Considerations for Buyers Looking to Charter
By Dirk Schwenk, Baylaw, LLC
Eventually, many people that love the water and love their boats will entertain the idea of chartering their boat. Perhaps if they can make a little money with chartering, they can write off their expenses and enjoy more time on the water. This is a great idea, but one that should be approached with solid planning and much caution. Here are some of the most important issues to consider:
- Income Tax Issues. In my practice, I leave income tax questions to qualified professionals (and if you are going to consider writing off boat-related expenses, so should you). Here is a rule of thumb, however -- you’d better have income related to the boat if you are going to write off losses related to the boat. Beyond that, lawyers like me are happy to consult with your qualified tax professional.
- Insurance Issues. Almost all personal yacht insurance policies either ban chartering altogether or limit it to a very small number per year. Carefully read the yacht policy to determine what limitations are currently in place. About the worst possible result is that you decide to charter the boat, there is a serious injury or death, and then you find out that you have violated the conditions of your insurance policy. That mistake could be catastrophic. If the boat is to be chartered, the policy should reflect the scale and duration of the charters.
- Banking Limitations. Many boat loans forbid the use of the boat for any purpose other than as a private yacht, and provide the bank the option to call the note if that prohibition is breached. I personally have never seen this become a serious issue in a case, and I struggle to imagine a situation in which it would become a serious issue -- but no one wants to be the guinea pig tasked with finding the worst case scenario.
- Limitations on Crewed Charters. Only US flagged boats with a coastwise endorsement can be used to carry passengers in US waters (except for American Samoa, the Northern Marianas, and the Virgin Islands)
a. To be coastwise, a boat must be built (or completely rebuilt) in the United States, or else it must obtain a waiver. (The waiver application is here). Generally waivers are available if a boat is more than 3 years old, cannot carry more than 12 passengers, and will only be used for passengers, not cargo or commercial fishing (Sportfishing is allowed, assuming no commercial sale of the catch).
b. Tip for Brokers and Buyers: if the owner hopes to provide crewed charters (especially meaning that the owner selects and employs the Captain), then it is imperative that the boat be qualified for coastwise endorsement. The safest option for this is a US built vessel or a boat with a previously granted waiver. Less safe, but possible, is a boat that is more than three years old and to be certified for no more than 12 passengers.
Issues with Bareboat Charters. Most yachts are not built in the US, and therefore are not eligible for a coastwise endorsement (see above, Limitations on Crewed Charters). The only chartering option for such yachts is to make them available for bareboat chartering. Some considerations for bareboat chartering:
a. A bareboat charter is considered to be equivalent of a lease of property -- for all intents and purposes the ownership and control of the boat transfers from the title owner to the charter for the period of time of the charter. The documents and the actions of the parties should reflect this.
b. A boat under bareboat charter cannot have paying passengers (i.e. the Captain can’t charter the boat and then have the passengers pay him) as this is a violation of the coastwise protections.
c. The title owner of the boat is responsible for providing a seaworthy vessel, and may be liable if issues arise.
d. Although the charterer is responsible for operations, the title owner may be left holding the bag if the charterer engages in illegal activity (like smuggling) and gets caught.
e. It is strongly recommended that any boat that is made available for charter comply with the inspection requirements for a similar passenger vessel with USCG certification -- anything less may be considered unseaworthy or negligent preparation.
f. While the boat must be fully in the control of the charterer, the owner can place some restrictions such as requiring certain certifications for the Captain and crew; placing navigational limits on region or running at night.
Placing the Boat in a Charter Fleet. Many boats in the US (and other destinations) place boat in a charter fleet so it is managed by a charter company. The benefits of taking this path are that typically the charter company handles the contracting, scheduling, maintenance, etc. On the downside, there may be significant limitations on the owner’s use and customization of the boat. For an owner looking for a newer stock boat, and who is willing to accept some limitations in exchange for cost savings, this can be a great option. Brokers may be advised to consider what boats the charter companies are looking for in order to best advise their buyers.
Corporate Ownership. A boat that is going to be placed in charter for a significant percentage of its use should consider ownership through a corporate entity like a limited liability corporation. Such an entity provides some protection against liability (although insurance should be the first consideration), some anonymity for the true owner, and also provides an organizing vehicle for income tax considerations.
A buyer (or a buyer’s broker) that is considering purchase of a boat to be used in charter should do some homework before buying. Considerations such as the location of future charters, the origins of the boat, the size and capabilities of the boat and its marketability should all be evaluated before purchase. An existing boat can be converted into a charter opportunity, but it is much easier if attention is paid to purchasing the right boat for the job.
Mr. Schwenk is a member of the Maryland Bar and bar of the Federal Court for the District of Maryland. He is a Certified Marine Investigator through the International Association of Marine Investigators, a member of the Mid-Atlantic Mariners Club, Marine Trades Association of Maryland and the Severn Sailing Association, where he sails J-24s and Jet-14s with his wife Stefanie. He is a past President of the Jet 14 Class Association, and the 6 time Chesapeake High Point champion in that class.