Take Your Dream to Sea: Financing a Yacht Purchase

“Yacht” can mean something different to almost anyone who says it or hears it. From a 134-meter cruiser with global range and two helipads to a 35-foot sailboat to take around nearby harbors on summer weekends, one thing all of these vessels have in common is owners who prize the freedom and adventure of time spent aboard.

A careful plan with the right team can protect your yacht purchase from unforeseen difficulties while also safeguarding other goals.

Yacht owners tend to be highly financially literate and informed about yachting. Many have boated since childhood and have acquired bigger and more sophisticated vessels as their careers and resources advanced. But there is still a unique emotional element of owning a boat; in the most successful projects, everyone involved shares that passion, delights in digging into the engineering and imagining cruises to the unique destinations that only boats afford. Owners who choose to build a yacht face even more complexity.

“We are helping clients fulfill their dream”, said Burton Gonzell, a senior vice president who handles yacht financing at Northern Trust. “It is a privilege to work together and turn someone's vision into a reality.” 

The right team may mean more than a better interest rate or paring weeks from a construction schedule – it may mean the difference between launching your vessel or having the project languish in avoidable disconnects among financiers, shipyards, suppliers and surveyors. 

Plan for ownership structure and operating costs

Yachts join aircraft and secondary homes as assets that are often owned by trusts or limited liability companies. While these structures may shield assets from creditor claims, they also introduce specific requirements that can add complexity to plans for funding the financing and operation of a lifestyle asset as resource intensive as a yacht.  

Even wealthy and sophisticated clients can be shocked by the full costs of operating a yacht – it’s not rare for these expenses to annually reach more than 10% of the vessel’s purchase price. Funding those operating costs while observing the rules of a limited liability company or trust while also preserving other areas of lifestyle spending demands careful planning and attention to detail.

Holding a yacht in a trust creates a handful of unique issues for a trustee to be aware of and manage: depreciation, plus operating expenses and asset concentration.

A trust’s governing documents should include provisions to protect the trustee from the liability of holding a depreciating asset which could be seen to contravene the prudent investor rule which governs trust investments and requires trustees to protect the value of trust assets and to minimize expenses.  

The prudent investor rule also requires trustees to maintain diversified holdings. A trustee would need to evaluate whether the yacht itself represented a concentration of assets. While definitions of a concentration can differ, generally holding more than 15% of the value of the trust can be considered a concentration.

The trustee would need to plan for funding the yacht’s operation for the lifetime of the asset and make sure sufficient liquidity is available when needed. A vessel that cost $40 million to buy or build could cost $5 million a year to operate, including fuel, docking, crew expenses and insurance. Hedging 10 years of expenses would require the ownership entity to hold $50 million of investments in relatively safe assets such as cash and high-grade bonds. That allocation should be considered in the context of other priorities, such as family members you wish to support, philanthropic intentions and the lifestyle you want to maintain.

Consider your financing options

Secure access to the liquidity needed for a yacht purchase while also achieving other goals. Borrowing, rather than liquidating assets, can help keep your investment strategy intact. A systematic, goals-centered approach to vetting your options will yield the best outcomes for your portfolio and wealth plan.

Bankers will look for information from you about both your boating history and financial situation.

“We are embarking on a relationship and that requires good communication and understanding each other,” Gonzell said. “If we are working on a three-year project of building a $100 million yacht, we are going to get to know each other pretty well.”

Boating history

Yacht owners tend to follow just a few trajectories on the way to buying a vessel. Many who are building a custom boat have owned a series of vessels and the current plan is a step in that progression. Others have frequently chartered or been guests on yachts and decide to upgrade to their own. And some have had a liquidity event and see a yacht purchase as an opportunity to use the boat’s depreciation to their advantage. Where the boat will cruise and whether guests will be family members, friends or business associates can impact insurance and tax considerations, and may also influence choices about financing the project, so a banker will be interested in learning a lot about an owner’s interests.

Financial situation

A lender will want to know many of the same things to fund a yacht purchase as any similar-sized loan. Where did the funds for the purchase come from? Whether it’s from a business transaction such as selling a company or an IPO, from investment income or from a personal situation such as an inheritance or a trust will influence what information a banker will ask for. The lender will ask for documentation that shows the income repaying the loan will be stable, such as a succession plan for a business or how the investments have performed and been managed in adverse markets. Your bank will expect clear information about other liabilities and leverage and see that there is adequate planning and liquidity for the vessel where it will operate, including crew, fuel, docking, insurance and other operating expenses.

It may be appropriate to use additional financial products such as swaps to manage interest rate, currency and other financial risks and additional strategies to manage long-term and multi-country risk. A knowledgeable lender may encourage other backstops such as a bank refund guarantee from a local bank.

Build the right team

Your crew will comprise much more than the maritime industry professionals responsible for operating your boat and keeping you safe and comfortable. Depending on your ownership structure and the complexity of your plans and vessel, you may have a large team managing many elements of the project off the water. Some typical team members will include:

• Lender
  A skillful, experienced lender will be familiar with loans of the scale of a yacht-building project, can tailor comprehensive credit solutions based on the yacht and other assets and give guidance on other team members to involve in the process.
• Maritime attorneys
  Retaining counsel provides an extra layer of protection for the buyer and lender throughout what can be a multiyear, multipart project. Maritime law, also known as admiralty law, is a specialized field that deals with issues unique to seafaring and situations arising outside of state and national jurisdictions.
  
  Maritime attorneys represent buyers, sellers and lenders in transactions. They can also advise on ownership structures and tax strategies, including where to register a vessel to minimize liabilities. A maritime attorney can also help establish compliance practices for adhering to global standards and maintaining seaworthiness.
• Insurance professionals
  Insurance specialists help you determine the types and amounts of insurance coverages you need. An insurance specialist will ensure that both the buyer and, in the case of a construction project, the shipyard have adequate and appropriate coverage. As expedition-class yachts and global cruises gain popularity, insurers are increasingly involved in evaluating itineraries to be sure to have the right coverage for events in unconventional venues or distances such as Antarctica, round-the-world cruising, or cruising near jurisdictions with higher political instability.
• Shipyards
  The variety of forms and uses of boats, the shapes and sizes of the vessels, plus plans and preferences of owners can be daunting, even for sophisticated yacht buyers – a construction project adds further to the complexity. The dominant builders of large yachts are spread across Europe, adding to the complexity and risk for U.S. buyers and lenders involved in these projects. Amid depleted inventories, disrupted supply chains, volatile financial conditions and unstable geopolitics, having a reliable network of experts working on your vessel is essential.
  
  Working with a properly capitalized and well-equipped shipyard offers some security for buyers and lenders against obstacles – such as a force majeure – completely derailing a project.
• Consultants or brokers
  These professionals can analyze your current and future boating wants and needs, suggest yacht types, size and makes to fit your profile and assist with crew management and placement.
• Surveyors
  A surveyor will examine a yacht before you agree to a purchase and inform you of the overall condition and any hidden issues. In the case of a new build, there will be a survey at every stage of construction, verifying that the shipyard has met benchmarks and authorizing agreed-upon stage payments from the lender, allowing construction to proceed.
• Onboard crew, service and maintenance staff
  An experienced captain and crew are fundamental to safe and comfortable cruising. As vessels get larger, crew size increases and a captain’s management skill takes on a larger role.