Some collectors are using their trophy vintages as collateral for loans, often to buy more wine.
“Whether it’s real estate or wine, it doesn’t make sense to accumulate assets with pure cash,” said Patrick Stella, the chief executive and founder of WineCredit. “With wine, you can borrow and not put your home or some other important asset at risk. You can finance toys with toys.”
Borrowers are mainly using the money to buy more wine, betting they can pick the winners that will surge in value, which they can sell to pay off the loan and make a profit — similar to buying stocks on margin.
No dig at the people mentioned in this article (some of which are active participants and probably good peeps), but the entrance of opacity through securitization in a naive market is usually a dangerous thing. I’m sure this could be helpful, though, for those overleveraged on wine.
Why would you even suggest it should/could be deductible? 3%? Yowsers - I want to bank at Hirsch National!
Sounds like they’ve priced it similar to a brokerage margin account. Maybe a couple points higher due to the less liquid asset. I’d expect similar pricing for artwork or collectable cars held as collateral as well.
Yes, if you take out a business loan, it’s deductible. The article ‘argues’ that the 8-10% rate is better than a credit card rate of 15-25%. Of course, the credit card is not secured by much. I’d think you’d want to tie the loan directly to the CapEx, be able to show the flow of funds from the loan to specific purchases.
Re the brokerage margin account. I’ve been able to work that rate down to LIBOR+100 (just not at the big places like Fidelity, etc).
If you are borrowing against the wine for a new business (like what seems to be in the article), this might make sense. Starting a restaurant is very risky and if you can limit the personal liability to the wine rather than your house, that makes some sense.
However, borrowing money to buy wine to drink in the future, IMHO, means you have a wine buying problem.
If the loan is for a restaurant, why wouldn’t the interest be deducible.
“Like a growing number of collectors, Mr. Gangas has pledged some of his finest French wines for large cash loans with generous terms. Using $300,000 worth of his Domaine de la Romanée-Conti, Chambertin and other wines, he’s about to receive a loan of about $150,000, which he plans to use to open a new restaurant in the Chicago suburbs.”
It seems you understand debt markets quite well, and for some reason seem to be looking for a fight here (the flame suit and pot stir icons). Im not going to pick a fight, but a few points you might be interested in:
we have had dozens of clients liquidate their collections, or at least large (multi 6 figures) portions to finance divorce, business expansion or other opportunities over the years
many of these people would have been quite happy to keep their wine and finance these projects some other way
our capital partners (of which winecredit is only one of several) have plenty of cash on hand to fund a very large portfolio without securitization or tranches that you mention
anyone who thinks a home equity loan is an easy source of cash has not gone thru the process recently. or at very least, has not been a self employed or non-traditional earner. you can show a bank a $100,000 or $200,000 IRS bill and have them tell you that you don’t have any documented income…happens all the time
Im not sure what opacity you refer to? Are you concerned about the huge rebates and incentives provided by the likes of Sotheby’s and Christies for major art consigners and purchasers to spend in other departments? “house money” so to speak? What about rebates and incentives to consign wine for sale, offered to some collectors and not others? is that opacity? does it lead you to think that there is either current or looming instability in the wine market?
Wine collectors are generally a very private group of people. It’s easy to forget that in a public forum such as this, but you should not underestimate the value of a simple, speedy and private transaction with no public record, filings,etc. There are many reasons why people choose to keep their sizable collections private, not the least of which being “optics” with friends, employees, family, etc.
I do appreciate the nod to us being good peeps, and hope this provides some clarity. If you ever need some cash, we are here for you
While I certainly wish their enterprise the best, and it is clearly filling a market need, easy financing is usually one of the late stage flags of a frothy market. And if they are not inspecting the collateral as carefully as a purchaser might, things could go sour. Perhaps they have personal recourse to their wealthy clientele, beyond the wine stored in a bonded facility.
This brings up the legendary tale for secured lenders everywhere: Tito de Angelis, which how Warren Buffet got his entry ticket into a deeply distressed American Express generations ago.
“What was puzzling about the quality of Amex’s Field Warehousing operation was that since De Angelis was theoretically buying so much, they essentially authenticated the existence of much more salad oil than was actually accounted for in the entire United States”
Ah, yes. This was at the time more Burgundy wines was being imported into Great Britain than was produced in Burgundy.
Thanks for chiming in here Marc. I really didn’t intend to pick a fight, but I do know that certain members of this forum (such as yourself) were mentioned/highlighted in the piece, so I was a bit glib about ruffling feathers. Congrats on the piece.
I have no problem with anyone providing collateral or making a business out of secured lending. It seems like a valid proposition for many, and the unfortunate truth for those of us who frequent these boards is wine collection can be an addiction that leads people to take on ill advised personal illiquidity in what they think is a fungible investment. The fact that someone who isn’t a professional speculator needs to take margin on their wine collection to pay for X would dismay me as their (hypothetical) financial advisor, but such is life.
Now where I worry as a wine lover is when speculators start entering and using leverage in what they think is a means for accelerating their profit. Again, professionals in capital markets do this all the time, but people taking on margin in their Rousseau to get more Rousseau to flip to the next unwitting guy is an unhealthy development for wine lovers (not wine speculators). This happened in 2007/2008 with 2005 vintage hysteria (Burgundy/Bordeaux) effectively being carry-traded to Asia. Sad to see '11 Rousseau CSJ selling for 500-700 due to frothy markets, or things like this:
I think that chart illustrates the bedrock principle of association not being equal to causation. Harlan is 600 bucks. Burgundy had 4 short vintages in a row. Traditional sources of burgs have seen their allocations cut in favor of new markets. And cheap money (yes lending contributes to this one factor but not the others )
![[stirthepothal.gif]](/uploads/db3686/original/2X/f/f40faec63ca1018898a40805efbf9f0066a3d205.gif "[stirthepothal.gif]"){kind=small}
