Over the years in our industry I have seen a few yacht brokerage companies focus on selling new or used cats into bareboat charter programs. I generally find the tactics and approach to this sort of selling a bit aggressive for my taste, but the ability to sell boats into charter programs is a highly profitable business for those who are good at it. Full disclosure: I am not.
One of the most frustrating things for me as a yacht broker is to be asked by nice, decent people if they should consider buying a new or used catamaran and placing her into a bareboat charter program. Invariably they always want to know, “What will the numbers look like at the end?” All these buyers ask you to send them detailed “pro-formas” on anticipated costs and revenue as well as depreciation estimates. They ask endless questions on the specifics of the charter programs, from dockage costs, maintenance costs and revenue splits. As well they should.
We were never very good at my company selling cats into bareboat charter because engaging in speculative sales programs has always troubled me as it requires offering advice which cannot be erected on very solid ground. The reality is, placing a cat into bareboat charter is no different than making a stock investment—past performance does not guarantee future return, or loss.
There is risk in any business venture, or any investment, of course, and one simply has to have their eyes wide open. I think the most critical thing for a person to consider when placing a yacht into bareboat charter is how often they will really use her each year, and how much value they believe they will extract from that use. As a general rule, I believe that when one uses a bareboat at least four weeks or more a year it can start to make sense. If they need to use their boat for more than two months a year, in prime charter season, it starts to make less sense. Guaranteed revenue, new boat programs, generally do not even allow for such extended prime-time use. Some non-guarantee programs will allow for this.
One thing of concern is when Americans are told or led to believe that placing a boat into bareboat charter is a “business” as far as the Internal Revenue Service is concerned. They tend to think they will yield great tax advantages by depreciating their bareboat and running her as if she were a business. For those who think this is so, I strongly advise them to discuss this with someone at the IRS, because placing a boat into a charter program where someone else is managing the boat is deemed a “passive business” not an “actively managed business” and the tax advantages that come with the former are nothing as good as the later. Luxury crewed charter yachts are set up as a real business and can and often do reap high tax advantages for certain people. Bareboat tax benefits need to be explored carefully, as an aggressive effort on this front might lead to a nasty audit if one is not careful. I always counsel people to seek out the best professional advice they can get on such matters.
Let me discuss here the advantages and disadvantages of non-guaranteed revenue charter programs. I will then turn to guaranteed revenue programs.
- Most yacht charter companies offer non-guaranteed revenue programs.
- The largest benefit of this is that most of them are happy to accept used, late model catamarans, and do not demand you buy a new or used one from them. You work with a broker to find a good used cat and then place her into their program. This means that you can purchase a used cat that is depreciated nicely already. Charter programs vary, but most of the companies will always take a nice late model catamaran into their fleets.
- With most charter companies you are on a year to year contract. If you are unhappy with a given company, or bored with a given location, you can move your boat to another company or location. As maintenance and care and the costs for this vary across programs, this might also be a reason to pull your boat from one fleet and move her to another. I strongly advise consumers to engage in a lot of due diligence on any charter company they may wish to do business with.
- If you find that you are not enjoying the charter experience, or find that after two years you have had enough, you are free to pull your boat from any fleet and sell it. You are not locked into a four or five year term before you can sell your boat without serious financial consequences.
- You control the calendar for your boat for the most part. If you block off Easter for your family, you accept that you will lose charter revenue, but you will still be able to use your boat. The flexibility of managing your calendar is a real plus if you are not strictly driven by charter revenue. Some charter outfits will not want your boat, however, if you block off large blocks of prime time charter weeks for yourself as their earnings are tied to charter revenue.
- You can experience pride of ownership provided you accept the fact that each time you visit your boat it will have new bumps and bruises which you must accept as a part of earning revenue from your boat.
- When you have non-guaranteed revenue you have non-guaranteed revenue! I well recall, in the wake of September 11th, that charter companies had a 35 percent drop in charter bookings that winter season. World events can change dramatically and impact the tourism industry rather instantly. Recent years have been good for charter, but during the heart of the recession things were challenging in the charter business.
- If you are unfortunate and some incompetent runs your boat onto a reef and it needs a big keel repair she has to be pulled from charter until she is repaired. Your charter revenue will end until she is back in operation. A worst case scenario is that you have an insurance claim on your hand and that is of course never fun or exciting stuff to deal with. While the chances are rare this could happen, I see enough bareboat boo boos on my frequent visits to the Caribbean that I know it is a potentiality of some order of probability. (If you do have a damage history to disclose on resale that will negatively impact your resale too).
- Non-guarantee revenue programs also leave you with non-guaranteed depreciation, and this too is subject to market conditions when you decide to sell. As a rule, four cabin, four head cats get the most bookings in charter, but are also the least sought after models after the yacht is no longer suited for charter. Very few private buyers want a cat with four heads and little storage inside. Hence the four cabin models depreciate more rapidly. You earn more while they are in charter, but earn less on the boat when you sell her. They are cheaper to buy used. (A powerful reason not to get a new one in my view).
- Any yacht that has a bareboat charter history, and especially a long one, is a turn-off to a great many potential buyers. I myself am not at all opposed to buying X charter cats for my clients if they offer the best value for their budget and needs, but there is little question that a privately owned and maintained yacht will always sell for more, often considerably more, than an X bareboat charter cat. I often believe that some of the very best deals around are on X charter boats because the supply is so high and the demand so low. When working with a limited budget, just turn the two heads you have no use for into storage lockers!
