The principles started managing the first LLC “shared ownership” vessel in 2006. San Diego Yacht Shares began in mid-2020 with the new concept of a “shared use” model. They are combining their experience in shared yacht ownership, yacht management, Sharing services, and food and beverage services to provide a cost-effective and effortless means to yacht sharing. 

Each owner can custom design the shared use model and determine how many shares to make available. The financial example provided is six shares each with 6 weeks annually and the owner retains 16 weeks. Six shares typically cover total monthly operating costs with no contribution from the owner. This assumes there is no loan or debt service.

The owner keeps the participant shareholder entry fee. 20% of the fee will be placed in a reserve account for potential one-time projects exceeding $2,500. Down the road, the shareholder may either sell their share to another party or at the option of the owner, the owner may purchase it back. For example, six shareholders multiplied by a $15,000 entry fee equals a return of the owners’ capital of $90,000. This returns $90,000 on a vessel valued at $250,000, nearly 40% of the value.

Owners may elect to use a schedule booking system or SDYS develops a calendar for owners’ approval. 

Shared Use model: Shareholders, owners, and SDYS sign an agreement that dictates the terms of the shared use and required rules and regulations. There is no ownership or equity provided in the vessel.  If the vessel is owned by a Limited Liability Company, the shareholders are not included in the operating agreement and do not have interest in the LLC.

Shared Ownership model: A boat can be owned in an LLC and members of the company hold an interest in the company. An operating agreement dictates the company rules and provisions between the members. Upon the change of a member, an amendment to the operating agreement and assignment agreement is executed. Under this model several members jointly own the company which owns the boat. 

Sailing club:  Owners can enter their boat into a sailing club and the club rents out the boat and revenue is shared with the owner. Typically, boats older than three years are removed from the system. And qualification requirements of the renters are very relaxed.

Advantages of the “shared use” model?

For owners who currently own their vessel solely and wish to share the expense of ownership, SDYS believes maintaining full ownership of the vessel is a significant advantage of the shared use model compared to the shared ownership model. The agreement between the owner and shareholder in the shared use model is a contract that provides indistinguishable authorities and liability protection from the shared ownership model. 

Either of the shared use or shared ownership models present a significant advantage over the club models. In the club models, you have renters with limited experience using your vessel. In the shared use and ownership model, a SDYS licensed Captain performs a six-hour operating and systems familiarization checkout of each participant shareholder. Shareholders stay involved for several years. 

At any time and for any reason, the owner using the shared use model may repurchase a shareholder’s share for their entry fee. This is not the situation using the shared ownership model.  The shared ownership LLC operating agreement dictates stricter provisions for removal of an LLC member.

Establishing ownership in an LLC is at the option of the owner and you should seek legal counsel regarding your specific needs and situation. The vessel will have the appropriate insurance policy and all participants will be included as operators on the policy. The agreement between the owner and shareholder in the shared use model is a contract which provides authorities, responsibilities, and liability protection. 

Additional liability protection can be attractive; however, the owner must get legal and tax advice. A common question is whether the LLC is a legitimate business and not just for the purpose of liability protection. SDYS maintains the establishment of a federal taxpayer identification number, a checking account for the transactions of the company, and agreements with shared use participants is a business. 

If an owner is advised to establish ownership with an LLC, SDYS will coordinate all the requirements using a facilitator, for example, Legal Zoom. 

SDYS currently uses a preferred provider for insurance for vessels in this model. The premium is based on the number of participants. Most vessels will be between $2,500.00 and $3,000.00 annually. The insurance company evaluates each operator’s experience and requires a SDYS licensed Captain performs a six-hour operating and systems familiarization checkout. Only qualified shareholders may operate the vessel. 

We recommend owners establish a separate checking account for this shared use business. If an LLC exists or is established the federal tax identification number may be used to establish the checking account in the company name of the LLC. If an owner does not elect to establish an LLC, then SDYS will establish a separate checking account using its federal tax identification number. Under both options, an online QuickBooks account which owners have access to will be established and used for accounting. 

