More and more people are buying monohulls and catamarans and placing them into charter programs all over the globe. Placing a yacht into charter management is a good way to reduce the cost of the boat and also offset the cost of ownership. There are different types of Management programs offered by the industry that I will analyze and explain to ensure that you have a good understanding of what you will be getting into if you decide to place a yacht into charter management.
The two most popular programs are the Guaranteed Income program and the Performance (aka Income Sharing or Variable income) program that, in all probability, are the two options that you will be presented with across the entire industry.
GUARANTEED INCOME PROGRAM
The Guaranteed program is the option offered by most of the large, well-established companies and is very popular for owners who want to have a “no hassle” ownership experience. The owner must qualify for financing which can be challenging, as most lenders are very sticky on making loans for yachts going into charter. There are, however, a few known lenders, who have certified these programs, and will approve transactions with well-qualified buyers. Once the financing approval has been received, the buyer will then typically pay a 20% deposit, while the balance of 80% is due upon completion of the yacht at the factory. The deposit can vary and be as low as 10% - and as high as the buyer wishes, which will obviously facilitate the financing - of the purchase price initially. At closing the ratio is usually 20% from the buyer and 80% from the finance company. See important note about financing issues at the end of this article.
The boats are normally priced fully equipped, delivered to the charter base and ready for charter so there are no more out-of-pocket expenses for the buyer after the initial deposit. The program is structured so that after that deposit, the charter company pays for all the expenses including, insurance, dockage, maintenance and general operating. The owner pays literally ZERO for the entire duration of the program. The guaranteed payment, which is made monthly, typically amounts to more or less 9% annually of the boat initial value. It is enough to cover a typical mortgage payment, making the entire proposition cash neutral for the duration of the program. The term varies from 54 to 66 months, so the longer the term, the more guaranteed income you will receive as a whole.
This is an important consideration when shopping companies or comparing programs. While the boat is in service the owner will have exchange privileges allowing them to sail on a similar boat at any one of the companies bases worldwide. While there is no charge for the actual charter, be aware that there are fees that will need to be paid, such as cleaning or turn around costs, diesel, water and ice etc. So familiarize yourself with the exact fee structure for the various companies.
The Charter Company is totally responsible for the maintenance and upkeep of the yacht for the duration of the program. However, this does not mean that the owner should not pay attention to it. It is strongly recommended to thoroughly check on your boat every time you are on board for a charter. Make a list of all items to be attended by the technical staff and give it to the maintenance manager. Then follow up.
When the contract expires, then the boat is “Phased out” and the owner must then take possession of her. Most charter companies will have a phase out program written into the management agreement that stipulates that the boat must be handed back in good working order except for fair wear and tear. It is critical for the buyer to fully understand the obligations of the charter company with regard to the phase out: this component will determine the condition and resale value of the boat after the owner takes possession. The phase out should be managed by the owner to ensure that he boat is in the best possible condition and involves a pre-phase out survey and final acceptance after phase out. This is a subject all on its own and if more information is wanted, visit catamaranguru.com and sailonline.com.
There are three options once the program has ended: private use, place the yacht in a second tier charter operation for another 5 years or sell the boat. In some cases the charter company will trade the boat in, or alternatively assist the buyer to sell the boat and upgrade to a new boat back into the program. Again this is a subject that needs to be addressed on its own, contact catamaranguru.com and sailonline.com for more information.
- No maintenance or accounting involvement – hassle free ownership
- Full financial visibility until the end of program; absolutely no surprise.
- Cash neutral program – Charter Company pays all operating costs, AND THE guaranteed payment covers the mortgage.
- World wide owner exchange on similar yacht
- No risk if the boat does not charter for whatever reason– guaranteed payment – no downside.
- Yacht undergoes extensive phase-out maintenance work at the end of program, at the charter company ‘s expense.
- No control over maintenance for the duration of the program. Maintenance is done at the discretion of the charter company.
- Fixed return. No upside if the boat charters a lot and generates a large profit.
- No tax advantages available – income is deemed passive under this program.
The advantage for the charter company with the Guarantee program is that there is no monthly accounting, just a monthly payment. The maintenance is at the companies’ discretion which negates owner involvement, which can be time consuming and often problematic. The Phase out at the end of the program allows the charter company to address all outstanding issues at one time with an independent survey as guidance. The boats are all interchangeable in terms of usage or booking, and so if there is a problem on one boat, the charterer’s party can be switched at the discretion of the Charter Company. As for the owner, his/her income is contractually guaranteed no matter what, so it is of no concern to them.
The Performance program is designed to be an income sharing relationship: the owner is credited for the full net charter income after booking commissions, and then the Charter Company bills the owner for services. While this program definitely yields the owner more income it requires a lot more personal involvement. Smaller companies tend to offer this program as opposed to the Guarantee program because it represents less risk or liability to them.
As with the Guaranteed program, the purchase requirements with respect to financing, down payment, yacht specification, equipment and delivery to the base are the same as stated previously.
