Navigating the potentially turbulent waters of yacht acquisition, ownership and financing

Yacht acquisition entails many decisions, including how to finance and register the newly acquired vessel. Any owner must take various considerations into account, including the manner of documenting the yacht. For beneficial owners who are U.S. citizens, federal documentation through the U.S. Coast Guard is often the most favorable option, but there are alternatives.

U.S. Coast Guard Vessel Documentation USCG documentation is based in the first instance on measurement of the vessel’s tonnage. Vessels under five net register tons are not eligible for USCG documentation. Vessels of five NRT or greater that engage in the coastwise trade or fisheries in U.S. waters are required to be federally documented. The “coastwise trade” includes carriage of passengers or goods for hire between points in the U.S. including its territorial sea and exclusive economic zone, as well as engaging in towing, dredging and salvage work in the U.S. A yacht that is chartered out with crew is deemed to be engaged in carriage for hire and needs a coastwise endorsement to engage in such activity domestically. But a U.S. vessel may conduct crewed chartering between U.S. and foreign ports with just a “registry” endorsement. The “registry” trade means, roughly speaking, transport of passengers or cargo between U.S. and non-U.S. destinations. Generally, to obtain U.S. documentation with a coastwise or fisheries endorsement, a vessel is required to have been built in the U.S. For the coastwise passenger trade, the Maritime Administration may waive the U.S. build requirement if no more than 12 passengers are carried. Vessels used solely for recreational purposes are not subject to this U.S. build requirement. For a vessel to be federally documented, generally all of its owners must qualify as “citizens of the United States” – a term defined under varying criteria depending on the persons and entities involved, as well as equity ownership and control. However, entity-owned vessels with solely recreational or registry endorsements appearing on the Certificate of Documentation (COD) may be owned beneficially by up to 50% non-citizens for partnerships and 100% for corporations, subject to requirements regarding entity representatives and limits on power to determine the use and control of the vessel.

Superyacht Registration in the U.S.

Generally, U.S.-documented vessels over 300 gross register tons (GRT) in use outside inland waters are required to undergo annual USCG inspection under safety rules developed for merchant vessels over 500 GRT. This requirement is difficult or impossible for yachts to meet. Further, U.S. law requires U.S.-documented vessels used in coastwise or fisheries service to be commanded and crewed by U.S. citizens – a more expensive proposition compared to international manning. Faced with these rules, U.S. owners registering large yachts have mainly used foreign, “open” registries that do not impose such restrictions. However, effective in 2019, Congress enacted a partial exemption to the inspection requirement, applicable only to recreational-use vessels. Consequently, yachts over 300 GRT used solely for recreational purposes may be documented under U.S. flag without having to comply with the more onerous inspection or manning rules. The vessel must comply with specialized safety rules for large yachts to be adopted by the USCG; in the meantime, compliance with the existing Large Yacht Code of the U.K. Maritime and Coastguard Agency (MCA) will suffice. For superyachts over 300 GRT, timechartering or voyage-chartering in U.S. waters would impose the more onerous inspection and manning rules (bareboat chartering – i.e., without crew – should not trigger those rules, as it is consistent with recreational use). Also, an owner’s desire to engage in chartering in locales outside the U.S., such as the Caribbean or the Mediterranean, would militate in favor of choosing an open registry, because of the applicability of the U.S. Passenger Vessel Safety Act of 1993 to chartered, U.S. documented vessels wherever located, and favorable VAT treatment of open registry vessels in EU waters under the “temporary admission” regime.

Open Registries

Over the years, the manning requirements of the U.S. and other major nations, along with other issues affecting costs of operating merchant vessels and yachts, have motivated some maritime nations to open their shipping registries to foreign nationals, for example, Liberia and Panama. Today the open registries have large fleets of merchant vessels and yachts, which each open registry regulates as the “flag state.” Any vessel also is subject to local regulation by the nations where it travels – the “port states.” In the North Atlantic basin, most maritime nations belong to the Paris Memorandum of Understanding on Port State Control. The objective of the Paris MoU is to assure that vessels visiting member states comply with international standards on safety, security, environment and crew working conditions. The Paris MoU publishes white-, gray- and black-lists of flag states. To minimize risk of one’s yacht being boarded and detained by a port state, it is advisable to register with an open registry that appears on the Paris MoU white-list. Open registries on the white-list include the Isle of Man, the Bahamas, the Republic of the Marshall Islands, the Cayman Islands, Gibraltar, Malta and Bermuda. Selected open registries are discussed at right.

