your Yacht, Your Money

Think­ing out­side the box

Yachts International - - Contents - BY CATHER­INE KENT At­tor­ney with Al­ley, Maass, Rogers & Lind­say, P.A.

Many own­ers who choose to fi­nance their yachts do so not for lack of funds, but be­cause a loan frees up cap­i­tal that can be used more prof­itably. While the tra­di­tional method of yacht fi­nance through a loan from a bank se­cured by a pre­ferred ship mort­gage has plenty of ben­e­fits, buy­ers may con­sider other op­tions when de­ter­min­ing how to max­i­mize the value of their yacht ac­qui­si­tion.

With the right lender and loan, fi­nanc­ing with a ves­sel mort­gage al­lows a buyer to bor­row at a lower in­ter­est rate than the rate of re­turn the buyer may re­ceive on the same amount in­vested in se­cu­ri­ties or a business. Ac­cord­ing to Lisa Ver­bit of Bank of Amer­ica’s yacht lend­ing prac­tice, a yacht is an as­set that can be used as col­lat­eral to fi­nance its pur­chase, or a re­volv­ing line of credit that the owner can use to invest in other business ven­tures, such as real es­tate ac­qui­si­tion, with­out ty­ing up the liq­uid­ity in the owner’s cash or se­cu­ri­ties port­fo­lio.

A bank can also ad­vance a port­fo­lio loan to its clients to fund a yacht’s pur­chase and op­er­at­ing costs with­out plac­ing a mort­gage on the ves­sel, re­duc­ing clos­ing costs in buy­ing and sell­ing the yacht. While the amount of a loan se­cured by a ves­sel mort­gage de­pends on the value of the yacht, the amount a bank will lend against a se­cu­ri­ties port­fo­lio de­pends on the value of the port­fo­lio, which, for most yacht own­ers, is sub­stan­tially higher than the value of a yacht they are con­sid­er­ing for pur­chase. For an ex­cel­lent bor­rower with sub­stan­tial as­sets and a good bank re­la­tion­ship, in­ter­est rates on a port­fo­lio loan can be as low as 1 to 2 per­cent. A risk of a port­fo­lio loan is that if the value of the port­fo­lio de­creases, the bank will seek ad­di­tional col­lat­eral.

A buyer can use a com­bi­na­tion of a ves­sel mort­gage and a port­fo­lio loan to fund a yacht pur­chase. Since a bank will al­ways re­quire a down pay­ment to pro­tect against as­set de­pre­ci­a­tion, a buyer can fund a por­tion of the yacht’s price with a ves­sel mort­gage and the re­main­ing amount with a port­fo­lio loan. With this strat­egy, the buyer

can hedge against po­ten­tial de­pre­ci­a­tion of the yacht ver­sus de­cline in the value of a se­cu­ri­ties port­fo­lio while fi­nanc­ing the en­tire pur­chase price of the yacht.

Al­ter­na­tively, if a buyer uses only a port­fo­lio loan to fund a yacht pur­chase, the yacht re­mains un­en­cum­bered, and in the­ory, the owner could then ob­tain a re­volv­ing line of credit with a ves­sel mort­gage to fi­nance other business ven­tures. Vice versa, if a buyer uses only a ves­sel mort­gage to fund a yacht pur­chase, the se­cu­ri­ties port­fo­lio re­mains avail­able ei­ther to di­rectly fund other in­vest­ment op­por­tu­ni­ties or to se­cure a loan to fund other in­vest­ment op­por­tu­ni­ties. Both op­tions in­crease an owner’s abil­ity to use lever­age in an over­all business and in­vest­ment strat­egy.

Seller fi­nanc­ing can pro­vide ul­ti­mate cre­ativ­ity and flex­i­bil­ity for a yacht buyer, but it is dif­fi­cult to ob­tain, as most sell­ers want im­me­di­ate liq­uid­ity. If the seller is highly mo­ti­vated, a po­ten­tial buyer may have the lever­age to ne­go­ti­ate fi­nanc­ing terms. A pri­vate seller has wider dis­cre­tion than a bank to de­cide the terms of a loan, in­clud­ing the down pay­ment and in­ter­est rate, and may be will­ing to ac­cept col­lat­eral and other terms that banks would not. For ex­am­ple, a seller may be will­ing to fi­nance with a mort­gage on real es­tate, alone or in com­bi­na­tion with a ves­sel mort­gage, and may be will­ing to forgo a per­sonal guar­an­tee of the loan. The price of this cre­ativ­ity equates to higher trans­ac­tion costs re­sult­ing from the ab­sence of a stan­dard pro­to­col, and in some cases, the need to con­duct due dili­gence and se­cure and record se­cu­rity on mul­ti­ple as­sets across var­i­ous ju­ris­dic­tions, with the buyer re­spon­si­ble for such costs.

The best yacht fi­nanc­ing strat­egy is highly de­pen­dent on the cir­cum­stances of the in­di­vid­ual owner or buyer. With the op­tions avail­able—and a lit­tle cre­ativ­ity—a yacht owner can use fi­nanc­ing to fund a yacht pur­chase, pay op­er­at­ing costs, support a pri­mary business or invest in se­cu­ri­ties or other business ven­tures. In this way, a yacht pur­chase can add value to the owner’s over­all business and in­vest­ment strat­egy.

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