Steve and Katie speak with former SCH colleague Rebecca Fine, now CEO of Athena Art Finance, about her career, how art finance is structured and diligenced, who art finance is for, and the risks that Athena and other lenders try to mitigate.
Resources
https://www.theartnewspaper.com/2023/03/08/art-loans-spike-as-specialist-lenders-multiply
https://www.deloitte.com/lu/en/services/financial-advisory/research/art-finance-report.html
https://fortune.com/2024/08/16/rich-art-market-collateral-cash-loan-debt/
Katie and Steve discuss topics based on news and magazine articles and court filings and not based on original research unless specifically noted.
Episode Transcription
Steve Schindler: Hi, I’m Steve Schindler.
Katie Wilson-Milne: I’m Katie Wilson-Milne.
Steve Schindler: Welcome to The Art Law Podcast, a monthly podcast exploring the places where art intersects with and interferes with the law.
Katie Wilson-Milne: The Art Law Podcast is sponsored by the law firm of Schindler Cohen & Hochman LLP, a premier litigation and art law boutique in New York City.
Steve Schindler: Hi, Katie. How are you?
Katie Wilson-Milne: Hi, Steve. I’m good, how are you?
Steve Schindler: Good, I’m so excited, because we’re going to talk about a very exciting subject today.
Katie Wilson-Milne: With a very exciting person.
Steve Schindler: With a very exciting person. Well, that’s really the whole key because we’re going to talk about art finance, which sounds exciting, but really we’re here to welcome back Rebecca Fine. Rebecca is the CEO of Athena Art Finance, and she’s a founding member of Athena Art Finance and its general council until 2021, when she became the CEO. But before joining Athena, and this is key, Rebecca was our partner and practice as a litigator and art lawyer at Schindler Cohen & Hochman.
Katie Wilson-Milne: It’s a reunion.
Steve Schindler: Yeah, it’s a great reunion. Prior to joining SCH, she did practice at a couple of other firms, Simpson Thacher & Bartlett, WilmerHale, small firms like that. She studied art history at Columbia University, received her JD from Columbia Law School, and it’s a thrill to have Rebecca here with us.
Katie Wilson-Milne: And we have not actually talked about art finance in any depth on the podcast, which is somewhat shocking since it comes up all the time.
Steve Schindler: I know, this is a first.
Katie Wilson-Milne: It’s the inaugural art finance episode with Rebecca Fine.
Rebecca Fine: That makes me feel better. Had you done that, I wouldn’t have waited five years for this reunion.
Steve Schindler: Right.
Katie Wilson-Milne: We were waiting for you.
Steve Schindler: And one of the things I happened to know about Rebecca, because we were colleagues for so long, is that she’s either the only one or one of few people in her family who took the dark path down law school, because everyone else are artists, as I recall.
Rebecca Fine: Exactly
Steve Schindler: And so you did start out as an art history major. So maybe tell us just a little bit about your journey from art history major to art lawyer and now to running an art finance firm.
Rebecca Fine: First of all, I’m actually very excited to be in the room with you guys. The offices look amazing, and I can’t believe that it’s been over five years. So my journey was very circuitous. I’m asked very often, “and when you were in college and you knew that you wanted to,” I was like, “no, that wasn’t the case.” I was always very interested in art. I did study art history and philosophy as an undergraduate. And I was actually planning to attend Yale. I was going to do my PhD in art history. And I had taken the LSATs and the GREs back to back. And when I was admitted initially to NYU, it just seemed like the most expedient path. It was three years. I figured either I’ll hate it or I love it. But, but I was also pretty convinced that there would be a way for me to find my way back to art.
The truth is, back in the day, there was no art law. There was no there there. But I did volunteer at the Volunteer Lawyers for the Arts. I also worked for IFAR, the International Foundation for Art Research, during law school. And out of law school, I became a litigator. I was, yes, at two small firms.
Steve Schindler: Very small firms.
Rebecca Fine: I was in Boston at WilmerHale, which was then Hale and Dorr, and then came back to Simpson Thacher. My focuses then were on really securities and antitrust work, having literally nothing to do with art. And my first real pivot was here with Steve.
Steve Schindler: Right.
Rebecca Fine: I came here ostensibly to do securities class action work. And Steve at the time had a very nascent art law practice that was principally focused on a gallery that had extensive art holdings worldwide. And significantly were involved in a contentious matter in France. And it was serendipity, though. Steve asked me to work on that matter. I don’t really think I started talking about or even fully appreciating the personal nature of this business until much later in my life. And I’m not sure why that’s the case, because obviously it’s core to my being.
Katie Wilson-Milne: Yeah, and you have a long- it links to so many parts of your life.
Rebecca Fine: But remarkably, it didn’t really occur to me. So Steve and I started working on that matter. And that was kind of the beginning of the art law practice here.
Katie Wilson-Milne: Yeah.
Rebecca Fine: Before you even came over, Katie. And to me, it was really remarkable, because art law is a little bit of a misnomer, as we all know, because when we’re working with owners of art, collectors of art, foundations and artists, we’re generally doing whatever the hell they ask us to do.
Katie Wilson-Milne: Right, and there’s no type of law. It’s just all different things.
Rebecca Fine: Not at all. It could be a real estate matter, it could be a trust and estate matter, but it’s regardless always more interesting than the other work.
Katie Wilson-Milne: The people are more interesting.
Steve Schindler: The clients are interesting, for sure.
Katie Wilson-Milne: So how then, I mean, your story keeps getting more interesting. So how do you pivot from being a truly excellent seasoned trial lawyer, doing some of the art stuff here with Steve, to becoming a very successful transactional lawyer in the art finance space? Because that’s also a big pivot.
Rebecca Fine: No, that’s a great question. So when I was here at Schindler Cohen & Hochman, our clients were typically the borrowers, right? They were the art owners.
Katie Wilson-Milne: Yeah.
Rebecca Fine: And when we were negotiating secured lending transactions, we were negotiating on their behalf. So I was always very attuned to the transaction. But I was focused on the exigencies of my client’s needs and always with a sort of an eye toward what it is that we could get out of the lender. So it was actually very helpful training. I was, I remember this very vividly, Steve and I were on trial in France the summer of 2015. I don’t think you know the story, Steve.
Steve Schindler: I’m waiting.