Conclusion

Parties acquiring and financing yachts face choices that may seem bewildering. But good assistance is available from seasoned brokers, consultants and other professionals on all fronts, including selection of the vessel type and size, pre-owned or newbuild, ownership structures, flag state, crew complement, part-time chartering or private use only, financing options, berthing location, and tax management. Ultimately, the owner’s purposes for the vessel, as well as the regions where it will be operated, should mainly drive the selections to be made. The maze of yacht acquisition and financing does have logical solutions, but solutions are not one-size-fits-all.

WHAT IS THE RED ENSIGN GROUP?

The Red Ensign Group is made up of the international shipping registries operated by the United Kingdom, three Crown Dependencies (Isle of Man, Guernsey and Jersey) and nine U.K. Overseas Territories (Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Falkland Islands, Gibraltar, Montserrat, St Helena and the Turks and Caicos Islands). These collectively form the British Register.

Financing Options:

U.S. FLAG OR OPEN REGISTRY?

U.S. Flag Financing – Preferred Mortgage Often another reason for documenting a yacht with the USCG is greater availability of loan funds for the acquisition. Creditor liens can outrank a lender’s security interest in a vessel. But owners of U.S. vessels may grant an enhanced mortgage lien called a Preferred Ship Mortgage, which outranks maritime liens for “necessaries” supplied to the vessel by trade creditors, as well as all nonmaritime liens such as tax liens and judgment liens. With this enhanced security available, lenders often can be more readily attracted to making loans on U.S. documented yachts than State-registered or open registry yachts. ⊲ Financing – Open Registries Unlike the U.S. and the Republic of the Marshall Islands (RMI), there is no “preferred” mortgage in the Red Ensign countries, and after-arising maritime liens will rank higher than a registered mortgage. But it should be noted that a mortgage will usually have priority over statutory liens – that is, unless a claim has been made and proceedings issued against the vessel that predate the mortgage. As for financing sources, there are a number of banks with specialist departments who are very active in yacht finance. Key players in the market include Lombard Asset Finance (though not for yachts over 40m in length), Credit Suisse AG, BNP Paribas, Close Brothers, Bank of America and Zenith Bank.

OPEN REGISTRY OPTIONS

An alternative to U.S. Coast Guard Vessel documentation, the Red Ensign Group offers safety and quality across the British fleet. Along with the United Kingdom registry, several of the registries in this article belong to the “Red Ensign Group” of British shipping registers. The Red Ensign jurisdictions are popular choices based on political stability, reputation for efficient management and application of British maritime rules. A significant benefit is the ability to seek assistance from any British Embassy or Consulate in the world. ⊲

THE U.K. FLAG

The U.K. flag is not as popular as many of the other Red Ensign registries, mainly because it does not afford the same potential tax efficiencies as many of the other Red Ensign flags. The U.K. Register is open to individuals and bodies corporate from Britain, its Crown Dependencies and Overseas Territories, EU member states, and the Commonwealth, among others. ⊲

BERMUDA

Bermuda operates a Category 1 register (unlimited vessel size). For Bermuda registration, at least 33/64ths of the vessel interests must be owned by individual citizens of Britain or British dependent territories, or bodies corporate registered in the U.K., a U.K. dependent territory, the EU or the European Economic Area (EEA). In general, there are no nationality restrictions for officers on Bermudian vessels. ⊲

BRITISH VIRGIN ISLANDS

BVI is tax neutral and outside the scope of EU VAT. Eligible for BVI registration are citizens of and bodies corporate formed in, among others, the BVI, the U.K., Crown Dependencies and Overseas Territories, and EU and EEA countries.

CAYMAN ISLANDS

According to statistics from the Cayman Islands Shipping Registry (CISR), a Category One British Registry, it has the largest register in the flagged superyacht market. The CISR permits companies formed in, and individual citizens of, the EU and EEA as well as the U.S. and Canada to register Cayman vessels. Yachts registered with the CISR as pleasure yachts may be granted a license to cruise in United States waters. Owners sometimes change their Cayman registrations between commercial and pleasure depending on whether U.S. private cruising or foreign chartering is being pursued. ⊲

MALTA

Malta is a popular EU flag for superyacht registration, in part because its registry has been developed in tandem with tax legislation aimed at encouraging owners to choose the Maltese flag. Yachts under the Maltese flag may be registered by bodies corporate or entities irrespective of nationality, or by EU citizens.

MARSHALL ISLANDS

The RMI is a U.S.-style jurisdiction whose registry maintains 28 offices in many parts of the world. Owners of yachts registered in the RMI may be business organizations formed under RMI law or “foreign maritime entities.” Yachts are registered as either “private” or “commercial.” A private yacht may be chartered out for up to 84 days in any calendar year, subject to compliance with certain safety and manning rules. Commercial yachts must comply with the RMI commercial yacht code. Private yachts are eligible to obtain U.S. cruising licenses.