By Alan E. Katz, Esq.

“A booming art market has many investors viewing their collections in a new way—as cash machines.” So reported The Wall Street Journal in an article by Andrew Blackman from June 14, 2015. Blackman notes that, with art prices rising, many collectors realize that the value of their art collections has increased substantially. However, collectors have many valid reasons to keep their art rather than sell it if they want to tap into that wealth. A collector may prefer to use the proceeds from a loan, rather than a sale, to purchase additional artwork, raise cash, expand a business, invest in a new business, refinance debt, diversify an investment portfolio, or fund life events, such as a divorce settlement or estate taxes.

Why has the art lending market become so hot? From the art collector’s perspective, numerous reasons exist for borrowing against, rather than selling, art. For example, the sale of art involves significant transaction costs and taxes. The federal long-term capital-gains tax on profit from the sale of art is 28 percent. Adding state and local taxes can result in a total tax bill of 40 percent or more on the gain, depending on the seller’s legal residence. Furthermore, the negative publicity that may result from selling a trophy piece of art, particularly through an auction house, in which the sale is well-known to the public, could lead the collector’s peers to assume that the seller is in financial distress.

Both major banks and smaller specialist lenders offer art-secured loans. Private banks typically offer loans ranging from $1 million to $10 million, with the loans generally not exceeding 50 percent of the appraised value of the art that the seller pledges as collateral. There is sometimes also a minimum value of $100,000 to $200,000 for each piece of art in the collection being pledged. Specialty lenders often deal with loans starting as low as $100,000.

Lenders offer a variety of loan types in today’s market. They can be term loans for as long as 10 years, structured as interest only; partially amortizing or fully amortizing facilities; lines of credit to fund short-term cash needs; revolving-credit facilities to fund recurring cash needs; recourse loans; or nonrecourse loans. In recourse loans, the art serves as collateral for the loan, but the borrower also must give a personal guarantee of repayment. If the borrower defaults and the art that has been pledged as collateral is of insufficient value for the bank to recover the full amount of its loan, then the bank can make a claim on the borrower’s other assets. A nonrecourse loan does not require the borrower’s personal guarantee, and the lender can look only to the art that has been pledged as collateral.

Some banks offer art-secured loans at interest rates of only 2.5 or 3 percent to ultra-high-net-worth collectors, such as hedge-fund manager Steven A. Cohen, whose art collection is reportedly worth an estimated $1 billion. In contrast, some small specialty lenders, such as Borro, can charge interest rates as high as 59 percent on an annualized basis in California and 47 percent in most other states. Most private bank loans are in the high-single-digit to low-double-digit range, however.

Even with these sky-high interest rates, the art-lending market is estimated at $9.6 billion a year, according to the Deloitte Luxembourg and ArtTactic Art & Finance Report from 2014. However, when you consider that global art sales that year were estimated at $63 billion, it is clear that only a small percentage of the art market is taking advantage of the benefits of borrowing against one’s art.

Art lenders have concerns that are specific to art as collateral. For example, the value of art is subjective and may fluctuate to a greater degree than other types of collateral. Art is relatively illiquid, and the provenance and authenticity of art present unique challenges to a lender. To establish provenance, the borrower must provide the lender with proof, such as purchase documents, exhibition history, and sales history, and must state whether any catalogs have included the artwork. Authenticity issues, on the other hand, relate to whether the artist alleged to have created the artwork did in fact do so. Certain types of artwork carry other risks that the lender must consider as well. Art from ancient civilizations faces the possibility that the government of the country of origin will try to recover it. The borrower must convince the lender that he or she is the legal and beneficial owner, that no other ownership claims exist, and that the artwork is not war booty or stolen goods.

In the United States, the lender will secure its interest in the collateral by filing a Uniform Commercial Code (UCC) financing statement, which in effect tells the world that the lender is the holder of the security interest in the artwork. This mechanism is generally not available to lenders in Europe. The lender must file the UCC financing statement in the state of the borrower’s principal residence. If the borrower has multiple residences, it is good practice to file in all such states.