Rebecca Fine: Oh dear. So I got a call from an executive search firm and I was really annoyed that this guy would have left such a message, because there was nothing discreet about it. And of course, I wasn’t looking for a job. He said, no, no, listen, this is a real thing. This is a new company that’s backed by the Carlyle Group. hey’ve committed $280 million of capital. They’re building an institutional platform. They’re looking for a general council. Your background seems very suited. Why don’t you send me your resume? And I went home that night and I thought, “what am I doing?” Because I was really, truly loved this job. I loved working with the people here.
Steve Schindler: I can understand that.
Rebecca Fine: I had no intention of leaving. This literally fell in my lap. I sent him the resume such as it was, and he flew up from DC and we met for two hours. So I went to interview with them. The very first person I met was the Chief Investment Officer, Cynthia Sachs, who’s a remarkably brilliant woman. This company was set up by a group of people in finance, structured finance and banking.
Katie Wilson-Milne: No art background, right?
Rebecca Fine: None, none. Had this been a bunch of people from the art world, I literally would have run in the other direction. But this was an opportunity for us to build a platform from a very unique perspective and to do so in a way that very closely mirrored what’s done in every other grown up industry. And Cynthia had spent years at Bloomberg creating BVal, which is an alternative asset valuation platform at Bloomberg. She did not know about art, but all of those learnings were transferable, and she was able to speak to the sort of the engineers and the data side of the business. So the task was really a fascinating one. I mean, when you’re building a company from scratch as the lawyer, there’s nothing that doesn’t have legal implications. So I was involved in everything.
Katie Wilson-Milne: How would you define art finance?
Rebecca Fine: So art finance is really a way for owners of art to extract liquidity without having to sell the art. So a lot of clients who have- particularly clients who built really important collections, because they bought early from artists who were emerging or whose markets were, at that point, not fully mature. And their art has appreciated massively in value, which would mean that if they were to sell, there would be massive tax consequences because they would have to pay the capital gains tax.
Steve Schindler: Right.
Katie Wilson-Milne: Right.
Rebecca Fine: That is very often a major consideration for clients. People have value literally trapped on their walls or on their floors in these objects, which they have very often purchased with equity financing. The most sort of financially sophisticated clients understand that that is not the most effective way or the most efficient way to use capital. And they understand sort of the leverage multiplier, and they buy every other asset using leverage or debt. And this was one of the- sort of one of the few spaces where there really was an opportunity, in my estimation, to create a product that didn’t exist, which is truly a non-recourse asset-backed loan against high-value fine art.
Katie Wilson-Milne: So if a client of yours, let’s say they have this wonderful art collection, they don’t want to sell it- but they have a very high net worth. It’s just that it’s tied up in their real estate and their cars and their art collection, and they need some liquidity to, let’s say, do a renovation or buy a house for their kid or whatever these people are doing. That this is just a way that without selling their art, they can get some liquidity out of their assets.
Rebecca Fine: Sometimes it’s incremental liquidity that you’re sort of alluding to. Our clients do tend to be very, very asset-rich, and art is among, you know, their many collections. They tend to have, you know, planes and a lot of real estate and a lot of illiquid, a lot of other illiquid assets. And sometimes they’re, very often actually, they’re using the loan proceeds to buy more art. It may surprise people, but very, very often they’re looking to invest in art. And we recognize that, and I think one of our key competitive features is that we really do understand the way this market works.
And when the clients are considering an acquisition, we can do sort of purchase financing, which generally means that we are diligencing the art before they buy it, to let them know at what loan to value ratio we’ll be able to provide them with proceeds against that purchase. And then they substitute- either they’ll release a piece that’s existing collateral from the loan, because they want to do something with it, or they will simply upsize the loan and increase the size of the loan when they buy additional artwork. But we- another thing that is very important for our clients is the ability to loan the artworks to museums around the globe for important exhibitions. And we all know that really greatly enhances- it enables people to share their art with the world, but also generally speaking, enhance the value of the piece.
Katie Wilson-Milne: Enhances the value. Yeah.
Rebecca Fine: So because we’re really global art lenders and very much by virtue of the relationships that I had developed working here, we had a very international practice. I’m able to facilitate transactions with museums and galleries around the world. And that’s very meaningful for our clients. And it’s not something that the banks do, for example.
Katie Wilson-Milne: Meaning, like, you can allow your collateral to be moved around the world, because you have the means to protect your interests.
Rebecca Fine: Exactly. So as long as we can maintain our first priority perfected security interest in the art, in the jurisdiction where the art will be cited, will be kept, we are able to enter into bailment agreements with those museums as our agents for purposes of perfection. Because generally speaking, outside the US, and I don’t know how technically you want to get…
Steve Schindler: When you started, talk a little bit about the landscape of art lending at the time. Obviously, we know that there were major banks who were lending…
Rebecca Fine: Right.
Katie Wilson-Milne: To their existing customers, accommodation loans.
Steve Schindler: Right, and who had serious art collections. And there was a group at Citibank that was also advising people and building collections. So how did this startup company sort of fit into the landscape at the time, and why did you see an opening?
Rebecca Fine: So in 2015, the landscape, as you alluded to, was fairly narrow. There were private banks that were making loans to their important clients on an accommodation basis. Really, it was balance sheet lending, then as it is now, frankly.
Steve Schindler: And what is that just for…
Rebecca Fine: That’s really, I mean, you’re essentially lending clients their own money, which is to say that they’re not truly concerned with the art.
Katie Wilson-Milne: The art is not the only collateral.
Rebecca Fine: Not at all, because in the event of a default, they’re not going to worry about whether or not the art is liquid and whether they can sell it at what price, because they have lots of highly liquid assets, including, generally speaking, cash on hand, they have equities portfolios, they have real estate, they have- all your assets, everything that you have is with the bank in those instances. And it makes clients feel a little better to know that they’re getting a few dollars against their art. But the lenders, the art lender in that situation is not, frankly, very focused on underwriting the collateral, because it’s ultimately not really their exit in the event of a default. In 2015, you had the private banks, many of the same banks were involved. You did have- Sotheby’s Financial Services, obviously did also have a lending business. But again, for the auction houses then as it is now, it was generally a way for them to drive consignments, much more like bridge loans. And in the instances where the clients are not immediately intending to sell, it gives Sotheby’s and Christie’s an opportunity.
