You'll find many parallels between financing a boat and putting together a successful fishing team. Both take some forethought, strong organizational skills, attention to detail and a lot of preparation. Where are the fish? What will it take to get the bite? How do we get there? How much will it cost? Is my boat safe, seaworthy and properly rigged for those conditions? What about tackle, accommodations, fuel availability and amenities for the family?
Successful programs always nail down the details. For years, I have fished with Hans Kraaz aboard Vintage (a boat built by John Bayliss). Kraaz would always create a thorough punch list with our mate, Mike "Dewey" Price. The list might include anything from prepping for a tournament or a long crossing to fun fishing. Hard preparation and devotion to details led the program to years of successful, safe fishing.
Since Marlin's readers are already extremely focused on catching billfish, they shouldn't have a problem investigating and following the procedures necessary to take the next step to own, or trade in for, their very own, brand-new sport-fisher. Where are the best rates? Who has the background, reputation and experience to deliver a great rate at a low cost? How long will it take? Will the loan be a safe and secure strategy for me? Will it deliver any tax benefits? How much down payment will it take? What are the monthly costs? Are there any unforeseen penalties?
With so many variables to consider, let's take it step by step - just like the boat's punch list. "Let's get ready to get ready" is a common expression in fishing!
The Boat, Its Condition and Value
This is probably the most important part of the purchasing equation - making your choice and signing a contract on a boat. In the production marketplace, there are a number of helpful resources to assist with pricing and background on the brand. Use the NADA, BUC or ABOS books to look up used and new values. In the custom-boat marketplace, go to www.yachtworld.com for comparables, and get to know the builder and his reputation. The keys to a good purchase: Do your research and connect yourself with honest and reputable yacht brokers and builders.
Take your time and try to ride on as many examples of the builder's work as you can. For a real beginner, or novice purchaser, consider becoming an observer in offshore fishing tournaments. This gives you the chance to fish on a large variety of boats and learn more about their performance in a real-world fishing situation with all kinds of weather conditions. And by mingling with the captains and owners, you can ask about their preferences and what they like or dislike about their boats.
Money Down
Any down payment is proportionally tied to the cost of the boat and varies from lender to lender, but the basics are as follows:
• $25,000 to $100,000 purchase; 15 percent minimum down payment; state sales tax included in down payment.
• $100,000 to $2 million; 20 percent minimum down payment; state sales tax included in down payment.
• $2 million-plus; 30 percent minimum down payment; state taxes paid out of pocket or foreign flag for tax savings.
Lenders want real money down. You can't artificially inflate your trade-in to show equity, nor can you inflate the boat's selling price, which we call a phantom down payment. These days, lenders verify down payments by examining escrow accounts and asking the buyer to prove his or her liquid net worth with current bank or brokerage account statements. The survey value of your trade shouldn't be considered part of your down payment; it is merely an estimated appraised value.
Credit Score
Your credit, borrowing history and comparable credit all play a huge role in whether or not you'll get your loan. You need strong credit. A potential borrower should have a credit score above 700. The lender will look at your history in the credit report. The applicant needs to show that he or she has established like, or comparable, credit to the line requested for the boat. Any public records such as open litigation, bankruptcies, collection accounts, child support or alimony suits immediately throw up a red flag and will usually result in a denied application.
The current credit markets are not going to accept or tolerate anything but deserving applicants. Think of the old-fashioned commercial lending rules of the past, and you'll be in the right ballpark.
Cash Flow and Income Verification
An essential part of your loan presentation is providing your lender with current tax returns. A lender will ask you to supply your personal tax returns for the past two years. If the applicant owns a company, or multiple companies, that shows significant gains or losses in income, the borrower will be asked to send in their business returns for the past two years as well. Lenders examine these tax returns to determine the applicant's real cash flow. Most lenders generate their cash-flow analysis based on gross income minus capital gains. Capital gains are not used as a basis for income since they are a one-time occurrence and not consistent. The bank then compares income to debt and calculates a debt ratio. Normal debt ratios should be less than 40 percent, including the new boat payment.