Because the value of art can vary significantly over time, the lender will often claim that it has the right to do an annual appraisal of the art at the borrower’s expense. The loan-to-value ratio usually cannot exceed 50 percent; if the appraisal indicates that the value of the art has declined, then the borrower may have to repay a portion of the loan, reduce the size of a revolving credit facility, or pledge additional collateral to the lender. Generally, the lender will permit the art to remain in the home or warehouse of the borrower. In some circumstances, however, the lender will require that the art be stored in a warehouse, where the lender would have unfettered access to reappraise or seize the art in the event of a default by the borrower. The lender may permit the borrower to loan the art to a third party, such as a museum or gallery, but may insist upon an agreement with the third party establishing the lender’s rights to access or seize the artwork.

Using art as collateral for a variety of loans, while in most cases maintaining the ability to continue to enjoy the art, has great appeal to many art collectors.

Credit:
serazetdinov/Shutterstock

The post Borrowing with Art as Collateral appeared first on Art Business News.

By Alan E. Katz, Esq.

Licensing your art is an excellent way to develop a supplemental income stream. According to the Graphic Artists Guild, licensing is a $70 billion industry, and art licensing accounts for 10 percent of the licensing market. You can license your artwork to be reproduced on a wide range of products such as T-shirts, posters, jewelry, prints, household items, and fabrics. The following tips will not help you market you art but will help you determine how your license can protect your rights once you find the right deal.

The United States Copyright Act of 1976 recognized the principle of divisibility, which allows artists to use narrowly defined licenses to divide the rights to their copyrighted artworks. For example, artists can grant one company the right to reproduce a work of art on a T-shirt, grant another company the right to reproduce the artwork on a coffee mug, grant a third company the right to distribute it, and grant a museum the right to display the artwork. Each of these licensees would become the owner of a limited copyright in the artwork, and the artist would retain all other rights that he or she had not otherwise parceled out.

An exclusive license stipulates that the artist agrees not to convey to another party a right it has granted to one party; these exclusive licenses may have time-period limits. To be effective under the Copyright Act of 1976, an exclusive license must be in writing, and the writing must clearly define the key terms of the grant of license, including duration, royalty payments, and the name on the copyright notice.

The license agreement goes from the artist who holds the copyright (the licensor) to the user (licensee). The license grants the licensee the right to use the artwork on a product or for a specific purpose and for a set time period in exchange for some form of compensation and subject to such other terms and conditions upon which the parties agree. The compensation can be a flat fee, a percentage of the sales of the product (a royalty), a combination of a flat fee and a royalty, or a guaranteed minimum amount against the royalty.

The license agreement should include the exact names and addresses of the licensor and the licensee; describe the licensed artwork; include an attached image of the artwork, when available; and clearly describe the use that the licensee can make of the artwork. For example, the license should clearly state whether the licensee plans to reproduce the artwork on a T-shirt, a coffee mug, or another product.

The license may entitle the licensor to a specified number of free samples of the product using the artwork and specify that the samples are subject to the licensor’s approval before production begins. The licensee must agree to seek permission from the artist to make any additional use of the artwork that the license agreement does not cover, and the licensor and licensee must agree upon payments for such use at that time.

The license should stipulate the time period that the license will remain in effect, the date upon which the artist must deliver the artwork, and the manner of delivery. The licensor should stipulate whether it is granting an exclusive or a nonexclusive right to reproduce the artwork on the product. The license should state where the licensee can use or distribute the product containing the licensed artwork. The artist should reserve all rights that the license does not expressly grant to the licensee.

If the licensee is paying royalties, the license should specify whether there is a guaranteed minimum payment and how the percentage is calculated—on gross sales or net sales, for example. It should also state whether the licensor has a right to audit the books of the licensee and what procedures will take place if the licensor finds a discrepancy in the books and how often the licensee must render statements of account to the artist and how detailed those statements must be.

