Short-term pain can lead to long-term gain when making those vital financial decisions about buying a superyacht…
Short-term pain can 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 or so months have ushered in a new outlook.
The superyacht industry is no exception. Brokerages and shipyards have reported 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. sales and construction.
So what’s at stake here? Our experiences, based on discussions with old and new clients, show that a reassessment of what both ‘cost’ and ‘value’ mean to yacht owners is an important factor, with many seeing more value in the deployment of disposable income to improve and enhance their options. and opportunities (in this case choosing to escape land-bound shackles for the high seas).
Adam Ramlugon, Partner, Hannaford Turner
For many years, yacht managers, lawyers and tax advisers have argued that while yachts can depreciate assets, the purchase or construction of a vessel should be treated with the same degree of care and diligence. reasonable with which an owner might approach the acquisition of a business or other “hard” asset as part of their core business.
This concept has been widely accepted in the industry and has resulted, for the most part, in key stakeholders working hard to protect the interests of their customers. Managers, brokers, lawyers, tax advisers and other professionals each play a role as part of an owner’s retained team to streamline transaction costs, maximize charter income (if the yacht is to operate commercially) and protect and preserve legal rights against contractual counterparties.
In 2021, the idea of protecting the “value proposition” of a superyacht has evolved. In the same way that ESG values and the impact of the investment industry are gaining more and more traction in the business world, both the cost and value of superyacht ownership have taken on broader meanings. In other words, when looking at the true cost of superyacht ownership, the focus must be on both financial and, increasingly, the “additional financial”.
Best practices require that a team owner is working as a cohesive unit to protect the financial interests of the owner in the traditional narrow sense and also to adopt a more global vision which may require short-term costs for the continued preservation the long-term value and protect these interests ‘extra-financial’.
It’s easy to lose sight of what an owner’s team is there to do. It’s all very well to chisel the shipyard or an adviser to cut costs and fees, but is that really the right outcome if the end result is less product, an increased risk profile, or high value work done by the wrong part?
As an industry, our raison d’être is to ensure that our owners enjoy every moment of their superyacht experience, from project genesis to delivery and beyond. It has arguably never been such a complex and nuanced issue.
Here are a few examples that illustrate this point throughout the life cycle of superyacht ownership.
1. Initial Considerations
The owner and his team must embark on a yacht project with as complete a vision as possible of what they want to achieve. Will the yacht operate as a commercial charter vessel? If so, what is the leeway to find a balance between the owner’s vision and commercial appeal in the rental market? How will this affect the resale value? These points should not be considered after the fact but tackled head-on.
As reported in these pages earlier this year, Lürssen is building its first superyacht that will incorporate hydrogen fuel cell technology. Other shipyards have also delivered top hybrid yachts in recent years. Current market sentiment seems to be moving more and more towards hybrid and alternative fuel systems. Any major superyacht project ordered now will likely be ready for delivery in as much as three years and likely more. What appetite does the owner have to explore hybrid or alternative fuel systems for the project? How sensitive are they to the politics surrounding this issue and what might the zeitgeist look like in three or four years?
There is an old saying that a guarantee is only as good as the person giving it, but this principle could also be applied to any contractual consideration. It is so important to perform thorough due diligence on every key party the owner does business with. It is quite common to cover the counterparty risk by seeking bank guarantees and insurance cover, but it is better to be in a situation where the owner does not need to call on them. What do the audited accounts of the proposed counterparty reveal? What other contractual activities do they have to guarantee their future cash flows? Are there any imminent or ongoing disputes 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 lawyers enjoy a good tear from time to time, this is another area where scoring points on behalf of the owner is not always the right approach. Take the example of a construction dispute between an owner and a shipyard. The shipyard has made a settlement offer, but there is a feeling that the owner can award more in arbitration. Even if this is the case, the owner risks being rewarded in their favor requiring the shipyard to be responsible for rectifying the problem when the owner would have preferred to have chosen another party who may have done a better job. Pursuing arbitration, and even winning it, may be an example of the tail wagging if a fair settlement offer is on the table.
This article first appeared in Superyacht Owner’s Report. To access The Superyacht Group’s full suite of content, publications, events and services, Click here join The Superyacht Group Community and become one of our members.
Hannaford Turner LLP
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