5 year Charter Company Contracts good deal or not ?

[barnakiel]

There are two parties to the deal: the charter company and the owner.

In the environment where the contract is formed and proposed by the company, why do you believe the owner could benefit?

Or do you truly believe this is a win-win deal?

Read around on things like quality of modern mass production boats, depreciation of assets, etc. Then inject your numbers into an xls.

b.

[Hoosiersailor]

I am not at all familiar with having a sailboat in charter but aren't you able to sell your "owner's time"? So maybe you can only use 2 out of the 8 weeks a year, can you not sell your other 6 weeks? If you can and even if you heavily discounted it to say $3500/week for a Lagoon 42 that would amount to $21,000/yearly or $105,000 over the five year period.

[nautical62]

Originally Posted by Leszczynski

Thank you all for taking your time to chime in and provide some very useful information. I hope to continue to get more experienced input. I also really like Chablis 1’s plan. I will tell my wife about it.

Initially my main attraction to the charter contract was the ability to own, at the end of a 5 year contract, a 2017/2018 Lagoon 42 for ~ 60% of what a new one would be.
As it looks now about 350k would be my max budget for a cruise ready boat, I am shooting for closer to 250-300k. After I retire I will be bringing in 3-5k per month of retirement / rental property income. Can I keep my small family living aboard a lagoon 42 with that income? Maybe I should be looking at older boats?
I know ol1970 mentioned
I would have to ask is this really the case? Can I get a 5 year old 42’ cat that is near live aboard cruise ready for ~300k? I have not found any online.
If I am not as concerned with taking advantage of my 12 weeks per year, it seems I be better off saving up to drop 300K 5 years from now. That plan would afford me more flexibility than locking into a charter program now.

I also have another quote from a different charter company.

I've heard many horror stories from people who buy an older boat and find someplace to "charter it" in return for some percent of the charter income. Often with happens, is the boat doesn't get chartered as much as one was told, so there is little income and the owner keeps getting calls being old his boat needs this or that maintenance he needs to approve. If you are not here, how do you know if your boat really needs a new sail or not?

To buy a charter catamaran now and get some use out of it for 5 years or wait and buy a used cat down the road, depends on many factors I think.

How much do you want to sail over the next 5 years and will you really use it several weeks a year?

So, you end up with a Cat for basically half price, well, how does this compare to what you would otherwise buy?

Buying my mono for 120K and getting half that back made more sense than waiting and buying a used boat for 60K. Why not enjoy "chartering" it for 5 years first for the same cost? However, paying 400K+ for a Cat in charter if I'm happy with a used, slightly smaller cat for 100K may not make sense. That's precisely why I didn't buy another boat in charter. It all depends on what you would otherwise do and how that compares.

[RickG]

We've looked pretty carefully at the charter model for a new boat. If you can shelter capital gains through accelerated depreciation it helps the financial model a lot. You need to be an active investor to pull that off. We're taking the approach of buying a used monohull for liveaboard.

The maintenance crew at your charter company makes an incredible difference on the condition of the boat when it finishes charter. We're big fans of the crew at CYOA Yacht Charters on St. Thomas USVI. It helps that they are ten minutes from the airport and most of the US based BVI bareboat charter market flies into St. Thomas and gets on a ferry next to their marina. CYOA Yacht Charters | US Virgin Islands | St. Thomas

We looked at the Lagoon 42 at the Annapolis Show. Very nice. The four cabin version would do well in charter.

Cheers, RickG

[PhiSig1071]

You keep talking about a "5-year old cat".

To paraphrase, it ain't the years, its the miles......

You might not be able to find a 5 year old cat for your budget. But depending on circumstances you may be able to find a 10 year old cat with much fewer "miles". A nice privately owned, non-charter, FP Bahia or Belize comes to mind. There are a lot of people who will tell you that the older boats are much better built anyway.

