Tax-Free Storage Wars

Atossa Araxia Abrahamian | Longreads | May 2018 | 15 minutes (3,575 words)

On September 17, 2014, the art world’s upper crust convened in Luxembourg City to fête Le Freeport, a warehouse where the ultra-rich hoard paintings, cars, jewelry, wine, and other luxuries in duty-free comfort. Waiters in red uniforms dodged oversize bouquets of white lilies to pass around trays of champagne, and an orchestra played an overture written especially for the occasion before an audience that included the Grand Duke of Luxembourg and top executives at Deloitte.

That evening, two American businessmen mingled among the government ministers, gallerists, and local bigwigs. Kenneth Cayre, a wealthy real estate developer, and Tom Sapienza, an accountant who’d worked for years in art shipping and handling, were planning their own entrée into the fine art storage business. But instead of operating in the luxury tax haven of Luxembourg, they would open their storage facility in a place not known for its low taxes: New York City.  

This story is published in collaboration with Artsy Editorial. Artsy is a global platform for readers to learn about, discover, and purchase art.

The terms “free port,” “free trade zone,” and “foreign trade zone” are used interchangeably in the art world. They generally denote a place that’s free of customs duties and other taxes— but the extent of that freedom depends largely on the jurisdiction of the facility. That’s why most of these warehouses tend to be in existing tax havens, like Luxembourg or Switzerland.

In the United States, these areas are called Foreign Trade Zones, and they’ve existed under the protection of Customs and Border Patrol since the first opened on Staten Island in 1937. Today, they’re located in airports, in seaports, and on waterfronts, but also in warehouses and urban centers. They’re a big part of the U.S. business landscape: There were 263 of these zones in 2016, employing 420,000 people across the country, with hundreds of billions of dollars worth of merchandise, from car parts to pharmaceuticals, moving into and out of them. The zones typically take advantage of what’s known as an inverted tariff. When there are federal duties on the imports of raw materials, like steel, but not on the import of a finished product, like a tractor, it makes sense to bring the steel into the duty-free zone, manufacture the vehicle there, then formally import it without incurring the taxes.  

None of this applies to artwork, though, because there are no federal import duties on art. Nor are FTZs home to any art studios engaged in manufacturing. Until recently, there was only one American FTZ dedicated to art, and it was in Delaware, which from a tax perspective is as close to a Luxembourgish freeport as you can get in the continental United States, so the facility was not only free of customs duties, but also most local and state taxes.

A few inside the Arcis art storage facility in Harlem. (Zoe Wetherall for Artsy)

What Delaware lacks is prestige and proximity to auction houses, museums, and galleries, so Cayre and Sapienza recognized potential in a New York competitor. “We saw the attention at the opening,” Sapienza recalled at a 2017 art business conference, “and we decided we’re coming to market with a 21st-century storage facility. Why not, as the icing on the cake, add a Foreign Trade Zone?”

Their facility, which opened in April 2018 on a proletarian Harlem block on West 146th Street, is called Arcis Art Storage. “Arcis” is Latin for “fortress” — a fitting name for what’s essentially a museum-quality bunker, currently insured to store up to $3 billion worth of goods. Like Luxembourg’s Le Freeport, which is armed to the teeth and admits next to no one, security is tight: Guests at Arcis must have their retinas scanned to go through the first door, then present their bare forearms for a vascular scan at a second door.

Instead of operating in the luxury tax haven of Luxembourg, Arcis would open their storage facility in a place not known for its low taxes: New York City.

Once inside, visitors to the building will be wedged — geographically, at least — between a historic black church and a daycare center. But as far as the U.S customs agents are concerned, once goods are imported into Arcis — whether they’re coming from Shanghai or the Upper East Side — they are no longer within U.S customs territory.

This was going to be Cayre and Sapienza’s edge over a crowded New York art storage market. But there was a reason no one else had done it yet: Even though customs duties don’t apply, New York State taxes do. This means a painting bought at Christie’s and stored uptown would not get preferential treatment when it came to sales and use tax over a painting going anywhere else. Arcis got the competitive, insular art storage world wondering exactly what its executives were selling.

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Kenneth Cayre, 74, has had a varied and eccentric career. His associates at Arcis, as well as friends and former colleagues, describe him as a sharp, family-oriented hustler. (He declined to be interviewed for this article.) Cayre began his import-export career in 1959 as a teenager, operating a floating duty-free store with his two brothers, sailing back and forth from Miami to the Bahamas with cigarettes, alcohol, perfume, and watches to sell to locals who wanted to avoid high import duties. Over the years, he helped a cousin run a textile factory in Puerto Rico; operated a pantyhose manufacturer called Kandy Mills, in Hialeah, Florida; and, inspired by the rhythms of the Miami Beach club scene, started a record label with his brothers called Salsoul.

