Fractional Ownership

For today, I’ll talk about something other than the GSSR…

 

I’ve mentioned a few times that I have a sport fisher here in Cabo.

 

Behind the scenes, it isn’t completely my boat. It is only partially my boat. In fact, I only own a fraction of it, which saves me a ton of money over what it would cost to own the boat alone. Fractional ownership can be a much more cost effective way to own a boat. Money is a scarce resource these days. Thus, it seems to me that anything which can reduce the total cost of owning a boat should be evaluated, especially if the alternative is not owning a boat.

 

The following is a brief overview of my experience with fractional ownership, and some of the positive and negative aspects that I’ve experienced.

 

My boat in Mexico is an Ocean 48 sport fisher. I owned shares in two prior partnerships here in Cabo; a 32’ sport fisher and a 42’ sport fisher. On the first two partnerships, I was one of six or seven partners. On the current boat, I am one of four partners, although this number has somewhat been reduced to two (more on that later). All of the boats have had a full-time captain, although, having a captain does not need to be part of fractional ownership.

 

Fractional ownership is not for everyone. For instance, if you live on your boat, sharing it with others doesn’t make a lot of sense. However, many boats are only used occasionally. My guess, with only limited information, is that most boats are taken out 20 times a year, or less, usually far less. A quick glance at most marinas seems to validate this concept. Even on sunny weekend days, 95% or more of the boats can be usually be found sitting in their slips. Many sit for months, or even years without moving. Prior to Roberta and I retiring, we owned a succession of boats, and our usage fit this pattern. We always had good intentions, but it’s tough to have a career and own a boat.

 

The concept of fractional ownership is simple: A bunch of friends each chip in some money, buy a boat, and agree to share the costs.

 

Let’s take an example boat, and look at what the costs might be. These numbers are “grabbed out of the air” and do not correspond to any particular boat. I’m just trying to communicate the concept.

 

There are the upfront costs:

 

Boat: $350,000

Sales Tax: $30,000

Initial fix-up: $50,000

Total: $430,000

 

And, then there are the annual operating costs:

 

Slip: $4,800

Maintenance: $3,000

Major repairs: $10,000 (It doesn’t take much to go wrong to blow through money fixing a boat)

Insurance: $3,000

Property Tax: $3,000

Total: $31,300

 

And, then there’s the direct expense of running the boat.

 

Fuel: $3 / gallon (for this example, I’ll assume each person uses the boat 80 hours a year, and the boat burns 10 gph)

Total: $2,400/person

 

So, if one person owns the boat, they would spend $430,000 up front, another $31,300 each year – plus another $2,400 each year in fuel. Where I come from, that’s a big pile of money.

 

If the boat were owned with six others, these numbers start to get a little less ugly. The upfront becomes $71,666 ($430,000 divided six ways). And, the annual cost, including fuel becomes only $5,616. In other words, you save 84%, both up front, and on an ongoing basis, with no reduction in usage. And, another important side benefit, at least here in Cabo, “It gives you someone to go fishin’ with.”

 

It’s actually even better than that. In our case, we were able to use the savings to hire a captain, whose only job is maintenance of the boat. In addition to maintaining the boat, he helps clean fish, carry bags to/from the boat, lug around scuba tanks, buy drinks, and more. Even with the captain, the overall cost of ownership is a small fraction of what would be paid for full ownership. Another huge advantage, you have access to a MUCH larger boat than you could afford if you had to buy it alone.

 

You get more, and you pay less. That’s my kind of deal. So.. where’s the rub? Why aren’t more boats owned this way?

 

I remember when I negotiated my first deal for a fractional share. All the group could talk about was “How are we going to decide who gets the boat, and when?” There’s an entire paragraph in our partnership agreement talking just about Thanksgiving weekend, and how to make the tough decision. Since drafting this language, no one has ever looked at it. In none of the three partnerships I’ve been in has this been an issue. In fact, the opposite has been true. Our captain may be the loneliest guy in Cabo. The partners tend to go months or even years without going out on the boat. I would have estimated my usage at 10-20 times a year. Last year, I think I took the boat out twice. This year I think I’ll have it out four times. I don’t know that I can explain this phenomenon, and perhaps my partners are unusual. But, I’m guessing that if someone were to poll members of fractional boat ownership groups, that complaints about excess usage of the boat would be rare.

 

So, what would be the top issue? Once again, I’m guessing, and have only limited experience, but I suspect that the top issue would be: maintenance and spending on the boat. With six different “owners” there is going to be at least one who is “a perfectionist”. This person will want the boat to be perfect. They will want all wiring neat with proper connectors. They will demand a dry bilge. They will be upset by even the smallest oil leak. There will also be someone who wants to spend money on cosmetic things the other owners don’t care about. They will want new curtains, different colored cushions or cute leather fender hangers. And, of course there will be the owners who don’t want to spend a dime on anything. If there is a captain, you can bet that at least one owner will like the captain, and at least one will hate the captain. In other words, in every partnership, there will be different people, each with a different opinion for how the boat should be staffed, maintained and upgraded. I was involved with one boat where I drove the other partners crazy whining about how poorly it was maintained. When we finally sold it, we received little money, and I was not surprised when it sank a few months later.