Katie Wilson-Milne: I also remember around that time, like Emigrant Bank was doing some standalone art loans. But that was the first time that we’d done a deal that was really a standalone, unaffiliated with an auction house, not a banking relationship.
Rebecca Fine: Emigrant did. Emigrant continues to do some lending. Suzanne Gyorgy is there now. They lend not only against fine art, but also musical instruments and furniture and a variety of other assets. The other players in the space in 2015 were the sort of hard money lenders, the sort of- literally the pawn shops. And they had developed a very bad reputation among the art market for really predatory loan terms. That generally meant that in the event of default, the client was going to lose their art, because they were massive collateral liquidation or collateral administration fees or default fees. That would effectively mean that at the end of the day, the client would lose whatever ownership interest it had in the artwork. And famously, there were litigations with Annie Leibovitz among others. And it was not a space that I wanted to be associated with.
Steve Schindler: Right.
Rebecca Fine: That was precisely kind of the attitude that everybody had, and rightfully so. It was really regarded as lenders of last resort. You don’t want to go there if you can avoid it. The Athena business was really the brainchild of Olivier Sarkozy. Nicolas Sarkozy’s half-brother. This, to me, was really an opportunity to build a platform that was highly rigorous, very institutionally kind of built, but that also recognized that we wanted to be the solution for the clients who really were true collectors, who wanted to maintain their collections and enjoy them as much as possible. We wanted to be able to give clients real optionality, so that at some point, if they should decide to sell, that they can have all of the auction houses compete for their business and optimize the sale results, because we are truly independent of all of these businesses. We are not a, you know, the banks are in the banking business.
Katie Wilson-Milne: Right.
Rebecca Fine: The auction houses are in the auction business.
Steve Schindler: Right.
Rebecca Fine: We are truly art lenders, and this is all we do. And so we’re not conflicted. We’re also not in the art advisory business. And a lot of my competitors have art advisory businesses. And it’s never clear.
Katie Wilson-Milne: It’s quite confusing.
Rebecca Fine: It’s very murky. And what I think is very key and attractive, frankly, to our clients is the independence that this affords them and the discretion. Because as we all know, these are people who are concerned even with the auction houses knowing about the art that they have. They don’t want to be under pressure to sell, you know, getting calls every month, trying to cajole them into parting with their precious art.
Katie Wilson-Milne: Right. You raise a really good point that if you’re the lender, but you’re also in the business of selling art or advising on art, and you’re making money in all these different ways, your incentives are to get your client to do all those things. And if you’re just the lender, it’s very clear what the incentives and the relationships are.
Steve Schindler: Well, maybe we can back up for a moment, because there’s some terminology that’s been floating around here that our listeners may not completely understand. So let’s go back. First, you said one of the things that distinguished Athena from other types of lenders is that you’re offering non-recourse asset-backed loans. What does that mean?
Rebecca Fine: So generally speaking, a full recourse loan is like a personal loan, where, in the event that there’s a default, the lender can enforce its rights and remedies, not only against the collateral, right, but also against the borrower’s non-art assets. So we are generally agnostic as to where people keep their non-art assets. We absolutely, we do a lot of KYC. We do need to understand their credit worthiness, and we do due diligence on their financial wherewithal, et cetera. But generally speaking, the assumption is, and sometimes this is negotiated, sometimes we do have personal guarantees and corporate guarantees. But generally speaking, a non-recourse loan means that if, God forbid, in the event of a fault, the artwork is sold and the sale proceeds are insufficient-
Katie Wilson-Milne: That’s all you get.
Rebecca Fine: To repay the outstanding principle in any accrued interest, we get what we get and we don’t get upset. That’s the- the long and the short of it is that we have recourse to the art. Does that make sense?
Steve Schindler: Yeah, it makes sense, which is why the art itself becomes so important, why you have to do the diligence to understand what the values are.
Rebecca Fine: Exactly.
Katie Wilson-Milne: And make sure it’s authentic, that there’s good title.
Rebecca Fine: Yeah, let’s talk about the binary risks, because I think it’s funny. I have worked long, long worked with a secured lending team at Blank Rome, now Blank Rome, who helped us to architect the document suite. And he refers to us as extreme asset-based lenders, like a sports reference. And I like the- it’s sort of an apt analogy. There are- absolutely, Katie, to your point, there are certain binary risks that we contend with in this space that are unlike any other. So, you mentioned authenticity and attribution, right? I mean, if something is not by the hand of the artist, or if it’s inauthentic, you basically have a security interest in nothing at all. If the borrower doesn’t have title to the art, you don’t have ultimately a security interest in the collateral. And this is very core to our business, is the extremely detailed diligence that we do on the collateral side, and I’m very happy to get into that. But it really begins, our whole analysis begins with understanding the art. Valuation is part and parcel of this, but fundamentally, it’s the research that we do internally and in conjunction with certain experts to determine that we’re comfortable with provenance and authenticity and attributions-
Steve Schindler: And title, I assume.
Rebecca Fine: And title, exactly.
Katie Wilson-Milne: But the risks are so high. I mean, even we’ve seen this in the art world, right? Even with the most sophisticated experts, sometimes you miss something, right? Or sometimes, you know, the forgery is so good or the title is so unclear, or there’s really a good faith mistake about it, or a dispute no one anticipated. And to add to all that, we’re dealing with this asset that has no intrinsic value. So forget, even if it’s authentic, the title is clear, you know, the whim of the market dictates the value of a piece of work, and you don’t control that.
Rebecca Fine: Right.
Katie Wilson-Milne: So it does seem like a very high-risk gamble.
Rebecca Fine: Well, let’s talk about valuation, because that’s also a very important aspect of the work that we do. The process sort of starts with a client approaching us about a loan. Generally speaking, these clients are all referred to us. It’s very much,- we don’t do any marketing.
Steve Schindler: Right. Is there a minimum amount that…
Rebecca Fine: Yes, we have generally $2 million as a minimum loan amount, but most of our loans are substantially higher than that. But a client will inquire about the eligibility of their artwork, and they’ll send us high-resolution images and the artwork information, which includes the artist’s name, the date of creation, the medium, the dimensions, etc. And then we ask for the fact sheets, which you all know involve sort of a listing of the provenance, the chain of ownership, and then exhibitions where the artwork has appeared. And we fact check every entry there.
