A POWERBOAT OWNER S GUIDE: PUTTING A BOAT INTO CHARTER This document was prepared by Joe Coons, an experienced boat owner. A licensed master, Joe owns a 43 Tollycraft double cabin motor yacht similar in layout to a classic trawler. His background in chartering includes four years employment as a boat broker where he sold a number of boats into, and out of, charter programs; and at the time of this writing, seven years of chartering his own boat, three years of which he managed it. He founded Skylark Charters, Inc., which in late 1998 became San Juan Yachting, Inc. when it was acquired by San Juan Yachting/San Juan Sailing of Bellingham. Joe now is semi-retired, but serves as an adviser to San Juan Yachting and also trains folks in boat operation, and counsels other charter companies and boat buyers regarding chartering and maintenance. About This Document... What You ll Learn about Chartering What s it like to charter your boat? Some owner s stories Financial considerations What boats charter best? What happens to boats? Inside this issue: Other Owner s Stories 2 Qualifying Charterers 3 In this paper, we re going to try to examine various aspects of putting a boat into charter. We ll talk about the emotional concerns, the financial considerations, and the operational and administrative aspects of chartering, and we will try to do this always from the perspective of the owner. It is valuable for you to know who what my personal interest in boating is! My wife and I own our boat for serious cruising. We like to take long-weekend trips, and each year we take several longer trips of a week or more. We have taken our 43 Tollycraft to Alaska twice, and have cruised local waters from southern Puget Sound to Northern B.C. extensively. My wife is pretty much a perfectionist, as am I regarding our boat s care. We have extensively refurbished our boat, which consistently wins oohs and aahs from bystanders. It looks far younger than its age (built in 1980)! We have attended the Tolly rendezvous a number of times, and other Tolly owners seem to agree with this appraisal. It has been chartered since 1992. We re active in our Yacht Club (I m a past commodore) and we ve also lead a lot of cruises. I ve served on the board of RBAW, am a life member of the Princess Louisa Society, and write a boating safety column (which you can read on the internet at byc.org) - - - Joe Coons How Much is a Boat Used 3 Cash Flows from Chartering: Typical Scenarios What is a Desirable Charter Boat? 4 What About Taxes? 5 A Free Gift for You 6 Required Boat Equipment 6 4 About Putting Your Boat into Charter IT CAN BE SCARY, letting your boat be used by someone else! After years of successful management of charters, we've learned how to minimize your risks and maximize your returns. First, some realities: In the Northwest, you can't pay for a boat just by chartering. The typical charter boat owner reduces the net cash requirement of owning and operating it by 30 to 70 percent, depending upon its popularity, the original cost of the vessel, and its age. Chartering does use your boat, so good maintenance is essential. For a charter program to succeed, you need to take care of your boat just as you would for your own use! Given careful charter management (especially when qualifying users), there is little likelihood your boat will incur any more wear and tear than with your own use. But if any wear and tear on your boat is unacceptable, you probably shouldn't charter to others. (Continued on page 2)
Page 2 A Powerboat Owner s Guide: Putting Your Boat into Charter ABOUT PUTTING...(Continued from page 1) How much revenue can you expect? A properly-priced, well kept, well equipped boat should earn enough to pay for (1) All its mooring expenses; (2) Insurance expenses; (3) Maintenance expenses; and (4) All charter expenses such as check outs, cleaning, and diver's inspections. In addition, depending upon the boat's initial cost, popularity, and age, chartering should yield enough for you to pay off 25-60% of its total price, including interest. That means that when you use the boat yourself, your only out-of-pocket operating cost is fuel, for all the rest is paid for by the chartering! Are there other benefits? Yes, there are. You ll read on the following pages about substantial tax savings from chartering. And finally, simply by virtue of being in use, your boat should stay in better condition than if it is just sitting at the dock, assuming your charter management company is a good one. What equipment does the boat need to be chartered? The list we require is on page 6 of this brochure. Our Charter Management Agreement, like most, details our requirements. We expect each of our boats to be well equipped, very clean, and well maintained! Can I maintain the boat myself? Yes, of course. There may be tax benefits for you if you do. How do I get insurance? Charter companies usually require you be in their fleet policy, since that way insurers spread their risk. Because of our claims record, we have a high quality marine fleet policy written by first class underwriters. In general terms about one week's charter will pay your annual premium! Every boat must have insurance, but it leaves you fully protected!. What if I want to use my boat? You can reserve any block of time for your own use in advance. In addition, if your boat is not out to charter, you can use it with shorter notice, too. Do I have to clean my boat to use it myself? No. Our company completely cleans your boat after every charter. It is also inspected by a qualified diver and check-in skipper. Can a company charge me for a lot of extras? Some do. At San Juan Yachting, we don t; instead, we pay owners a specific net percentage for each charter with no other fees. How can I get an idea of income? Most firms, including ours, will prepare a pro-forma report of When you use the boat yourself, your only operating cost is fuel. All the rest is paid for by the chartering. Some