Our experience shows that setting a fixed monthly fee for shareholders is better than charging out the actual monthly expenses as they occur which will cause high volatility in the required monthly payment. One month the payment may be $300.00 and another month it may be $700.00. A fixed monthly fee is accomplished by establishing a reserve of 1-2 months and expensing paid expenses only up to the monthly fixed amount times the number of shareholders. If, for example, the fixed monthly fee is $550.00 then times six shareholders the monthly ceiling is $3,300.00. If the total monthly expenses are less than $3,300.00 then there will be a surplus added to the reserve. If the total monthly expenses are higher than $3,300.00 the ceiling will kick in and the reserve is used to cover the balance.  The remaining overage will be expensed in subsequent months.

Owners should seek legal and tax counsel regarding their specific situation. Our recommendation, subject to review by tax counsel, is to file the LLC and treat it as a nonprofit. The definition of nonprofit in this circumstance is that the company has no income. It is not that the company is seeking preferential treatment on income. The basis of the determination, that there is no income, is that the entry fee is the return of principle to the owner and the monthly payment is for sharing the monthly expenses. Since there is no income there is no need to file a tax return. If owners did file a return it will only serve to report expenses giving the impression of losses or deductions. And the IRS heavily scrutinizes deducting and expensing the costs of pleasure vessels. 

Owners should seek legal and tax counsel regarding their specific situation.  Our recommendation is that you do not deduct expenses relative to your use of the boat or cost to operate the boat. The exceptions to this include expenses paid on behalf of entertaining clients. Owners may choose to provide all-expense paid trips for clients. For example, day usage, overnight stays, accompanied trips by a licensed Captain, catering, and other concierge services. These expenses are not related to operating the vessel and may be deductible business expenses. The same holds true for the shareholders.

SDYS also manages charter boats. These are typically owned by companies and, by design, the charter revenue is income. The company treats income and expense as any business might. Chartering revenue is income and distinctly different that return of principle and sharing expenses.

SDYS has relationships with preferred vendors and marine suppliers developed over two decades. SDYS holds wholesale accounts with marine suppliers. Some parts have significant discounts while others truly little. Our purchases are passed on at cost to owners. If a marine vendor is hired, however, parts are purchased through the vendor to preserve parts and labor warranties.

SDYS provides a service agreement which details what services are included in the monthly management fee and what services owners can leverage our experts at time and materials. 

Yacht Management fee includes:

• The San Diego Yacht Shares – Shared-Use Program
• Manage Marina services – slip fee, locker, recreational storage.
• Arrange, schedule, and contract for vendors.
• Schedule and coordinate monthly and annual maintenance – topside and bottom cleaning, zincs, detailing, gel coat repair, annual engine, and generator maintenance.
• Schedule and coordinate long term maintenance – boat yard fees, bottom paint, water pump, heat exchanger, macerators, head systems, air condition, navigation systems, inverter, refrigeration, electric.
• Coordinate fiscal & legal – contracts, insurance, agreements, amendments, assignments, vessel documentation, property tax, and accounting.
• Manage maintenance and replacement of safety items – maintain coast guard compliance, flotation devices, throwable devices, fire extinguishers, signaling devices, epirb’s, contract towing and on-water service.
• Marketing responsibilities for coordinating the sale of shares.

Available at cost of $60.00 an hour, time and materials:

• Walk on walk off services.
• Cleaning of interior
• Refueling prior to arrival of next party
• Concierge services
• Catering, food & beverage services.
• Manage maintenance and replacement of minor equipment – supplies, bulbs, flashlights, tools, etc.
• Coordinating professional Captain services for client excursions.
• Skippering and training. Operator training and systems familiarization. 
• Chartering – charter licensing requirements, professional captains’ coordination.
• Optional services by SDYS staff if owner elects not to use local vendors:
  • Annual engine and generator service.
  • Polish stainless.
  • Repair canvas snaps.
  • Replace clutches and cleats.
  • Replace lines on sailing vessels.

It may take several months to sell six shares. The shared-use model shown on the Dollars & Sense page, by design, has six shareholders’ covering the monthly costs of the vessel and the management fee. The example assumes there is no debt service.