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Show Us the Money

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The phone rings—it’s Warren Buffett. He has an investment opportunity that should pay 15, maybe 20 percent over the next couple of years. You can get into for $10 million, but he needs a commitment right away. Only thing is, you’ve just spent all your money on a megayacht. Warren mutters something about your financial savvy and hangs up.

Now you know why smart people borrow money to buy yachts, even if they have the cash at hand. But what’s the procedure for securing a $5-, $10-, or $20-million loan? Do wealthy folks get better deals from the bank? I consulted some top professionals, and their answers surprised me: It’s not that much different from borrowing for a car, home, or smaller boat, except with bigger numbers.

Not many people just write a check to buy a yacht, says Lisa Verbit, senior vice president of marine finance at Bank of America’s Private Bank: “Most of our clients have cash but look for other ways to use it.” Private Bank clients must have either a total net worth of at least $5 million or investable assets of $3 million. “These people have special financial needs,” says Verbit. Private Bank marine loans are customized for each client: “You don’t pick up a rate sheet at the boat show.” Most want an interest-only loan, a variable interest rate, or a balloon payment at the end to keep monthly costs as low as possible. Fixed-rate loans have a penalty for early repayment, so many clients prefer variable rates with no penalty; if the rate gets too high, the borrower just writes a check for the balance, says Verbit.

There’s no hard data, but Verbit’s opinion, based on 18 years of experience in high-level yacht financing, is that between 50 and 75 percent of buyers finance, using the yacht as collateral. Most borrow 70 to 80 percent of the purchase price, although the bank will write loans for up to 100 percent—sometimes asking for extra security in those cases. Other buyers borrow against stocks, real estate, or other assets; they are not included in Verbit’s estimate. “These clients have used leverage to build companies and are comfortable with using it to buy toys,” she says. Borrowing means the clients don’t have to liquidate assets or miss good investments because their money’s tied up in a megayacht.

Buyers who finance rather than cash out assets also avoid paying taxes on the profits from those assets, adds Jim Velez, vice president of Key Bank’s new Luxury Yacht Lending division. Velez has been in marine lending since 1979 and was president of First New England Financial until joining Key Bank last August. Leaving the money invested can not only defer taxes but also generate returns that offset part or, in some cases, all of the payments on the loan, he adds. For example, a client recently approached Key Bank to help him buy a 157-foot Christensen. He wanted to finance $25 million of the purchase price, even though he had the money in his investment portfolio. “We were able to structure an interest-only loan with low payments,” says Velez. Income from the money he didn’t spend on the yacht offset the client’s monthly payments.

I know you’re wondering: What’s the monthly nut on $25 million? According to standard amortization tables (Google “loan amortization”), repaying interest and principal on $25 million at a fixed 8.25- percent interest (the prime rate at presstime) over 20 years will remove $213,016 per month from your bank account, of which $171,875 is interest in the first month. An interest-only loan at this rate under these terms saves $41,141 per month—but at the end of each month, you still owe the bank $25 mil. On the other hand, if your investments are earning more than 8.25 percent, you’re ahead of the game, at least until you have to start repaying principal. (Note: Real-life interest rates and loan terms may vary widely from those used in the example. Taxes can change things significantly. Consult your CPA or tax attorney for advice.)

Maybe you want something less costly. Velez explains that Key Bank has other options for the yacht buyer: a 20-year loan with interest-only payments for the first three years, then amortizing after that; construction loans, with interest-only payments until the yacht is launched, then converting to a fixed rate; and a LIBOR-based adjustable-rate loan that’s discounted for the first three years. (LIBOR, or London Interbank Offered Rate, is the interest rate paid by a group of London banks on U.S. dollar deposits. It’s the basis for many adjustable-rate loans, by adding a fixed margin—one percent, two percent, etc.—to the ever-changing LIBOR. At presstime the 12-month LIBOR was about 5.45 percent. You can find current LIBOR information in The Wall Street Journal.)

This article originally appeared in the February 2007 issue of Power & Motoryacht magazine.