Buying a Charter Cat
The pros and cons of buying a boat and putting it in charter
Is putting a boat in charter right for you? Zuzana Prochazka helps you decide
“I own a yacht in the Caribbean.” It’s one of those things many of us would like to drop at
a cocktail party but few can utter with any truthfulness. Maybe that’s why buying a boat
and putting it into charter service (whether in the Caribbean or at dozens of destinations
worldwide) is so enticing. How does it work? Can you make money? Does it make sail
ing free? Is it right for you? I spoke with a few charter companies and owners and learned
that, as with most things in life, it depends on what you put into and want from the
program that defines your experience.
First and best advice: Know thyself.
“I own a yacht in the Caribbean…and I barely have time to use it because I’m skiing in Vail all winter.” This sounds like the best kind of first-world problem, but before you fall in love with the idea of yacht ownership in exotic locations, ask yourself a few questions:
Will I actually take 4-12 vacation weeks on the water?
If you still work, have family commitments or are interested in other leisure activities, like skiing or golf, you may not be able to take the time to sail often enough for the financials to work. Create a calendar and ask your partner if two months of on-water vacations sounds feasible and whether you both actually want to take ownership of the boat at the end of its service.
What is my primary goal?
Are you trying to defer the costs of buying a new boat, or are you trying to make money? Most programs will cover costs, and some may even make you slightly cash-positive in the end. But this is generally not a way to make money. On the other hand, if your goal is to spend more time sailing, offset the cost of vacations and maybe try out the cruising lifestyle before selling everything and committing, then this could be just the ticket. Of course, if you’re looking to leverage yacht ownership for some kind of tax break, you need have a detailed conversation with your accountant well ahead of time.
Charter yacht ownership also isn’t a “one-size-fits-all” arrangement. Some companies offer multiple programs, others only one. Midsized boutique companies like The Catamaran Company or CYOA may only have a single location, so you had better like that destination because you’ll be sailing there repeatedly. If, on the other hand, you want to charter the world, then a large organization with dozens of bases, like Dream Yacht Charter or The Moorings/Sunsail is right for you. If you’re concerned about maintenance, also be sure to talk to multiple companies, because you need to be comfortable with whoever is taking care of your boat.
Do I have the financial resources?
With down payments of 20 to 25 percent, yacht ownership is a major financial investment. Curtail the romance of it and look at the realities of resource allocation, which include both time and money. You don’t want to regret your decision down the road because money is getting tight.
PROGRAM STRUCTURE
Again, charter companies differ widely according to size, location and agreement structures. Many, for example, promise “guaranteed income,” where 8-10 percent of the new vessel price is paid regularly. “We offer 9 percent annually, and that’s guaranteed to be paid to the owner monthly,” says Jean Larroux, Yacht Ownership Sales Manager at The Moorings/Sunsail, which purchases on average 200 new charter boats per year. “That’s a good deal, but if you don’t take advantage of using your charter weeks, the overall value of the experience is diminished.”
Eric Macklin, Yacht Sales Manager at Dream Yacht Charters (DYC) agrees, saying. “In our guaranteed program all expenses are paid by the charter company for a five-year term (minus the 20 percent down payment)....There’s no financial risk, but it does help if the owner applies the windfall to his/her principal on the loan so that at the end, the mortgage is lower. The outlay is generally a wash, and the value you create is in the free charter weeks.” Similarly, Andrew Thompson of Horizon Yacht Charters says, “We have guaranteed revenue and split revenue/ active management programs and offer options to extend ownership beyond five years. Owner usage is unlimited. A financial report and maintenance history for the yacht is provided on a monthly basis.”
Other programs are run more as yacht management arrangements, with a strict income and expense equation. Tortola Yacht Management (TMM) based in the British Virgin Islands, for example, offers this along with a booking service where the company markets your boat for a 25 percent broker fee. Don Pietrykowski, Yacht Sales Manager at TMM, adds that some owners see tax advantages to owning a charter boat and running it as a business. In that case, it is an active investment, and the owner needs to show effort in marketing charters, which may include advertising, having business cards and a website for the venture, attending boat shows and several other items on a checklist. Be warned though: the commitment isn’t insignificant and can/should take you 500 hours per year to qualify.
