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Structuring financial terms of a new-build contract to your advantage

Protecting yourself financially when investing in a new-build yacht is tricky. There are inherent risks with every payment method and there’s substantial risk with an overly attractive price. A firm, fixed price that is fair to both parties is essential.

Strangling the yard and leaving it strapped only sets up a situation where the buyer may have no boat, no money, or a boat with no pedigree if it ultimately must be finished elsewhere.

What the buyer really needs is a smooth ride on the yacht build, with the yard absorbing any cost overruns.

That being said, price is only one part of the new build contract. How to pay for the yacht – in milestone stage payments where the builder is working with the buyer’s money; or letters of credit, where the bank substitutes its credit for the client’s and requires the builder to finance more of the project on its own nickel; or a construction loan – is the real question.

Construction loans

A typical construction loan places the yacht owner at risk for draw-downs on the loan because vessel title remains with the yard until the construction loan is converted to permanent funding.

The vessel in process is not collateral for the construction loan, unless the yard joins the buyer as a co-borrower and pledges the vessel in process as collateral.

If the yard moves to bankruptcy reorganization or liquidation, the buyer could end up with no interest in the vessel, still owe the lender, and have to pay twice to see the project to completion.

‘The only way an owner can be protected against losing his money because the yard rips him off or goes bankrupt is to have the construction directly in his name although the construction contract is with the shipyard,’ says Carol Scanu, a yacht designer with Studio Scanu.

Phil Friedman, a yacht building consultant with Port Royal Group, advises obtaining a first security interest in the vessel under the Uniform Commercial Code if you are in the US.

‘The buyer has a secured interest to the extent of monies paid to date, an interest which has to be satisfied first, before any other party can gain clear possession of the vessel,’ says Friedman.

Scanu had a client who built a vessel in Turkey and specified that all its parts and components be kept directly in his name. This provided a comfort level for him and was beneficial when the yard went under due to cash flow problems stemming from another contract. While the original yard remains embroiled in legal issues, the buyer can now finish the vessel at another yard.

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