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JTC Private Office discuss flying and floating assets

JTC Private Office explain why you should buy a superyacht like you are investing in a company…

Would you buy a company for £50 million without doing proper due diligence and asking independent experts for advice and guidance? Probably not. Yet you would be surprised that when it comes to purchasing private jets or superyachts, some buyers will do just that. So isn’t it time we help refine the decision-making process for acquiring these flying and floating assets?

How?

Get an independent perspective from a party that is neutral in the transaction, who can discuss the pros and cons of the purchase for you. Don’t just rely on what the seller says.

Aside from tax and ownership concerns, you should consider the practicality of what the entire process will require from acquisition to operation to ultimate disposal.

The enjoyment factor- this is akin to the goodwill element in a company. Work out how you will use the yacht or aircraft in a way that gives you and your family enjoyment in addition to the financial aspects.

In asking clients these questions, we are not trying to put them off a purchase; we are helping them to decide whether it’s the right decision and the right asset for them. This is about making the experience a more positive one.

Costs?

Prospective buyers should take a deep dive into the anticipated transactional costs, the ongoing maintenance fees and all the associated ownership costs, including the cost of raising finance. You are unlikely to keep the asset for the rest of your lifetime, so even at the start, you should consider what the exit fees and lock-ins may be. Costs extend beyond the purchase and the top-tier running costs. Clients can be surprised by the cost of communication systems, running the equipment on board, insurance and dockage.

In buying a company you may review capital expenditure (“Capex”) and operational expenditure (“Opex”) in detail, you’d look at the company pedigree and the possible depreciation of its assets, so do the same with a yacht or an aircraft. Analyse the market, is it overinflated? COVID has done strange things, and the mantra of buy now before it’s too late can be all too convincing.

The Private Jet - When to say no and when to say yes

You have found the ‘one’. You know it is expensive; there are numerous acquisition and operational expenses that will arise and you will be able to cover them. But the best advice here is to listen, slow down and take your time. Some practical and operational pointers that may help start that ‘pause’:

1. Hours - as a simple rule of thumb, buying an aircraft outright when it is likely to be used for fewer than 150 hours per year by the owner is unlikely to be financially viable

2. Distance - distance capabilities can be oversimplified in a brochure. With the right wind direction and weight, a flight may get to New York, but add more passengers and luggage and a change of wind then a refuelling stop could be required on the return

3. Cabin configuration - is the theory always workable in practice? The hours, effort and sign-off required to convert a six-seater to an eight-seater may mean quite a change to the cabin reconfiguration that may take several hours. And that is before we discuss the compact toilet...

4. Who will use it, business or family and friends? Think practically; ceiling height is essential if you want in-flight assistance - you can’t expect an air steward to serve you well with a maximum head height in the cabin of 5ft!

You should review the potential market, popular flight routes and customer base; post-Brexit the landscape has altered in terms of who you can carry

5. Operator - is your operator qualified to maintain (not just manage) this model of aircraft? If not, external assistance will be needed, which means more time and money

6. Charter or private - chartering out the aircraft can help support the operational costs and may have some tax benefits, but it means loss of flexibility and potentially a quicker devaluing of the asset through constant use

7. The lock-in - manufacturers may build in clauses to prevent a quick onward sale of their product through concerns over the devaluation of their brand. Some operating agreements may also have a minimum period to run before which it may not be easy to extract oneself

Taking intended advice to consider all of these points has obvious benefits and is likely to save more than it costs. This upfront conversation helps to make the decision more informed. The answer may indeed be ‘get your own plane’, but the discussion could highlight that what you have in mind isn’t actually the make and model that will work best for you.

The Yacht

Sometimes the costs of running the yacht can be understated, and the time that the owner expects to spend on the yacht is often overestimated.

In this situation, some owners consider chartering their yacht, however, this can often bring some stress and financial impact. You can avoid the U-turn by investing in good due diligence right at the start of the transaction;

1. The full spectrum of costs - when purchasing a business you would request a detailed overview of Capex and Opex and depreciation estimates – you should do the same for a yacht. Review acquisition costs (all of them), winter maintenance, crewing, management and entity costs. In addition, ask for anticipated prices to change from private to charter as well as exit costs

2. Time - prospective owners should look at how much time, in reality, they will spend on their yacht, as it may work out to be a very expensive holiday!

3. Geography - will the Mediterranean prove enough of a playground? If there are plans to use the yacht in the Caribbean this may not only be expensive but there may be tax and flag considerations to consider

4. Could it be the wrong boat? - Making sure all of the people that will use the yacht want a similar vessel, sailboat or motorboat is not the only consideration. The feel of the water (impact of stabilisers), size as well as who will crew it, need to be agreed upon.

We know yachts are bespoke, but if chartering it out, consider the fact that not everyone may have a such unique taste

5. It’s not correctly fitted - yachts marked for charter must be fitted in accordance with certain regulations according to their flag state, and these can be difficult to cater for and costly to implement post-build. If buying a new build, have it fitted for charter if possible, even if private use is the end game. This allows for a switch and means your re-sale market is more diverse.

The corporate acquisition analogy is a good one, but these assets are not going to make the revenues that a successful business could. However, by looking more critically and making them work better for clients enables them to enjoy themselves without stress.

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JTC Private Office discuss flying and floating assets

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