The central goal of a bankruptcy trustee is often to pay claims and creditors, a process that includes liquidating assets to convert valued items and properties to cash. Within this principle there has always been a concern that the assets being sold are being surrendered for “cents on the dollar,” or are bringing in far less than it is acknowledged that the asset is worth.
Going hand-in-hand with all of this are the business tools needed to execute a bankruptcy. This sector continues to see new products and innovation from service providers, much of it enabled by Internet/web technology. There’s an emerging business model in lending and financing that trustees should know about. Lending on precious, luxury assets may give a trustee more flexibility in wiring up a solution that will be advantageous to the creditors.
To this day, most banks, factors or asset-based lenders would never entertain a loan based on luxury, precious assets as collateral. This is referring to loans where the security is fine art, wine or jewelry; high-end, exotic vehicles; family heirlooms; rare musical instruments; antiques; rugs and tapestry; and other collectibles.
As banks have become rigid on their lending policies largely in response to aggressive oversight by government regulators, this development has opened the door for emerging entrepreneurship by independent concerns with capital. This is especially true during current economic conditions where the Federal Reserve has while imposing extraordinarily low interest rates for perhaps one of the longest periods in U.S. history. This has led to private individuals and firms that offer loans based on precious, luxury assets. There are some six significant players now engaged in this “new generation” sector, but no doubt there are more people privately, quietly entering into these transactions.
There are a variety of scenarios where lending on precious, luxury assets serves an important purpose. Some include (1) a widow who has discovered her late husband left her with debt; (2) a business owner who has suffered a severe financial setback; or (3) an individual who simply spent too much money and lives beyond his/her means.
Lending on precious, luxury assets may also be viewed as a temporary “bridge loan.” A business or individual could be signing a lease, seeking a mortgage or applying for a line of credit where they do not show enough on their balance sheet to qualify. In all of these cases, making use of a precious, luxury asset to design a solution makes practical sense. It is very possible that the asset in question has already been for sale for a period of time with no buyers. Perhaps it is sitting somewhere on consignment. Many times, this luxury item does not get regular use by the owner and is stored away or locked up. Putting this asset to use as collateral is a good business strategy because it provides a financial benefit without the owner having to part with it.
About two years ago, a well-known New York private club was facing imminent bankruptcy because of fraud and mismanagement. In their panic, the board hastily agreed to sell one of the two extremely valuable paintings they owned for less than half its worth. While the cash influx improved the club’s finances, the drastically discounted sale triggered a revolution by the members against the leadership.
A new board was installed, but the damage had already been done. The club’s heirloom asset was now owned by someone else who received a great deal. Borrowing on the club’s precious, luxury asset may have provided a different outcome, including preservation of ownership and equity for the club.
A small business owner in dire need explained to one of these firms that his company had not been paid on an international transaction and that he was waiting for an insurance settlement. After a series of rejections, he found a bank willing to offer a new line of credit — but the business owner did not show enough on his personal balance sheet. He had two exotic vehicles that he kept as a hobby in his garage, each valued at approximately $100,000. Within several days, the small business owner was provided with $100,000 in cash and a loan collateralized by the vehicles based on 50 percent loan to value for a six-month timeframe. With this sum, he now qualified with the bank for a fresh line of credit.
The lawyer of an elderly lady contacted one of these firms about a client in financial distress. She had sizable bills for medical care along with nursing home and rehabilitation services. Her husband had passed away without the funds that she had been led to believe were in his estate. It was a contentious situation involving two previous marriages and several children in different states. The client owned a very valuable diamond bracelet that she had previously attempted to sell but received only meager offers.
The firm was able to provide her with a $56,000 loan, which represented a 70 percent loan to value based on an appraisal of $80,000. These funds relieved some of the pressure that she was under to bring her past due bills current while the late husband’s estate was being settled. She was able to retain ownership of her precious asset, although she also knew that she can possibly sell it in the future for a price that reflects its true value.
What is the procedure to secure a loan based on precious or luxury assets, whether put together by a bankruptcy trustee or a distressed party? Most of these are phone call or email inquiries. For example, if the asset is a vehicle, these firms require proof that it is owned outright by the person or entity receiving the loan. A copy of the title, model and serial numbers, mileage and some high-resolution photos must be provided. The maintenance record is also important. An expert in exotic vehicles will examine this documentation and make a preliminary appraisal. (Subject to a physical inspection of the vehicle, between 40-50 percent of the vehicle’s value is generally offered.)