And we find that many clients buy at auction, most of the time they’re relying on information that’s coming from the auction houses. We find that very often the information that we get from the auction houses is wrong. They’re- simply don’t have, they’re not on risk long enough to be investing the time to do that work. We can have a whole other conversation about title registries and sort of an obsession of mine.
Katie Wilson-Milne: We don’t have those, by the way, just so our listeners know.
Rebecca Fine: I know that, and sadly, that’s what I think about on the weekends. But truly, the valuation is very key and you can’t possibly have all of the expertise in-house. So we have a very experienced team and I really am remiss, because I should have started by talking about how exceptionally badass this team, this all-women art finance team is, by the way. And we’ve been working together now for almost 10 years. But, I mean, they’re extensive training in all of this research and they can appraise works. They’re USPAP certified, but in every instance, we also retain independent third-party appraisers with the requisite certifications and training in the genre or the particular artist. And we rely on those valuations, but we’re requesting valuations that have very specific valuation methodology. So, if you think about appraisal values on a spectrum, at the very lowest end, you think about sort of a fire sale, liquidation value. And when you’re selling art in less than three months, effectively, that’s a fire sale. After that, you get to sort of low auction estimates and marketable cash valuations. And marketable cash is really the net sale proceeds that would be received at auction, net of commissions and fees.
Katie Wilson-Milne: Okay.
Rebecca Fine: Because at the end of the day, a lender needs to understand the money that they would take in.
Steve Schindler: Right.
Katie Wilson-Milne: Right.
Rebecca Fine: After everybody is paid. So marketable cash is sometimes referred to in appraisals as a valuation for loan collateral purposes or marketable cash or net realizable proceeds. That’s another way of looking at it. And then you get into sort of a fair market valuation and high auction estimates. And then you can think about, I mean, retail replacement value and insurance values all the way at the high end.
Katie Wilson-Milne: So you’re actually looking at all of these different-
Rebecca Fine: No, we only rely on valuations that describe that marketable cash valuation or the net sale proceeds or the net realizable value. So it’s a valuation for loan collateral purposes. These conversations with the borrowers are generally fraught, because if they’ve never done this before, we need to explain this.
Steve Schindler: Right.
Rebecca Fine: And it is a little bit like telling people their kids are ugly. So, I mean, I really try.
Katie Wilson-Milne: Your art is so beautiful, but…
Rebecca Fine: So, I think what’s really important for us to convey, and the best sort of advisors to these clients do understand this, it’s not that they are wrong about their values. And if they can sell the art at exactly the right moment to exactly the right buyer, they can certainly, you know, ostensibly achieve that price. But that’s not where we’re living. Like, we’re taking credit risks. So, we explain to them that it doesn’t have any bearing on what this art might sell for in their hands. And thank God, I haven’t had to sell anybody’s art. But the reality is that most of the clients really do understand after explanation why we think about it this way.
Katie Wilson-Milne: So, we’re talking about all the different binary risks that you have to analyze when you’re looking at art. But surely, there’s some shortcuts like, you’re not going to consider in that depth with that level of resources every work of art that comes to you. So, are there sort of general criteria for what you will even throw those resources in to consider?
Rebecca Fine: The short answer is absolutely. And value is only one of them. We will only spend time looking at something if we know at the outset, for example, that a work is in the catalogue raisonné. We have to have proof that this work, validation from the…
Katie Wilson-Milne: If there is a catalogue raisonné.
Rebecca Fine: If there is a catalogue raisonné or an authentication body or a foundation, we are not able to even and won’t consider collateral where there are disputes among the scholars as to whether it is or is not by the hand of the artist. And very often, people will come to us with a mountain of evidence, forensic and otherwise, about the rediscovery of this. And we said, you know what? That’s fascinating research. Oh, they’ll say, “oh, it will be published in the forthcoming.” And we said, “and as soon as that happens, you come to us and we can have a different conversation. But for now, those works are simply not eligible for a loan from us.”
Katie Wilson-Milne: Would you lend against any type of art, genre artist it’s in a catalogue raisonné or a scholar who’s authoritative opines that it’s authentic?
Rebecca Fine: I mean, we have, I think that it’s fair to say that most of the art that we have loaned against is, it’s really the most liquid art. We absolutely do lend from time to time against old masters, against impressionist art, against modern art, non-Western art, Latin American art, etc. We don’t have the expertise generally to work with ancient Chinese and Asian art, sadly, because it just requires a different set of expertise than we have. But we have loaned against art really that runs the whole gamut. I always find it funny when we started this business, there were two working assumptions that I had, both of which were wrong. One was that we weren’t going to be lending against artworks made by living artists, because they could obviously create more art. They could behave in ways that would adversely impact their markets. I mean, any number of reasons why you would be hesitant to do that. But ultimately, it is probably the most liquid part of the market. And when I say liquid, it’s just the most saleable, the most frequent sales at auction. There’s obviously huge demand for artworks by living artists. So, for example, in the early days, I saw lots of Banksy’s in 2015 and 2016, and we turned them away all the time. And nowadays…
Katie Wilson-Milne: You’d do it.
Rebecca Fine: I, absolutely- the other thing was that I thought with works that exceeded, I don’t know what threshold in my mind, $20 million, that we would be able to do some sort of non-invasive forensic analysis of those works, just given the concentration risk of lending that kind of money against artwork.
Steve Schindler: Right.
Katie Wilson-Milne: Right.
Rebecca Fine: And there was so much pushback. We couldn’t convince anybody to allow us.
Katie Wilson-Milne: No owner?
Rebecca Fine: And I don’t know that it was because they didn’t want to know the answer, or because they were fearful the work could be damaged as it was being inspected. I don’t know exactly what the motives were, but that died on the table, and we really haven’t picked those conversations up. I think it was probably also due to non-competitive, because nobody was doing that at the time.
Steve Schindler: So you must also be looking, and I think have looked at auction results, right?
Rebecca Fine: Absolutely.
Steve Schindler: Because one of the key, as I understand what you’re saying, is how sellable these assets would be.
Rebecca Fine: Yeah.
Steve Schindler: And that, I guess, bears on auction values.