Your Personal Financial Statement
This is a statement of assets and liabilities that is also necessary in your loan presentation. Lately, lenders are concentrating on borrowers' liquid assets (cash and marketable securities). Real-estate equities are valid and important, but they are not looked upon with the same weighted strength as liquid assets. Use current bank and brokerage account statements to support your financial statement.
Tax, Title and Flagging
Taxes are a guarded subject and should be treated with great caution and discretion. Consulting with your CPA and a skilled maritime attorney is advisable. Your yacht broker shouldn't be the one explaining how to set up a tax shelter with the purchase or what states provide what tax advantages or disadvantages.
For years, most U.S. citizens have flagged their boats in the United States via U.S. Coast Guard documentation. This is a federal titling process that most yacht owners opt for since it provides a safe mortgage recording system and gives the lender more strength than a state title.
On certain purchases, where the owner is engaging in a very expensive transaction, foreign flagging may make more sense. Lenders are ultimately going to control the method of flagging because it protects their future interest (the mortgage recording) in the yacht, so talk with them first. The most common countries outside of the United States that banks recognize as safe places to record a mortgage are the British Virgin Islands and the Grand Cayman Islands. Some lenders will also accept the Marshall Islands. If you plan to borrow money on a yacht and part of your expectation is to do so under a foreign flag, please consult with your lender in advance because most only accept U.S. Coast Guard-documented vessels in their portfolio.
Tax Benefits and Potential Deductions
There are opportunities here, but you should always consult with your CPA about your own personal financial situation. The IRS code that deals with interest and mortgages is taken from Section 163 (h) (2, 3 and 4) if you need any clarification. In brief, for a qualified interest deduction on a yacht, the yacht must have living quarters (salon and berth), a bathroom (head) and a kitchen (galley) to fit into what the IRS would classify as a second home. The IRS will allow a deduction from form 1098 to be made from your schedule A. (The form 1098 describes the amount of interest you paid to a lender in a calendar year.) However, the law does have a few stipulations, i.e., the maximum deduction is based on a $1 million loan. Improvements with borrowed money fall into the classification as home improvements and are classified as home-equity loans. Home-equity-loan deductions are limited to $100,000.
By looking at the interest rate and the applicable tax deduction, one can determine the real cost of borrowing money on a yacht. For example, if the bank charges a 6.5 percent rate on $1 million, the borrower pays $58,965 in interest to the bank during the first year. If the taxpayer is in a 38 percent tax bracket, the borrower reduces his taxes owed by $22,406. The real cost of borrowed money is down to 4.03 percent. So for many boaters out there, borrowing may make more sense than paying cash if you make more than 4.03 percent on your investments. This is what our economics professors termed the "opportunity cost of money and investing."
Since they are pretty self-explanatory, I will only mention some of the other costs of ownership that you should consider when making a final judgment. Fuel costs, maintenance, crew payroll and insurance are all part of the overall equation in yacht ownership.
Covering Your Asset
As with any mortgage or loan, a lender will require that you purchase insurance for your new boat. A myriad of factors will determine the cost of your policy, but there are a few other considerations that come into play before the underwriter will agree to cover your vessel. Skip Smith of Smith-Merritt Insurance says, "The underwriting criteria are tougher than ever. Prior to Sept. 11, we might have had 25 companies to work with; now we are down to about eight. And when you have limited companies, you have no competition."
Smith does see some good news on the horizon, however. "What's helping right now is the number of new companies coming into the market - companies like AIG - that are very busy. Anytime you get new players, rates start to fall as these companies try to compete for your business," he says. Smith strongly advises that you stick with a domestic carrier instead of one of the London-based companies for three reasons: The policies aren't usually as comprehensive, you get better rates here at home and any claims will be settled here in the States, not overseas.
"Call your local agent and try to get out and visit with several companies. Depending on your location, that can be easier said than done. In the Northeast, out of the hurricane belt, you might be able to get 10 companies willing to write the boat, but on the Gulf of Mexico, you might only find one. Try to get at least three different quotes. If you're buying a 24-foot center-console, your homeowner's insurer might underwrite it, but for bigger boats, you need an independent agent, like BoatU.S., for example," says Smith.
Mike Costolo of C&L Insurance in Stuart, Florida, goes a step further and suggests you stick with "a marine insurance agency that knows the marketplace and that can be open with the prospective buyer to let him know where he stands."
