgh, V. “Returns of impressionist, modern and
contemporary European paintings 1962-1991.” Annales d’economie et de Statistique, 35
(1994): 143-181.
Didier, Christopher G. “Picasso, St. Guadens or Lafite: Does Passion Have a Place in Wealth
Management?” Baird Wealth Management (November 2009): 3. Accessed April 4, 2016.
Ekelund, Robert B, Ressler, Rand W., and Watson, John Keith. ““Estimates, Bias and ‘No Sales’
in Latin-American Art Auctions, 1977-1996.” Journal of Cultural Economics 22(1) (1998):
33-42.
Findlay, Michael. The Value of Art: Money, Power, Beauty. Munich: Prestel, 2004.
Gerlis, Melanie. Art as an Investment? A Survey of Comparative Assets. London: Lund
Humphries, 2014.
Wang
53
Goetzmann, William N. “Accounting for Taste: Art and the Financial Markets over Three
Centuries.” The American Economic Review 83(5) (1993): 1370-76.
Goetzmann, W. and Spiegel, M. “Private Value Components and the Winner’s Curse in an Art
Index.” European Economic Review 39: 549-55.
Hagstrom, R.G. “The Essential Buffett: Timeless Principles for the New Economy.” Choice
Reviews Online, (2001).
Hodgson, D. J. and Vorkink, K. P. “Asset Pricing Theory and the Valuation of Canadian Paintings.”
Canadian Journal of Economics/Revue canadienne d'économique, 37 (2004): 629–655.
Accessed April 4, 2016 doi: 10.1111/j.0008-4085.2003.00241.x
IRS. “Determining the Value of Donated Property.” Publication 561. April 2007. Accessed April
9, 2016. https://www.irs.gov/publications/p561/ar02.html#d0e139.
J. Frye, “Collateral Damage.” In Credit Risk Modeling: The Cutting-edge Collection: Technical
Papers Published in Risk 1999-2003, edited by M. Gordy, 115-120. London: Risk Books,
2003.
J. P. Morgan and National Association of Pension Funds Limited. Derivatives and Risk
Management Made Simple. London: National Association of Pension Funds Limited, 2013.
Kao, D. “Estimating and Pricing Credit Risk: An Overview.” Financial Analysts Journal 56(4)
(2000): 50-66.
Kazakina, K. “Sotheby's Boosts Art-Loan Financing With $1 Billion Line.” Bloomberg.com. June
23, 2015. Accessed April 15, 2016.
http://www.bloomberg.com/news/articles/2015-06-23/sotheby-s-boosts-art-loan-financing-
with-1-billion-line.
Kent, F.W. et al. eds. Patronage, Art, and Society in Renaissance Italy. Oxford: Oxford
University Press, 1987.
LaCour-Little, Michael and Zhang, Yanan. “Default Probability and Loss Given Default for Home
Equity Loans.” Office of the Comptroller of the Currency, Economics Working Paper
2014-1. (June 2014).
Markowitz, H. “Portfolio Selection.” The Journal of Finance 7(1) (1952): 77-91.
McAndrew, C. and Thompson, R. “The Collateral Value of Fine Art.” Journal of Banking &
Finance 31(3) (2007): 589-607. Accessed April 4, 2016.
doi:10.1016/j.jbankfin.2006.01.012.
McAndrew, C. and Thompson, R. Pre-sale Estimates, Risk Analysis, and the Investment Quality of
Fine Art. Unpublished Manuscript (2003).
Wang
54
McAndrew, C. and Thompson, R. “Are Presale Art Auction Estimates Unbiased? Some
Affirming Evidence.” Southern Methodist University Working Paper (2004): 1-31.
McAndrew, C. “Key Findings and Summary.” TEFAF Maastricht Art Market Report (2016): 15.
European Fine Art Foundation, Accessed April 4, 2016.
McAndrew, C. “Summary of Key Findings.” TEFAF Maastricht Art Market Report (2015): 21.
European Fine Art Foundation, Accessed April 4, 2016.
McAndrew, C. and Gyorgy, S. Fine Art and High Finance: Expert Advice on the Economics of
Ownership. New York: Bloomberg Press, 2010.
Medelyan, V. “The Art of a Loan: When the Loan Sharks Meet Damien Hirst’s ‘$12-Million
Stuffed Shark.’” Pace Law Review 35 (2014): 643.
Mei, Jianping and Moses, Michael. “Art as an Investment and the Underperformance of
Masterpieces.” The American Economic Review 92 (5) (2002): 1656-68.
Mei, Jianping and Moses, Michael. Are Investors Credulous? Some Preliminary Evidence from
Art Auction. Unpublished Manuscript (2002).
Medley, Margaret. The Chinese Potter: A Practical History of Chinese Ceramics. Oxford:
Phaidon Press, 1976.
Merton, R. “On the Pricing of Corporate Debt: The Risk Structure of Interest Rate.” Journal of
Finance 29 (1974): 449-470.