Rebecca Fine: Absolutely. I mean, 50 percent or so of the market is transacting privately, even at the auction houses, the difference between private treaty sales and auctions, et cetera. We have a lot of data, private data, because we’ve been building a proprietary data analytics database since we started. Really, that was foundational to the sort of Athena business model with Cynthia Sachs. That said, ultimately, the credit analysis turns in part on future saleability of these artworks. And, you know, we don’t have crystal balls. And part of the reason that these valuations have to be conservative is because we have to understand that, you know, the markets shift, and there is fluctuation and volatility. But I think that our expertise in-house is such that when there are discrepancies between sort of our valuations and those that we receive from the external third-party appraisers we use, we have conversations. And in every instance, actually, they’ll consider additional sort of evidence or circumstantial evidence that- I’m talking in terms that I never use with the appraisers.
But if there are other indicia of value that they haven’t considered, we do that. Generally speaking, there is less kind of volatility than you would probably think. Because again, we’re only looking at a one-year interval. We have annual reappraisals in every instance. So notwithstanding, I mean, sometimes we do a three-year loan. But in every loan agreement, we have an annual reappraisal. And at that point, if the value of the pool of collateral has changed, which it often does, the client is faced with decisions about whether they want to contribute an additional piece, or pay down a certain amount of the loan, or potentially give us cash collateral.There are many ways of solving that. But every year, annually, the artworks are being reappraised.
Katie Wilson-Milne: That could pose some serious changes, though, for the borrower. Steve and I have been talking recently on the podcast about- you’re saying you’re loaning more of contemporary art, because that’s where the money is, but there’s also a lot of risk with contemporary art. You have this young artist who appears out of nowhere, and everyone thinks that they’re the new best thing, and they fit the political moment and the social moment. And they blow up and then people get bored.
Rebecca Fine: So you have- make an interesting point, and it’s worthwhile for me to elaborate a little bit. We do not lend against emerging artists where there is not a sufficient, like a five-year auction history. Matthew Wong is a good example. I mean, before he died, many of our clients were collecting his works. The values spiked tremendously upon his passing. And those are conversations that we have at the investment committee meetings. If we don’t feel that there’s enough data points, there are enough data points, and enough sales for us to feel confident about those marks. So it’s a very good point that you’re making. People do come to us from time to time with very emerging artists. I will say that it’s rare that those works are selling in the hundreds of thousands, generally speaking, in the early years. But it’s absolutely a consideration. And most of the artwork that constitutes kind of loan collateral for us, I would characterize as more of the sort of the blue chip category, or the sort of re-emerging, as opposed to the emerging artist category.
Katie Wilson-Milne: Meaning the criteria are, you know, a long history of public auction records, and I guess obviously a certain value of the art itself.
Rebecca Fine: Absolutely. There’s one thing I know we haven’t touched on, which is also critically important, which is the condition of the artwork. So in every instance, the artwork is physically inspected. Every piece of collateral is physically inspected by a museum conservator to assess the condition, because the condition of our artwork heavily impacts its value. And we have a team of really talented museum conservators all around the world, who provide that information directly to the appraisers, even if the appraiser isn’t able to see it in person. And so, I think that there’s a huge focus on understanding each object, because they are very sui generis, and these are not commodities, and every object has its own history. And frankly, provenance is an important factor, and does often factor into the valuation. So it’s a pretty sophisticated and all-encompassing analysis, and we have, I don’t know, something like 37 different factors that we consider, and score each art object.
Katie Wilson-Milne: So how do you confirm that the borrower has good title?
Rebecca Fine: So with title, really, there are a number of things, a number of facts that we look at. We need to see not only the invoice, but the proof of payment.
Katie Wilson-Milne: Right.
Rebecca Fine: Which very often is comprised of a wire transfer, a bank statement. It’s not sufficient for us to hand us an invoice that says, you know, paid, with a stamp on it.
Steve Schindler: Sure.
Katie Wilson-Milne: Yeah. But it’s the art world, so that’s what people have.
Rebecca Fine: They say it all the time. They say, but I have- the art’s in my possession, and you can see from here, look, it says paid in red with this little stamp. And I said, well, that frankly doesn’t tell me anything about whether or not you actually have title. So, and we look at the metadata of every document that we receive, literally.
Steve Schindler: Oh, wow. That’s pretty cool. I didn’t know that.
Katie Wilson-Milne: Oh, wow.
Rebecca Fine: We look at- because PDFs can be modified or manipulated.
Katie Wilson-Milne: And they are, yes.
Rebecca Fine: And they are from time to time. That said, it’s all of a piece, right? I mean, you have to understand the collecting history. It all has to make sense when there are flags, right? If there is smoke, there is generally fire. I think we’ve all worked on those cases together. I mean, when you purchase something, pay for it, and…
Katie Wilson-Milne: And receive it.
Rebecca Fine: Receive it, it’s that sort of title.
Rebecca Fine: I mean, there isn’t really anything you can do. And in circumstances where you have, you know, secret silent partners and transactions that nobody could ever know about, there is unfortunately very little that a lender can do.
Katie Wilson-Milne: All to say you take some risk, right? You do your very best.
Rebecca Fine: Absolutely, absolutely.
Katie Wilson-Milne: But if someone’s defrauding you…
Rebecca Fine: No, I mean, there’s very little that can be done if somebody willfully and repeatedly misrepresents facts and presents forged documents and falsifies contracts. That, unfortunately, that is a fact.
Katie Wilson-Milne: But obviously, you run UCC searches, you do Art Loss Register.
Rebecca Fine: Let’s talk about that, because I think very few- your audience is very sophisticated, but I think most people don’t understand that we do not have at this time a global international registry for title and ownership of art.
Steve Schindler: Unlike, for example, real estate, other kinds of assets.
Rebecca Fine: Even cars and, yeah, absolutely.
Katie Wilson-Milne: They cost far less than many of these things.
Steve Schindler: You know that there’s a place that you can look and title is very clear.