With the Performance program, there is typically a split of the net charter income. That split usually ranges from 65% owner-35% charter company, to 80% to the owner and 20% to the Charter Company. The reality, often misunderstood by the boat buyers, is that the split is almost completely irrelevant and used as a marketing catch when it looks very favorable to the owner. Truth is, only the bottom line is relevant. That is because it is what the owner is charged for after the split (costs of the price of services, booking commission paid to charter brokers, etc. that truly determines the bottom line and not the split formula. Some companies rely entirely on outside booking agents – in which case the commission load is high - while others have a booking office in-house with only occasional use of outside booking agents. The issue here is that the outside booking agents charge 15% to 20% commissions, which means that the owner starts with 15-20% less income per charter. Conversely, the charter company’s in-house booking office might charge less or no commission at all. Therefore, if there is an outside booking agent 100% of the time and the split is 80/20, then the owner will earn $64 on every id="mce_marker"00 received.
If there is no outside booking agent, and if the charter company does not charge a booking commission, with a split of 65/35 the owner will earn $65 on every id="mce_marker"00.
In that example, an 80/20 split that seemed very attractive at first becomes less favorable than a 65/35 split.
That is why it is very important to know and understand how the booking commissions work because they have a big impact on the final outcome.
Similarly, because this is an income-sharing program, the owner needs to know what the costs are, and how they will be billed to him. For example: hourly labor rate, dockage and electricity costs, turn around costs, insurance or any other fixed or variable expenses the owner will be responsible to pay for.
It is very important to analyze those costs to see what the actual bottom line income is projected to be. As you have seen, the split does not determine the bottom line and will be affected by many factors: So do not get blinded by this.
Generally speaking, the maintenance of a boat in a Performance program should be better because the Charter Company bills for services and the owner is involved in the management and operation of the yacht. Depending on the type of boat, configuration and location, the Performance program will yield 30% higher an income than the Guaranteed program to the owner. That is a substantial difference. Typically, there is no phase out for yachts in this program. That is because if the maintenance is being done regularly and diligently, then the yacht should be in good condition at all times, including the end of program. If there were any issues that need to be addressed, then the owner would be responsible for the expense. So the phase out notion is not applicable.
As with the Guarantee program, once the program has ended, there are three options: private use; yacht placement in a second tier charter operation for another 2 to 5 years; sell the boat. In some cases the charter company will trade the boat in or alternatively assist the buyer to sell the boat and upgrade to a new boat back into the program. Again, this is a subject that needs to be addressed on separately. You may visit catamaranguru.com for more information.
- Better ongoing maintenance – Owner is involved on a month to month basis and is billed for services – maintenance is not discretionary
- Much higher financial return with upside potential
- Owner is able to place the yacht into a Corporation for substantial tax advantages – see tax advantages on catamaranguru.com
- Boat should generally be in better condition at end of program
- No protection from downside: if charter bookings drop off, or economic conditions or airline fares become unfavorable, the owner is still responsible for all the upkeep costs.
- No owner exchange / reciprocal privileges as in the Guaranteed programs: Owner can only use own boat at her location.
- Owner has to be engaged in the operation of the vessel – it is not “hassle free” ownership configuration.
Advantages to the Charter Company are that there is no contingent liability that comes with a Guaranteed program; the financial risk is with the owner. The maintenance is entirely invoiced to the owner and there is no phase out obligation. The Charter Company generally earns less income from this program, with the owner benefitting more than in the Guarantee program, but the trade off is that the risk is shared. The owner is actively involved and the administration requirements on the Charter company side are high compared to the Guarantee program.
Conclusion: In the end, the main aspects to consider for the boat buyer are his/her risk tolerance (financial visibility vs. potential upside, similar to the difference between a bond and a stock); need for tax benefits; attraction to exchange programs between locations vs. sailing in one cruising ground; interest in involvement in the yacht management vs. hassle-free experience.
FUNDAMENTAL FINANCIAL CONSIDERATIONS
There is a very important element is to be considered, and most charter companies’ sale staff do not often highlight it. You’ll see why.
It goes like this: any loan with a 80% financing (the usual configuration) paired with a maturity higher than 12 years, is guaranteed to put the buyer significantly upside down at the end of the charter program, simply by virtue of the typical charter boat depreciation and value on the second-hand market. In other words, the typical charter boat depreciation and value on the second-hand market ends up being less than the loan payoff amount.
Regardless of the buyer’s plans after the end of the management program, it is not a situation anyone wants to be in. Consider this: it’s the end of the management program. You thought, 5 years ago, that you would keep the boat for private use. However, your life circumstances have changed (5 years is a long time) and you are now forced to sell your boat. You’re upside down by $50K. in relation to the real resale value of your boat. Sounds familiar – remember the real estate disaster in 2009? This is not a hypothetical situation. We see it often and it can be a precarious situation. The reason many sales people do not mention this is because a 5-year financial proforma on any boat, paired with a 15 or 20 year-mortgage looks significantly better than one with a 10-year mortgage, in regard to the monthly and annual cash flow. We think it is borderline deceiving and potentially dangerous.