Guest Post: Beware of the Darker Side of Art Financing

Posted on August 9, 2012


This guest post was submitted by Karl Stockton, writer for Sterns & Walker, an aviation law firm. Seems like he’s arguing that the standard risks of financing are exacerbated by the relative uncertainty of art valuation. What do you think?

You walk into a gallery or auction house. You eye a certain piece; consider the reputation of the artist, the age of the painting, the feeling you get in the presence of the artwork and this begins your list of assessments before you decide to have this piece of work, even if you need to resort to some art financing to get it.

1. Is Art Financing like Car Financing or House Financing?

When financing a car or a home, there is a definite formula to assess the value of your purchase and specific rules to execute the loan. Art financing is a little more creative than that.

Investors and art dealers who believe they have a good eye when it comes to marketable artwork, will attend advanced showings at galleries and auction houses to procure valuable pieces of art at low prices. You may buy an item simply because you like it, investors will purchase the item for the resale value.

At these events there are persons who can facilitate an art purchase to get the  ‘bargain rate‘  for you on the spot. If the borrower sells the piece he purchased at auction the next day, there will be a profit.

This high risk borrowing is one form of art financing that is only made available to select borrowers as a source for them to acquire their investment piece or borrow against their current art collection.

2. If the buyer gets what they want, what is the Darker Side of Art Financing?

There should be a reminder to be careful what you ask for when getting involved with art financing. Investors who take out loans into the thousands of dollars speculating on the value of a piece of art, want to make a big profit. The dark side is when these investors become entangled in heavy handed collection practices.

When their purchase does not turn the sizable profit anticipated, some borrowers find they were only asking for trouble by using art financing.

3. Isn’t art financing when some rich benefactor sponsors a starving artist?

Another form of art financing is when an institution directly supports the artist with a virtual blank check loan. This is not the benevolent patron of the arts who shares personal wealth out of sheer kindness.

Art financing today is a business of making loans to an artist, based on future work. It is a calculated risk where the lender is highly favored in a default.

Art financing creates a private banking system that opens the door for questionable terms for short term financing, surreptitious deals to acquire funds quickly and some shady practices that create an atmosphere that is rife with art crimes and ruins the good reputation of honest lending institutions.

4. Isn’t it a good idea to invest in art even if I have to borrow the money?

Acquiring artwork through art financing rather than paying for the piece outright can be more risky and more expensive than almost any other type of investments. For artists to borrow money against their future creations can be risky as well. Consider all the possibilities.

Art financing extracts a high cost. Just the exorbitant interest on the investment can break the borrower. With a commodity like art, whose value fluctuates, there are many logical reasons why one should avoid any art financing services.

5. Is art financing an illegal practice or a scam? 

Officially, art financing and art finance advisory are terms for a special set of financial services that some auction houses, banks and investment consulting firms offer exclusively to their clients who are either art collectors or artists themselves.  It is not illegal. It is not a scam. It is loaded dice for borrowers under the facade of a bright light of hope.

6. Have there been any victims of art financing in the news?

The most notable recent case was involving Anne Lebowitz and The Art Capital Group, which had over $20 million at stake in art financing made to the photographer. 

Paying off this debt could have cost the artist all of her assets and the rights to everything she produced in the future. Liebowitz dodged a bullet when she was able to work out reasonable financing arrangements with a more reputable lender.

7. If I find a beautiful piece of art, but I don’t have the money to invest, is art financing a way to turn a quick profit?

Beauty is in the eye of the beholder. When it comes to art financing, the consequences are in the eyes of the bean counter. Art financing has a dark side. Avoid it.