The license should stipulate whether the licensee has the right to change the artwork or combine it with other artworks and, if so, whether the licensee can do so without the approval of the licensor; specify whether the name of the artist will appear on the artwork when it is reproduced; and state whether a copyright notice in the name of the artist will accompany the artwork when it is reproduced.

If the artist is licensing electronic rights to the artwork, the license should specify the form of final use, such as a website or a compact disc, and indicate whether the consumer or end user can print a copy of the artwork or is limited to only viewing a display of the artwork.

The license should provide for indemnification of the licensor by the licensee against any and all claims, costs, and expenses, including attorneys’ fees, that arise in connection with any use of the artwork that differs from those that the license allows and from any claims relating to the product upon which the artwork has been reproduced, even if in full compliance with the terms of the license agreement. The licensee should agree to assume liability for loss, theft, or damage to the artwork.

Finally, the license should specify the manner in which disputes will be resolved—for example, whether the parties will submit to binding arbitration or are free to litigate. If the parties do not agree to binding arbitration, then the license should specify that the law of a particular state shall govern and the court that will have exclusive jurisdiction over the dispute.

While putting together a comprehensive license agreement with all these terms can be daunting, don’t let it deter you from licensing your art. Doing so offers you the opportunity to earn income multiple times from the same work of art, which is not the case if you sell the artwork outright.

Alan E. Katz is a partner in the New York City law firm Greenfield Stein & Senior, LLP, where he specializes in art law, real estate law, and software licensing. 

The post Licensing Your Art appeared first on Art Business News.

By Alan E. Katz, Esq.

After months or years of searching, you have finally found the ideal studio space. The location, light, and rent all meet your criteria. The only thing between you and your ability to move in and start creating art is the dreaded lease.

Negotiating an art studio lease presents many unique challenges. The first of these challenges is the “use clause,” which defines the purposes for which the tenant can use the premises. Few landlords object to a gallery use, but some might find it disturbing that paint and other flammable materials will be on the premises. Thus, if you need more than just a retail space, the use clause must clearly stipulate that the lessee has the right to use the premises for creating art in addition to using it as a gallery.

However, your problems do not end there. The fine print of the lease often contains numerous clauses that might thwart the intended use of the space. Most leases stipulate that the tenant may not use or occupy the premises in violation of the building’s Certificate of Occupancy or local zoning or environmental laws. Accordingly, your attorney must review the Certificate of Occupancy for the building and the zoning laws to ensure that the proposed use is permitted, even if you have overcome the hurdle of spelling it out in the use clause.

Most leases contain a hazardous-materials provision, which prohibits the tenant from keeping any hazardous or flammable materials on the premises. Moreover, the tenant is generally liable for the cost of removal of any such materials, for the cost of any remedial action incurred by any governmental authority, and for personal injury or property damage arising from any violation of this provision.

Leases are complex instruments. You may think you have agreed upon the rent, but you will soon find out that the rent figure is only a base number, because the rent is often subject to annual percentage increases or increases based on the Consumer Price Index. The tenant often must pay a pro rata share of real estate tax increases and, depending on the location of the premises, a pro rata share of common area charges over a base year. Other items that are quick to add up include electricity, water, sewer, insurance, garbage removal, snow removal, and extermination services. You should immediately ascertain their cost so that you can determine whether the deal is still financially feasible for you.

If you default on a lease that you personally signed, you may face a huge amount of personal liability, which may equal the amount of the unpaid rent and other financial obligations for the remainder of the term of the lease. This amount of liability varies, depending on the state in which the property is located. Therefore, it is advisable to ensure that the tenant be a limited-liability company (LLC) or a corporation. The cost of organizing either entity is minimal, especially compared to the potential liability you would face if the lease were in your name. On the other hand, landlords may still want a personal guarantee because they recognize that LLCs and corporations have limited or no assets from which to recover damages in the event of a default.

