Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. Today we’re looking at two questions that highlight how financial decisions intersect with both emotion and strategy. First, a listener asks about restoring their historic home in Virginia and whether the tax incentives truly make a difference when the renovation costs rival the purchase price.
Then we’ll turn to a family considering how to transfer LLC interest to their children, and whether valuation discounts can make that process more tax efficient. and later in the episode, I’ll be joined by Steve Myers, CEO of YATCO, to talk about the luxury yacht market and how it fits into broader wealth and legacy conversations. Let’s get started with question one.
Question 1 – Historic Home Tax Advantages
Listener: We just purchased a Colonial home in Virginia that’s listed on the National Register of Historic Places. Purchase price was 800,000 and we expect to spend another 800,000 restoring it. I found old photos of what it looked like originally and would love to restore it to that condition. Are there financial incentives or tax advantages for doing this kind of restoration and what should I think about before starting a project like this?
Stephan Shipe: When looking at a historic home, I think the first thing we have to do is get out of the way the concept of which fortunately it doesn’t sound like you’re on that direction, but it’s very common to look at this of saying, oh, well we’re gonna get these tax credits, so it’s gonna make it, make it all worth it on spending another $800,000 on it.
And it’s important to note that this is definitely going to be , a passion project. And the odds of having a high ROI on this is low. And that’s not necessarily a bad thing, but there are some. Federal and even state, and sometimes even local incentives for restoration of historic places. So if we start at the tax side of things, and we can talk about some of the other considerations to take into account when doing this.
On the federal side, there are historic tax credits. There’s a 20% credit that could be used toward any of these qualified rehabilitation costs that you take on. Now there’s restrictions there, of course, that the timing is a little bit spread out and it’ll be, and the payback ends up being spread out over a few years.
But the key distinction here is that it’s used for income producing properties only. So in other words, if you’re buying this historic home, you wanna rehab and you’re gonna live in it as a primary residence. That’s not gonna fly. You’re not gonna be able to get the tax credits for it. But if you’re gonna turn it into, let’s say it’s , some sort of bed and breakfast, or you’re gonna turn it into an office building or something along those lines, then these tax credits come in.
Now Virginia also has state credits and many states will offer them, especially, you see it more common a lot on the East Coast as well, where you’ll see a lot of state tax credits and even local tax credits. The local tax credits, you’re likely going to be looking through your local historic society.
So if you go to your town and talk to the local town or municipality, they likely have a historical society. And some of those, if they’re large enough, actually give credits to help fund these types of renovations because it fits the overall goal of their organization. And not only is it going to be help to talk to them from a financial perspective.
I’d say the biggest consideration that you’re gonna have in this are the added costs and difficulty of finding the right artisans to come in and help you restore it. I say artisans, ’cause this is not something that you’re gonna be able to do with a couple Home Depot trips. You’re gonna need, experts in a lot of different areas.
So, for example, one of the biggest issues that people run into in these are plaster walls. So you can’t just throw new drywall up. You need someone who’s used to the, the older ways of plastering walls, not only to be able to do it. But to match previous walls, to make it all look seamless and get it to the level that you’re looking for in the home, the same is gonna go for any type of moldings or woodwork.
You’re not gonna be able to go match those types of moldings. So you’re gonna need a carpenter who’s not only comfortable doing those types of skills, but comfortable matching the older styles as well, and using possibly historic tools depending on what you’re, you’re looking for. On top of that, if you’re dealing with any painted ceilings, anything along those lines where you’ll have to bring in an artist to recreate any of that or preserve any of the historic work.
Those are gonna be the big ones. Now, I say that’s a good area for the historic societies because the odds are if this is your first time restoring a historic home, you probably don’t have a plaster guy on your phone that you could easily dial in and have ’em come out and check everything out. So you’re gonna need experts in this area who have seen this done, who have contacts, and they’re likely not gonna be local.
Maybe they are, but you’re gonna have to bring some people in for these projects, which means that cost, as I’m talking, continues to go up. As we keep going anytime you start hearing specialty construction work, that cost is going to rise and rightly so. You’re gonna be bringing in people who have a very particular skillset that’s not very common.
So when we look at the overall cost of this project, I would plan for a higher overrun than you normally would, where normally construction project you may get away with 10% of an overrun I’d plan for 20% of this. So if you’re looking at 800,000, I’d plan to throw another $160,000 just in reserve knowing that there’s gonna be some project that comes in.
