By Catherine Kent, attorney with Alley, Maass, Rogers & Lindsay, P.A.
Many owners who choose to finance their yachts do so not for lack of funds, but because a loan frees up capital that can be used more profitably. While the traditional method of yacht finance through a loan from a bank secured by a preferred ship mortgage has plenty of benefits, buyers may consider other options when determining how to maximize the value of their yacht acquisition.
With the right lender and loan, financing with a vessel mortgage allows a buyer to borrow at a lower interest rate than the rate of return the buyer may receive on the same amount invested in securities or a business. According to Lisa Verbit of Bank of America’s yacht lending practice, a yacht is an asset that can be used as collateral to finance its purchase, or a revolving line of credit that the owner can use to invest in other business ventures, such as real estate acquisition, without tying up the liquidity in the owner’s cash or securities portfolio.
A bank can also advance a portfolio loan to its clients to fund a yacht’s purchase and operating costs without placing a mortgage on the vessel, reducing closing costs in buying and selling the yacht. While the amount of a loan secured by a vessel mortgage depends on the value of the yacht, the amount a bank will lend against a securities portfolio depends on the value of the portfolio, which, for most yacht owners, is substantially higher than the value of a yacht they are considering for purchase. For an excellent borrower with substantial assets and a good bank relationship, interest rates on a portfolio loan can be as low as 1 to 2 percent. A risk of a portfolio loan is that if the value of the portfolio decreases, the bank will seek additional collateral.
A buyer can use a combination of a vessel mortgage and a portfolio loan to fund a yacht purchase. Since a bank will always require a down payment to protect against asset depreciation, a buyer can fund a portion of the yacht’s price with a vessel mortgage and the remaining amount with a portfolio loan. With this strategy, the buyer can hedge against potential depreciation of the yacht versus decline in the value of a securities portfolio while financing the entire purchase price of the yacht.
Alternatively, if a buyer uses only a portfolio loan to fund a yacht purchase, the yacht remains unencumbered, and in theory, the owner could then obtain a revolving line of credit with a vessel mortgage to finance other business ventures. Vice versa, if a buyer uses only a vessel mortgage to fund a yacht purchase, the securities portfolio remains available either to directly fund other investment opportunities or to secure a loan to fund other investment opportunities. Both options increase an owner’s ability to use leverage in an overall business and investment strategy.
Seller financing can provide ultimate creativity and flexibility for a yacht buyer, but it is difficult to obtain, as most sellers want immediate liquidity. If the seller is highly motivated, a potential buyer may have the leverage to negotiate financing terms. A private seller has wider discretion than a bank to decide the terms of a loan, including the down payment and interest rate, and may be willing to accept collateral and other terms that banks would not. For example, a seller may be willing to finance with a mortgage on real estate, alone or in combination with a vessel mortgage, and may be willing to forgo a personal guarantee of the loan. The price of this creativity equates to higher transaction costs resulting from the absence of a standard protocol, and in some cases, the need to conduct due diligence and secure and record security on multiple assets across various jurisdictions, with the buyer responsible for such costs.
The best yacht financing strategy is highly dependent on the circumstances of the individual owner or buyer. With the options available—and a little creativity—a yacht owner can use financing to fund a yacht purchase, pay operating costs, support a primary business or invest in securities or other business ventures. In this way, a yacht purchase can add value to the owner’s overall business and investment strategy.
Catherine Kent is an attorney with Alley, Maass, Rogers & Lindsay, P.A., in Palm Beach, Florida. She can be reached at 561 659 1770, by email at email@example.com, or via Twitter @YachtLawyer.