If the landlord requests a personal guarantee, it is generally limited to a “good-guy” guarantee, which means that if the tenant knows that he or she will be unable to pay the rent and wants to return the premises to the landlord, then the tenant must give the landlord notice of his or her intention to vacate the premises and pay all of the rent and other charges due through the date set in the “notice to vacate.” The length of the notice to vacate is subject to negotiation, but is generally 90 days. The tenant must also deliver the premises in “broom clean” condition or in any other condition that the lease stipulates and must hand the keys to the landlord. If the tenant meets all of these conditions under a good-guy guarantee, the guarantor is no longer liable for obligations arising after the vacate date. However, the LLC or the corporation is still liable for the obligations under the lease for the balance of the term or until the landlord finds another tenant.

Most leases stipulate that the tenant is in default and can face lease termination if he or she is late in the payment of rent or if he or she fails to comply with any other lease provision. Hence, it is important to negotiate a “notice clause,” which states that the landlord must give the tenant some number of days’ notice and the opportunity to cure the default before the landlord’s right to terminate the lease comes into existence. The typical recommendation is 10 days’ notice for monetary defaults and 30 days’ notice for nonmonetary defaults.

To seal the deal, a landlord will often agree to give a tenant either some period of rent abatement or a cash allowance to make improvements to the premises. Otherwise, the landlord might decide to make some improvements, such as painting, electrical work, and lighting, before the commencement of the lease term.

In short, negotiating a studio lease can be a daunting task for an artist. Having an experienced attorney representing you in structuring the deal before signing a term sheet or a letter of intent and negotiating the lease is as important as priming your canvas with a good gesso.

The post Negotiating an Art Studio Lease appeared first on Art Business News.

By Alan E. Katz

In 1958, a private collector donated an Alexander Calder mobile to the Pittsburgh International Airport. Calder crafted the mobile, “Pittsburgh,” of aluminum and iron—two signature Pittsburgh metals. Shortly thereafter, officials at the Allegheny County Department of Aviation decided to have the black-and-white mobile painted in Allegheny County’s official colors—green and yellow. The county also reconfigured the 28-by-28-foot sculpture by adding weights to hoist up a portion of the mobile that it deemed as hanging too low and then attached a motor because, with the added weight, the mobile would no longer rotate on its own.

Although these changes greatly annoyed Calder and he had not approved them, he had no legal recourse against the county. Because of this situation and others like it, the United States in 1990 enacted legislation, the Visual Artists Rights Act (VARA), to protect the “moral rights” of artists’ work.

WHAT IS VARA?

Congress enacted VARA as an amendment to the United States Copyright Act of 1976, and it brought the United States into line with much of Europe, which had for years protected artists’ moral rights. The term “moral right” comes from the French “le droit moral,” an 18th century French concept referring to spiritual or personal—rather than economic—rights.

VARA comprises the basic rights of attribution and integrity. It protects these rights by granting the author or the creator of a qualifying work of visual art the rights to:

• claim authorship of the work;
• prevent the use of the artist’s name as the author of a work that the artist did not create;
• prevent the use of the artist’s name on any work that another party has distorted, mutilated or modified in a way that would be prejudicial to the author’s honor or reputation; and
• prevent, under certain circumstances, the distortion, mutilation, modification or destruction of the work of visual art.

VARA provides its protection only to paintings, drawings, prints, sculptures and still photographic images in single copies or limited editions of 200 or fewer copies that are for exhibition only and that the author has signed and numbered. This protection exists for the author’s lifetime, and these rights cannot be transferred to another party. However, the author can waive these rights in writing.

VARA does not apply to works made for hire; posters; maps; technical drawings; diagrams; models; applied art; motion pictures; or books and other publications and art produced primarily for commercial purposes, such as advertising, packaging or promotional materials.