In fact, The Moorings’ Larroux contends that they don’t market their programs for the tax advantages specifically because of the required owner involvement as well as issues like an owner’s individual tax situation, residence and other factors that can make things sticky.
DYC’s Macklin notes that they have six programs to choose from for maximum versatility, more than any other charter company. Their Performance Program, for example, splits the charter income between the owner and the company (65/35 respectively). The owner then takes expenses and depreciation off his/her income tax. “Owners may recoup the depreciation at the end if they sell the boat for more than they depreciated it, so knowing their exit strategy ahead of time comes into play,” Macklin says.
Overall, Macklin says, DYC puts about 260 new boats into charter each year, with about 75 percent of owners choosing either the guaranteed or performance programs with the first one being the most popular. The other quarter of the owners choose one of the remaining four, which while may be appealing to some, but may require you a
CPA to understand.
Brent Hermann of the Catamaran Company also describes their program as being a 77/23 percent split, with the client receiving the lion’s share after expenses. With 30 boats in the fleet, Hermann says they add 4-5 boats annually and offer a three-year program versus five years. They call themselves a boutique operation. “It’s a doughnut and if you fit inside it, it works great,” Hermann says.
Navigare Yachting, a large European company that includes a Caribbean fleet, offers three different programs. “Our most popular program offers guaranteed income up to 10 percent annually for seven years, the longest charter period in the industry and some of the most competitive returns on investment,” says North American marketing manager Maryline O’Shea.
In terms of legal ownership, most companies allow their boat to be put into an LLC or other type of partnership, leaving it up to the individual owners to structure. In fact, splitting a loan is a great way to spread costs and ensure that all available owner weeks are used. Most companies also allow owners to “gift” their weeks to friends.
RECIPROCITY AND OWNER USE
The actual time an owner can use their vessel varies, but it is usually from two to 12 weeks.
In terms of how exactly it works, owners at The Moorings/Sunsail programs are on a point system. Low season costs are one point per day, high season two points and there are no blackout periods. In all, you receive 84 points per year with half available for advanced bookings. The other 42 points must be used on short notice and inside of 16 days of the first day of the charter. That means you have to be flexible in both work and travel times.
Dream Yacht Charter, on the other hand, does theirs according to weeks. You receive two weeks of high season (which can be converted into four weeks of low season time) plus two weeks of low season time and then six weeks of “last minute walk-on” (short notice), so that technically you can sail for up to 12 weeks. Basically, you have four to six weeks that can be booked in advance depending on season, with the walk-on weeks as a kind of a bonus if you can use them. DYC also has the largest number of bases around the world, so if you like to travel, this may be the right choice.
Similarly, CYOA offers owners between four and 12 weeks of use, depending on their individual agreement. TMM and The Catamaran Company, on the other hand, offer unlimited owner use, although the boats are typically booked 15-20 weeks per year for charter work. Of course, while you’re chartering your own boat, it’s not making money. That said, this is great for people who have extended time off (like teachers) and want to cruise a month or more at a time.
Like The Moorings/Sunsail Navigare, which is expecting to put 80 new yachts into its fleet in 2019, runs on a points system. However, the company also offers a twist in terms of owners’ rewards. “Navigare offers reciprocity sailing at over 50 locations worldwide, including nine Navigare bases,” says O’Shea. “But our owners can also choose to spend their holiday in a luxury villa in Italy, Thailand, Costa Rica, Jamaica or Florida or they can stay in a ski resort in the Alps or Aspen, Colorado.” Not bad!
