A drop in the Ocean – by Remco Immink
2007 has been a wonderful year for sail and power yacht owners and all other people enjoying a life on the ocean waves. Watching the America’s Cup in Valencia or the Super Yacht Cup in Palma could only make it harder to postpone the decision to purchase or upgrade to that beautiful yacht of your dreams.
Taking that decision is only the beginning of a long road, a list of items that have to be handled before you can experience the extraordinary fulfilment that can only be achieved by taking your personal yacht onto the high seas. What questions should you be asking yourself that will allow you to find the best way to fund the purchase of your new yacht, to find out what is best for you and your financial situation?
What will be your personal horizon? How long do you think you will you keep your yacht? Is it for just a few years, maybe while your young family matures, or is it for the next 15 years to take you well into your retirement? Historically ownership of a vessel lasted for an average of six to seven years, now it is closer to 3! As you can imagine, just this question alone has a massive influence on how you wish to finance your yacht.
Also will you purchase the yacht for private use only or also allow it out for charter to help with some of the running costs? To charter a yacht to third parties through a professional charter broker is a completely different story to that of a privately operated yacht. It is not only the number of crew you have to take care of but also the fickle needs and wishes of the charter market? This affects the number of guest and VIP rooms your yacht may need and in what waters it needs to operate etc. to be successful. Charter can generate a contribution to the running costs of the yacht but the costs themselves, especially maintenance, will also be higher than those of a privately used yacht. What should you expect from charter, will it be a fully booked season on an ‘in demand’ brand new yacht, or will you go for a yacht that already has a charter track record of say six weeks during the summer season? What will be the charter area, the Mediterranean, Caribbean or maybe you are thinking of a world cruise with chartering along the way? Is it true that the annual costs will be approximately 10% of the value of the vessel? Running costs and percentages of value do not tie up!
Should you go for a new build or a yacht on the second hand market? Or will you go for a brand new yacht to be built according to your partners or your own personal wishes? What about the owning structure, the flag, VAT, MCA, ISM, crew?
There really are numbers of questions to be addressed before even entering the front door of a respectable broker, dealer or yard to start negotiating the potential purchase.
Then there is the less exiting or interesting part of the whole adventure how will you handle the finance of the transaction. There are a number of options:-
You can finance it from your available liquidity at the bank. Great if you have it!
You can finance it through an account with your own company.
You can take a mortgage out on your real-estate, or leverage your stock portfolio or other assets.
You can arrange a yacht-lease or a traditional yacht loan.
Each option has its own advantages and disadvantages. Taking capital from your own liquidity is the easiest way with no documentation; it’s quick with no fee’s etc. The downside of this as a businessman is that you cannot use your money anymore for any interesting investments that happen to come along for you to receive a good return on? Your money is, from the moment you hand it over, floating workless in the harbour. Taking it from the current account of your company might leave you in discussions with your accountant, tax advisors or banker when you are planning for further business investment, maybe a takeover or expansion of your company. Leverage against a portfolio can be very interesting but has the obvious disadvantages at the moment that the stock market decides to plummet and a margin call is sitting just around the corner and on your portfolio!
If you wish to purchase your yacht by the book, like any personal asset it should in general be financed on its own. What options are there left? And what is best for my situation? Basically there are two options, a traditional yacht loan or a yacht lease. What is the best for you depends greatly on the answers to the earlier questions.
For instance the Italian lease can be an interesting solution, the Italian lease company has the possibility of reducing the VAT, and the VAT will be calculated according to the registrated length of the yacht. This reduction can result in a VAT rate of 6% for yachts over 24 meters. The VAT will be paid in monthly or quarterly instalments and registration can take place under the most convenient flag from say the UK, Germany or Holland, etc. Please note you must be fully aware that the yacht will be owned by the lease company and that you are the lessee. You can compare it with a car lease where you have a purchase option at the end of the lease. Further there is a minimum term of 3 years and a maximum of 10 years. The longer you make the term the less that the VAT advantage will be as you are also paying VAT on the interest part of the lease. The lease can be transferred to a third party should you want to sell the yacht. However the lease company first has to accept the new owner. It is a good solution, especially for privately owned yachts not offered for charter to the market. The lessee can be either an individual or a company. If it’s a company the leasing company will usually ask for a personal guarantee from the beneficial owner. It’s worth comparing the different quotations and to figure out who is offering the services, also do they speak your language, which could be a very useful question!
If we go for the traditional yacht loan we have to look at the following items; what is the maximum term? The financing banks offer terms from 60 months up to 180 months. Finance will be available for the purchase of a new or existing yacht, to re-finance and free up some liquidity, to finance a refit or to bridge the period between the yacht you have at the moment and the yacht you have just ordered. The finance is normally based on the realistic market value of the yacht, and depending on the term, it might be combined with a balloon payment. (A large lump sum to be paid at the end of a series of smaller payments) It’s important to know if the loan is flexible and can be repaid at any time you like, without a penalty! What currency and interest possibilities are there, fixed, floating?. Are there additional costs and fees involved? What happens when you want to sell your yacht? Does the financer also offer construction finance for the building period? What is the goal of the individual bank? Are they solely interested in financing your yacht or are they interested in managing your securities portfolio? What are the securities the bank is looking for? Normally a yacht loan should be based on a first mortgage on the yacht and a personal guarantee of the beneficial owner. You may need to spend a lot of time to find out which is the right course for your needs.
Where to go to get the information you are looking for? The number of traditional banks and finance companies active in this field are limited and if you look at the marine finance and leasing market today you will discover that there are an increasing number of parties entering the market, some focussing on the private banking activities that might be tagged on, while others are in just to build up a healthy loan portfolio. You have three ways of finding out what is the best option for you; either research the market yourself, instruct your general advisor, or have the research done by a specialist yacht finance company. The last option will save you a lot of time and money, they obviously know the market better than anybody, and also where to address the right questions. They will first list your personal requirements, then approach and filter the market before coming back to you with a clear package, a complete package tailored to your specific needs.
Not only will a specialised yacht finance company provide you with the best deal they will also guide you through all yacht related matters, many that you may not have foreseen. Finance might just look like a dusty item but with the right help and advice buying that dream may not give you too many sleepless nights after all!
Remco Immink is an adviser working for Ciris Capital a specialised yacht finance company based in The Netherlands.
Contact: +31 30 697 0865
Photo credit: Merijn de Waard / Yacht-Images.com