Milgrom, Paul R. and Weber, Robert J. “A Theory of Auctions and Competitive Bidding.”
Econometrica 50(5) (1982): 1089–1122. Accessed April 4, 2016. doi:10.2307/1911865.
Mitsubishi Consumer Electrics. AM., Inc. v. Steinberg’s, Inc. (In re Steinberg’s, Inc.) 266 B. R.
8, 11 (Bankr. S. D. Ohio 1998)
Moulin, R. The French Art Market: A Sociological View. New Brunswick, NJ: Rutgers, 1987.
Nicyper, and Gipson, First name. “Rights of Lenders Accepting Works of Art as Collateral.”
Entertainment, Arts and Sports Law Journal 17(1) (Spring 2006).
Parks, Tim. Medici Money: Banking, Metaphysics, and Art in Fifteenth-century Florence. New
York: W.W. Norton, 2005.
Pesando, James E. “Art as an Investment: The Market for Modern Prints.” American Economic
Review 83(5) (1993): 1075-1089.
Wang
55
Renneboog, L. and Spaenjers, C. “Buying Beauty: On Prices and Returns in the Art Market.”
Management Science 59(1) (2013): 36-53. Accessed April 4, 2016.
doi:10.1287/mnsc.1120.1580
Robertson, Iain. “The Current and Future Value of Art.” In Understanding International Art
Markets and Management, edited by Iain Robertson, 228. London: Routledge, 2005.
Robertson, T. “Theft Case Threatens the Art of the Handshake.” Boston Globe. May 22, 2003.
Shleifer, Andrei. “Inefficient Markets: An Introduction to Behavioral Finance.” Journal of
Institutional and Theoretical Economics, (1999): 369-374.
Skatershchikov, Sergei. Skate's Art Investment Handbook: The Comprehensive Guide to Investing
in the Global Art and Art Services Market. New York: McGraw-Hill, 2006.
Skate’s. “Skate’s Art Fairs Report, Summer 2015.” Accessed March 27, 2016.
http://www.skatepress.com/art-market-reports/skates-art-fairs-report-summer-2015.
Skate’s. The Global Art Loans Market Report: Art Lenders Directory. New York: Skate’s Press,
2015.
Skate’s. “Skate’s Annual Art Investment Report 2015.” Accessed April 4, 2016.
Skate’s. “Skate’s Report on Global Art-loan Market.” Accessed April 4, 2016.
http://www.skatepress.com/wp-content/uploads/2015/08/Skates_Global_Art-Loans_Re
port_July_2015.pdf.
Skate’s. The Global Art Loans Market Report: Type of Art Loans and Other Market Practice.
New York: Skate’s Press, 2015.
Skate’s. The Global Art Loans Market Report: Existing Market Size and Segmentation. New York:
Skate’s Press, 2015.
Smith, Richard M. “The Art of Auctions: Christie's CEO Edward Dolman.” Newsweek, February
11, 2010. Accessed April 12, 2016.
http://www.newsweek.com/art-auctions-christies-ceo-edward-dolman-74999.
Sotheby’s. Annual Report 2015. New York: Sotheby’s, 2016. Accessed April 12, 2016.
http://investor.shareholder.com/common/download/download.cfm?companyid=BID&fileid
=881557&filekey=17B2C0B6-51EA-42AF-AE18-6D2DD7C34ADB&filename=2015_ann
ual_report.pdf.
Stein, John P. “The Monetary Appreciation of Paintings.” Journal of Political Economy: 1021.
Stiglitz, J.E. and Weiss, A. “Credit Rationing in Markets with Imperfect Information.” American
Economic Review (1981).
Wang
56
Stiglitz, J.E. and Weiss, A. “Incentive Effects of Terminations: Applications to the Credit and
Labor Markets.” American Economic Review (1983)
Timiraos, Nick and Androitis, Annamaria. “Mortgage Lenders Ease Rules for Home Buyers in
Hunt for Business.” Wall Street Journal. April 18, 2014. Accessed April 8, 2016.
http://www.wsj.com/news/articles/SB10001424052702304626304579509463522046346?
mod=WSJ_hp_LEFTWhatsNewsCollection.
UCC§ 9-109 (2010)
UCC§ 9-102 (2010)
UCC§ 2-326 (2002)
UCC§ 1-201 (2002)
UCC§ 2-403 (2002)
von Habsburg, E., Goodman, R., and McAndrew, C. Art Appraisal: Fine Art and High Finance.
New York: Bloomberg Press, 2010.
Welch v. Cayton, 183 W. Va. 252, 257, 395 S.E.2d 496, 501(1990).
Whyte, Alasdair. “Falcon Fine Art,” Private Art Investor. October 8, 2014. Accessed April 17,
2016.
http://www.privateartinvestor.com/art-finance/falcon-fine-art-we-have-the-money-and-we-
are-ambitious-789/.