Posted: 1st August 2014 | Written by: Daniel Shea
Imagine a world of financial insecurity, where some of the richest people have the least time for leisure. This is the reality facing the yachting industry, and it's prompting a rise in the number of companies promoting fractional ownership as a more viable proposition. In theory it's a great idea, making yacht ownership more accessible to a wider range of people, including many who might otherwise never have considered it. In practice it will never appeal to everyone, but many would argue that it's an ideal solution for certain types of owner, providing the margins are right and the correct management is in place.
It was 1999 when Phillip Burroughs first faced up to the dilemma posed by yacht ownership. He was a financial adviser in Washington, D.C., and a friend who worked for one of the big Wall Street firms was seeking advice on buying a yacht.
Burroughs, who owned a boat at the time, remembers his friend telling him, “God, I could probably do this, but then I sat down and started doing the math…” It was at that point that Burroughs knew the man would never buy the boat.
“If you start doing the math,” says Burroughs, “you’ll never end up buying a boat. You’re going to try to make some kind of sense out of it and try to justify it, and you’re just not going to make that happen.”
It was at that point that Burroughs embarked on an odyssey to make yacht ownership make sense financially.
Fractional jet ownership had just taken off among a certain class of businessmen and Burroughs, who is now spearheading a fractional ownership model for Sanlorenzo Americas, wasn’t the only one trying to uncover a similar business model that worked for yachts.
It was around the turn of the century that Luuk V. van Zanten wrote his thesis on a fleet of identical fractional ownership vessels while at the University of Chicago. And it was around this time that Loren Simkowitz, the president of Monocle Fractional Yachts, came up with his own business model.
The idea was to find a way to make yacht ownership more financially viable.
“The biggest benefit is financial,” says van Zanten, who is the founder and director of Curvelle Yachts. “They typical stretch of yacht ownership is five-to-seven years. And if we take our model based on five years, you can save 90 percent. So that is a huge advantage.”
The question doesn’t seem to be whether the business models work, but how widely they can expand.
There is very little that is practical about owning a yacht. It’s a massive undertaking in every sense, with financial considerations being the most obvious. Even for people who have the economic means, it’s often hard for them to justify such a hefty expenditure, especially when the majority are savvy businessmen themselves.
For many, it boils down to how much time they’ll spend on the yacht.
“People do not have the time as it was in the past,” says Barbara Tambani, the president of Floating Life, who says that most people don't want to use a boat more than four weeks per year. “All the owners are very much concentrating on the business because the crisis surely has not helped for long holidays.”
Burroughs puts it this way: “People who have a lot of money but don’t have a lot of time – that’s the mixture I’m looking for.”
For this reason, Burroughs makes the most of his connections within the financial industry. He sold his original fractional yachting business in 2006, which he ran while also working as a full-time stock broker. However, his business was successful enough that Sanlorenzo recently approached him with a view to setting up their own fractional business model.
While Burroughs seeks out busy professionals at the pinnacles of their careers, Simkowitz has found his success with a slightly older crowd that tends to be semi-retired or fully retired – people who have a long history of boating, either through ownership or chartering. “They love boating but just don’t want the hassle,” he says.
Meanwhile, both Floating Life and Curvelle have attracted a mixture of interested clientele. Some view it as a low-risk stepping stone into full yacht ownership while others are simply happy to find a more flexible approach.
“It’s a much lower-risk investment,” says van Zanten. “And it’s also quite a liquid investment if you want to get rid of your share.”
For Simkowitz, there’s a very simple explanation for the high levels of interest. “The reason it’s successful is because it makes sense for 99.9 percent of people,” he says. “Most people want to get on a boat, enjoy themselves, get back off and not have to worry about it.”
These are generally people who can afford to buy the boat outright if they wanted to, but they still want to go skiing and travel and don’t want to feel obligated to spend every free holiday on their yacht.
So far, the concept has gained more traction in the United States than in Europe, many say. "Compared to the US fractional yacht ownership is still new in Europe and hasn’t recorded a comparable success," says Verena Stättner, the head of marketing and sales with SmartYacht, a fractional yacht company based in Liechtenstein. There have been several reasons for this, including misinformation and the poor track record left behind by failed predecessors.
The emotional angle to yacht ownership also presents a major hurdle to overcome. This isn't as big a consideration when dealing with fractional jet ownership because a plane is a means of comfortable and efficient transportation. However, a yacht is a home.
"I think it’s simply that the impulse to buy and own a yacht is so strong, that anyone not wanting to charter – because they want to be on their own yacht, with their own possessions around them, their own yacht name, their own crew, etc. – feels a need to own the asset outright, to the exclusion of others, in a way in which fractional ownership wouldn’t be sufficient," says Tony Allen, a partner at Hill Dickinson.