Maybe you’re redoing some stairs or there’s some stained glass that you’re gonna have to fly somebody in and they’re gonna work on it for a few weeks and you’re gonna have to get it right and it’s gonna be a larger expense than you’d expected to begin with. Fortunately, if you have a good relationship with the local municipalities, they can also help you out with a lot of the different architectural guidelines of the area.
Generally, towns like to see historic buildings preserved or restored to a better level. So they’re a little bit more lenient on maybe the home that you’re restoring doesn’t meet the current architectural guidelines. But because it’s a historic home, they’ll let that slide. So you have some grievances there.
When it comes to property values and taxes, and long-term resale potential. gonna roll back to the conversation about this not being a high ROI project. This is going to be a passion project that you jump into. The tax credits are there to maybe help offset some of the passion part of that investment.
But to say that this is going to be a great investment, it’s probably not there, this is definitely gonna be more of a consumption area and something that you enjoy doing. I think a worthwhile thing that’ll probably have a lot of value to you and their community. So when you’re going through this process on the tax credit side, definitely coordination with your CPA coordination with, local organizations and municipalities and really work with somebody, especially with the amount of money that you’re spending here.
It’s worth working with an expert who knows that area well, when it comes to what are those qualified rehabilitation expenses, what does that tax credit look like, both at the federal level and for Virginia? Is there anything on the local side? If this is your first rodeo, you don’t want this to be your CPA’s first rodeo either, of trying to figure out how you’re gonna get money out of this type of investment.
So let’s go into question number two.
Question 2 – Valuation Discounts
Listener: My wife and I have around $10 million in a family LLC that holds several investment properties. We’ve started talking about transferring some ownership to our kids through a trust, and our attorney mentioned using valuation discounts to reduce the taxable value of the gift. How do those work and when do they make sense?
Stephan Shipe: When you’re gifting to kids, the value of whatever you’re giving is very important. So it’s very easy when you give cash. If I give you $15,000 of cash, it’s 15 grand. There’s nothing weird about it. 15,000 is 15,000. It’s the closest conversion to cash that you’re gonna get is cash.
However, when you start giving properties, businesses, especially minority interest, we have to look at that a little different because imagine a situation where I have a business that I gift to you and I gift you the whole thing. I gift you the whole business. It’s yours now. So maybe it’s worth a million dollars at that case. But what if I only give you 20% of the business? Well, immediately that’s not as valuable as owning the whole thing because now you don’t have control. You’re not able to vote on things in a big way. You have no say in what’s gonna go on.
So you may look at it and say, sure, when I owned it as a million dollars, but now that you only gave me 20%, it’s not worth 200. It’s probably only worth maybe 150, let’s say for example. So that $50,000 drop in value is due to the lack of control, due to the minority interest. So that’s one way that that valuation drops.
The other is gonna be a lack of marketability. So if I give you shares in a business that holds properties like you’re considering for your kids and they’re properties that are not easily sold, then, unlike the example I gave before of $15,000 of cash, that’s equal to $15,000 of cash, maybe there’s a drop in the liquidity or marketability of that asset.
So you say, well, sure it’s a million-dollar property, but I can’t just go sell it tomorrow. It’s gonna take me years to be able to sell this property. You see this happen a lot with land where you go give someone land, and it may take years and years to sell that land, that vacant land. Say, well, it’s not really worth a million dollars. It’s probably only worth $800,000 to me today because of the lack of marketability.
Now, imagine if you combine those together and you were to gift your kids a million dollars in your mind of land that they can’t sell because it’s not marketable and that they only have a minority interest. So you give them 25% of a vacant land in the middle of nowhere — well, now it’s lack of marketability and they don’t even get a say of if they wanted to sell to begin with.
So if they don’t get a say of when they wanna sell, and even if they wanted to sell it, it would take them forever to be able to sell it — that’s not that valuable anymore. That’s exactly what a valuation discount is. We have to look at when you give to them and the IRS looks at it, the government looks at it and says, well, how much was the value of that gift?
Somebody’s gotta make that call. Somebody’s gonna have to say, you’re giving 25% of vacant land to your child. How much is the 25% of that vacant land taking into account that they have no control over it, that they have no easy way to be able to sell it? Now that million-dollar property that you have that’s split between, let’s say, two kids, could actually be gifted at 600,000.
