Michael Steinhardt, the former hedge-fund manager who has spent at least $200 million on fine art, is using part of the collection to secure low-cost funding for his latest real estate venture.
Steinhardt and his wife, Judy, pledged 20 paintings and drawings, including five by Pablo Picasso and one by Jackson Pollock, as collateral for a loan from JPMorgan Chase Bank NA, according to New York state records. David Steinhardt, Michael’s son, said in an interview that the loan from JPMorgan’s private bank is related to an investment in the former American Stock Exchange building, which Steinhardt bought earlier this year.
“We had the opportunity to get some very cheap borrowing,” said David, who says he goes by the official title of “helper” at his father’s firm, New York-based Steinhardt Management Co.
Steinhardt, 70, joins hedge-fund managers including Steven A. Cohen and Nelson Peltz who have been using fine art to secure loans. With top works fetching record prices at auctions and borrowing costs near all-time lows, more and more ultra rich are turning to private banks to borrow against their collections, according to Suzanne Gyorgy, director for the art advisory and finance group at Citi Private Bank, a unit of Citigroup Inc.
“We have seen interest in this by banks who have never done it before,” said Howard Spiegler, the co-chairman of the art law group at New York-based Herrick, Feinstein LLP. “Otherwise they are going to lose relationships because a lot of high-net-worth individuals want this kind of loan.”
Stock Exchange Building
Steinhardt and Allan Fried, an independent real estate adviser to the former hedge-fund manager, disclosed in March that they had purchased the former Amex site and an adjacent building in Manhattan’s financial district for $65 million in cash. At about that time, they entered into the agreement with JPMorgan’s private bank to borrow money against some of the family’s artwork, at rates that were much lower than those for commercial real estate projects, David Steinhardt said.
The younger Steinhardt declined to give an update on the plans for the project, which Fried described in a Wall Street Journal interview published in March as converting the main exchange building into a retail and hotel complex and tearing down the other to make way for a 60-story residential tower.
This type of mixed-use project would likely cost at least $250 million when the price tag for the properties is included, according to Ben Carlos Thypin, director of market analysis for Real Capital Analytics Inc. in New York. David Steinhardt declined to comment on the estimate.
A real estate developer would ordinarily finance this type of development through a two- to three-year renovation loan that would carry a variable interest rate based on a benchmark such as the London Interbank Offered Rate, also known as Libor. Banks usually charge a significant premium to Libor for such loans because of the risk that the development project will go awry, leaving the lender with a half-completed building as collateral, Stephen Brodie, the head of Herrick’s banking practice and an expert in both art and construction finance, said in an interview.
Some private banks are providing art loans to top clients at 200 to 300 basis points above Libor, said Philip Hoffman, chief executive officer of the London-based Fine Art Fund and the former director of finance at Christie’s auction house. With one-year Libor averaging about 79 basis points in February, according to data compiled by Bloomberg, it’s possible that Steinhardt was able to finance at least a portion of his real estate project at less than three percent. A percentage point equals 100 basis points.
“If Steinhardt was able to get this as a construction loan for the entire mixed-use project, that would be very cheap financing,” said Bart Steinfeld, an executive managing director in the capital markets group at Cassidy Turley, a St. Louis-based provider of commercial real estate services. “This is what private banks are willing to do for their well-heeled clients.”
Doug Morris, a spokesman for the private bank unit at New York-based JPMorgan Chase & Co., declined to comment.
Other fund managers who have secured loans by art in recent years include billionaire Cohen, founder and chairman of SAC Capital Advisors LP in Stamford, Connecticut. Cohen, an avid collector who recently sold a portrait of Elizabeth Taylor by Andy Warhol for $26.9 million, pledged undisclosed “works of fine art” to Deutsche Bank Trust Co. Americas under an Oct. 30, 2009, borrower security agreement, according to New York state records.
Jonathan Gasthalter, a spokesman for Cohen, said that the hedge-fund manager declined to comment on the lending arrangement with Deutsche Bank.
Chinese Side Chairs
Peltz, the billionaire who co-manages Trian Fund Management LP, pledged 15 works by artists such as Henri Matisse, Claude Monet, Edgar Degas and Pierre-Auguste Renoir to Bank of America NA, according to a financing statement filed in May 2009. Peltz also secured the lending arrangement with antiques, including a pair of Louis XV commodes, a set of four Italian white marble busts dating as far back as the 17th century, and four Chinese side chairs that were made around 1725, the document shows.
Anne Tarbell, a spokeswoman for New York-based Trian, didn’t respond to an e-mail and phone call seeking comment.
“Going through the downturn in 2008, a lot of people realized that art weathered that storm very well and is a stable form of collateral,” said Gyorgy at Citi Private Bank. “When you look at our client base, its savvy business people that for the most part are using the liquidity from the art loan to invest back in their businesses.”
Steinhardt opened his money-management firm in 1967 at the age of 26 with two friends, Howard Berkowitz and Jerrold Fine, and during the next 28 years, its hedge fund generated average annual returns of about 24 percent after fees. Steinhardt, who retired from the hedge-fund business in 1995 with a personal fortune estimated at $500 million by Forbes magazine, has been managing his own money and making investments, as well as collecting modern works on paper and antiquities.
In a 2007 interview, Steinhardt said that he and Judy had given $150 million to charities and spent about $200 million on antiquities and works by Picasso, Pollock, Paul Klee and other modern artists. The couple is included in ‘Great Collectors of Our Time,’ a book published in 2007 and written by James Stourton, the chairman of Sotheby’s U.K., who quotes Steinhardt saying “my wife pushed me into the second half of the 20th century with Pollock and (Jasper) Johns.”
David Steinhardt said that the family will maintain possession of the artwork pledged as collateral for the JPMorgan loan. He added that the artwork represented only a portion of the art collection.
‘There Are Gems’
According to a UCC financing statement filed by JPMorgan in July, the Steinhardts pledged three oil paintings that Picasso created between 1922 and 1936, along with two works on paper, including a charcoal entitled ‘Homme a la sucette’ that he drew in 1938. The collateral also includes four works by Klee, two by Johns, and single works by Honore Daumier, Henri Matisse, Piet Mondrian, as well as a Pollock that, according to Beverly Schreiber Jacoby, the president of BSJ Fine Art in New York, once belonged to Si Newhouse Jr., the chairman of Advance Publications Inc.
“There are gems in this group,” said Jacoby, even if as drawings “they may not be the most valuable works by the artists.” Jacoby, an art valuation expert who reviewed the list of paintings and drawings pledged by the Steinhardts, estimated that they would be able to borrow $40 million to $50 million against the collateral.
Banks typically advance loans equaling as much as 50 percent of the appraised value of the artwork received as security, according to Brodie and Spiegler. From the bank’s point of view, these are personal loans based on the creditworthiness and cash flow of the borrower, with the art posted as collateral serving as a secondary layer of protection, the two attorneys said.
“If he got 3 percent on his borrowing costs, god bless him,” said Stephen Pearlman, senior managing director in the capital markets group at Cassidy Turley. “It just shows you the power of being a high-net-worth individual.”