What to Say as Someone's Reference

SANTA MONICA, Calif. (MarketWatch) -- The auctioneer makes a final call, the gavel hits, and a buyer is named. This is a familiar scene at art auctions. But behind that scene there may be a world of financing taking place that is largely out of the public eye. For instance, did you know that all those millions of dollars paid for works of art don't necessarily come out of buyers' bank accounts?

Sotheby's BID, +1.56% , the large auction house has a loan business, a very sophisticated loan business, for the well to do. And Christie's advances funds against pending sales. Some financial-services companies, such as Citigroup C, +1.54% , also offer art loans. It's not unlike mortgage underwriting, except the auction house often acts as buyer, seller, appraiser and financier.

So it can be said that lots of art patrons are putting on a big show. In this month's issue of Departures magazine, reserved for American Express Platinum and Centurion (black card) cardholders, one art lender is quoted as saying that while most of the people he lends to don't need the money, they would rather put their cash to work "in other high-return assets, such as hedge funds or private equity."

Which makes you wonder, if you don't need the money...

In any event, auction houses are playing an astute game by leveraging the works of art in which they deal as asset-backed securities. The spike in the number of art buyers and art prices could make it more profitable for auction houses to be run more like financial-services companies than art purveyors; the arbitrage scenario is just too good.

The Mei Moses fine art price index has far outperformed the S&P 500 since 2000 at the same time the number of millionaires is growing at a rate greater than inflation.

All that wealth in all those hands, and if you're in a spot where you can readily identify those hands, why wouldn't you offer financial products aimed at them? Indeed, Sotheby's is rolling out a premium credit card, a World Elite MasterCard that will allow holders free admission and tours among other benefits.

Also, behind-the-scene advice is being rendered that is akin to financial planning. Departures quotes Mitchell Zuckerman, president of Sotheby's Financial Services, as saying: "In one case an older woman wanted to make a large charitable gift but also wanted to enjoy her painting. We lent her the money, she made the donation and we sold the picture some time later for her estate."

This sounds more like estate planning than art dealing to me. Examples such as this may be why more financial-services companies are getting in on art-financing techniques.

Besides Citigroup and Christie's and Sotheby's advisory units, Bank of America and Fine Art Capital, a unit of New York's Emigrant Savings Bank, are also players in the field of fine-art financial services.

Picture this: more loans

To be sure, there are many rich patrons who merely write checks for the pieces in their art collections. But many, many more people, I'll bet, will eye financing expensive works rather than using their own capital for purchases. This, of course, will help keep fine art prices on an upward trajectory. Yet, leveraging art will hold the same dangers as it does in the capital markets these days: overleveraging. Many fine art collectors already complain that art prices are artificially inflated and there are few deals to be had.

Maybe that's why Sotheby's is offering a MasterCard instead of an American Express card. With a MasterCard, you can pay over time, with many American Express cards you have to pay the bill in full when you get it.

There seems to be no escaping the revolving-debt mentality these days, no matter how much money you have or what you are in the market to buy. And that is all well and good for the economy and the financiers, not necessarily owners.

Already the U.S. tax code imposes higher federal capital gain rates on art than it does on other investments - 28% versus 15% on most assets, plus state and local taxes. But add to those taxes commissions, plus financing charges and advisory fees, and art becomes even more expensive, especially as an investment vehicle.

Despite the charges, and because of the exclusive nature of art, just like hedge funds and private equity, people will flock to it. Perhaps even more so now that they know they can pay for it over time.

Fine art in the future may just be a show.

What to Say as Someone's Reference

Source: https://www.marketwatch.com/story/the-fine-art-of-behind-the-scenes-borrowing-at-auctions

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