Rebecca Fine: Yes. So, the best that we can do right now, in addition to ascertaining and obtaining evidence of payment, and then understanding which entity made the payment, et cetera. The Art Loss Register is used not only by parties that have concerns or claims about works that, you know, may or may not have been stolen. You, as a secured lender, can also both run a search and then register your security interest in the art, which we do in every instance. So at the time when we obtain collateral for a loan, we always check with the Art Loss Register to ensure that there isn’t another party out there that claims to have an interest in that object. Upon closing the loan, we register as a secured party. And what this does is it puts the world on notice that, you know, if anyone were to inquire subsequent to this loan being made, they will hear from the Art Loss Register that there is another party that has registered an interest.
I believe that the Art Loss Register does not tell them without our permission that it’s Athena, and we often do not share that information. It’s sort of case by case. But it puts them on notice. Likewise, and this happened, when and if we get a call from the Art Loss Register after a loan has been made, that triggers a conversation with our borrower. Oh, by the way, we received an email from the Art Loss Register. There’s been an inquiry about this piece. Do you have any idea why anyone might be inquiring? And then if the answer is, oh, well, I have a very sophisticated museum that is considering an acquisition. Now, obviously, that’s not true, but it absolutely puts you on notice that something is going on, and at a minimum engenders a conversation. And it’s used pretty widely, but for example, the banks aren’t really doing it, because again, it goes back to the point that they’re not really concerned about the art, because at the end of the day, that is not their concern.
Katie Wilson-Milne: Well, they’ll file the UCC-1, which obviously you do, too, but filing a security interest on the Art Loss Register is…
Steve Schindler: Well, can I just make sure that we’re using the right terms? Because when you file a UCC-1, as we say, that is a document that has a form that gets filed, you know, with state authorities, right? That’s where you can find it. I think with the Art Loss Registry, because we’ve had some interactions with them on this topic, is that you’re just saying to them that you have a security interest.
Rebecca Fine: No, you have to prove- I mean, in every instance, they require indicia of proof. I mean, they’re not going to take my word for it. We do provide them with sufficient evidence that they can be confident that I’m not making that up.
Steve Schindler: Because I’ve had situations where people have just registered complaints with them that are not really based on anything.
Katie Wilson-Milne: Not lenders, but yeah.
Steve Schindler: Not lenders, but ownership. I have a claim to this, and then it sort of surfaces, and then you have to spend a certain amount of time disproving that, even where it has no merit.
Rebecca Fine: No, absolutely. I mean, it’s just sort of the best that we have, unfortunately, right now. And for another podcast, I would love to continue a conversation that I began like a year ago at a symposium that you organized to consider with other professionals, including all my competitors and artist foundations and the art lawyers and the collectors about the challenges to creating an international registry for ownership, because it would effectively eliminate the risks of competing claims against an artwork. And it’s important too for fractional ownership, because we all know that certain artworks are owned fractionally, and I’m just talking about the most extreme example of masterworks. But even in instances where you have tri-party or multiple parties that assert ownership interests, it could really solve a lot of these issues. But it requires a lot of work to understand the very real objections among them, not just confidentiality, because we know that people obsess about the confidentiality. But we know that there are governments with real confiscatory policies that would love nothing more than to access this information to be able to assess tax and-
Katie Wilson-Milne: But also cultural property, which is not always ancient artworks.
Rebecca Fine: Absolutely.
Katie Wilson-Milne: I really think it’s so interesting. I have a lot of thoughts on this.
Rebecca Fine: But again, back to flags. So yes, I mean, really, what you’re doing is you’re trying to look very holistically at the transaction and whether it makes sense. And if there are reasons to be concerned, you continue to probe, and if issues surface, we simply don’t make the loan. I mean, we don’t have a gun to our heads.
Steve Schindler: Right.
Rebecca Fine: We try to make really, really considered decisions. There’s a very rigorous process. There are investment committee members who interrogate all of this information. And it’s very much part of, I think, why we’re able to do what we do, where other companies can’t. And I know that there is a new crop of sort of art lenders principally from the art world who are hanging shingles and making loans now.
Katie Wilson-Milne: But high-risk, high-risk stuff.
Rebecca Fine: For sure.
Steve Schindler: So let’s just, there are some nuts and bolts questions that we haven’t covered that I think our listeners might just want to understand. So I inherit a bunch of art.
Rebecca Fine: Yeah.
Steve Schindler: And let’s say, now I know that, well, if I thought it was worth, say, six million dollars, that might not be relevant to you, because it’s now going to be net realizable proceeds, so let’s call it five.
Rebecca Fine: Right.
Steve Schindler: How much money can I borrow using that as collateral?
Rebecca Fine: So the six million is the acquisition price?
Steve Schindler: The six million is what we’ve appraised as date of death valuation, but I realize that’s not your valuation. So let’s just say we get- you take a look at it and whether it’s marketable cash or net realizable proceeds, I think those are what the terms you use. Let’s say you get $5 million using that measure. And it’s art that’s on your list.
Rebecca Fine: Right. So our loan to value ratio is also calibrated on the basis of other liquidity factors. So at the high end, we can loan 50% against a marketable cash valuation. But for artworks that we consider to be less liquid, the LTV is very often much lower. It’s an involved process. It’s not a short answer.
Steve Schindler: Ok.
Rebecca Fine: People very often sort of come to us and say, “how much can I borrow against this art?” And what we do really well, we can very quickly sort of come to a preliminary assessment regarding eligibility and what we think the loan amount might be.
Katie Wilson-Milne: And decide whether you want to dive deeper.
Rebecca Fine: Right. And then after that, there’s sort of an engagement stage. We have to, again, retain these independent third-party experts, the conservator, the appraiser.
Katie Wilson-Milne: Does the borrower pay for all of that?
Rebecca Fine: Yes, the borrower pays for the third-party work that is done. Those costs are passed through, but we’re also not marking any of that up. I mean, they pay sort of the cost of the third-party diligence. There’s also, as you guys know, you do background searches and UCC lien searches, and you do that of people who have more than sometimes a 10% interest in the transaction. Sometimes it’s the banks really use like a 20% threshold when determining which of the ultimate beneficial owners they’re going to diligence.
Katie Wilson-Milne: So even if you don’t make the loan, but you do the diligence and then decide you’re not gonna make it, the borrower signed something saying they’re gonna pay for that initial investigatory period?
Rebecca Fine: Yes, but very, very typically, if we’re in a process and there is any issue early on, we pencil down and all of that money is refunded to them. So, you know, to the extent that we discover in our diligence that there’s a suspicion that we won’t be able to proceed…
Katie Wilson-Milne: You just stop right away.
