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

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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. 

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