Annie Leibovitz’s exit strategy

By Felix Salmon
August 31, 2009

Bloomberg’s Katya Kazakina has done the rounds of various real-estate appraisers, asking them how much Annie Leibovitz’s property might be worth, and it turns out that the real estate alone – never mind her life’s work – could well sell for substantially more than she owes Art Capital Group. But, as Kazakina says with delicious understatement:

Whether the appreciation of the real estate, in Manhattan and upstate New York, will offer the photographer a path out of her financial troubles is unclear.

For one thing, Leibovitz has to repay Art Capital the sum of $24 million, plus $2.9 million interest, plus fees, by September 8. As one appraiser told Kazakina, “It’s not going to sell in a week” – especially not her West Village live/work studio, renovated at enormous expense, and custom-designed to the specific needs of Annie Leibovitz. And there’s another major impracticality: according to Art Capital’s complaint against Leibovitz, she has refused to allow Art Capital’s real-estate brokers to show her property to interested potential buyers.

For there’s the rub: as part of the loan agreement, Leibovitz authorized Art Capital to act as the “irrevocable exclusive agent” for the sale of both her photography and her property. Neither Leibovitz nor anybody else can sell these properties, the liens on which are held by Art Capital. Only Art Capital can do that. And the way that Art Capital’s sales agreement with Leibovitz is structured, there’s very little incentive for them to sell any property before September 8. As Kazakina reported on August 18, quoting Art Capital spokesman Montieth Illingworth:

Goldman and Art Capital stood to gain 12 percent interest from their one-year loan to Leibovitz, Illingworth said. This means, Leibovitz would have to pay $2.9 million on top of the $24 million loan…

If Leibovitz doesn’t default, Art Capital would receive a 10 percent commission on copyright and real estate sales, Illingworth said. If she does, the commission would increase to 25 percent of the sale of the collateral (the higher rate includes 11 percent to 13 percent in legal, real estate and other fees, Illingworth said.)

How many people, working on commission, will sell an item at a 10% commission today if they know full well that the commission rate rises to 25% in little more than a week’s time?

It’s not just the sales agreement which gives Art Capital an incentive not to sell the property. There’s the loan agreement, too: Art Capital’s Ian Peck told me in June, talking about his business in general rather than Leibovitz in particular, that his “commissions and fees are designed to be prohibitive” in the event that a borrower defaults on her loan. Come September 8, Art Capital won’t just be collecting a 25% commission on any real or intellectual property it sells on behalf of Annie Leibovitz. The amount which Leibovitz needs to repay Art Capital will also spike significantly: the interest rate on the loan will go up to some unknown penalty rate, from 12%, and Art Capital will almost certainly charge Leibovitz substantial (and also unknown) fees on top for going into default.

What’s more, since Art Capital is now working on a 25% commission, it’s also clear that it has every incentive to sell both the real estate and the intellectual property, rather than the real estate alone, since the best-case scenario for Art Capital involvesmaximizing its total sales commission.

The subtext to the Bloomberg article, as elucidated by the likes of Jessica Pressler, is that if she’s really lucky, Leibovitz might be able to pay off her whole loan just from real-estate proceeds, without having to touch her intellectual capital. But that seems improbable to me. Clearly, no real estate deal is likely to get done between now and September 8 — so if and when the property is sold, Art Capital will take a 25% commission off the top. Using the high end but not the highest end of the estimates in the article, the Rheinbeck property could sell for $6 million, with the West Village property going for $24 million. That’s $30 million together, or $22.5 million after commission – not enough even to repay the loan principal, let alone the interest and any unknown default penalties.

Art Capital would, I think, then be fully within its rights to continue to shop Leibovitz’s full archive of photographs, which it values at $50 million, to the highest bidder – and to take its full 25% commission on any sale before repaying the balance of the loan plus interest. Let’s say it sold the archive for $30 million: again there would be that $7.5 million in sales commission, leaving $22.5 million to repay $1.5 million loan principal, plus interest and unknown penalties. Even with no penalties at all, there’s $2.9 million in interest already accrued: in the wake of her real estate and life’s work being sold off for a total of $60 million, Leibovitz would be left with just $18 million, or less. The rest of the proceeds ($42 million plus) would be kept by Art Capital. Oh yes, and Art Capital would also be entitled to a 25% commission on any income from photography which Leibovitz makes for two years after the loan is paid off.

How can Leibovitz get out of this mess? As I see it, she has two hopes. One is that Goldman Sachs, which owns part of the loan, takes pity on her and advances her the money to pay it off in full. The other, as sketched out by John Cook, is that she files for bankruptcy and throws herself on the mercy of a sympathetic bankruptcy judge:

Art Capital would still likely be able to force the sale and recoup some or all of its debt, but a judge might be convinced to reduce the amount, modify the interest rate, or alter the sales agreement under which Art Capital gets commission on the sale.

For Leibovitz, there’s a real risk that the bankruptcy strategy would gain her little and just end up diverting precious millions to two (or more) sets of bankruptcy lawyers. But I reckon it might well be her best hope.

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