In the early 1980s, the Cayre brothers started Good Times Entertainment, which distributed VHS copies of Jane Fonda exercise tapes, knockoff Disney movies, and other videos whose copyrights were in the public domain. An early encounter with Walmart founder Sam Walton led to a long-standing distribution deal, but by the time they filed for bankruptcy in 2005, the company was more than $100 million in debt.

A client viewing room at Arcis. (Zoe Wetherall for Artsy)

Today, Cayre owns and manages property with his sons, Jack and Nathan, including a million-square-foot chain of self-storage warehouses in the New York tri-state area called Treasure Island. In 2014, real estate heavy Steven Guttman made a splashy transition from cheap self-storage to high-end warehousing with Uovo, which now has branches in Rockland County and Long Island City, Queens — home to a burgeoning gallery scene and the contemporary art museum MoMA PS1. During this time, the art market was growing fast: Between 2005 and 2015, annual sales doubled to reach $63.8 billion, and more contemporary art is being produced and sold every day. Nearly 80 percent of all artwork is in storage, according to one storage executive, and since new art is made every day, demand for storage facilities — at least in theory — will grow continuously.

In an application for property tax breaks from the city of New York, Cayre describes himself as “an artist at heart” and claims that after Superstorm Sandy ravaged the downtown gallery scene, he felt compelled to enter the art storage business. “Ken witnessed more and more galleries and Fine Art storage facilities vacating Manhattan for locations in New Jersey like Newark and Jersey City,” the application reads. A desire to clean up his image may have also provided motivation: In 2006, Cayre was accused by New Jersey con man-turned-FBI informant Solomon Dwek of having received stolen assets worth $2.2 million. Although he was never charged, Cayre was kicked off the board of a New Jersey medical marijuana foundation in the aftermath.

Guests at Arcis must have their retinas scanned to go through the first door, then present their bare forearms for a vascular scan at a second door.

In mid-2013, less than a year after the storm, Cayre spent $4.5 million on the Harlem parking lot where Arcis now stands and an adjacent property housing a childcare and eldercare center. Six months later, one of his sons ran into a real estate developer friend at a Super Bowl party, who offered to introduce the family to someone in the art storage business.

That someone turned out to be Tom Sapienza, now a 48-year-old dad of two from Long Island with dusty blond hair and the wholesome, slightly stiff demeanor of a Little League coach. An accountant by training, he’s a khakis-and-blazer kind of guy, which makes it hard to imagine him at a glitzy art opening in Luxembourg. But Sapienza had a Rolodex of potential clients at museums, galleries, and family offices — fruits of a decade working as a consultant and CFO at Crozier Fine Arts, one of the world’s biggest art storage firms. Sapienza’s tenure there ended on a sour note: According to legal documents, he was fired in 2012 and subsequently sued the company for allegedly denying him his share of equity. His ex-boss, Simon Hornby, declined to comment on the termination and the lawsuit; Sapienza also declined to comment on the suit, which was settled in 2017.

Cayre and Sapienza hit it off, and before long, were en route to a castle in Maastricht for a business seminar designed to educate art world professionals about finance and to educate financiers about the art world. “It was to expose Ken to the new global art world,” Sapienza says. In the class, they heard a presentation by a business professor about Le Freeport and the business of Free Trade Zones for art. “We left with binders and binders of information,” says Sapienza. “He loved it.”

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The first free ports were established in early modern Europe as way stations for goods like grain, coffee, or spices. Their extraterritorial status saved traders time and money, but since the contents of these warehouses were perishable, the facilities weren’t intended for long-term storage, let alone keeping valuables like paintings and sculptures. But as globalization made more and more types of business transnational, these facilities evolved too. Today, free ports are a crucial cog in the global art trade. Their contents are fiercely guarded, top secret, and largely tax-free. But which exact taxes they incur depends on their location.

“The term ‘free port’ really does mean something phenomenal in Europe and Asia,” says Jason Kleinman, a partner and art-tax-law expert at Herrick Feinstein LLP. Those free ports exempt buyers and sellers from VAT and income taxes, and because of their clear perks, they have courted art collectors for decades. “These locations confer great tax advantages to the people who use them to store or conduct business,” Kleinman says, adding that when sales take place within a foreign free port, sellers also save on shipping and handling costs. For speculators flipping Picassos, free ports specializing in art and luxury items offer an attractive deal.