 

Before entering into a boat partnership, there needs to be some serious discussion and agreement amongst the partners about spending and maintenance. This isn’t as easy as it sounds. No one wants to be on an unsafe boat, or a dirty boat. But, no two owners ever see maintenance and cleaning exactly the same way.

 

I’m in the category of being a “difficult partner” because I’m very picky about how I think a boat should be maintained (especially when I’m not the guy who has to do it!) I have had a heck of a time stopping myself from complaining about minor details that my partners don’t even notice. I’d make a list here of some of the items that have bugged me over the years, but it would just get my blood boiling. That said, most of the items that infuriated me, over the years, have gone unnoticed by my partners. I had an amusing conversation with a friend, who is in an unrelated fractional boat ownership deal, and he mentioned that, after a year of reading my blog, he was starting to notice things he never would have noticed before. On a recent trip, he noticed that the twin engine sport fisher was running on only one engine. No problem, said the captain. On another trip, he noticed that the VHF radio was missing. No problem, said the captain. Owners that know about boats are a captain’s worst nightmare.

 

The problems don’t end there. I mentioned earlier that I am not sure exactly how many partners I have on my current boat. Of the original four partners, two have decided they want out. I haven’t spoken to them directly, so I’m not sure what their issue is. My guess is that they simply weren’t using the boat enough to make it worthwhile. They were boat “newbies” to boat ownership. Unfortunately, they can’t just “shut down” spending on the boat, as they might if they owned 100% of the boat. Until they sell their partnership interest, they are stuck making payments. I was in one partnership where when I wanted out I finally negotiated to give my interest FREE back to the group. I did have some hot prospects to buy my interest, but our partnership agreement had a provision that allowed the group to veto prospective owners. My guess is that I could have pushed hard and found a buyer for my share, that everyone agreed with, but I ultimately decided it was more effort than it was worth.

 

And, there’s another problem with my current partnership. My other partner wants to upgrade to a larger boat. Unfortunately, we’re down to only two owners, which makes it an expensive proposition. We do still have the other two partners, who are on their way out, but they need bought out, or replaced, before anything can happen. That leaves me as the sole owner of the current boat, who actually likes the boat. We did come very close to upgrading the boat, and still might, but only because the partner who wants to upgrade is making it financially an easy decision for me.

 

Having a captain probably simplifies fractional ownership. Most of the partners I’ve had have not been capable of driving the boat. This is probably a good thing. By having only one person who drives and maintains the boat, there is a consistency to the quality, and how the boat is treated. All of the owners certainly have the right to drive the boat, although other than myself, none ever have. I happened to be driving the boat when the transmission went out. Ouch. I really wish the captain had been driving at the time. All the partners had to ante up, and although I’m sure the transmission would have blown regardless of who was driving, it was an uncomfortable situation.

 

Structurally, all of my “deals” have been done by creating a legal entity (a partnership or LLC) that owns the boat. We have a partnership agreement, which lays out the rules for the partnership. This includes the policy and procedures for “reserving the boat”, paying for fuel, exiting the partnership, dissolving the partnership, resolving disputes, etc.

 

So… to summarize: Fractional ownership of a boat is a tremendous way to own a boat. I complain about it from time to time, but the fact is that I’ve been in three partnerships, so far. Ultimately, I think the partnerships may not be perfect, but they beat the heck out of not having a boat. You can save a ton of money, while getting more than you’d have if you owned the boat alone, and yet you get to use the boat just as often. On the other hand, the #1 determinant of whether or not you’ll regret the decision later is your choice of partners. Everyone must agree, in advance, and in detail, on how the boat is to be maintained, upgraded and operated. You also need to really think through the exit-strategy issues. Sooner or later, someone will want out. Perhaps everyone will want out. Or, perhaps a majority of the group will want one of the owners “out.”

 

And on a completely different topic…

 

The past couple of blog entries have centered around what equipment I would buy, to act as a backup diver, on the GSSR. Kirt, our primary diver, read my blog, and had this to say:

 

Ken. I just read your blog. I’d like to reassure you that I have the knowledge and experience to handle most dive situations that we might encounter, depending on sea conditions. I’ve been diving consistently for 35 years, with many solo dives under my weight belt. I’d prefer to dive alone with deck support than with an inexperienced buddy.”

 

I suppose my feelings should be hurt, but Kirt makes a great point, and I agree with him. I do not claim to be an experienced diver. I am a “recreational diver” and no more. As Kirt says, a diver who is in “over his head” could be dangerous.