Rebecca Fine: We stop work, yeah.
Katie Wilson-Milne: And do you, when you make a loan, do you take possession of the artwork?
Rebecca Fine: So, that depends really on the facts and circumstances of the individual loan. But in the US, where we have a uniform commercial code system that allows us to perfect without taking possession, we do allow the borrower to retain some of the art. We- generally speaking, it’s rare that we would allow them to keep all of it. But it is a conversation and very often, the borrowers- I mean, most of our borrowers have multiple residences, and so some of the work is, you know, on the walls in East Hampton for the summer, and then they go to Aspen.
Katie Wilson-Milne: How do you keep track?
Rebecca Fine: We have an extensive collateral tracking and maintenance system, and everybody at the company and, you know, the borrowers generally have someone at their company or their family office who is providing us with certificates of compliance on a routine basis. We have inspection rights as well, but, you know, it’ll be sort of monthly that they’ll be reporting to us. And they do need to get permission if they want to move something. We visit the site to ensure that the security and conditions are apt. And obviously, we haven’t talked about insurance. That’s a very big part of our process as well, because we require the borrowers to have their own nail-to-nail or wall-to-wall fine art insurance policy.
Katie Wilson-Milne: That you verify.
Rebecca Fine: That we verify. And very often, it’s interesting, this happens not infrequently, that we’re reviewing all of the coverages and the exclusions, and we’ll discover that you don’t actually have any insurance when it’s at that house in Aspen over the summer.
Katie Wilson-Milne: People do not understand their insurance.
Rebecca Fine: They don’t understand it. And then there’s sometimes- it’s in a facility with aggregation limits, which means that effectively, there’s so much exposure that that insurance company has at that particular site that there’s no coverage there. And we’re always monitoring that as well. But it’s funny, the work, you know, when I hear myself saying this, it sounds like a lot of work, even that the borrowers have to put into it. That said, very often the client says to us, that was a little bit more painful than, you know, my experience with, you know, whatever, Bank of America. But the product is this very comprehensive kind of bible that includes, you know, all of the information, the very self-same information, that is going to make it easier for them ultimately to sell. So the imprimatur of having received a loan from Athena, we’ve been told by many, many clients, is meaningfully enhances the future saleability of that work.
Katie Wilson-Milne: Because you’ve done all the diligence.
Rebecca Fine: And they know. Well, if it was collateral for a loan from Athena, so we feel confident.
Steve Schindler: And then it’s in one little book.
Rebecca Fine: I mean, we know because, I mean, it’s- among all of the lovely things I could say about my clients, who I love, they’re not the best record keepers.
Katie Wilson-Milne: Yeah.
Rebecca Fine: It’s kind of remarkable.
Katie Wilson-Milne: That’s the art world. I mean, that’s what’s so, when we ask about title, it’s just like people weren’t getting documents about art.
Rebecca Fine: Also, think about it. I mean, these are like true collectors. This is a passion. And they’re buying art at fairs or they’re meeting the artists, and they’re collecting anything and everything that the artists will give them. Or they’ve inherited art from a family member, and they don’t have the kind of the language or the, or the context to be able to understand what questions they should be getting or asking for. The truth is, there are so many different facts and circumstances that you can’t possibly reduce it all to one thing. But one of the reasons that I think my legal training really serves us well is that we all understand at the end of the day, like no matter how many thousands of documents there are, right, it all comes down to like a few seminal pieces of information and the ability to sort of tell a compelling story.
Steve Schindler: Right.
Katie Wilson-Milne: Right.
Rebecca Fine: And so that just involves marshaling all the evidence, contemporaneous evidence of ownership, a picture of the collector proudly holding up the painting in their new home with a date or, you know, a newspaper clipping that references a visit to their home or whatever. I mean, any number of kind of evidentiary facts that would enable us to draw this conclusion, we work with them on an affidavit. They reference all of these disparate pieces of information. They confirm that everything is 100% accurate and complete to the best of their knowledge. And this supplements the reps and warranties that they’re also making in the loan agreement. And that, too, is different from the way that the bank affidavits generally look, where they’ll literally say, I hereby confirm and attest that all of these artworks are owned by me. I was like, thank you very much, and a list, you know, okay, well, that and a subway token won’t even…
Katie Wilson-Milne: Well, let me ask you this, because this has always been my question with specialty lenders, or these non-recourse lenders like Athena, is what is the type of client that’s coming to you, this wealthy person who has lots of assets? Like, why don’t they have a relationship with Citibank or Bank of America or…?
Rebecca Fine: They do. Very often, our clients do. So, let’s just remember back even to the not-so-distant past, Silicon Valley Bank, for example, right? I mean, there’s a lot of new wealth generated in that part of the country. Many of them had invested in art, and they were getting capital calls, or they were needing to make kind of investments in their own businesses. A lot of our clients are sole proprietors, they’re entrepreneurs, serial entrepreneurs, very successful people, but their money is typically invested in their own businesses. And they were looking in the couch and under the table, they were like, where am I going to get this money? And so they were coming to us for liquidity during that crisis, with the banks pulling back in lots of areas, lending- for example, a lot of our clients have heavily invested in real estate. And they had construction loans that were either stalled or lines of credit that were kind of shut down. And it’s not the case that these clients are not, many of them, private-banking-worthy clients. But the circumstances for a lot of these clients have changed. And most of our clients are hundred millionaires and billionaires now. Fewer and fewer of them are people who have, you know, collections of ten million dollars. We do have clients who have smaller collections, but our loans are typically larger than that.
Katie Wilson-Milne: But the reason they’re not going to Citi Bank and, getting, you know, an accommodation loan for a fraction of what you charge in interest, presumably, is- or half or some less, right, is because their other assets, because of their life circumstance, don’t meet…
Rebecca Fine: No, we get a lot of our referrals and a lot of our refinancings are of bank loans now. Keep in mind, we lend globally. So there are lots of clients who have interests outside of the US and the banks won’t be able to address those needs, because they can’t deal with certain foreign clients. A lot of our clients are trustees. They’re managing what would otherwise be a totally illiquid trust corpus. It’s vastly, vastly more valuable than anything, you know, you can imagine, but it’s also illiquid and the banks are not going to lend to them because there’s no, they don’t have the ability to service the debt. They don’t have cash and the banks want assets under their management, and they want to have a different exit. The trustees look at what we’re doing as sort of conferring the ability to address a lot of their fiduciary obligations.