[MYTraveler]

Originally Posted by Leszczynski

The deal they briefed ranged from 20% down with guaranteed 9% income for 5 years to the one we are interested in, 35% down with a balloon 25% payment at the end of 5 years, no income. *



I basically buy the boat for 60% of the initial cost. The charter company buys the rest (40%).

Better talk to a tax accountant, as the IRS will view the 60% of equity you are getting for "free" as income, which you should be able to at least partially offset with depreciation. If this is to be foreign-based, the rules get trickier.

[ssmoot]

MYTraveler makes a good point I hadn't thought of. I don't have any experience with it, but if the contract says the sales price is $570,000, I don't see why it wouldn't be taxed that way. I'd definitely talk to an accountant first.

One huge thing you're missing though is the value of cash over time. Let's assume a CAGR of 7% (use your own numbers, the formula is the same). With a price of $570,000 and 35% down you need to pay $199,500 today, and another $142,500 in 5 years and the boat is yours. For a total cost of $342,000.

But that's not the whole story. If the 20% down deal pays you 9% of the price (and not just of the remaining loan principal), and gives you a 0% "loan" on the remaining principal, then they're paying for 45% of the boat over 5 years. That's already 5% better than the 35% down deal. On top of that you only put 20% down, so you keep $85,500 of your cash today. Which is worth an extra $35,000 to you in 5 years (with a CAGR of 7%), making the deal about 10% better. And there's certainly no case where it ends up worse all else (maintenance, dockage, etc) being equal.

What if you just held onto your money for 5 years instead though? It's only fair to assume you'd have at least the 35% down right? Invested, that's worth $280,000 in 5 years. Add the 25% in 5 years and you've got $422,500, a lot less risk and a lot more flexibility.

Talking about a future price of $342,000 only makes sense in the non-charter scenario if you're just going to keep that money in your checking account for 5 years. Will you be able to buy a cruise ready used Lagoon 42 for $422K in five years? I would definitely take that bet. I'd bet you could also get a nicer Helia for that in 5 years. So now you have to figure out how much the owner time on a charter is worth to you. And in that case I really like ol1970's comments on the difficulty of trying to complete your bucket-list vacations while cruising.

[barnakiel]

All fine but I am not certain how one comes at 7% CAGR in a country with 5 y govts yielding 1.25%.

What I want to say if you give real life scenarios, use real world numbers.

Which in turn leads to 'less risk'.

Well, it depends.

It depends on what kind of lease structure (operational vs. financial) the contract is based. So to say who owns the boat should the charter company turn turtle.

Now the picture is a bit more complete. You can rewrite the scenario.

If less risk then CAGR not 7% and the boat must stay OFF the balance sheet of the charter company.

Right? Wrong? Midway?

b.

[ssmoot]

Originally Posted by barnakiel

All fine but I am not certain how one comes at 7% CAGR in a country with 5 y govts yielding 1.25%.

I definitely think you should plug in numbers that you feel comfortable with.

Obviously I wouldn't be recommending treasury bonds if you're aiming at anything better than tracking inflation.

[barnakiel]

Originally Posted by ssmoot

I definitely think you should plug in numbers that you feel comfortable with.

Obviously I wouldn't be recommending treasury bonds if you're aiming at anything better than tracking inflation.

OK. I am not critical. Only practical.

What instrument could we employ to arrive at 7% CAGR in 5 years span while bearing less risk? I can see none.

And who owns the boat while the charter agreement holds? The bank, the charter company, or the 'owner'? Good to know just in case the company flips in the 5 years period (statistically, 1 in 5 does).

I am back to my initial post: there is no such thing as a free lunch.

500k is too much money (in my bank) to remain delusional. People who made 500k and have 500k are not delusional. People who have good earnings and good credit scores can be. Especially if paired with sellers like those at Wells Fargo.

PS Inflation tracking US bonds trade presently at negative yields.

Cheers,
b.

[ausaviator]

This argument about if it's such good value then the charter company would buy the boat themselves is not relevant at all.

There's no way a small charter company is going to be able to get finance for 1 dozen catamarans at $400-600k each - it's simply not going to happen.