American FTZs, by contrast, have more limited benefits and have historically served the automotive, electronics, and oil industries. The art world got one of its own in 2015, when Austrian art shipper Fritz Dietl opened the 36,000-square-foot Delaware Freeport. His art-centric outpost allows clients who buy pieces in New York or Miami to avoid state sales taxes if they ship their pieces directly there — but the saving is due to the tax breaks offered by the state, not because it’s a FTZ.

For speculators flipping Picassos, free ports specializing in art and luxury items offer an attractive deal.

That’s because while American FTZ rules do waive federal customs duties when they are applicable, they don’t eliminate state or city sales and use taxes; in that respect, FTZs are part of the state they’re in, but not part of the country. Federal law further stipulates that goods can’t be bought and sold within the zones, so under-the-radar handoffs aren’t possible either. And New York’s sales and use taxes on art are levied based on the location where the buyer gains possession of the item, whether it’s acquired at a domestic sale or at an auction abroad — so the most an FTZ could possibly do is defer that cost while the item is in storage.

In other words, if a $10 million painting ends up hanging on a billionaire’s wall in New York after passing through an FTZ, the FTZ alone will not save its owner from the state’s 8.875 percent tax on sales and use. It might be more convenient or indeed more prudent to store a painting bought in Manhattan just a few miles uptown from the auction house than in Delaware or Long Island, because moving art is risky, but an FTZ won’t save money. And in the event that a painting was bought in London and brought to New York, the most the FTZ would do is defer tax until the piece leaves the zone. Since artwork isn’t dutiable, there’s nothing to gain from avoiding customs. “I spent hours researching it,” Kleinman says, “and I concluded that Arcis is a tax-free zone in search of a tax.”

Nevertheless, a tax-free anything sounds good to a certain clientele, even if the actual benefits are limited (or, as Kleinman suggests, virtually nonexistent). “People toss the term around all the time,” Kleinman says. “It’s P.R.”

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After the Maastricht seminar, Sapienza called a former Crozier colleague, Kevin Lay, who joined Arcis as director of operations in 2016. For Lay, a rakish former punk rocker who is more visibly artsy than Sapienza, art preservation is a matter of philosophical import. “Art storage is time travel,” he says. “When you look at a painting you’re standing where the painter stood, and as custodians of culture it’s up to us to return this in the same condition it came in.”

Now complete, the warehouse looks a bit like a steely blue iceberg: monolithic, windowless, and blank. There’s no obvious signage save for a large purple A, for Arcis, on the north face of the building, about 10 feet above a 16-feet-high and 40-feet-wide loading dock that opens onto 146th Street. “If your art doesn’t fit here, it won’t fit anywhere in the city,” says Sapienza. (The largest dock at Uovo’s New York City facility is 13 feet 7 inches high and 11 feet 10 inches wide.) A discreet black car entrance leading into the loading area and visible only from one-way mirror windows in the executives’ offices will accommodate the rich and wary.

Detail of the Arcis storage facility. (Zoe Wetherall for Artsy)

Inside, the newly painted facility smells disconcertingly like an Ikea stockroom and looks, at first glance, like an ordinary industrial warehouse: exposed beams, large metal columns, huge mechanical doors, and stark white walls. The ground floor is divided into viewing rooms with $1,000-a-bulb lighting, per the company,  and ceiling rigs for moving heavy sculptures. There’s also a loft-like space where artwork will be inventoried, and, on the higher levels, private storage units in different sizes, along with larger shared spaces.

Lay and Sapienza can — and do — talk for hours about the building’s technical specs. If a storm surge were to occur, a protective envelope of panels made of insulated metal panels between its inner and outer walls would help protect it from the elements. Its power supply is uninterruptible, with every function intentionally redundant in case a power source goes out. The generators have backups located on the roof, which run on natural gas; in theory, they will keep the building going until any emergency is over. The faint whir of the air-conditioning system, which filters the air three to six times an hour, is a constant presence; otherwise, it’s completely quiet. “They’re not taking any chances,” says Lawrence Bovich, a partner at Mechanical Technologies, LLC, one of the firms that installed part of Arcis’ HVAC system. “These guys are many folds more risk-averse than any museum might be.” Arcis would be a great place to hide during a natural disaster, or allergy season.

Cayre applied for and received $13 million in tax breaks on construction by promising the warehouse would bring six full-time and 10 part-time jobs to East Harlem.