“What we are battling with is the emotional experience,” says van Zanten. "There’s more and more emotions and that is what the whole industry is struggling with concerning a business model that can fit the yacht industry.”
Some of the early business models were guilty of taking advantage of the shareholders, and plenty have failed along the way.
They would take a boat with a market price of $2 million and divide it into 10 shares of $400,000, thereby doubling their investment by selling it for a total of $4 million. “So they were trying to make a killing on one boat,” says Burroughs. “They might be willing to pay a small premium, but they’re not willing to get taken to the cleaners.”
It really comes down to bringing the margins into perspective, and several companies have created viable solutions that work for them.
Most fractional business models are based around the boat as a company with anywhere from four to 10 shares, giving each shareholder between four to seven weeks of use per year.
Monocle has the largest fleet, managing around 45 yachts of between 24m (80 ft) and 61m (200 ft), according to Simkowitz. Each yacht is divided into 10 shares, with each share offering four weeks onboard. For those who want more flexibility in terms of scheduling or more weeks onboard, they can buy multiple shares, but most boats average around six or seven owners.
SeaNet has partnered with Azimut-Benetti in recent years. Its fleet is managed by Fraser Yacht Management, with each yacht divided into four shares and each share offering around seven weeks onboard.
Floating Life has three identical sister yachts – Ocean Emerald, Ocean Sapphire and Ocean Pearl – each 41m (134 ft). Floating Life manages all aspects of the yachts and each one is divided into eight shares offering four weeks onboard.
Curvelle launched its first catamaran, 34m (111 ft) Quaranta, less than a year ago. Managed by Hill Robinson, Quaranta was actually designed with fractional ownership in mind, and boasts some innovative features such as movable bulkheads allowing a choice of 20 different layouts for guests. She is divided into seven shares, each offering five weeks onboard. A second yacht is planned once a few more shares have been sold.
Sanlorenzo’s program is the most recent. Burroughs believes a five-share model works best, offering each shareholder six weeks onboard per year, with a five-year contract in terms of exit strategy, adjustable by the shareholders.
Word on the street is still that fractional ownership has not worked, but speaking to those directly involved and you hear a different story. “I think the only negative perspectives I’ve heard have been from the brokers because they want to sell whole boats,” says Simkowitz.
In fact, everyone we spoke with was fairly bullish on the future potential.
Curvelle highlights the financial benefits, whereby a one-seventh shareholder spends around 10 percent of the total they would spend as sole owner of a yacht over five years. “So they get a 90-percent saving over a five-year period,” says van Zanten.
Similarly, Simkowitz likes to say that you get the same experience as owning a yacht – a crew you’re familiar with, a boat you’re familiar with, and a say in the itinerary – for a tenth of the cost of outright ownership. “You’re just throwing your money away chartering,” he says. In fact, Simkowitz feels that fractional ownership may start to compete more heavily with charter operations in the future.
And while some detractors have said the model doesn’t work because everyone will want the same weeks, in practice most operators don’t seem to have an issue with that. Van Zanten says that a Curvelle shareholder has an 82 percent probability of getting all the weeks they want.
The only real downside is that it’s more difficult to manage a yacht with so many different families and interests. That’s not to say it’s impossible – just that it requires very strong management skills.
Tambani says the back-office management in place to make these operations work is really impressive. And while skillful diplomacy is sometimes necessary, most shareholders tend to be understanding and flexible. “All the organization on the back has to work like a clock and it has to be perfect,” she says. “I think the fact of knowing them personally helps a lot, because they call me on my mobile.”
“To make fractional ownership work, you really have to work hard,” says Tambani. She has manuals for each yacht detailing how to prepare each room for different owners. Every detail has been worked out.“They expect to find the same crew. They expect to find their photos, because every time they come onboard we personalize it for them.”
No one knows exactly what the future holds for yacht ownership, but van Zanten hasn’t given up on his thesis just yet. He plans a fleet of 10 identical yachts, each situated in a different part of the world, allowing shareholders to use any of them in any of the locations. As well as offering greater choice and flexibility, it will drastically reduce re-location costs.
It could also be a plus for crew, enabling a more stable home life.
“At the moment, wishful thinking,” says van Zanten. “But already that will work quite well with four boats.”
Providing the margins are right and the correct management is in place, fractional ownership can be a solution for cetain types of owner. It's certainly one way to make ownership more accessible for many who might otherwise never have considered it, and growing the market can only be positive for the industry as a whole.
Photos provided courtesy of Floating Life and Curvelle. First two photos are of Ocean Emerald; the final three of Quaranta.
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