Other Owner s Stories Two owners joined our power fleet in 1998; in fact, they both came into the fleet late! One owned a new 36 Monk trawler. The boat wound up with a net of about $6,500 in spite of the fact that it wasn t in any advertising until June. The other boat was a 1990 38 Bayliner. It was very successful too, netting over $7,000 in just five weeks! Admittedly, these owners were lucky: if they had had their boats in our fleet earlier they would have been assured of considerably more revenue! charter revenues and expenses for your boat without obligation. What does the charter company do, and what do they get? It gets commissions on charter income. It advertises, checksout-and-in, cleans, dives, and supervises your boat. It does all the contracting and qualification of charterers. Our firm pays State sales taxes and gives you a full accounting for your taxes. In summary, chartering is like any other business: If it is done well, it will be successful. If it is done by professionals, it is likely to be done well. A good charter company can withstand a full review by you, as a prospective charter boat owner. What should I do next? To learn more, call me: our number is on the last page of this brochure. We ll discuss your own situation, review your options, and give you an analysis of your boat s opportunity in a charter fleet. I ll provide a written cash flow analysis for your boat. And I ll send you copies of our owner s contract and other documents. Having our materials in hand and our ideas in mind, you can then evaluate other firms compared to ours before making your final decision!
A Powerboat Owner s Guide: Putting Your Boat into Charter Page 3 Qualifying, Checking Out and Checking In Users: Perhaps the Most Important Processes! When a charterer calls us about a boat, we make it a point to determine how much experience they have, and whether the boat they are asking about is appropriate. We also ask them about their reason for chartering. That s because we want to get some idea of how they will be using our boat: Use should be appropriate for cruisers. For example, if they want only a two-week charter from Bellingham to see Alaska s Inside Passage, we can tell that they won t be treating our boats kindly! But it does make a good two-week cruise to see Desolation Sound. If they only have a week, we encourage them to stick to the San Juan and Gulf Islands. Part of our contract is a Boating Experience Resume that the charterer fills out in full, documenting his/her experience, training, etc. This tells us more about the customer. On the morning of the charter departure (or the afternoon before it), Skippers Meetings are held to acquaint all users with our rules, area waters, insurance requirements, and other general info. We use a booklet, videos, and other visuals as well as a question and answer period to get charterers off on the right foot. (This is also a chance for inter-boat camaraderie to begin). Then each charterer gets aboard his chosen boat for the first time and locates all inventory items. Then our staff checkout skipper comes aboard and answers questions, reviews important boat details, and evaluates the charterer s abilities to run the boat. Unless the charterer is Our disciplined use of these procedures gives all of us assurance... known from previous charters or has substantial experience, this time aboard will include at least some actual boat maneuvering time away from the docks. After this process, the skipper is fully empowered to release the boat, require more training, or require that a professional skipper be aboard. He can also deny the charter. He thus is a link between the owner, the insurance company, the charter company, and the charterer to be sure all will go as well as can be predicted. Upon the boat s return, the check-in skipper (usually the same person) debriefs the charterer to find out how things went, and reviews the boat for damage and/or problems. The boat is also checked by a professional diver to be sure there is no bottom damage. (In fact, the boat is dived after the owner s use, too, so we always know its condition!) To make the checkout skipper s work thorough and consistent, we use a detailed checklist, which both the skipper and charterer sign before and after the trip acknowledging the checkout and responsibility for the vessel. Our disciplined use of these procedures created after years of experience gives us assurance that our fleet is properly handled and maintained, and that charterers have the information they need to make their charter-vacation aboard one of our yachts as much fun as possible. How Much Does a Charter Boat Get Used? What about Damage? Boats in our fleet have a pretty consistent pattern of use by their charterers. A Charter-week s (six days) usage ranges from a low of 15-17 hours to a high of 36 hours. Although we have no absolute limit, we make it clear that running hard is not in the best interests of the boat, or for that matter, a good vacation for the charterer. Likewise, we ve gotten pretty good at predicting the kind of accidents that happen. My own boat, for instance, has had a damaged propeller twice in charters since 1992, and one of those times the shaft was bent and had to be replaced. On another occasion, a charterer struck a rock when anchoring, causing $150 damage to the boat s keel forefoot. And once, a charterer put a minor gelcoat gouge in the topsides on some kind of protruding piling hardware. In each of these cases, the damage deposit paid the full cost of the damage. I had no out-ofpocket expense for any of these incidents. Meanwhile, my boat earned a net of over $130,000 even though I limited charters in some years to only six or eight weeks while I went to Alaska! I think that was a great tradeoff! Bottom line? Assume occasional minor damage, rare significant damage... Just like you might incur yourself! Meanwhile, my boat earned a net of over $130,000 even though I limited charters...
