Buying a Charter Yacht
Buying, Charter, Yacht, Purchasing, Buy
Buying a Charter Yacht
By Josephine Williams, Footloose Sailing Charters
Is Charter Management a Good Option For You?
Buying a new yacht is an important decision and considerations need to be given to budget, the type of model to purchase, and how much time you can set aside for maintenance.
Most owners take out a boat loan and pay substantial interest over the loan term. Add to that the cost of dockage, insurance, regular maintenance and annual haul-outs, and you can be looking at an expensive investment, especially if you have limited time available to sail your yacht.
Owning a yacht in a charter program can provide solutions to some of the financial and practical drawbacks of the traditional scenario; allowing you to offset the cost of financing or to upgrade to a yacht model you could not otherwise afford, minimizing maintenance and operating expenses, and allowing you to make the most of your sailing vacation.
How does it work?
The Yacht Purchase
There is a wide array of charter management options offered on the market, from your small family owned local charter business, to medium sized companies with fleets of 20 to 100 boats, up to large companies with worldwide fleets. You can purchase your new or used yacht through a dealer and ask them to recommend a local charter company that will place your yacht in their fleet, or you can purchase directly through the charter company. In the latter case, the choice of yacht models may be limited, but they are usually designed to better meet the demands of charter use, and offered with upgraded equipment included in the standard package, which can enhance the yacht’s value. You may also have a choice of destinations where your yacht can be based.
In any case, unless you pay cash, you will need to start by providing the down payment and securing financing for your yacht purchase. The typical charter yacht loan is a 25% down payment over a 15year term with a fixed interest rate. Some charter companies have a preferred lender, and can assist you in finding suitable financing, however you may use your own source if you choose. Note that banks will not take account of charter revenues and thus look for approximately a 30-40% income to debt ratio, and only a limited number of banks will provide financing for a yacht placed in a charter program.
Revenues and Expenses
In return for the charter of your yacht, most of the small to medium sized companies offer variable programs which pay you income as a percentage of gross charter revenue (less management and booking fees typically), therefore you should check how well their programs have lived up to their promises in the past. A few of the larger companies offer a guaranteed revenue program established in advance, so you know exactly what to expect from start to finish, regardless of charter activity.
To reduce the loan pay-off on your yacht at the end of the charter program, you can apply an additional out-of-pocket sum to your charter revenues. With a fixed revenue situation, the necessary additional monthly payment can be quickly calculated so you can plan on paying off your loan within 5 years (or the duration of the program) rather than the standard 15 years.
Another issue to determine is who bears the cost of operating and maintenance expenses. Smaller companies may require you to pay the costs of insurance, dockage and maintenance contractors directly (the benefit being you see exactly what the fixed and variable costs comprise), others may bill you regularly or deduct this cost from your revenue, while larger companies with more standardized fleets will typically cover these expenses. If you are on a program with variable revenues and expenses, consider making provisions for low-income months and heavier annual expenses.
As far as owner use is concerned, smaller companies are generally very flexible with owner use and there may be no limitations at all outside of charter bookings, but while you’re sailing, you won’t be earning revenues. The larger companies usually define in the management contract the number of weeks sailing time you are entitled to without any impact on your revenues. An advantage that some of the companies with worldwide fleets offer is the use of a sister-ship at another of their sailing destinations.
Maintenance and Phase Out
Last but by no means least is the standard of service and maintenance offered by the company - often a deciding factor when comparing similar services. You should enquire about the type of maintenance tasks carried out, with what regularity and by whom i.e. are you responsible, or does the company use contractors or manage this in-house? Large companies with greater parts inventories will generally take care of this aspect from A to Z, but should be able to provide you with standard maintenance plans or manuals. This can impact on the value of your yacht at the end of the program, so it is worth checking out a company’s reputation in this area. Try visiting a charter base and looking over 3 to 5 year-old boats for a good indication of their standards in this area.
When phasing out of the charter fleet, your yacht should undergo a full inspection, and it is advisable to be present for the ‘handover’ formalities. Some companies can provide you with full phase-out manuals containing check off lists for all aspects of the yacht’s condition.
If your yacht is operated outside US waters, your purchase is not subject to Sales Tax. In the US, as a business with a proper tax ID number, you may be exempt from Sales Tax. For the larger vessels, you also have the possibility to write off the loan interest expense as a second home. In a business situation, you can also offset the depreciation of your vessel against your charter revenues, thereby reducing taxation on your revenues. If you are personally involved in your charter business and can document it, you may qualify for active income and write off any losses from your charter operation against other types of revenues, although most owners remain passive and declare their charter revenues as passive income. In any case, it is recommended to seek advice from your accountant or tax advisor to see which formula suits you best.
End of Program Options
While you may wish to keep your yacht for personal cruising or live-aboard projects, some charter companies can offer you a range of alternative options. Small companies do not generally limit the time your yacht can remain in their fleet, but you will need to assess the increased cost of maintenance and effect on revenues as your yacht ages if you decide to continue chartering your yacht. Large companies generally limit the age of yachts in their fleet to 4 to 6 years, but some have second-tier fleets where you can extend your management program. Alternatively, some companies offer trade-in options if you wish to continue in the program with a new yacht, or brokerage solutions if you are looking to sell your yacht.
Choosing the Right Yacht Management Company
To help you choose, you should consider the following questions: Are you flexible on the model you wish to purchase, or do you have a specific yacht in mind with particular options and layout? Do you want your boat to be based locally where you can have frequent access to it, or is the opportunity to enjoy worldwide sailing more interesting for you? Are you chartering your yacht just to offset the bills, or are you seeking a full management solution? Do you mind paying unplanned operating and maintenance costs in return for variable revenues, or would you appreciate the security of a guaranteed payment with no expenses?
Overall, if you prefer a low risk, low involvement solution to owning your yacht, with the opportunity to sail in other destinations, then you should look at the fixed income programs offered by the larger companies, who will also take care of all the maintenance and operating issues. If you are not adverse to risk and cash flow management, prefer to be more involved in maintenance and operating issues, and would rather have your yacht based locally with plenty of flexibility regarding owner use, then a smaller company may be the answer.
By Josephine Williams, Footloose Sailing Charters