- Because there has been a proliferation of charter companies forming over the past several years, there is a growing supply of X charter cats for sale. My gut is that the supply may grow too steeply in the not too distance future which will further depress prices of X-charter offerings.
- Many of the larger outfits in the charter business are yacht sales organizations as much as they are charter companies. Most are well geared up to sell new boats into their programs and demand that you buy your boat from them. On the brokerage side our experience is that only a few charter companies have highly qualified and expert yacht brokers managing the sale or purchase of used cats. The typical modus of operation is to sell the customer the boat where they make the most profit, not the best deal or best boat fit for the buyer. There is a huge difference between a salesman and a yacht broker yet many consumers are not aware of this.
The largest and most important consideration when placing a yacht into any charter program, as I said above, is how often you will use the boat and how much you will enjoy using the boat in that specific location on an annual basis. While you may not “make money” on your boat, the numbers just might work out better for you than paying for charters on a catamaran you do not own yourself. Certainly four weeks of use a year is the minimum number based on my observations. If you can use the boat more than this it starts to make even better sense.
That said, any yacht in bareboat charter, and certainly one that is working hard in charter, is depreciating. How much it will depreciate, sadly, cannot be determined until you decide to sell.
GUARANTEED REVENUE PROGRAM
A guaranteed revenue program is nearly always tied to a new yacht purchase. You agree to buy X catamaran, you agree to allow the charter company four to five years to charter the boat, you are allowed X weeks a year to use your boat at X periods, and for that you are offered a fixed amount of revenue each month while your catamaran is in the program. The companies can do this because the revenue from the sale of the new yacht offsets some of the guarantees they offer. They make money selling you the boat, you turn it over to them, and they make more money chartering the boat, and they also hope to make more money selling it for you at the end. It is honestly a fantastic business when going well!
- If the charter market goes to hell and a hand basket over some global turmoil, financial or otherwise, you have guaranteed revenue until your catamaran is phased out of the fleet. (Note that if this was the case, it is very likely that your boat would also suffer higher than normal depreciation.)
- You get to buy a bright and shiny new boat with your own name and fittings, and the warranty from the builder for a certain period, and the charter company very likely managing and sorting out the warranty problems for you since they need to keep the boat earning in charter. This is a real plus.
- With companies that have charter bases in a range of locations you could enjoy, many of these programs allow you to charter a similar yacht in different locations, and to my mind this is a very nice advantage for those who like to try sailing in a lot of different areas. I once had a pilot friend who came to me to get a catamaran and when it was obvious that he could fly to any location around the world for free I told him to get a cat from the Moorings or Dream Yacht and just use it all over the place. That all worked well for him in a Moorings program, and in my view he got a good deal, but like so many people when it came time to sell he was upset that he was “upside down on his loan” due to the steep depreciation he experienced. His problem, in my view, is that he failed to add up the 20 weeks of charter he got and place the value of that into the context of the program. The larger question is really if he had paid for those charters and not bought the boat where would he have ended up?
- With a guaranteed revenue program you are very much locked into a specific time frame, usually four or five years. To get out earlier, if you must, comes with stiff penalties or losses very often. Some of the companies demand that you sell the boat from them as well, which takes away your options on whom you wish to market your boat.
- For the most part, you are tied to buying the sorts of cats the various company has to sell. Invariably these will be bulky slow moving cats suited for the charter application and built to specific price points so the numbers work as well as they can for charter programs.
- When the yacht is phased out and you have to sell her, you will be competing with all of the other cats that were phased out of the same model, etc. The buyers on the open market can shop around for the most motivated seller, so if you are not very motivated plan to keep your boat for a while. The great advantage that non-charter cats have always had, boutique yachts, or performance yachts, or yachts that are specific to the task of voyaging, is that they hold far better resale due to limited supply. When someone calls us to buy a Lagoon 440, or some other high supply catamaran, the task of finding the best one or best deal is daunting simply because there are so many around for sale. Invariably, however, the ones that are priced right and in an accessible location will sell first. On any high supply product the buyer holds the cards.
- Guaranteed depreciation is hard to estimate four or five years out. I have seen it vary after five years in bareboat charter cats by as much as 60 percent. To date, it seems the depreciation rates have been running between 35 percent and 50 percent. Any owner version will always depreciate less, and any crewed version of a cat that never had a charter sailor at the helm also tends to fetch a bit more. If I have a concern right now, here in 2016, it is that a great many new yachts have gone into charter over the past few years, and I fear a bit of a glut will form in the not too distant future.
If you have a chance to speak with people who have placed boats into bareboat charter the comments will run the gamut from very happy to a big miserable mistake. I have had customers who have gone in with eyes wide open and accepted the risks and pleasures and come out pretty happy. I have also seen and heard of folks who come away feeling as though they were sold a bag of beans. If you keep the above things in mind perhaps it will help you make a better decision. The only reason anyone is buying a boat is to experience a measure of joy and fulfillment on the water. If a charter company can bring you that, why not!
Phil Berman is the President of The Multihull Company and the owner of Balance Catamarans.