Overseas Radio Network – Charter Yacht Ownership Programs
In the Overseas Radio Network Show 4, Segment 3, we talk about various types of charter yacht ownership programs:
- Guaranteed income program
- Variable income program
- Performance program
GARY FRETZ: I want to welcome you back to “Yachts: The Perfect Escape Vehicle”. Today we have Stephen Cockcroft and Michel Benarrosh who are considered experts in worldwide cruising and chartered yacht management. Charter yacht management is relevant because placing a yacht in charter can be a great way to defray your cost of ownership and of acquisition of the boat.
For a transcript of this podcast, click “read more” below.
GARY: Tell me, what are some of the different types of charter management plans out there?
Guaranteed Income Program
STEPHEN COCKCROFT: Well, the most popular one with the larger charter companies is the guaranteed income program. And what this does is: you choose the yacht you want, you choose the catamaran or the monohull, generally you can choose your location, but sometimes it is dictated to you by the required volume of boats in the different locations. Gary, what happens is the charter company will guarantee you between 8% and 9% of the full purchase price of the boat annualized. So if you bought a boat for $100,000 you would be getting a guaranteed payment of $8,000 or $9,000 per year. This is net to you. All the operating cost of the vessel are paid for by the charter company. They pay the insurance. They pay the dockage. They pay the maintenance. They pay the turnarounds. The only expense you have…you have no expenses except…I am sorry you do have to pay the mortgage and the mortgage is more than covered by the 8% to 9%.
So essentially once you’ve paid your deposit and place the boat it is a cash neutral situation. You have absolutely no out of pocket expenses. There are couple of other benefits. Obviously there is no hassle because you don’t have to worry about accounting, maintenance, accounting…trying to find out if there was a bilge pump installed in your boat why, was it broken. It’s all paid for by the charter company.
You have worldwide sailing. You are able to exchange your owner time and sail anywhere in the world under the guaranteed program. You get a fixed term which is great. It is a 55-month generally…or was it 66, I think it is 66 months. And after that the boat is phased out and it is handed over to you in good shape where you to accepted it.
The downsides are if the boat does charter a lot and generates a lot of income, it is to the benefit if the charter company. You don’t share in the upside and, of course, we spoke earlier about using the tax advantages if the boat is in guaranteed program, it is in passive use. It is being managed so you would not qualify for any tax benefits in this regard.
GARY: But I thought that you could deduct the second home mortgage payments unless you are already doing that on a second home.
STEPHEN: I believe you can do it. A lot of people already have second homes, but that’s something I would check with your CPA.
Guaranteed Income Payments Cover Yacht Loan Payments
GARY: Now let me ask you something, you are saying the for $100,000 yacht I could put down, I understand, it is typical 25% nowadays. So you put down $25,000…that would be your down payment. You get a loan for the balance. You are not going to have any operating expenses for the what 5 years or so.
STEPHEN: Five to five and a half years.
GARY: And you can use the guarantee payment to cover your loan payments right? Tell me about this.
STEPHEN: Yes the guarantee that you are paid by the charter company will cover your mortgage payment provided you put down a 25% mortgage payment deposit.
GARY: Wow that’s like income in real estate where you are using other people’s money to pay your note so that goes on to 5 years and then, what a lot of people do after that do they just go to another program or do they because you still owe you can’t pay off your loan in 5 years so how would they handle that?
STEPHEN: Well, there are a number of ways to deal with that. There are a lot of second tier charter companies that will take your boat for a second 5-year period. Also, pretty lucrative although of course your maintenance cost goes up. And you generally won’t get a guarantee. You end up being in a performance type program which we will speak about next.
The one thing you’ve got to consider is that you get up to 12 weeks of owner use. So yeah, let’s just say you used 4 of those weeks to charter a yacht it cost anywhere from 5,000 to $8,000 but let’s just take the low end and say it cost $5,000 a week to charter a boat, if you charter for 4 weeks that $20,000 value that you benefiting over and above your guarantee which is very attractive especially for people who likes to travel and able to use their boats a lot.
Variable Income Programs
GARY: Wow that sounds pretty good, now there are other programs out there I have heard about these, what is it variable income programs, Michel, tells us about that.
MICHEL BENARROSH: Well, those programs are strictly offered by charter companies that are smaller size than the larger companies but basically it is a program where the owner provides the boat puts a down payment like the other program gets a mortgage and splits the income the total income of the boat with the charter company they can be, it varies from 65 to 70% now that goes to the owner and 30 to 35% to the charter company.
The big difference is that the owner pays for all the expenses: docking, maintenance, insurance etc., etc. on top of the mortgage. Usually the net income to the owner can be slightly higher than the guaranteed income, but the downside is obviously there is no guarantee. So that’s the big difference. And also there is no worldwide sailing exchange program in the variable income, it is determined only on your boat at the base where the boat is located.
GARY: And in these variable programs you…I understand that some of them will allow you to take your boat for like 6 months or something. Why don’t you tell me about that?
MICHEL: Some companies, not a lot of them, but a few of them in the Caribbean, will take boat in management. And because the typical location of time for the owner on a usual variable income is about 6 to 8 or 9 weeks on the boat. Some companies will allow the owner to use the boat for 2 to 3 months, 5 or even 6 months sometimes out of the year. So that’s in the mindset of the escape program that these are great ways for the owner to experience the boat and experience prolonged time on the boat, you know, with all the experience that goes with it.
GARY: Wow, I had some customers who once bought a boat from me. And they owned a chain of Dairy Queen restaurants I think it was in Indiana. So the Dairy Queens were only open for only 4 to 5 months out of the year, the warm months. And they had the rest of the year off so they would work like crazy for those months and then they would go down on their boat in the winter to the Caribbean and have a great time.
So I guess you could do something similar if you put your boat in a variable program, right. Wow, okay, Stephen, did you have something to say about that?
STEPHEN: Yeah, I just want to point out that the performance program where there is income sharing and obviously risk sharing, generally, if you want to get your boat paid down relatively quickly this is the program that you would want to go for. You would want to take the boat and put it into a very popular destination where you would have very high occupancy And, of course, added to that we already discussed the potential tax advantages which your tax professional could advise you on.
But between tax advantages and putting the boat into performance program where you are actually are benefit…taking the full benefit of the boat working, you can substantially pay your boat down. Especially if you plan to go the first year for the first five and a second year for the second five you would end up with a pretty much paid down boat at the end of the period so performance is the program to go to if you really want to get the boat paid for.
GARY: Well, and I understand that in some charter companies, they allow you to install extra equipment on the boats and in other companies, they are very strict about what they allow you to put on there. Can you just talk about that and how that works?
STEPHEN: Well, the larger charter companies dictate to you that you have to, in fact, have a specification. It is a one-size-fits-all concept where you couldn’t even put a cigarette lighter anywhere because everything is exactly the same. So that when they are maintaining these huge fleets, there is absolutely no abnormalities whatsoever. The maintenance can be flawless and they are able to maintain it with a set and a fix set of inventory of spares.
Other charter companies really liked to offer the buyers the owners the option to spec their boats out: put water makers on, put solar panels on, etc. It’s very popular with a lot of people who are going their second time around where they were forced onto a boat the first time and the second time around they are able to spec their boat so when they go cruising they have the boat of their choice.
GARY: We have to take a short break and we will be right back this is “Yachts: The Perfect Escape Vehicle” only on Overseas Radio Network.