Specialized financing leverages art to buy more art

Collateralized loans based on assets such as art and real estate are among the specialized topics that private wealth advisers need to understand. Stephen Drake, private client adviser with Bank of America Private Bank in Los Angeles, said he once helped a wealthy client use credit to fulfill a lifelong dream of owning a professional sports team.

“When it was time to ink the deal to buy the team, you have never seen a more excited person,” said Mr. Drake, who explained the specialized financing techniques in a conversation with Liz Skinner, InvestmentNews’ special projects editor.

Liz Skinner: What type of assets are you helping clients leverage for credit?

Stephen Drake: It would include marketable securities that are tradable and liquid. We call these margin lines and we do a lot of margin lending. The next level up we start looking at individual assets. We do a fair amount of art lending, taking art as collateral. We like commercial real estate as collateral, private aircraft and marine, mainly mega-yachts, and hedge funds, which are typically illiquid and have some esoteric underlying strategies. Also, we do a fair amount on an unsecured basis. It’s quite a rainbow of different types of collateral to sometimes no collateral at all.

LS: Let’s talk about art first. How much art do you need to have and how much credit can be given?

SD: Every situation is different but typically, we want an art line to be $1 million to $2 million in size, all the way up to hundreds of millions of dollars. How much art does that need in the collateral pool? The rule of thumb is 50%. We lend 50 cents on the dollar. We always have a current appraisal. There are times where because of the art, such as it may not be as diversified as we would typically like but we still want to provide leverage, we might scale that back to a 40% ratio. I’ve seen deals where we have boosted it up a little, too.

LS: What are clients typically seeking to buy when they leverage art? More art?

SD: It can be a number of different things. If we step back and say, why would someone want to leverage in the first place. You can be debt-averse and not want to have anything on the right side of your balance sheet. But you might have a large amount of assets on the left side of the balance sheet. When we find a client who is open to leverage and what they are trying to do is unlock assets to buy further art, such as they want to go to the auction knowing they have a certain amount of dry powder that they can bid and have the commitment from the bank to honor their bid. It could be, 'Hey I want to invest in commercial real estate.' The typical reasoning behind unlocking or monetizing a value of art other than selling it, which obviously has capital gains implications, can be they want to pass it down to family members or it’s part of estate planning and they want to leave it to a museum down the line. So they unlock the value of the credit facility.

Most times it’s because they want to make additional investments in art or commercial real estate. I’ve seen where they have used it to buy a vacation home and they didn’t want a mortgage, they just wanted to pay cash for negotiation purposes.

LS: How is it different with real estate?

SD: We do a fair amount of residential mortgage lending, primary homes, secondary homes, and some of our clients have multiple secondary homes scattered about the country. Then a lot of clients also have commercial real estate investments, apartment buildings, warehouses, hotels, retail shopping centers, etc., and we can lend against those properties. Each one would have a standard approach.

LS: With real estate, is it the same target of 50 cents on the dollar like with art?

SD: There’s a little bit more variability on that because we appraise the property, and there is a lot of analysis on the cash-flow generation availability of that piece of, say, commercial real estate. What are the leases? What’s the net operating income? In a shopping center where you have 30 or 40 tenants, what’s the maturity of their leases? Apartment buildings that are fully leased in a prime area like Los Angeles or along a beach community, where there is huge demand, we might go to 75% loan-to-value ratio, whereas an apartment building in Phoenix, Arizona or Oklahoma City, Oklahoma, it might be closer to 50% or 60%. It’s a property-by-property analysis.

[More: Popularity of collateralized loan obligations widens thanks to demand from rich]

LS: What about aircraft?

SD: We have an aviation group that does nothing but aviation lending. BofA has a huge business in that. We are one of the largest lenders on corporate aircraft. My part of the bank, private bank, does individuals. We do a lot of lending to individuals to acquire aircraft. We also have a lending program with construction financing, where someone might want to buy a particular, brand-new plane and they have to jump into the [manufacturer's] queue. The company might say we can deliver it in three years and they’ll start constructing it 18 months ahead of that. That’s where we provide advances to the manufacturer as they build it. When it’s finished and delivered, then the loan can roll into a five- or seven-year term facility.

A lot of clients also buy used planes and we do a lot of acquisition financing in the corporate aircraft market.

LS: What kind of maritime lending are you doing?

SD: Our marine finance group does nothing but yacht lending. Much like aircraft, we have a construction loan program and provide longer-term financing once it’s done. Typical loan-to-value ratios on that, depending on the amount, the builder of the yacht, its size, etcetera, is probably anywhere from 50% to 65%.

LS: Can you do these types of loans for foreign clients?

SD: We are very limited in European countries because of various tax law treaties that the U.S. has with various countries in Europe that govern what we can and cannot do. In South America and Central America, it’s easier for us to be involved with those individuals and others in those general areas of the world. In Asia, we also are more limited in ability to take care of those clients. Our international lending is very focused on certain parts of the world. About 99% of my business resides here in the U.S.