Superyachts, business jets, art collections, watches, wine cellars, classic cars, prized handbags, jewellery and even the occasional pair of trainers. These assets are often seen as must-haves for high net worth individuals.
Why and how these assets are acquired can of course vary wildly, from inheritance to “passion” acquisitions or speculative investments, through to the simple fulfilment of business needs. It has also long been clear that some “luxury assets” perform very well when compared to other types of investments, sometimes outperforming stocks and shares. This has led to an increasing awareness of the potential to unlock the value of these assets and provide additional liquidity to owners, either through individual asset financing arrangements or as part of a wider banking arrangement.
What is luxury asset finance?
Typically, lenders will offer a lower interest rate on a loan if an asset is offered as security or collateral for the borrowing. This allows the lender, in the event of non-payment by the borrower, to enforce its rights by taking and (in most cases) selling the secured asset in order to recover the outstanding debt. A typical example of this is a mortgage against property, but some lenders will take security in the form of other assets including “luxury assets”, such as business jets, art, fine wines, watches or collectible cars.
Can all luxury assets be financed?
In short, no. On a basic level, lenders try to ensure that they will be made whole in the event of an enforcement by only lending a percentage of the value of the asset offered as security. This percentage can vary greatly between lenders and between different asset classes, with higher percentages being lent against “safer” assets which can be valued easily, widely and comparatively (such as real estate, where loan values can sometimes reach as much as 90 or 100 per cent of the value of the property) whose title can be established easily and definitively and which can be protected against disposal whilst secured.
Typically however, much lower loan to value percentages are offered for loans secured by unique moveable chattels such as art or wine, where title can often be difficult to establish and prove, where the asset can physically be moved easily, where value is subjective or intrinsically linked to provenance and / or authenticity (such as handbags), or where comparable values exist only in a small pool of typically depreciating assets (such as cars or business jets).
Similarly, values can differ (often unpredictably) depending on market appetite and the quality of an individual piece, making lenders more cautious about the loan to value they will offer against some of these asset types. The gaudy interior of a superyacht or imperfect mechanisms of a watch could significantly and adversely affect its value, as could market popularity of an artist at a certain time.
How can you assess whether a luxury asset might be suitable for finance?
A lender will likely only lend against an asset if it (a) has all of the information that it will need to pass to a potential buyer and (b) is confident it will be able to recoup its monies on an enforcement sale. A potential borrower would be well advised take into account the following considerations before approaching a lender for finance secured on a luxury asset.
Location, usage of and access to asset
Before seeking to raise finance against a luxury asset the owner should consider where that asset is, how much access they require to it and what they need to use it for. Often lenders will need to establish or protect their security by housing the secured asset in a specialist warehouse with restricted access. If an individual wishes to keep their valuable watch on their wrist, continue to drive their classic car or store their wine in their own cellar, this could ultimately prevent those items from being offered as collateral.
The borrower should consider whether they or their companies need to use planes, cars and yachts and if so, where they may to want to use them as lenders will have strict rules about where secured vehicles can be taken. Similarly, if an asset is owned by a company, lenders may also have certain stipulations, not only around where the asset itself can be registered or used, but where the company owning it can or can’t be incorporated. Lenders will also want reassurance that the asset’s tax and customs situation is in order.
If the assets are located or registered outside of England and Wales, or owned by a foreign entity, legal advice will likely be required in each jurisdiction where the asset is located (or vehicle is registered) as well as in the jurisdiction of any ownership companies, trustees and underlying trusts, which can increase documentation and costs.
Title and ownership
It is imperative that whoever offers an asset as security for a loan actually owns that asset. Ownership registers do assist in establishing this for most yachts, cars and aircraft but tracing title can be more complex for personal collectibles such as art, wine, watches, handbags or jewellery. Lenders will typically insist on seeing and verifying unbroken “back to birth” title chains dating from the creation or manufacture of the piece through to the proposed security provider. With registered assets (such as jets and yachts) this is often achieved through registration documents or bills of sale. For non-registered assets, however, where title is often established by a collection of evidence such as invoices, auction records, receipts and catalogues, difficulties can arise. Often the title deduction process reveals questions around ownership, particularly where borrowers have conflated individual with corporate or trustee ownership or where ownership of IP rights has been separated from the asset itself. In order to reduce legal costs and increase efficiency, borrowers contemplating offering a luxury asset as security should ensure that they have clarified and identified the ownership and title of the asset before approaching a lender for finance.
Authenticity, provenance, maintenance and insurance
In addition to establishing title, a lender will require assurance (and will base its lending value on the fact) that the asset offered as collateral is genuine and has been well cared for. Ideally the title chain would always flow neatly back to the original manufacturer or artist but this is often not the case, especially for older assets or assets which may have been transferred several times within a family without any documentation, or where business and personal assets have been intermingled and records lost. A lender would usually appoint their own experts to carry out provenance and title checks and to check for details of any repairs or restoration, as well as asking for things like gem or manufacturers’ certifications. With vehicles, the lender will want to check carefully that the asset has been frequently maintained, serviced and insured in accordance with legal requirements, manufacturers’ recommendations and market practice and that all documents necessary to the ownership of the vehicle (such as log books, manuals etc) are in place. The assets will need to be adequately insured and the lender’s position as secured party must usually be reflected in the insurance documentation.
Establishing the value of any luxury asset can be difficult as comparators can be rare, sales are often private, and because the true sale value is not always marked on the bill of sale. Certain services such as auction records or the “blue book” for private jets can be helpful, but lenders will always conduct their own valuations (usually at the borrower’s expense) before lending. With unique assets such as art, lenders may also require a diverse security pool, requiring more than one asset or assets by different artists to be offered as security in order to hedge against changing market appetites.
Relationship with lender
The luxury asset financing market is quite mixed. Some specialist lenders will lend purely against the secured asset, with recourse only to that asset. Others will only lend against an asset which is consigned to sale (with them) within a certain period of time. Private banks will typically only lend against these types of assets as part of a wider relationship, where the lending is also supported by a personal guarantee from the underlying owner, or where the lender is given certain investments to manage. Borrowers can expect loan pricing to vary in accordance with the type of arrangement they choose to reflect the different risk levels involved.
Finally, borrowers should be aware that it may be necessary to register certain security on public registries (especially in the case of vehicles or company owned assets) so confidentiality considerations should not be ignored. Similarly, certain luxury asset markets are very small, and values can be prejudiced if an asset is known to be secured. It is important, therefore, to treat security valuations very sensitively and to only approach legitimate lenders who are familiar with lending against these asset types.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, May 2023