APPLICATION TO PUBLIC ART

“Tilted Arc,” a 120-foot-long steel sculpture by Richard Serra, was installed at Federal Plaza in Lower Manhattan in 1981—before the enactment of VARA. Although the General Services Administration (GSA) had commissioned the art, an eight-year struggle between government bureaucracy and the artist culminated in the removal of the sculpture on March 15, 1989. Serra brought a lawsuit against the GSA seeking damages arising from such removal. He was unsuccessful because, among other reasons, he had signed a contract containing a clause permitting the GSA to remove the piece. Had VARA then been in effect, the outcome likely would have been the same because Serra had waived his right of integrity.

Graffiti artists tried to protect their art under VARA when a building containing their murals and graffiti was slated for demolition. In a case involving the 5 Pointz building in Long Island City, New York, the artists invoked VARA but lost because the judge ruled that, although the artists had permission to decorate the space with murals, they “knew that the buildings were coming down” and therefore could not have expected that the work would be permanent. The court also concluded that, although the graffiti at 5 Pointz was visual art, it was not a “work of visual art” within the meaning of VARA and thus was ineligible for protection.

Likewise, in the Carter versus Helmsley-Spear case, three sculptors—John Carter, John Swing and John Veronis—sued building owner Helmsley-Spear Inc., citing both the modification and the destruction clauses of VARA. The U.S. District Court granted the plaintiffs a permanent injunction enjoining Helmsley-Spear from removing, modifying or destroying the artists’ visual-art installation in the building that the company owned. However, on appeal, the U.S. Court of Appeals concluded that the artists were employees of Helmsley-Spear; thus, the works were made for hire and outside the scope of protection that VARA affords. The final decision vacated the injunction and resulted in the artwork’s destruction.

An artist who receives a contract for a commission to create a public mural or sculpture must read the contract and understand what it does and does not cover. It may not address contingencies, such as the nature of the materials the artist or artists used, the need for maintenance or the demolition or renovation of the building in which the art is installed. In a case involving a building in Baltimore, cracks appeared in a glass sculpture that was commissioned for the lobby in the early 1990s. The building’s owner became upset, leading to arbitration that forced the sculptor to remove the work at his own expense and return the money he had been paid. The sculptor had failed to disclose that cracks generally appear in the material that he used but that it would not compromise the structural integrity of the work. In a similar case, a sculptor received two commissions for public art, but the contracts did not contain a clause requiring the owner to provide routine maintenance of the sculptures. When the works rusted, they became a hazard to the public, and the city destroyed them for safety reasons. It would appear that letting a work of art deteriorate to the point at which an owner can declare it hazardous provides a loophole to the provisions of VARA, unless the contract provides a duty to maintain the work.

On a brighter note, VARA was held to be applicable in the case of sculptor Jan Randolph Martin versus the City of Indianapolis. Martin had created a large outdoor metal sculpture on city land and had a contract that required the city to preserve the sculpture. After the city demolished the sculpture, Martin brought suit against the city for violating his rights under VARA. The court determined that the work was one of “recognized stature,” one of the key qualifying requirements of the legislation, and further held that the work was not a work for hire, which would have denied it protection under VARA. The court awarded the artist the maximum statutory damages, as well as attorneys’ fees and costs.

BOTTOM LINE

Although VARA represents a giant step forward in adopting the European tradition of respecting and recognizing artists’ moral rights to visual works of art, it offers limited protections, particularly in the case of public art. Thus, it is critical that artists negotiate comprehensive contracts for both the proper attribution and the protection of the integrity of their works of public art. Likewise, galleries, museums and art collectors should be aware of the far-ranging implications of VARA, which apply to private art, as well.

The post Know Your Rights appeared first on Art Business News.

By Alan Katz, Esq.

You may have bought a work of art, but are you sure you own it? How do you know whether the IRS or creditors of any prior owner have filed claims on your artwork?

