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Since the average yacht loan is outstanding for only four to five years, according to Velez, the lower monthly payments of a three-year interest-only or discounted variable-rate loan are attractive to many buyers. After three years, if the owner decides he wants to keep the yacht, he can always refinance to a fixed-rate loan, says Grant Skeens, president and CEO of Key Recreation Lending, the parent of Key Bank’s Luxury Yacht Lending Division. Like Bank of America, Key Bank offers lots of flexibility, within guidelines. “For example, we can arrange to defer the first payment,” says Skeens. “People who commit to buying a boat in the winter don’t want to start paying for it until the spring.” And sometimes a custom loan becomes a product: Key Bank’s interest-only option was inspired by a customer request, he explains.
Depreciation isn’t as much of a concern with megayachts as it is with smaller yachts, so folks paying interest only for three years can often recoup their principal, or most of it, when they’re selling. Sometimes they make money: If a new yacht takes three years to build, suggests Velez, when she’s launched she may sell to a buyer for more than she cost because the buyer doesn’t want to wait to commission one. “Quite a few people contract for the next yacht as soon as they take delivery of a new one,” he adds. “Some clients love the build,” agrees Verbit.
Many owners let the yacht work for them by chartering when they’re not aboard. “A large majority—90 percent or more—of Key Bank clients set up an entity to own the vessel: a limited liability trust, etc.,” says Velez. “There are advantages to setting up the yacht as a charter business.” As with any business, the owner can now deduct interest, operating expenses, depreciation, and so forth against charter income and maybe take a net loss for the first few years. (Again, consult your tax attorney.) Owners choosing this course may not need the charter income to own the yacht—”if they do, it’s not a deal we want to participate in,” says Verbit—but doing so keeps the yacht in Bristol condition, because she’s being used all the time and not languishing in port between owner visits.
How does one qualify for a megaloan to buy a megayacht? It’s just like qualifying for a mortgage or car loan: You need to show the wherewithal to pay it back. Key Bank looks for a debt-to-income ratio of less than 45 percent, explains Velez; that’s consistent with the requirements for mortgages and other large loans. The bank’s credit group factors in costs of operating, insuring, and maintaining the yacht, too. But determining the income of high-net-worth individuals can be complex—they have earnings from companies, investments, trusts, and so forth. Often the bank will want tax returns, accountants’ statements, and other corroboration; nevertheless, the credit-approval process is fairly quick, according to Velez. “Most people show up knowing they will qualify,” he says. “Ninety nine out of 100 know what they’re getting into; they can handle the debt.” He added that the typical yacht buyer looking for, say, a $10-million loan would be worth multiples of that and would have lots of experience with boats, including previous ownership. About half the time the borrower doesn’t deal with the bank directly, but delegates the process to his accountant and attorney.
If you’re ready to make the step up to megayacht ownership and want the benefits of using other people’s money to do so, take the advice of all the experts I consulted: Choose your lender carefully before signing on the dotted line. Deal with a reputable bank staffed by loan executives who understand both yachts and the marine-lending business. While they won’t help you with the payments, they will nevertheless make going into debt as easy and painless as possible—and the next time an unbelievable investment deal shows up, you’ll have both the cash to participate and a great yacht to enjoy while the returns roll in.
Key Bank Luxury Yacht Lending
This article originally appeared in the February 2007 issue of Power & Motoryacht magazine.