The true cost of ownership
Short-term pain may lead to long-term gain when making those vital financial decisions about buying a superyacht…
Short-term pain may lead to long-term gain when it comes to making those vital financial decisions about buying a superyacht, says Adam Ramlugon, partner at Hannaford Turner.
As is the case in many industries, the changes and challenges of the past 18 months or so have ushered in a fresh perspective.
The superyacht industry is no exception. Brokerage houses and shipyards have been reporting bullish sales and growth figures over this period, with an increase in first-time buyers dipping their toes in the water and more experienced players driving growth in sales and construction.
So what’s at play here? Our experiences, based on discussions with clients old and new, is that a reassessment of what both ‘cost’ and ‘value’ mean to yacht owners is an important factor, with many seeing more value in deploying disposable income to enhance and improve their options and opportunities (in this case by opting to escape land-based shackles for the open sea).
Adam Ramlugon, partner, Hannaford Turner
For many years, yacht managers, lawyers and tax advisors have argued that while yachts may be depreciating assets, the purchase or construction of a vessel should be treated with the same degree of care and due diligence with which an owner might approach the acquisition of a company or other ‘hard’ asset in the course of their mainstream business.
This concept has gained broad acceptance across the industry and has translated, in the main, to key stakeholders leaving no stone unturned to protect their clients’ interests. Managers, brokers, lawyers, tax advisors and other professionals each play a role as part of the team retained by an owner to streamline transaction costs, maximise charter revenue (if the yacht is to operate commercially) and protect and preserve legal rights against contractual counterparties.
In 2021, the idea of protecting a superyacht’s ‘value proposition’ has evolved. In much the same way that ESG values and the impact of the investment sector are gaining more and more traction in the business world, both the cost and value of superyacht ownership have taken on broader meanings. Put another way, when looking at the true cost of superyacht ownership, emphasis should be placed on both the financial and, increasingly, the ‘extra financial’.
Best practice requires an owner’s team to work as one cohesive unit to protect the owner’s financial interests in the traditional narrow sense and also to take a more comprehensive view that might require short-term costs to be incurred in the pursuit of preserving long-term value and protecting these ‘extra financial’ interests.
It’s easy to lose sight of what an owner’s team is there to do. It’s all very well chiselling the shipyard or an advisor to reduce costs and fees, but is that really the right outcome if the end result is a lesser product, a heightened risk profile or high-value work being carried out by the wrong party?
As an industry, our raison d’etre is to ensure our owners enjoy every moment of their superyacht experience, from the genesis of the project through to delivery and beyond. This has arguably never been such a multi-faceted and nuanced issue.
The following are some examples that illustrate the point throughout the superyacht ownership life cycle.
1. Initial considerations
The owner and his team should go into a yacht project with as full a realised vision as possible for what they want to achieve. Will the yacht operate as a commercial charter vessel? If so, how much room is there to strike a balance between the owner’s vision and commercial appeal in the charter market? How will this affect the resale value? These points should not be afterthoughts but addressed head-on.
As was reported in these pages earlier this year, Lürssen is building its first superyacht which will incorporate hydrogen fuel cell technology. Other yards have also delivered high-profile hybrid-powered yachts over the past few years. Current market sentiment seems to be swaying more and more towards hybrid and alternative fuel systems. Any significant superyacht project commissioned now will likely be ready for delivery in no less than three years and probably more. What appetite does the owner have for exploring hybrid or alternative fuel systems for the project? How sensitive are they to the politics surrounding this issue and what the zeitgeist might look like in three or four years?
There’s an old saying that a guarantee is only as good as the person giving it, but that principle could also be applied to any contractual counterparty. Carrying out thorough due diligence on every key party that the owner does business with is so important. It’s quite standard to hedge counterparty risk through seeking bank guarantees and insurance cover but it’s much better to be in a situation where the owner doesn’t need to call on them. What do the audited accounts of the proposed counterparty reveal? What other contractual business do they have to secure future cashflow? Is there any threatened or pending litigation with third parties? These are all standard questions in any corporate due-diligence exercise and are, in our experience, of increasing prevalence in the superyacht industry.
While we, as lawyers, enjoy a good tear up from time to time, this is another area in which scoring points on behalf of the owner is not always the right approach. Let’s take the example of a construction dispute between an owner and a shipyard. The shipyard has made an offer to settle but there is a sense that the owner might be awarded a greater sum in arbitration. Even if that’s the case, the owner risks an award being made in their favour requiring the shipyard to be responsible for rectifying the problem when the owner would have preferred to have chosen an alternative party that may have done a better job. Pursuing the arbitration, and even winning it, might be an example of the tail wagging the dog if a fair settlement offer is on the table.
This article first appeared in The Superyacht Owner Report. To gain access to The Superyacht Group’s full suite of content, publications, events and services, click here to join The Superyacht Group Community and become one of our members.
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