Using the author’s company as an example, the owner can drop off the vehicle at its storage facility. If they are not local, transport to the facility can be arranged and is handled on a closed flatbed by a licensed, approved and recognized carrier. The storage facility is part of a luxury car dealership and is climate-controlled, with regular access to a battery charger. The vehicle gets rotated twice a month to keep the engine freshly maintained. There is proper security and insurance coverage, and the vehicle is not sitting in some unattended outdoor lot.
Upon confirmation by physical inspection, the firm takes possession of the vehicle and executes a loan agreement with the owner, called a “collateral loan broker agreement.” This contract is regulated by New York state under the Collateral Loan Brokers Law, Article 5 of the New York General Business Law.
The client does not have to be present. All of the documents are electronic and do not have to be notarized. Upon signing and approval, the money for the loan is wired into the client’s bank account. Again, the firm would hold the title and have actual possession of the vehicle at a storage facility. These loans typically run for three months, six months, one year or longer.
There are no late fees and no prepayment penalties. All of the fees and expenses concerning transport, storage and insurance documentation are typically covered by the firm. The client is charged a set-up fee of 3-5 percent of the principal amount for all of these costs, which are paid up front and deducted from the principal amount of the loan. The client pays monthly interest, which ranges anywhere from 1.5-3.99 percent per month (again, that is negotiated based on risk, amount of the loan, the loan’s term period, etc.).
The client is welcome to terminate the loan at any time; a few days’ notice is recommended. They need to provide a certified check, a bank wire or an electronic transfer from a bank covering the loan and any outstanding interest through the loan’s conclusion. Cash is not accepted due to risk and security issues. The vehicle can be picked up at that time or transported with an acknowledgment release that is signed by the owner. The client may also want to extend the life of the loan, which is often done without altering terms with a simple, new agreement.
With respect to a painting or a work of art, there are some variables. Very clear, high-quality photos of the art from all sides (including the front, back, the signature, and close-ups showing detail) are required. In addition to disclosing the dimensions, artist, title and all provenance — which can include receipts and other forms of proof of ownership and ownership history — are also required. The appraisal should be conducted by a credentialed team at a reputable auction house. For example, the author only lends on auction-quality artists and works, and there should be no liens on the art; the works should also have no claims or not show up on the “Art Loss Registry” (an international database tracking missing and stolen artwork). Shipping and storage can be a much more sensitive concern in terms of quality and expense.
Bankruptcy trustees and professional service providers in this field should know that it is important to deal with an experienced and reputable lender who can offer several references. Most lenders in this growing niche are not “pawn shops,” but they do operate with a “pawnbroker license.” While this varies from state to state, in New York interest rates can go up to 3.99 percent per month. (Since the author is based in New York, which is where the activities originate, this is the maximum that can be charged.) Again, negotiated rates are influenced by the asset, term and risk issues.
Clients can be successful business owners, entrepreneurs and high-end, affluent people, or have had access to precious, luxury assets. Nearly 50 percent of the author’s clients are referrals or are introduced through a professional service provider, such as a lawyer, accountant, financial advisor or broker. Contrary to a typical “pawn shop,” lenders in this specialty are not in a seedy storefront where people come in seeking to hock an obsolete flatscreen for $100. Lenders in this domain typically conduct business in a professional office setting as opposed to retail space. The author works directly with a client to clearly illustrate all facets of the loan and will provide a detailed projection showing cash flow from the loan’s inception to expiration. The author encourages participation from a client’s lawyers or accountants to help coordinate the loan process into their overall financial strategy and goals.
The financial service provider can be useful in helping a client determine the asset’s true, accurate value. In a third of the author’s deals thus far, the applicant starts with an illusion or unrealistic view of what the asset is actually worth. Based on the evaluation, the firm is generally able to lend about 40-70 percent of the value.
The asset is covered by end-to-end insurance once upon taking possession at the time the loan is issued. The application procedure can require anywhere from 24 hours to several days. The client and/or the professional service provider have the right to know where the asset will be stored and maintained. They should seek validation on the quality and security of the facility (garage, vault or other storage facility) and should be made aware of any accommodation fees and charges.
It is beneficial for the professional service provider to review the client’s loan document, especially if the terms of the loan need to be shortened or extended. There should be no hidden exposures or encumbrances. There are bankruptcy trustees who have found that lending on precious, luxury assets is a useful instrument. It keeps a trustee’s options open on the liquidation of these assets at a point that reflects the asset’s accurate value. When trustees need to generate quick cash for the purposes of meeting operating expenses and paying bills in a bankruptcy, using a precious, luxury asset this way can be an effective solution.