For example, some of the beneficiaries of a trust, imagine they’re being sort of our age, right? Their parents spent many, many decades building a collection of impressionist or Americana, and some of them have no interest at all in ever looking at that art. Some of the kids feel very obliged to keep the collection intact because of what it represents to their family, and others just want to pay for their kids- respectfully, I just want to buy that apartment on Park Avenue and send my kids to school. These loans enable the trustees to do what I meant to like little leverage buyouts where they can effectively take a loan and pay off the beneficiaries who want nothing further to do with the collection, and to maintain the collection and think about a very orderly asset disposition plan such that, you know, the impact to the collection is minimized and they can continue…
Katie Wilson-Milne: And they’re not in a rush, yeah.
Rebecca Fine: To make a plan that is going to ultimately result in the best kind of outcome for all the parties. And the trustees can’t go to a private bank for a loan like that. And frankly, the lenders who don’t have sort of this financial sophistication or the legal expertise can’t help these trusts either, because it’s simply too complicated. And you know, you need to consider not only the jurisdiction where the artwork is cited, but you have to understand that the laws and the regulatory framework in the jurisdiction where the borrower is resident.
Katie Wilson-Milne: Very complicated.
Steve Schindler: Right.
Rebecca Fine: And then you have to think about if the art is in different jurisdictions, is it freely exportable? Like, I don’t lend in jurisdictions where it would require court intervention for me to be able to get the art out, right? Because I don’t want to be in a situation where I’m waiting for a court to make a decision. It could take forever. I mean, that’s why we don’t lend in Italy, because you could literally spend your entire life waiting for that to happen.
Steve Schindler: Right.
Rebecca Fine: And France is not so dissimilar, although there’s a banking monopoly in France. So that’s another reason why.
Katie Wilson-Milne: But no, a lot of countries outside the United States don’t have these public- It’s not as easy to perfect your security interests.
Rebecca Fine: There’s that, but then there’s also the exportability, right? I mean, all of these countries have…
Katie Wilson-Milne: Italy again…
Rebecca Fine: They are…
Steve Schindler: Yes.
Rebecca Fine: Always developing, yeah, you know, Spain, etc. I mean, they’re looking at their cultural patrimony, and they’re thinking about ways that it is important or not for them to exercise kind of dominion and control over what they consider to be important cultural property. And I need to know whether or not…
Katie Wilson-Milne: Yeah, that creates way too much unpredictability in the market.
Steve Schindler: Right, that’s the beauty of the United States. We don’t really care.
Katie Wilson-Milne: We care.
Steve Schindler: We don’t care.
Katie Wilson-Milne: We have a lot of government agencies dedicated to…
Steve Schindler: Right, we don’t care about exporting…
Katie Wilson-Milne: We don’t care about exporting…
Steve Schindler: Cultural- for the most part.
Rebecca Fine: So the regulatory- we didn’t even talk about that, but there are massive regulatory implications in all of these places as well.
Steve Schindler: I was just reading, and actually in the Bank of America report, and this is a number I’ve seen before, the younger generations, the millennials, Gen Zs, are potentially set to inherit a tremendous amount of assets, tremendous amount of art. $72 trillion, I think, was the number that they quoted. So, do you see as a trend in terms of art lending is going up as a result of that, or where do you think your business is headed?
Rebecca Fine: Yeah, I think that- I’m very confident that the market for art lending is on the ascent. It was challenging, obviously, as rates were kind of peaking, but frankly- I think we have visibility into a rate kind of still going to be much higher than where it was a few years ago. But I think people understand that this kind of financing provides them with a lot of flexibility, and there is little to no stigma associated with borrowing against your art as there was even 10 years ago when we started this business. I think it’s fair to say that I once heard from a client who was offended that I would have reached out- a former client of mine- would have reached out to inquire. I said, this is absolutely not a commentary on whether or not you manage your finance as well.
Katie Wilson-Milne: No, no this is totally normal, yeah.
Rebecca Fine: But I think I would be very surprised if people were to respond that way. It’s being discussed a lot more. The younger generation obviously understands debt in a way that our parents didn’t, and culturally I think they’re a lot more comfortable- in fact, what they’re mostly focused on is acquisition financing. So most of my borrowers under the age of 40 are coming to me, because they’re collecting in huge quantities, and they want to understand before they buy that next painting, how much they’re going to be able to get from me.
So it’s feeding their passion for collecting. And then we do, you know, the galleries and the gallerists who used to go to sort of friends and family for the sort of the 50% when they would buy art with friends have realized that they can effectively get that, you know, 50% equity check from us, and then they don’t have to share any of the upside when the artwork ultimately appreciates in value. Because with the debt financing, they have a fixed cost of the capital, but when they sell, they’re not having to share that profit with another party. So they’ve done the math, and it’s very advantageous, especially for people who are buying well and know that, or have some confidence that they’re going to hold for some period of time.
Katie Wilson-Milne: And make enough to make the cost of the loan well worth it.
Rebecca Fine: Yes.
Steve Schindler: Well, that’s a good place to end it. Thank you, Rebecca. It’s been a pleasure.
Rebecca Fine: My pleasure. It’s really fun seeing you guys here. I can’t believe you took us this long.
Steve Schindler: We’ll do it again. And that’s it for today’s podcast. Please subscribe to us wherever you get your podcasts and send us feedback at podcast@schlaw.com. And if you like what you hear, give us a five-star rating. We are also featuring the original music of Chris Thompson, and finally, we want to thank our fabulous producer, Jackie Santos, for making us sound so good.
Katie Wilson-Milne: Until next time, I’m Katie Wilson-Milne.
Steve Schindler: And I’m Steve Schindler, bringing you The Art Law Podcast, a podcast exploring the places where art intersects with and interferes with the law.
Katie Wilson-Milne: The information provided in this podcast is not intended to be a source of legal advice. You should not consider the information provided to be an invitation for an attorney-client relationship, should not rely on the information as legal advice for any purpose, and should always seek the legal advice of confident counsel in the relevant jurisdiction.
Music by Chris Thompson. Produced by Jackie Santos.