Their only way is to have someone else own them and put them "on-line" just the same as an aircraft.

Aircraft are not comparable as they are often up to 30+ years old and in this case are usually owned by the flying schools or clubs, but then again, sometimes very few are owned by the schools. A new Cessna 172 could be $500k but a 1970 model might be as low as $30k. They are both comparable in terms of performance, but one is better fitted out and newer. They both have similar running costs, although the old one will cost more for end-of-life items.

[ol1970]

Originally Posted by ausaviator

This argument about if it's such good value then the charter company would buy the boat themselves is not relevant at all.

There's no way a small charter company is going to be able to get finance for 1 dozen catamarans at $400-600k each - it's simply not going to happen.

Their only way is to have someone else own them and put them "on-line" just the same as an aircraft.

Aircraft are not comparable as they are often up to 30+ years old and in this case are usually owned by the flying schools or clubs, but then again, sometimes very few are owned by the schools. A new Cessna 172 could be $500k but a 1970 model might be as low as $30k. They are both comparable in terms of performance, but one is better fitted out and newer. They both have similar running costs, although the old one will cost more for end-of-life items.

I apologize but I cannot help myself here. Your very argument makes my point that it is not a good deal for the buyer. If bank, which is a for profit entity, would not lend money for a fleet of boats there is a very simple reason. The reason is you cannot make a business case for it because the margins are simply not there in the business case and the risk is high.

There may be some outlier cases where high net worth or high income individuals can shield taxable income, but at the end of the day a boat is 99.9% of the time going to be a luxury purchase that you should make because it increases your happiness (which besides your health is the only thing that really matters). The amount it costs you or mitigates your overall expenses should be considered a lifestyle expense, but it will surely be an expense.

[Sail power sail]

Make sure you consult your own CPA (not the boat manufacturers accountant) before pursuing any of the tax advantaged structures that are sometimes offered at the boat shows. Most of these structures that have the owner enjoying some use of the vessel during the charter portion of the arrangement don't work. People may have used them and gotten away without being caught/audited but it they are examined they don't hold up.

Sent from my SAMSUNG-SM-N910A using Cruisers Sailing Forum mobile app

[PhiSig1071]

Originally Posted by ol1970

Snip..... If bank, which is a for profit entity, would not lend money for a fleet of boats there is a very simple reason. The reason is you cannot make a business case for it because the margins are simply not there in the business case and the risk is high.

Snip.

Not necessarily a single, simple reason. They may be able to get loans for their boats easily, they may not want to. Moorings may not be interested in buying the boats themselves because their margins are higher by selling the boat. They may sell the boat twice, (beginning of contract as new, and end of contract as used) and make a commission on both sales. And a profit from mark up (if there is one? Not sure about boats, but I used to work in the motorcycle industry and there was some).

On top of that, this lowers their overhead significantly, which is always good business practice, and guarantees they're not stuck with old boats they can't sell.

It may not be bad business for them to own their fleet, it may just be better business not to.

[ol1970]

Originally Posted by PhiSig1071

Not necessarily a single, simple reason. They may be able to get loans for their boats easily, they may not want to. Moorings may not be interested in buying the boats themselves because their margins are higher by selling the boat. They may sell the boat twice, (beginning of contract as new, and end of contract as used) and make a commission on both sales. And a profit from mark up (if there is one? Not sure about boats, but I used to work in the motorcycle industry and there was some).

On top of that, this lowers their overhead significantly, which is always good business practice, and guarantees they're not stuck with old boats they can't sell.

It may not be bad business for them to own their fleet, it may just be better business not to.

Well I guess we will agree to disagree on this subject. I do agree with you that there are more that one reason why charter companies don't buy their own boats. I just come from a background of owning, operating successfully, and selling businesses. It just bothers me to see poor personal financial advice given to people on the internet(not your comment phisig). Like others have said, do your own due diligence and go in with eyes wide open, good news for the OP is that it is a boat and you will have fun along the way!