- Private bank clients can borrow against art, yachts, and jets, to buy more luxuries or invest.
- Banks keep a watchful eye on their collateral with yearly inspections and maintenance schedules.
- JPMorgan’s head of lending told Insider how these loans work and what the wealthy use them for.
The wealthy can use their riches to finance their passions, and vice versa.
Private bank clients are taking loans out against their fine art, yachts, jets, and even stakes in sports team. Whether they use the proceeds to expand their collections or invest in private equity is up to them. It’s also cheaper than selling stock and incurring
taxes, which can total nearly 40% for top earners in high-tax states like California.
The beauty of lending against art and other luxuries is that clients can still enjoy them during the loan. JPMorgan’s private bank allows clients to keep art in their home, or with the bank’s permission, lend pieces to museums.
“They are illiquid assets that otherwise you wouldn’t be able to do anything with,” Vince La Padula, global head of lending, deposits, and custody at JPMorgan, told Insider. “It’s great that you own it and it looks beautiful and you show it off to your friends, but it’s an asset that is sitting there, and the question is if you can use the proceeds for something else.”
Lending to the wealthy is a growth spot for banks. Art loans make up a relatively small piece of the pie, but the segment is sizable and growing. Deloitte estimates that banks’ combined art loan portfolios will hit between $20.7 billion to $23 billion this year, and grow 9.4% next year.
JPMorgan’s exposure to the fine art market is about $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 typically requires that clients use at least five artworks for collateral. Loans require a third-party appraisal, a personal guarantee, and home inspections to ensure pieces are properly secured and preserved. The loans are typically one year but can be renewed after another inspection.
“Inspections on art every year is important,” La Padula said. “Are there imperfections? Are you putting it in a room that’s temperature-controlled? That’s all incredibly important when you have a $100 million piece and I’m running $50 million on it.”
The loan-to-value on art is typically 50-60%, lower than that of securities, which ranges from 70-80%, according to La Padula.
And while it’s quicker to get securities-based lines of credit, which can also be approved in little as two days, lending against art is a way to take advantage of an idle asset with little impact to the owner. If you borrow against your portfolios, you can generally trade within your accounts but transferring out cash or securities has to be approved by the lender.
Using yachts and jets as collateral requires similar inspections. Aircrafts have a higher loan-to-value than yachts, as they are much easier to sell. Offloading a yacht takes a year to 14 months, in La Padula’s experience. Sometimes he requires clients to agree that if the loan is not repaid, the bank is allowed to charter the yacht, as it makes it easier to find a potential buyer.
Lending against assets like fine art and jets is not a priority in and of itself, according to La Padula, but rather a way to help these longstanding clients get
to invest in other assets, whether it’s 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 declaring that the work-from-home shift has killed the market for office space, commercial real-estate investing has actually topped pre-pandemic levels. In the first nine months of 2021, commercial real estate deals reached $462.1 billion, up 10% from the same period in 2019, according to Real Capital Analytics.
“Clients thinking long-term ask if they can buy the dip,” La Padula said. “Is there an asset that is undervalued? While buildings were boarded up, we had clients looking at those assets in New York and LA.”
In the past five to six weeks, properties in Austin, Miami, Ft. Lauderdale, Phoenix, and Scottsdale were most in demand with his clients, and New York will always be “a fairly hot” market, he said.
Since JPMorgan already has extensive information on these private bank clients, including their liquidity, cash flow, and charitable obligations, loans to buy commercial real estate can be approved in about a week.
“If you’re buying distressed property, or you want to buy an apartment, speed is the most important thing in this market,” he said. “You want to have capital ready to deploy.”