Page 4 A Powerboat Owner s Guide: Putting Your Boat into Charter FINANCES: Typical Cash Flow Projections for Three Different Boats To give you an idea of how your boat might generate income when in charter, we illustrate here three different boats income in our program. These estimates are for a full season assuming the boat is enrolled in our fleet early enough to be in our printed literature. Costs of moorage are for our docks Bellingham. We are assuming 10 weeks prime (July-August) season charter use, 3 weeks shoulder (June, September) use, and 1 week off-season (October-May) use per boat. Boat size and type 34 Cruiser 42 Cruiser 48 Cruiser Sleeps/No. Staterooms/No. Heads/No. of Engines/Cruise Speed, Knots 4/1/1/2/16 6/2/2/2/12 8/3/2/2/12 Prime Season Rate $2,300 $3,200 $4,000 Approximate Cost of Boat (for Insurance Calculation) $150,000 $250,000 $350,000 Gross Revenue $30,590 $42,560 $53,200 Less 37% Commission & Turnaround Allowance to San Juan Yachting -11,318-15,747-19,684 Net Cash towards Boat Payments & Operation $19,272 $26,812 $33,516 Insurance at 1.2% of value + $500. -2,300-3,500-4,200. Estimated Moorage/Maintenance Allowance -4,540-5,750-7,000 Gross Profit, After Expenses (Available for Boat Payments) $12,432 $17,563 $22,316 Let s examine the middle, 42 cruiser, example: This might be one of the popular Ocean Alexander 420 s, a later model, with twin CATs, or a 42 Grand Banks Trawler with two staterooms, or a newer similar boat. The boat is well-equipped and clean. The $3,200 charter rate would apply for a week s charter in July or August; rates would be discounted in June and September, more in October May. Hull insurance is estimated assuming boat is 11 15 years old. Moorage is estimated at $5/foot per dock or boat size, whichever larger. Maintenance is a guess, allowing for annual haulout, bottom paint, etc. For the 42 boat, the annual cash to the owner is $17,563, an average of $1,464 per month which can go towards payments. Note that the owner has no other personal trip operating expenses except his own fuel. In addition, the owner typically has this revenue free from taxes, and could save an additional $18,750 or more in sales taxes at time of purchase. What is a Desirable Charter Power Boat? When considering putting your boat out to charter, it s important that the boat be desirable, otherwise it won t earn much! For this reason, there are some guidelines that help you determine if your boat will be busy: 1. Popular makes and models are best. Charterers can quickly visualize Bayliners, Tollies, Ocean Alexanders, Carvers, Offshores, Grand Banks and other high-profile vessels. These makers quickly get prospects attention! For less well-known models, traditional layouts are most attractive. 2. Accommodations are primary, speed is secondary. Really fast boats attract less stable customers. Any boat should be able to accommodate passengers comfortably. Three-stateroom boats are very popular! 2. Quality accessories, installed traditionally, help the boat get busy. A good dingy and outboard, lots of electronics, and other quality boat accessories will help make the charter a success, bringing repeat business. 3. A well-maintained boat is essential! At least in our fleet, yacht-quality maintenance including immaculate, odor-free interiors and exteriors (even the bilges) is what makes the difference to our customers. 4. A safe boat is the standard. All safety equipment should be available, convenient and current. All fittings must be secure. We charter only Diesel-powered boats... 5. A Well-documented boat is best. A good boat manual (I prepare our boats 30-to-50 page manuals), placards where necessary, and all manufacturer s equipment manuals should be available and in good order to help your charterers run your boat better! 7. Full equipment is required. See p.6. Charterers aren t buying boats, they re buying vacations! Each thing we do must keep that in mind, and give them a great trip if we are to be successful.