Again, TMM, Voyage and CYOA only have bases in the BVI or USVI, so reciprocity with them may be somewhat limited. Horizon, on the other hand, runs multiple bases in the Caribbean, so that can be attractive for American owners, and Thompson adds that their program is unmatched in the industry in terms of the reciprocity it also offers at unrelated worldwide companies based on a point system.
In fact, reciprocity is a terrific deal, but it’s not free, because there are turnaround fees, fuel, water, propane, yacht cleaning, linens, dinghy and insurance fees to pay. As as is the case with regular charters, these fees are dependent on the size of the yacht and range from $300-$900 per trip. The good news is that it’s still a small part of what could be a $10,000 overall charter cost.
INSURANCE, LIABILITY AND WARRANTY
Charter companies offer umbrella fleet insurance, which is more affordable than if each owner buys his/her own policy and is usually estimated at 1.8 percent of the hull value. It’s basically mandatory, with charterers also being charged a daily collision damage fee that covers the deductible so the owner is spared the expense. Yachts are covered for casualty loss as well as up to $10 million P&I (liability) coverage for damage to other yachts or personal injury. That means if a charterer runs over a snorkeler while anchoring, for example, the owner is not liable.
Unfortunately, for catastrophic incidents like hurricanes Irma and Maria, the issues can be a bit murkier. Per TMM’s Pietrykowski, the boats that were a total loss fared well with 100 percent coverage on stated value of the vessel. Those that were damaged but repairable, however, had to go for insurance claims, and some of those costs came back to the owners.
Factory warranties are also provided by boat and equipment manufacturers with no additional cost to the owner. However, if, for example, a stove goes out, the cost of shipping in a new one may go against the owner’s expenses.
BRANDS AND TYPES OF VESSEL
Larger charter companies don’t accept pre-owned vessels, but smaller, boutique and Tier 2 companies do. Some companies work with certain boat builders, like The Moorings which accepts only Leopard catamarans and Sunsail which works with Lagoon. By contrast, Macklin says DYC is fairly brand-agnostic, although the company’s Bali cats get lots of attention in charter due to their comfort and amenities. “By-the-cabin charters on our crewed luxury Lagoon 620s are off the charts,” he adds. “When a charter comes in at $25,000-50,000 per week, we also get whole families that book the boat.”
Other companies like Horizon, which purchases 20 new boats annually, also offer flexibility, so if you want to own a Fountaine Pajot or go for a monohull in a sea of cats, you’ll have that option. The Catamaran Company also accepts any model, any year and any layout, and owners can equip the yacht as they like. Finally, some companies make an allowance for a locked compartment where an owner can store private equipment like dive gear, water toys or even clothing for use during their private charter time.
MAINTENANCE, CARE AND SERVICE
Maintenance is done regularly and yachts are checked (with various degrees of thoroughness) before and after each charter. Larroux says that periodic preventive maintenance, such as oil changes, is also done as needed and managed by the operations managers at each base. Clearly, preventive maintenance helps avoid more large repairs. “In a guaranteed program, all these costs are borne by us and there are annual evaluations and repairs done including bottom paint,” Larroux adds.
Beyond that, Horizon, CYOA and most others also dive the boat after each charter to inspect for hull damage and do quarterly as well as annual maintenance procedures at the boatyards. In terms of schedules, new bottom paint and a full inspections generally take place at haul-out in August and September during the Caribbean low season.
As mentioned earlier, if you’re concerned about the care of your investment, interview each prospective charter company in detail as to what gets done, how often and how the expenses are charged. Some, like Horizon and The Catamaran Company, even offer full owner reports online that are extremely detailed.
In terms of the overall quality of the care, the good news is the charter companies also very much have skin in the game. “We want to give our charter customers the best possible experience so we take care of the boats,” says Macklin. “The condition of the vessels as well as our service reflects on our brand so there’s no shirking.”
END OF SERVICE
What happens to the boat and how much is it worth at the end of its initial charter service period depends on a few variables, including the company you worked with. In some cases, your yacht may even be free and clear, depending on its model/size, the program chosen, the term of the program, usage and the amount of the down payment.
