About This Document . . .
What You’ll Learn aboutChartering
• 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 How Much is a Boat Used 3 Cash Flows from Chartering: Typical Scenarios 4 What is a Desirable Charter Boat? 4 What About Taxes? 5 A Free Gift for You 6 Required Boat Equipment 6
About Putting Your Boat into Charter
IT CAN BE SCARY, letting your boat be usedby 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 pro-gram 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 unaccept-able, you probably shouldn't charter to oth-ers.
(Continued on page 2)
In this paper, we’re going to try to examine various aspects of putting a boat into char-ter. We’ll talk about the emotional concerns, the financial considerations, and the opera-tional and administrative aspects of charter-ing, 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. ex-tensively.
My wife is pretty much a perfectionist, as am I regarding our boat’s care. We have exten-sively refurbished our boat, which
consis-tently wins “oohs and aahs” from bystanders. It looks far younger than its age (built in 1980)! We have attended the Tolly rendezvous a num-ber of times, and other Tolly owners seem to agree with this appraisal. It has been char-tered since 1992.
We’re active in our Yacht Club (I’m a past com-modore) 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
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 dou-ble 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.
charter revenues and expenses for your boat without obliga-tion.
What does the charter company do, and what do they get? It gets commissions on charter income. It advertises, checks-out-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 busi-ness: 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 with-stand 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 cop-ies of our owner’s contract and other docu-ments.
Having our materials in hand and our ideas in mind, you can then evaluate other firms compared to ours before making your final decision!
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 ex-penses 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 sub-stantial tax savings from chartering. And finally, simply by virtue of being in use, your boat should stay in better condi-tion 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 re-cord, 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 insur-ance, 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 no-tice, 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
ABOUT PUTTING . . .(Continued from page 1)
Some Other Owner’s Stories
“When you use
the boat
yourself,
your only
operating
cost is fuel.
All the rest
is paid for
by the
chartering.”
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 suc-cessful 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!
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
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
Qualifying, Checking Out and Checking In Users:
Perhaps the Most Important Processes!
of accidents that happen. My own boat, for instance, has had a damaged propel-ler twice in charters since 1992, and one of those times the shaft was bent and had to be replaced. On another occasion, a char-terer struck a rock when anchoring, causing $150 damage to the boat’s keel forefoot. And once, a char-terer put a minor gelcoat gouge in the topsides on some kind of protruding
pil-ing hardware. In each of these cases, the damage deposit paid the full cost of the damage. I had no out-of-pocket 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 occa-sional minor damage, rare
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 char-terer.
Likewise, we’ve gotten pretty good at predicting the kind
“Meanwhile, my
boat earned a
net of over
$130,000 even
though I limited
charters . . .”
diver to be sure there is no bottom damage. (In fact, the boat is dived after the owner’suse, 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.
Our disciplined
use of these
procedures
gives all of us
assurance . . .
significant damage . . . Just like you might incur yourself!
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.
When considering putting your boat out to charter, it’s important that the boat be desir-able, 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, Off-shores, Grand Banks and other high-profile vessels. These makers quickly get pros-pects’ attention! For less well-known mod-els, 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 tradition-ally, 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 re-peat business.
3. A well-maintained boat is essential! At least in our fleet, “yacht-quality” manance including immaculate, odor-free inte-riors and exteinte-riors (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.
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)
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
REQUIRED CHARTER BOAT EQUIPMENT
The Minimum Equipment Required on each Boat
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)
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
TAXES (continued from preceding page)
How to reach us . .
.
Phone: (360) 739-1528 Fax: (360) 647-7598 E-Mail: [email protected] 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!
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.]