A Powerboat Owner s Guide: Putting Your Boat into Charter Page 5 FINANCES: What About Taxes? A general discussion from a layman s perspective... This is intended to be a general discussion of the implications of taxes upon the cash flow from a boat placed out to charter. It is not intended to be a substitute for your tax counsel or legal advisor when it comes time for you to make the final decisions affecting the purchase, or placing in charter, of a pleasurecraft. In late 1992, I put my 43' Tollycraft into charter. This article is based upon my research then with my accountants here. FIRST, SOME BASIC FACTS: Sales Taxes: If you have a formal charter agreement for the boat in place at the time of purchase: A) You are exempted from paying sales tax at that time, provided that you have a tax ID number from the Washington State Department of Revenue, and a signed charter contract in hand from a charter agent when the boat is acquired. (The contract is proof to the state that you do intend to charter.) B) You then will pay the State a sales tax based upon the usual charter rate whenever you use the boat yourself. Under a contract defined by the Northwest Yacht Charter Association and accepted by the state, the charter company collects sales tax for the value of each use you make of your own boat. For example, if your boat would charter for $1500/ week during the time vou use it, and you use it for a week, you would owe a 7.8% tax on $1,500, or $117, to the state. Use when out of state, or for maintenance, is not taxable. C) Later, if you take the boat out of charter and keep it for personal use, you ll pay sales tax based on the depreciated value of the boat by negotiating directly with the State. If you put a boat into charter service upon which you have paid sales taxes already, no sales taxes are due for personal usage, and you do not need the Department of Revenue stamp. Washington State "B & O" Taxes: You will probably have a small business exemption for state B&O taxes. We will send you the figures for your boat at season s end. Federal Income Taxes: A) First, determine whether the investment is Passive or Active : (1) To qualify as an "Active" investment, you must personally do a lot of maintenance and management of your boat. The IRS usually looks for at least 500 hours/year of your own time working on the boat and its marketing. I met this goal (according to my accountant) by doing most maintenance myself. I also prepare many supporting materials for the boat. In short, I work hard at chartering! If you are an Active" investor, you can "lose" money for tax purposes (through depreciation) on your boat's charter business. (2) If you do not qualify as an active investor, you are "Passive". This means your charter business cannot lose money for tax purposes, although usually all your boat's income will be sheltered with interest and depreciation deductions anyway! Excess depreciation which cannot be deducted because of the no-loss rule for passive investments this year may be carried forward to the following years for deduction then, if needed. B) Second, determine your IRS Usage Profile: Summarizing the May, 1992 issue of Cruising World, we have three: (1) If NOT a business, a yacht qualifies as a "second home". If you do not deduct another second home from your taxes, you may do so on any vessel that has cooking and toilet facilities. Your only deductions will be on your personal return for interest on the vessel's mortgage, and real estate or personal property taxes on the yacht. If you sell it for less than you paid for it, no loss is deductible. If you sell it for a gain, you must report that gain. During your ownership, you may incidentally charter for up to 14 days yearly without reporting income/expenses, and without serious IRS evaluation because your chartering is incidental. (2) If chartering is a business, you can passively operate the boat in charter, ignoring the 14-day rule. Excess depreciation or other expenses cannot create a loss on the boat s operation, but must be carried forward to future years. This lets you have greater tax-free income to help pay the costs of ownership. You will pro-rate business/personal usage as below in calculating your taxes. When you sell your boat, assuming you don t sell it at the fully-depreciated price, you will have to recapture as a gain some depreciation. (3) And then finally, you can "actively operate with full deductibility of all expenses, subject to the pro-ration between business and personal use as below. Federal Tax Calculation Examples and Pro-rating Use: The distribution of costs between deductible business costs and pleasure un-deductible costs is based upon actual weeks of use. That means that if the boat is chartered in a year for 10 weeks, and you use it five weeks, two-thirds of all expenses are deductible against the charter income, while one-third is not. BUT, the non-business one-third of interest can be deducted under the second home, personal deduction. Taxes and Interest are technically pro-rated by annual days, rather than usage, but since taxes and interest are deductible either as a second home or as a charter expense, this is irrelevant. Here's a typical scenario for a 41' Trawler: (see next page)
