David Eccles School of Business
3 Art-Secured Lending and Evaluating the Loan-to-Value Ratio in Art and Real Estate Lending Markets
Bennett Blake
Faculty Mentor: Jeffrey Coles (Finance, University of Utah)
A Senior Honors Thesis
Date of Submission: April 21, 2023
Abstract
I analyze the lending terms for loans with art as collateral. The standard loan-to-value (LTV) ratio offered by private banks is 50% of the value of a piece/collection, while for other tangible assets, such as real estate, LTV is often 80%. I use a linear regression model with common U.S. stock indices as my independent variables to compare systemic and idiosyncratic risk for art and real estate. My analysis indicates that differences in these risk characteristics explain in part the substantially lower LTV ratio for art versus real estate. I also examine concerns about market liquidity, ownership, and authenticity of art as they pertain to LTV.
1 – Introduction
Fine art is a complex market that attracts some of the wealthiest individuals in the world. The most coveted painters regularly sell for tens to hundreds of millions of dollars depending on the appetite of a small group of collectors. It is a market that is opaque, loosely regulated, and inaccessible to the average individual. Art also has an increasingly active lending market, where collectors can take out loans with their art collections serving the function of collateral. By this I mean that the art serves as security for the repayment of the loan. This is similar to how one can borrow against their house in promise of repayment.
I compare the art market with the U.S. real estate market under the expectation that risk characteristics of art returns, and how those characteristics differ from those of housing returns, influence the terms of art-secured loans. Additionally, I discuss why private banks, who are creating some of these loans, find value in the market for loans with art as the collateral.
A reason that fine art is an attractive asset to collectors is the fact that art is aesthetically and spiritually valuable. It can often embody the personal values of collectors and represent their own aesthetic sensibilities. Individuals and families end up developing long-lasting relationships with paintings, in which the presence of a piece represents an aspect of their legacy. Aside from the aesthetic dividend art pays (Etro & Stepanova, 2021, p. 108), collectors are drawn to the status of owning museum-quality works of art in their homes since they can show off their collections to their social and professional networks. There is also data to suggest that making fine art a component of one’s portfolio can be valuable in terms of both portfolio diversification (Mei & Moses, 2002, Table 1) and potential appreciation in value of the art. For these and possibly other reasons “Ultra-High Net Worth Individuals” (UHNWI) are interested in art collecting.
Art tends to have a less-active and less-liquid market than more typical