Charter Strategy for Yacht Purchases
Simply stated, our charter strategy is to make our clients enough money to take the sting out of yacht ownership. However, our strategy does not mean over-chartering because that has negative consequences. When a yacht is chartered too much, it loses value because of excessive wear and tear and simultaneously, the yacht owner loses tax benefits. So let’s determine what is just right and what is too much when it comes to chartering a yacht.
The benefits of chartering are more than just defraying expenses. “Use it” or “lose it” applies directly to yacht use. Over the years we have seen as much damage created by under-use as over-use. On the French Riviera, the average yacht is used 50 hours per year. That is too little. In that market, we routinely see engines getting overhauled at 250 to 500 hours (5-10 years use); whereas, most engines should not be overhauled until they reach 10,000 hours, and with some smaller diesels, the first overhaul may be as long as 20,000 hours (with in-line Gardener Diesels 30,000 to 40,000 hours is the norm). 10,000 hours in the Med at 50 hours per year would take 200 years! Hence, under use is patently bad and wasteful for marine diesel engines as well as most of the other mechanical equipment on yachts. Our charter yachts average 250 hours a year. Even at that rate, it would take 40 years to arrive at an average overhaul schedule. Since most yacht owners keep their yachts 5 years or less before trading for a new one, strategic chartering helps maintain a yacht in good condition, and does not lessen the value of a yacht at resale. More importantly, when a yacht is used 250 hours a year and properly maintained by a professional crew, it is always ready to go at a moment’s notice without some underlying problems that have not been discovered because of under-use. After all, the idea behind buying a yacht is to use it for pleasure, and nothing is less pleasurable than a yacht that has a multitude of small problems due to lack of use and supervision…you know the problems: a tack that is not working, gauges that are inaccurate, a generator that overheats due to a shredded impeller, an AC unit low on Freon, sea strainers clogged with seaweed, etc. In our charter program, we monitor all hiccups and fix these immediately so that every yacht is always ready for the next charter… or you!
What is optimum chartering? In our opinion, chartering should make enough money to cover marina fees (slip and electrical), marine charter insurance, maintenance, cleaning and some depreciation. “Some” depreciation is the key word because once your revenue is able to cover some depreciation; you begin to lose tax benefits. The IRS accepts a 10 year double-declining balance depreciation schedule on yachts for hire. After 5 years, an owner will have depreciated 62% of the original cost of the yacht. So in theory, if your new yacht can be sold for 50% of what you paid for it after 5 years, you will actually have to recapture a portion of the depreciation that you used over the 5 years. And, if chartering paid for the cash outlays over those 5 years, your reduction is personal income taxes were reduced the acquisition cost of your yacht substantially. If you want an exact calculation of this amount based on your situation, please contact us.
The above paragraph explains the major reason why you never buy a new yacht for charter. The first few years in a new yacht’s life are prone to very high depreciation, especially when you are dealing with production models. The best charter yachts are somewhere between 5 to 10 years old at purchase, because they avoid the early high depreciation, yet they are new enough to appeal to charterers. The most economical yachts to buy for charter are 10 to 15 years old, but have modern lines that do not deter charterers. Examples are yachts that set the pace in new design 10-15 years ago like Princess, Ferretti, Lazzara, as well as all the premium yacht builders in the USA, Italy and Holland.
The cost of operations is another factor that must be considered. For example, if a slip costs $2000 more in Ft. Lauderdale than a comparable slip on the Florida West Coast, unless there is an adjustment in charter prices, the higher operational costs of Ft. Lauderdale will require more usage which will translate in more wear and tear and hence, a smaller return on the eventual sale. This relationship between all these chartering parameters is a good example of the “no-free-lunch” principle of economics that economic professors try to explain to their freshman students. These relationships also explain why the chartering venue is important. It might be more advantageous to charter in an area where there is less chartering, hence less competition, than in a big market like Ft. Lauderdale and Miami. Our charter brokers would be happy to discuss the viability of some of these markets with you.
In conclusion, strategic chartering is a balancing act between the cost of acquisition, the level of usage, and the cost of operations. Every owner has different charter objectives when it comes to usage. Whereas some local owners want to be able to use their boats on weekends (also in high demand from charterers), others prefer to let us charter whenever we can find a charter and then utilize their boat when there are no charters; this is fairly easy since our average charter boat only does 50-60 days of charter each year. Whatever your situation and time requirements, we can find a charter program that works for you.