When a new owner builds a large yacht and keeps it for, say, 10 years or more, one overriding consideration is the total capital, expenditure and losses incurred over the 10 years to keep the superyacht in exceptional condition and to enjoy the ownership experience. This is the ‘total cost of superyacht ownership’.
Estimating the total cost of ownership upfront can help an owner decide whether a superyacht project is realistic as a long-term, life-changing commitment. It also helps minimise unexpected costs or unpleasant surprises later on. Family offices can apply a strategic framework that supports informed investment decisions about the total cost of superyacht ownership.
A disciplined costs framework would include three essential building blocks:
l the ownership lifecycle
l the scope of capital costs, operational expenses and portfolio losses
l the high-level decision-making considerations
OWNERSHIP LIFECYCLE
Total cost of ownership is determined by a superyacht’s lifecycle. There are two kinds of lifecycle: the ‘asset lifecycle’ of the superyacht; and the ‘superyacht ownership lifecycle’ of an owner. It is important to distinguish the two because they relate to the total cost of ownership in different ways.
‘Asset lifecycles’ of large yachts last from a few years to over 50 years for classic yachts. Costs, risks and losses arise throughout the asset lifecycle, which includes the following four phases: feasibility and planning; build and delivery; in-service operation; and disposal at the yacht’s end of life.
‘Superyacht ownership lifecycle’ refers to the period that someone owns a yacht. It is specific to one owner, since many yachts are bought and sold by several owners during their asset lifecycles. So asset lifecycles are divided into shorter superyacht ownership lifecycles for each owner.
A superyacht ownership lifecycle starts when an owner first considers building a superyacht and continues until disposal of the yacht when an owner upgrades or gives up ownership altogether. It can sometimes range from about five to 15 years or more depending on how long an owner wants to keep the yacht.
SCOPE OF TOTAL COSTS
The overall cost incurred by an owner is the total cost of ownership. It is the total amount that an owner invests, spends and loses on all aspects of a superyacht portfolio throughout their superyacht ownership lifecycle.
Obvious costs and risks include feasibility and design studies, build project costs, purchase price and depreciation. Related to these are financing and transaction costs, advisory fees and corporate expenses. Owners also cover the routine annual yacht running costs – whether or not they personally use or enjoy the vessel (i.e. fuel, port fees, crew wages, repairs, maintenance, spares, communications, insurance, safety management, yacht management, charter management, administration, legal advice and more).
Less obvious costs also exist and they are not insignificant. However, with discipline and forethought owners can make provision for these items when estimating the total cost of ownership.
Items include refits and large one-off capital investments to maintain the vessel’s aesthetic qualities and seaworthiness. Disputes with yacht builders and equipment suppliers are not uncommon. Other risks derive from legal disputes with captains and contractors. Regulatory penalties can be imposed for breaching maritime, tax, VAT and other obligations. Add salvage and repairs when the vessel, inevitably, is involved in accidents or causes environmental damage.
In addition, superyacht owners face agency costs, a corporate governance term that refers to: costs of fraud by staff/crew; avoidable costs and losses due to mismanagement or inadequate advice; monitoring the performance of crew and third-party suppliers; and any incentives required to ensure the loyalty of staff/crew.
Opportunity costs should not be overlooked. Owners and in-house teams incur these costs when forced to take valuable time out of their schedules to deal with disputes, operational matters and other distractions.
DECISION MAKING CONSIDERATIONS
Owners who are investigating the total cost of superyacht ownership can consider the following: taking a prudent approach; accountability; gauging the true total costs; and the use of benchmarks.
A prudent approach
It is prudent to try to forecast the total cost of ownership of a superyacht portfolio before deciding to start a new build project.
One approach is to seek out specialists capable of completing a disciplined, quantitative analysis. Experts in various specialist areas will be able to assist with the costing exercise to varying degrees. For example, contributions can be made by other owners, superyacht builders, captains and operational teams, administration and management companies as well as brokers, designers, lawyers, engineers and naval architects.
Accountability
Owners are ultimately accountable for their own decisions about their superyacht investments and the total cost of ownership, but it helps to pick advisers that are competent, trusted and that give the owner confidence that the ownership experience is going to be worth it for the family.
F a m i l y offices can play an important role in preparing their principals by implementing disciplined decision-making processes and assembling the best superyacht advisory team.
Gauging the true total costs
Calculating the total cost of ownership does not lead to a precise guaranteed figure.
Costs and risks change in response to the constant evolution of assumptions, forecasts and estimates about the yacht’s characteristics, its proposed design and operational profile. Data on costs and risks are discovered and refined over the days, months and years that the new build project progresses to completion.
A risk-averse owner can build these cost factors into their superyacht strategy, operating framework and performance evaluations of their superyacht team throughout the full superyacht ownership lifecycle.
Benchmarks
Previous build projects can provide some benchmarks for the total cost of ownership. Owners can share their own data and experiences amongst themselves – principal to principal – to help colleagues understand the costs and risks of ownership, independent of the superyacht supply chain.
But caution is required because a yacht that is not properly funded by its owner will not provide a good benchmark for other projects. Costs data based on an underfunded superyacht portfolio will probably not include all of the important cost items. Understating the total cost of ownership like this could induce an inexperienced owner to buy a yacht that they cannot realistically afford as a long-term, life-changing commitment.