Serious protection costs serious money. The price of storing a painting at Arcis can range from just a bit more than at your average self-storage facility to thousands of additional dollars a month depending on the size of the unit, whether there’s custom shelving, and where in the building it’s located, says Lay — but he won’t say by how much.

Cayre applied for and received $13 million in tax breaks on construction by promising the warehouse would bring six full-time and 10 part-time jobs to East Harlem and calculating that its benefit to the city, mainly in other taxes, would total $20 million. But employment at art storage facilities typically goes to aspiring artists who know how to handle, crate, and transport the art; even Arcis’s own filings note that the business will require “employees with specialized skills sets similar to those of a museum registrar.”

That could explain why an administrator at a community organization on the south side of the block called Street Corner Resources, which does job placement for young people as part of its larger mission of reducing gun violence, said on a recent afternoon that he’d heard nothing about Arcis, let alone the possibility of jobs there. Staff at neighboring bodegas, a barbershop, and a local diner were aware of the facility because they’d served chatty construction workers from the job site; none of them knew they would soon share a block with million-dollar paintings. At the senior center next door to Arcis, whose building Cayre’s company acquired, a coordinator said they’d received assurances from the newcomers that they would not be displaced.

Because FTZs are regulated by the federal customs agency, local elected officials don’t participate in the approval process. When asked how Arcis might affect this part of his district, City Councilman Bill Perkins grew aggressive, demanded more information, and directed questions to his predecessor, current State Assemblywoman Inez Dickens, who didn’t respond to requests for comment.

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In April 2017, Arcis was a sponsor of the Art Business Conference, a glitzy annual networking event for the fine art world, at the Time Warner Center in Manhattan. “Kevin and I both keep getting calls from people pushed from locations in Manhattan,” Sapienza told the crowd during a panel about freeports. “People wanted us to commit space. We have a warehouse reservation binder, with clients signing up for the space.”

In the audience were Delaware Freeport founder Fritz Dietl and Crozier president Simon Hornby. Hornby says Crozier also consulted with advisors on the utility of an FTZ, and the benefits came up short. “Art is not a dutiable good. There are no duties on art in the U.S.,” he says. “So what’s the point of a FTZ for art if there’s no duty in the first place and it’s designed to suspend duty?”

Even Dietl says the free port part of the Delaware Freeport saves little money. But branding something as a free zone or free port sends a powerful — if empty — message to potential clients. “It absolutely works because it’s a term that’s so widespread in the art world,” he says.

A freight elevator at Arcis. (Zoe Wetherall for Artsy)

Self-storage king–turned–fine art protector Steven Guttman says his team studied the possibility hard before they opened Uovo and found no significant benefits. “We did not take this lightly,” Guttman says. “We knew about this a long time ago and kept saying this makes no sense. I’ve been in the business for three years, and never heard a tenant request an FTZ.” He adds of Arcis, “They may be onto something just by confusing people.”

Sapienza declined to comment on tax hypotheticals, insisting that it’s the client’s responsibility to obtain appropriate counsel and follow the law. Kevin Lay insists there’s some tax value to the FTZ — though that depends on how you define “art.” “Antique furniture that’s a hundred years old can be imported duty-free, but if you have a lamp from 1921 that you bought in Paris at auction for $1 million, if you were to bring it here, you would avoid those duties,” he says. The idea is that the lamp could hang out in storage until duties weren’t due. Other valuables, like some jewelry, also carry duties. In those scenarios, an FTZ can also be useful to avoid or defer them.

Herrick’s Jason Kleinman, whose job it is to help collectors manage (or as he puts it, “control”) their U.S. tax bill, says Arcis “doesn’t change anything for me or present me with any tax-planning opportunities.” Some of his clients were curious about Arcis, he says, but none had serious plans to relocate their assets. “I’d suggest anyone look at Arcis and apply to it criteria you’d demand of any other facility,” he says.

In the end, the biggest draw might be to collectors looking to keep their art close to home, and eventually sell at a New York auction. If there’s one thing everyone can agree on, it’s that the less you move art, the better. And the tax-averse, art-collecting global elite? They’ll always have Luxembourg. 

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Atossa Araxia Abrahamian is a journalist and the author of The Cosmopolites: The Coming of the Global Citizen.

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Editors: Michelle Legro and Anna Louie Sussman
Photographer: Zoe Wetherall
Fact checker: Ethan Chiel
Copy editor: Jacob Gross

Special thanks to the editorial team at Artsy.

 

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