"When you're talking about a $2 million boat," says Bruce Wixon, yacht product manager of Ace Recreational Marine Insurance, "you want to make sure that you're working with a company that can settle a large claim. You need to hire someone with expertise in marine issues who can navigate one of these policies. A good agent evaluates each company - determining what things they normally cover and what things they don't - without the consumers having to do it themselves."
Let's face it - not everyone is qualified to run and maintain a large sport-fisher, and if you're not careful, you could wind up buying a boat that you can't insure on your own. "If it's your first boat and you're starting out with reasonable size, like a 21- or 23-footer, then you shouldn't have a problem. But once you exceed 30 feet, you're going to have to demonstrate some background and knowledge in the operation and maintenance of a boat that size. But if you've owned a boat of comparable size - the rule of thumb is a 10-foot jump - then the underwriter will give you credit for that. For large boats, we usually need to see a resume of past ownership or operation. For instance, on boats larger than 60 feet, it's virtually unheard of to have an owner/operator insured unless he has a Coast Guard captain's license. If the underwriter feels uncomfortable, he or she is going to put a captain's warranty on the policy to make sure there's a captain on board if you visit certain places," says Costolo.
Once you hire a captain, make certain that your insurance takes care of any liability issues on his or her part. "When you have a captain and crew, the Jones Act works kind of like the workers' compensation of the sea," says Wixon. "This act is rooted in maritime law, and you have to provide coverage - it's not an option. Some companies provide this coverage automatically; others do not. Good agents will steer their clients to companies that do have this coverage or make sure they get the proper supplemental coverage."
To avoid any unexpected surprises, Smith says that when you make an offer on a boat, you should make it subject to insurance availability. "Let's say you just got a big handful of cash from a settlement on your previous boat that got trashed by a hurricane and you want to put it down on a new one - will you still be insurable?" Avoid the hassle by making sure that your deal is contingent on your ability to get insurance.
Just as when you go to purchase your automobile insurance, one of the first things your agent is going to look at is your prior claims history. "They even look at your driving history," says Costolo. "They feel that if you have a bad driving record on the land, then it might carry over to the water. And they will do credit searches as well - they call it an insurance score. The higher your credit score, the more likely you are to take care of the boat."
"But the biggest thing they look at is location, location, location," says Smith. "If you want to keep the boat down in south Florida or the Caribbean for the summer and leave it down there, then you'd pay almost twice as much as the guy who took the boat up to North Carolina or Cape May, New Jersey, for the summer, limiting his hurricane exposure. They want you out of the hurricane belt from June 1 to November 1. In Florida, you need to have a hurricane plan before they will even begin to underwrite the vessel."
"With all the hurricane issues we've had over the past several years, absentee owners became a real problem," says Costolo. "Insurers felt that leaving the boat unattended and in the water led to a large number of claims. Now a lot of insurers want you to sign a warranty on the larger boats in hurricane areas that requires you to have a full-time captain assigned to your vessel, year-round. He can't work for other boats. The reason being that if the captain has 10 boats to look after, and you're number nine on the list, you might not get your boat pulled out of the water in time. Insurers don't like that."
You can take several steps to help lower your premiums such as installing a fire-suppression system and fume detectors, taking a boater safety course or even getting a captain's license. But as with everything, in insurance you get what you pay for. "You have to remember," says Smith, "that you're paying for a claim that you hope will never happen, not just a piece of paper you can show the dockmaster in Cancun."
Some research came from www.marinebankers.org and the IRS 1040 Quickfinder Handbook.
Marine Finance and Insurance Experts
Ace Insurance
Alisa Breese
949-481-3741
alias.breese@acegroup.com
Bank of America
Lisa Verbit
954-765-2226
lisa.verbit@ustrust.com
C&L Insurance
Mike Costolo
561-395-3730
mike.costolo@clinsurance.com
Essex Credit
866-377-3948
www.essexcredit.com
Intercoastal Financial Group
Chris Berkeley
772-559-8588
cb@boatloans.net
Smith Merritt Insurance
Skip Smith
954-784-1807
skip@smith-merritt.com