Page 6 A Powerboat Owner s Guide: Putting Your Boat into Charter A Free Gift for You When You Inquire about Chartering! When you call us to learn more about chartering, we ll send you one of our booklets Maneuvering Inboard Engine Power Boats. This booklet includes discussions about both single and twin-engine maneuvering techniques, using lines for easier docking and undocking, how to work with your mate (without shouting) and lots more. Ask for your free REQUIRED CHARTER BOAT EQUIPMENT The Minimum Equipment Required on each Boat GROUND TACKLE & DOCKING: Anchor with Rode & Chain Stern Shore Line & Emergency Anchor with Chain (4) Fenders & (4) Dock Lines Boat Hook Electric Anchor Windlass SAFETY: Bilge Pump(s), Electric (2) Flashlights with Batteries Fire Extinguishers First Aid Kit Life Jackets (1 for each berth + 2) Life Ring Flare Kit ELECTRONICS. ETC.: Engine Alarms for Oil, Temperature (2) Depth Sounders (2) Compasses (2) VHF Radios Genset or Inverter GPS ENGINE ESSENTIALS: Fuel Gauges/Dipsticks Spare Propeller(s) Battery Water Spare Engine Oil Spare Generator Oil Spare Transmission Fluid Fuel Filters Sea Strainers Other spares as req'd: Belts, Impellers, Gaskets, Hoses TOOLS, SUPPLIES: Tools Duct & Electric Tape DINGHY: Dinghy w/oars & Outboard, Painter, Bailing Device/Pump STATEROOMS: Pillows, blankets for each berth COCKPIT/DECK: (2) Deck Chairs CLEANING EQUIPMENT: Vacuum Cleaner 50' Water Hose, Nozzle, Sponge, Mop, Deck and Scrub Brushes, Bucket GALLEY EQUIPMENT: Can & Bottle Openers Cork Screw Spatula Wooden Spoons Butcher, Paring, & Fillet Knifes Cutting Board Dish Drainer Salad Bowl w/servers Measuring Spoons Tea Kettle & Coffee Pot 1 Qt. & 3 Qt. Saucepans w/lids Broiler Pan Pot Holders Waste Basket Paper Towel Rack (2) Frying Pans Steamer Kettle Juice Container Serving Dishes Salt & Pepper Shakers Crab Cracker And, with one setting for each berth: Silverware, Dishes, Glasses DOCUMENTS/CHARTS, ETC.: Ship's Papers: Documentation/ Registration, Radio License, etc. Inventory & Operations Manual Manufacturers' Manuals in Binder Charts: Seattle-Desolation Sound Parallel Rule & Dividers Cruising Guides: NW Boat Travel, Gunkholing in the Gulf Islands Guest Book for charterers to sign Operating, Customs & Maintenance Logs OTHER: Heater (Electric or Diesel) Propane Barbecue Approved Marine Head System(s) Head Chemicals (if req'd) Shore Power Cord Set(s) Shore Power Adapter(s) Crab Ring w/50' Line & Float Fishnet Insulated Plastic Marine Ice Chest Sufficient Toilet Tissue TAXES (continued from preceding page) Use: Personal 4 weeks Business 11 weeks Amount Business Use Business Use % Net after agent commission $15,361 $15,361 100% Moorage, Insurance, Maint. 5,552 4,071 11/15ths Interest for year 1 6,000 1,266 77/365ths Depreciation: MACRS 10yr 12,000 8,800 11/15ths NET INCOME (LOSS) ( 481) The $481 loss in this example cannot be taken under the passive investment rules; however the loss can be carried forward to following years when deductions may be lower, to keep future income also tax-free. In addition, second home interest of $4,734 ($6,000 total less $1,266 deducted as business expense) can be deducted on your personal return, so you still save some of your non-boat income taxes. If the boat was an "Active investment, all the depreciation could be taken, and $481 would be deducted from your taxable income. As you see, in either case all income from the vessel is sheltered, and, in addition, some personal income is sheltered with the second home provision. Each taxpayer s and boat s situation is different. However, the expectation of substantial tax-free income to help some, if not all, your boat's expenses clearly is an enticing reason to consider putting your boat out to charter! [Depreciation Schedules: The schedule used is the "Modified ACRS" schedule, where depreciation in year 1 is 10%, year 2 is 18%, year 3 is 14.4%, year 4 is 11.52%, etc.] How to reach us... Phone: (360) 739-1528 Fax: (360) 647-7598 E-Mail: Chartervet@aol.com Mail: Joe Coons 25 Shorewood Drive Bellingham, WA 98225 Note: Our office will be closed from April 7 through April 29, 1999, for our annual vacation. Printed in USA Copyright 1999 Joseph D. Coons Life is Pretty Dry Without A Boat!