Art-title insurance entered the art-market scene in 2006. Only one company, ARIS Title Insurance Company, offers art-title protection insurance (ATPI). The ATPI policy insures that the policyholder has legal ownership of the insured artwork. The insurance policy addresses the following principal risks:

• the insured artwork’s record of ownership, or provenance;
• whether liens or claims exist against the artwork; and
• whether the owner has authority to sell the artwork.

An art buyer usually orders art-title insurance before purchasing the work from a dealer or a gallery. The insurance becomes effective once the seller transfers the title to the buyer. Buyers can also obtain the insurance months or years after the purchase. However, any defects in the art’s title history and other claims that the insurance company discovers during its investigation would then appear as exceptions to the title and would not be insured.

HOW IT WORKS

The ATPI policy breaks the risks into two categories: “art-provenance and chain-of-title risks” address theft and illegal import or export before the date the policy was issued. “Classic title risks” include creditor claims and the owner’s authority to sell.

Unlike the transfer of real-estate deeds, no public system exists in the U.S. for the recording of art transfers. ARIS conducts a search on the artwork’s history through documentary evidence about the art that previous owners, galleries and museums provide. This evidence includes ownership affidavits, bills of sale, gallery catalogs or citations in a catalogue raisonné, a comprehensive, annotated listing of all the known artworks by an artist either in a particular medium or all media. ARIS searches the few public records that do exist, which are limited to lost- or stolen-art reports, as opposed to actual title transfers. These sources include the Art Loss Registry; Interpol; the National Stolen Art File, which the Federal Bureau of Information maintains; and the International Foundation for Art Research. ARIS ascertains classic title risks by searching public records in the states and counties in which the owner and previous owners resided or conducted business.

The ATPI policy does not cover the art’s authenticity but merely the artwork’s ownership. The ARIS title insurance policy excludes two general categories from coverage. The first is affirmative misrepresentations, such as forged documents or false or misleading statements made by the seller of the artwork to ARIS. The second is defects, liens, encumbrances, adverse claims or other matters created, assumed or agreed to by the insured or known to the insured and not disclosed in writing to the insurance company—for example, if the buyer of the artwork knows of a lien or claim of ownership by a third party and does not disclose this fact to ARIS.

The policy holder pays a one-time premium ranging from 1 to 3 percent of the purchase price for most artwork. However, the premium can be substantially higher for works of art with gaps in ownership that occurred around World War II, when many works were seized from collectors, stolen or sold under duress. The art owner pays the premium when the policy is issued, and it covers the insured for the period of ownership. The coverage also automatically extends to the insured’s heirs.

IS IT WORTH IT?

Many art owners obtain art-title insurance, regardless of the piece’s dollar value. According to Judith Pearson, the president of ARIS, policyholders purchase a substantial amount of art-title insurance for art having a value of less than $100,000.

Historically, collectors and museums have expected reputable dealers to know the artwork’s record of ownership and either explicitly or implicitly warrant the art. Likewise, major auction houses obtain a warranty of title from their consignors and often conduct their own searches of the art’s history.

Auction houses and others can also use art-title insurance as a marketing tool. When Christie’s held a sale of art from the bankrupt Salander-O’Reilly Galleries in 2011, it recommended that the buyer purchase title insurance from ARIS. Although the bankruptcy court had approved the sale and the work was legally free of any claims or encumbrances, Christie’s thought that a buyer would feel more comfortable with title insurance.

A buyer who purchases art-title insurance transfers the financial risk of a potential claim to the insurance company, which has likely conducted a more extensive investigation of the art’s history and, presumably, has deeper pockets.

As with other types of insurance, the collector is buying protection against a specific risk. Perhaps more important, collectors are buying peace of mind that the work of art proudly displayed on the living room wall actually belongs to them.

The post Peace of Mind appeared first on Art Business News.