 

-Ken W

 

5 Responses

  1. Sam: It would be awesome if someday, some company does a “class act” fractional ownership program, modeled on the jet programs. The fractional ownership homes work roughly the same way, and allow you to swap between homes in different countries. -Ken W

  2. Ken, you said, “Owners that know about boats are a captain’s worst nightmare.”

    Let me respectfully disagree:

    Owners that THINK they know about boats are a captain’s worst nightmare! I come from the commercial side, but I loved owners who knew their stuff and knew what they wanted. On the other hand…, well you get my drift!

  3. The fractional aircraft industry (companies like NetJets, FlexJet, CitationShares…) has done pretty well and has many satisfied customers. These companies offer benefits over simply co-owning a plane with a few friends. First, if 4 friends own one plane, they cannot all use it at the same time. If those 4 friends each own a 1/4 share through NetJets, they can all fly at the same time. Also, each owner has a fixed cost per month and flight hour since the costs are spread over such a large group of owners and planes. Finally, the crew training is consistent and managed by aviation experts.

    Now, the aircraft industry is quite a bit different than the boating industry. Most of the time a plane isn’t in use for more than 14 hours in a row by a single user so the scheduling is much different than a boat where someone would want to use it for at least a few days in a row probably. But I wonder how a program like NetJets for boats would work…

    Regarding having a community own a boat…we have a cabin on Decatur Island in the San Juans. This island is not serviced by ferries and only about 15 of the homeowners own boats. As a community (about 90 homeowners) we own a 60 foot water taxi that runs to and from Anacortes twice a day. You pay when you use it but that costs is subsidized by homeowners association dues and special assessments when major work is undertaken. The captain and board of directors are the ones who decide which maintenance needs to be done and for the most part people agree with the decisions they make.

  4. hk: I do not believe there are any fractionally owned Nordhavns, or at least, I’ve never heard of one.

    In Seattle, there was, and perhaps still is, a company that sells fractional shares in Nordic Tugs. A friend of mine owned a share through them, and had “mixed” success with it. He had some very good times, but also had times where he booked his vacation, only to find that when the time arrived, the boat had a maintenance issue and he couldn’t go. I’ve had that occur here in Cabo, where we have friends coming into town, and I call for the boat, and it is “in the shop” for some reason. Of course, breakdowns happen whether you own all of a boat, or 10% of a boat.

    It may be that fractional hasn’t been very popular, simply because it doesn’t work very well. I’m always a fan of getting more for my money, and to me fractional ownership of a boat seems an effective way to do it. The problem is controlling the “people” that own the boats. They tend to disagree with each other, and the boat gets caught in the middle.

    There is one role model for fractional ownership that does seem to work well. I’ve noticed a recent trend here in Cabo, and other resort communities, towards communities buying boats. A boat can be an “amenity” for the community, much like a common swimming pool or golf course. This seems to work, because you are sharing the cost across 100 or 200 homes, and can afford a good captain and proper maintenance.

    I didn’t mention it in the article, but I’m also a fan of charter. I have bare boat chartered boats in Mexico, France and Croatia. On the surface charter looks expensive, but I’d argue that when compared to the cost of ownership, it is an incredible bargain. There was a Nordhavn in Alaska available for charter. It might still be chartering. Roberta has been wanting to go to Alaska for a decade, and I’ve asked her several times if we couldn’t just go up and charter the Nordhavn that is already there. Her answer “No. I want my own boat.” I don’t know how to argue with that one…

    When our boat was in construction, there was another near-twin boat to mine in construction. I asked Roberta, seriously, if I could propose to the other owner “splitting” the two boats. Our out of pocket costs would be exactly the same but we’d own two boats, one on the left half of the globe and one on the right half. I loved the idea of beginning each cruising season by saying “Want to go to the Pacific or the Med this year?” There would have to be a bit of co-ordinating, and you couldn’t always do everything you want to do at all times, but overall I think it would be an interesting option. Roberta, being the practical member of the family, said “You are nuts” and the idea was never proposed.

    So.. how do these things get started? All of my partnerships happened through friends and homeowner meetings. I’m suspicious of the professionally managed fractional guys. There might be some very good operators out there, and it would be the best way to do this, if there are, but I would proceed carefully. But in my experience, the partnerships have started by people standing around at a party, and someone says “Wouldn’t it be cool if we could buy a boat in Alaska and split the costs?” Then another couple guys say “Hey. If you get serious, call me, I’d probably go in.” And, then the partnership gets formed. Another friend of mine did in fact, go in on a boat in Alaska last year, that started up like this. The last I spoke to him, the partnership was off to a rocky start, because he wanted major upgrades to the boat, and his partner was unenthousiastic about chipping in.

    So .. as I said, these things may be ultimately flawed…

    -Ken W

  5. Ken,

    would you consider fractional ownership a valid concept for passagemaker type of boats?
    Are you aware of any Nordhavn or similar which is run that way?

    hk

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