How rich people use art, yachts as collateral for low interest loans
- Customers of private banks can borrow against art, yachts and jets, to buy more luxury or to invest.
- Banks keep a watchful eye on their collateral with annual inspections and maintenance schedules.
- JPMorgan’s loan officer told Insider how these loans work and what the rich are using them for.
The rich can use their wealth to finance their passions, and vice versa.
Clients of private banks take out loans against their artwork, yachts, jets, and even participation in a sports team. Whether they use the product to expand their collections or invest in private equity is up to them. It’s also cheaper than selling stocks and hiring
taxes, which can total nearly 40% for top earners in high-tax states like California.
The beauty of loans against art and other luxuries is that customers can still benefit from them during the loan. JPMorgan’s private bank allows customers to keep works of art in their homes or, with the bank’s permission, loan pieces to museums.
“These are illiquid assets that you couldn’t do anything with otherwise,” Vince La Padula, global head of loans, deposits and custody at JPMorgan, told Insider. “It’s great that you own it and it’s beautiful and show it off to your friends, but it’s an asset that stays there, and the question is whether you can use the product for something else. “
Loans to the rich are a growth pole for banks. Art lending is a relatively small slice of the pie, but the segment is large and growing. Deloitte estimates that banks’ combined art loan portfolios will reach between $ 20.7 billion and $ 23 billion this year and grow 9.4% next year.
JPMorgan’s exposure to the fine art market is around $ 5 billion, according to La Padula. Some of the most popular artists among their loan portfolio are Picasso, Renoir, Matisse, Cy Twombley, and Lichtenstein.
Banks go to great lengths to protect their collateral
JPMorgan generally requires customers to use at least five works of art as collateral. Loans require third-party appraisal, personal collateral, and home inspections to ensure parts are properly secured and preserved. Loans are usually for one year but can be renewed after another inspection.
“The inspections on the art each year are important,” said La Padula. “Are there any imperfections? Do you put it in a temperature-controlled room? This is all extremely important when you have a $ 100 million coin and I’m managing $ 50 million on it.”
The loan-to-value ratio on art is typically 50-60%, lower than that of titles, which ranges from 70-80%, according to La Padula.
And while it’s faster to get lines of credit on titles, which can also be approved in as little as two days, lending against artwork is a way to profit from an inactive asset with little money. impact for the owner. If you borrow from your wallets, you can usually trade in your accounts, but the transfer of cash or securities must be approved by the lender.
The use of yachts and jets as collateral requires similar inspections. Airplanes have a higher loan-to-value ratio than yachts because they are much easier to sell. Unloading a yacht takes a year to 14 months, depending on La Padula’s experience. Sometimes he asks clients to agree that if the loan is not repaid, the bank is allowed to rent the yacht, as this makes it easier to find a potential buyer.
Lending against assets like fine art and jets isn’t a priority in and of itself, according to La Padula, but rather a way to help these longtime clients get
invest in other assets, be it real estate or private equity.
“I don’t want to own the Marlins or the Jaguars. I want to work with the individual,” he said. “It’s part of a puzzle.”
Loans can be used to invest in anything from private equity to real estate
Many clients borrow against their art in order to expand their collections, but these loans are also used to diversify their assets. Lending – against all types of assets – to invest in commercial real estate has become particularly popular, according to La Padula.
Despite headlines stating that working from home has killed the office market, commercial real estate investment has actually surpassed pre-pandemic levels. In the first nine months of 2021, commercial real estate transactions reached $ 462.1 billion, up 10% from the same period in 2019, according to Real Capital Analytics.
“Customers who think long term ask if they can buy the dip,” La Padula said. “Is there an asset that is undervalued? While the buildings were closed, we had clients looking at these assets in New York and LA.”
In the past five to six weeks, properties in Austin, Miami, Fort. Lauderdale, Phoenix and Scottsdale were the most requested by his customers, and New York will always be “a pretty hot market,” he said.
Since JPMorgan already has detailed information on these private banking clients, including their liquidity, cash flow and charitable obligations, loans to purchase commercial real estate can be approved in about a week.
“If you are buying a troubled property or want to buy an apartment, speed is the most important thing in this market,” he said. “You want to have capital ready to be deployed.”