By Joel Frank
A number of the firm's clients are art collectors, some for purely aesthetic reasons, and others for the investment potential; some for both reasons. We also represent a number of artists and art dealers. For those reasons, I thought it would be interesting to discuss three recent developments in the art world concerning authenticity, financing, and tax issues.
Art in Your DNA: First, the University at Albany and the University at Albany Foundation recently launched i2M standards, identification and standards and independent technologies designed to solve the problem of forged art. The initiative resulted from a two-year, global, world-wide collaboration of artists (including Chuck Close, Eric Fischl and David Salle), academics, scientists and curatorial institutions and was sponsored by ARIS Title Insurance Corporation, an underwriter of art title insurance.
The first i2M standards compliant system permanently embeds bio-engineered (i.e., synthetic) DNA elements into the surface of art objects through a specially-created label which attaches to the object. The bio-engineered DNA will be unique to each work of art and provide an encrypted link between the artwork and a database holding the consensus of authoritative information about the artwork.
The applied DNA will penetrate the work at the molecular level and is said to be all but impossible to decipher or replicate. Attempts at removal or replacement will leave microscopic forensic evidence according to a New York Times report on the introduction of this technology.
An objective way of identifying art is welcome in light of the reluctance to rely on subjective expertise and provenance. In addition, checking an artwork for a DNA code could be useful in determining whether or not an item has been stolen. Keep in mind, however, that the i2M-standards will only work with living artists. Authentication of works by artists of the past will require the traditional tools of due diligence and be subject to the risks inherent therein.
Borrow Against Art: Second, Athena Art Finance Corp. ("Athena"), formed by The Carlyle Group and the private equity unit of the Pictet Group, will offer non-recourse loans exclusively collateralized by works of fine art. Athena will offer up to 50% of the low estimate values of individual artworks or collections. Loans of 6-months to 7-year terms of at least $1,000,000 will be available. The loans will provide financing for existing collections or acquisitions. The new vehicle is said to offer an alternative to recourse art-loans offered by major banks and short-term high interest loans by boutique lenders. Athena has said that it does not aim to sell or take an ownership interest in any of the works backing its loans. Athena requires that artworks eligible for financing must be internationally marketable and produced by prominent artists with an existing track record in the secondary market.
Delaware as Art Capital: Finally, art collectors are now storing works of art in Delaware. Art collectors have for some time now stored art in tax-advantageous free ports overseas such as Geneva and Luxembourg. Now, as reported in the New York Times, Delaware is becoming a haven for the storage of art. The advantage is that Delaware is one of five states without any sales or use tax. Purchasers of art in New York can avoid sales tax on their purchase by shipping the art to Delaware directly after the purchase. Once in Delaware, a work of art can be bought and sold within the storage space without any tax on the transaction for as long as the art remains in Delaware.
The Delaware storage spaces are said to appeal to American-based collectors who want to safely store their artwork without shipping the artworks overseas. Interestingly enough, recent efforts by the New York State tax authorities to insure proper payment of sales and use taxes on art transactions may be fueling the current interest in Delaware's storage facilities according to the Times article.
These are just overviews of the issues at play. If you're interested in discussing any of these topics further, please feel free to contact me.
Joel Frank is a partner at the firm and practices in the corporate & securities area. He alsoadvises clients on legal issues relating to art. His approach is predicated on providing practical legal advice that helps his clients achieve their business objectives. He can be reached at email@example.com or at 212-981-2306.