The Epstein files highlight how the wealthy borrowed against art collections

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for the high-net-worth investor and consumer. subscription To receive future issues, directly to your inbox.

A $484 million art loan taken out by billionaire Leon Black and revealed in the latest Epstein filings highlights one of the fastest-growing and most lucrative corners of the art world.

According to a March 2015 document released as part of the Epstein files, Black obtained the loan from Bank of America backed by artwork. Although not unusual for large private banking clients, the loan made headlines for its size and the bizarre collateral, which included stellar works by Picasso, Giacometti, Titian, Matisse and others.

However, art lending has become an increasingly valuable tool for both wealthy art collectors and wealth management firms vying to manage their wealth. The global art loan market is estimated to be worth between $38 billion and $45 billion today, according to a report by Deloitte and ArtTactic. The market size is expected to reach $50 billion by 2028, with a growth rate of about 12% annually.

Art loans are a way for collectors to take money out of paintings that they can also continue to enjoy on their walls, said Adam Chen, managing partner of International Art Finance and a longtime art finance expert.

“It’s the best of both worlds,” Chen said. “You can monetize assets that don’t produce income. It’s still nice to look at.”

Far from indicating a lack of funds, wealthy people typically use art loans to provide ready cash, increase financial investments, and avoid hefty tax bills. Private banks often grant art loans to large clients at low interest rates, knowing that the client has hundreds of millions or even billions in other assets in case the loans default. The interest rate on Black’s loan in 2015 was 1.43%, according to the document.

The bulk of the art lending market is dominated by auction houses – particularly Sotheby’s Financial Services – as well as specialist lenders such as International Art Finance.

Collectors use the proceeds for a wide range of purposes, said Scott Millisen, head of global lending at Sotheby’s Financial Services. The company now lends classic cars as well as art.

“Many of our clients borrow against their fine art collections to invest in businesses, pursue new art acquisitions or cash out without selling works they love,” Melissen said.

Many of today’s collectors are senior leaders in private equity and hedge funds, Chen said. Since they are accustomed to using influence to enhance their wealth in their investments and businesses, they see leveraging their art collections as a natural extension. Chen estimates that the total value of privately owned artwork is between $1 trillion and $2 trillion. Although art loans represent a small portion of the total — well under $50 billion — the industry has plenty of room to grow.

“Art is the most under-leveraged asset on the planet,” he said.

Art loans also generate lucrative tax benefits. Selling a work of art brings a capital gains rate of 28% — a higher rate for collectibles than other categories — along with a net investment income tax of 3.8%, bringing the top rate to 31.8%. Selling in some states also results in state taxes.

An art loan, even at today’s high lending rates, typically 8% to 9%, is still more efficient than paying taxes. Additionally, borrowers can usually keep artwork on their walls.

The art lending business also benefited from a 2017 tax change that eliminated the use of so-called 1031 exchanges in the art market. This practice allowed art collectors to avoid capital gains taxes by exchanging one work for another. Without this advantage, many collectors turned to loans to provide liquidity without the tax penalties.

Given the recent recovery of the art market and low interest rates, art lending is poised to continue its strong growth, Chen said.

“The art market is a strange market,” he said. “But if you look at every other asset class, they end up being fragmented, securitized, and leveraged. It’s just the nature of the universe.”