Per The Moorings/Sunsail, with 20-25 percent down a loan for 12-20 years and a guaranteed income program where the owner put the funds against the principal, the residual on the loan after five years should be less or equal to the resale value. The good news is that cats currently hold their value better than monohulls not only due to their popularity but also because there is currently a shortage due to the hurricane damage of two years ago.
Of course, when the time is up, you own the boat, so you also own the mortgage. If it’s paid, great. If not, you have options. You can take ownership of the boat, for example, continuing your loan payments and go cruising. Or you can put the boat into a Tier 2 company and continue its charter work. In some cases, you can extend the vessel in its current contract, or you can sell the boat, often with the help of the charter brokerage department. Most charter companies recommend that you list the boat for sale during its phase-out period— perhaps 9-12 months before the end of the contract. You will be assessed a brokerage fee.
Some owners may choose to sell and existing boat and then purchase a new one to put back into charter with the same company. Not surprisingly, this kind of a trade-in program is something many companies, including DYC, The Moorings/Sunsail and Horizon, love to see, since it generates repeat business for them that some, like TMM, say can represent up to 25 percent of all owners. Similarly Horizon says their repeats represents 30 percent of its ownerhip clientel, while The Catamaran Company touts that they have owners who own multiple boats in their program.
For those who want additional flexibility, some com
panies also allow for an early termination of a contract. Horizon and The Catamaran Company, for example, say allow an owner to remove the boat by giving a 90-day written notice. TMM owners Frank and Mary Grace Stich took advantage of a similar provision. After putting their Fountaine Pajot Helia 44 into charter, they took the boat out after just over two years to sail full time. “You don’t do this to make money, but we had a great experience, sailed more and then got back a boat in great shape that we could cruise,” says Frank.
Lori and Michael joined DYC’s Dream Easy program that offered a very nice Lagoon 450 at a heavily discounted price. They weren’t worried about income, but planned on retiring on the boat. They have loved the program and have taken advantage of reciprocals in other countries. “Strangely, the challenge is finding friends to join us on our trips,” says Michael. “There are any number of people who love the idea, but even though the boat is “free” the cost of travel and expensive locations we want to travel to make it impossible for many of our friends.”
THE INTANGIBLE ADDED BENEFITS
Finally, putting a boat in charter isn’t just about deferring costs and sailing more. You’ll also receive assistance on the front end. For example, Horizon’s Thompson touts the way a charter company can help out with things like ownership contracts, factory direct pricing, delivery logistics, marketing management and warranty management. If you’ve never owned a boat in charter or otherwise, there’s a lot of handholding that you may find beneficial by going this route.
Final tip: The bottom line is fuzzy, so roll with it
If you’re honest, introspective and practical on the front end, you’ll likely achieve your objectives at the end. However, be warned: the bottom line may remain fuzzy as realities change.
Here’s a hypothetical example: A week of charter aboard a 45ft cat costs approximately $10,000, so if you use it for five weeks a year for five years, you’ll have created $250,000 in vacation value. If you then put the guaranteed income toward your loan, you should be in a break-even scenario when all is said and done, and that’s pretty good because sailing isn’t cheap.
Again, charter companies agree that this is an investment in a lifestyle, not a money-making scheme.
Some owners may be one-and-done; others will continue on with a second, third or even fourth contract if they’re happy.
Some owners I’ve spoken with have waxed poetic about their experience. Often, these were people who took advantage of their owners’ weeks, used the boat to really learn to sail and then proceeded with their plan to take the same vessel cruising. Some have loved their programs but worried that their plans of retirement aboard would come too late for their physical abilities. Others emphasized that it is a long-term commitment of funds and should never be a financial stretch.
Again, the best you can do when considering putting a cat in charter is know your goals, learn as much as you can and accept what comes. Then, if you want to work your yacht ownership into conversation over a cocktail, it may be even sweeter than you imagined.