Where that becomes important is when we’re starting to look at the overall estate limit of right now, 30 million. If you’re gifting somebody $10 million worth of property — in this case, shares in an LLC that you have — and just aside on that one, the idea of shares in an LLC just makes it really easy. You don’t have to gift a portion of every property. They’re all lumped together as one interest, and you’re saying, I’m giving you $500,000 worth of shares in this LLC that you don’t control that happens to own these properties that are not marketable.
So now that $500,000 is a lot less than if they had control or if the properties were easier to sell.
Now this starts to sound a little too good to be true, and this is an easy area where you run into taxing greed, which can become a problem. And that’s because there’s clearly a benefit here. Everyone would love to be able to take a $10 million property, gift it to their kids, and it only be worth $3 million when their kids get it because it only uses $3 million of their exemption. But they were able to move this huge property.
Because of that benefit, the IRS will definitely look at valuations of this in a very big way. You will absolutely go under the microscope of the IRS looking and saying, what is the valuation you gave on these assets and does it make sense? So it is extremely important to have an independent valuation done. You want documentation on this. You wanna make sure this is not the time to start going in, getting into the weeds on the gray areas, and trying to just play the game on the tax side.
It needs to be truthful. You need to go in and say, I’ve looked at this based on the fact that this property now has minority ownership in it, that’s not as valuable. And now that it’s not as marketable or wasn’t as marketable, that’s not as valuable. So an independent valuation showed that maybe the property was worth 10 and now it’s worth nine, and you got a 10% valuation discount, let’s say, and then you run over all of that with a gift.
So a lot of people look at valuation discounts as this loophole in the tax code — that’s some way to say, well, if I do a valuation discount, then I can save all this money on taxes, I can give my kids this really big gift and really only have it valued as a small amount. That’s not the way I would look at it.
I look at it as valuation discounts are there because there really is a lack of value because of lack of control and lack of marketability. And where you can easily get into trouble is if you start to stretch those valuation discounts and say more than they need to be.
So make sure you have clear documentation, use independent valuation, and make sure you’re really pulling this all together — whether it’s through your advisor, estate attorney, and valuation experts — to make sure you’re all set from a compliance issue and for long-term flexibility.
If you’re dealing with one of those team members there and things are starting to sound too good to be true, it may be time to get a second opinion to make sure that they’re not a little too comfortable with stretching those valuation discounts either.
From the Field – Interview with Steve Myers
Stephan Shipe: And for today’s guest from the field, we caught up with Steve Myers, CEO of YATCO, about what’s happening in the global yacht market, how family offices are approaching yacht ownership more strategically, and what really separates a good purchase from a costly mistake. So let’s dive in.
Alright everyone. Today we have Steven Myers. He’s the founder and CEO of YATCO, the official MLS of yachting, with over 20 years in the yacht brokerage marketplace and over $5 billion a year in sold vessel transactions. So Steve, welcome to the show. Welcome back from what must have been an exciting trip over to and Monaco for the shows over there. Given your vantage point in the marketplace, we’d love to get your perspective on some of the intersection, the financial lifestyle decisions that go into yacht ownership. So tell us a little bit about yourself.
Steven Myers: Yeah, so I’ve been in the yachting industry for my entire career. Started in East France for Viking Yacht Company and eventually worked my way to become their international sales manager. Then moved to South Florida, got into the retail side as a yacht broker, and then a dealer for the Ferretti Group, became their number one dealer in the world and sold to Marine Max, which is a publicly traded company on the New York Stock Exchange, and have been building and running YATCO ever since.
In the past couple years, YATCO has grown from a pre-owned Yachts for Sale multiple listing system to a holding company of five different brands, stretching from Triton and A Crew, which are crew-, captain-, and business-facing publications and communities for yachting professionals and captains and crew and businesses, and also Yacht and Boat and Boat Deck down in Australasia, covering those markets. And then YATCO’s been expanding as well into charter and the builder communities and beyond.
Stephan Shipe: Lots of good things there that we’re gonna jump into as well when we start talking about the charter options and purchases. But I guess on a high level right now, you just came back from two of the largest shows in the world. What are the trends that you’re seeing right now among yacht buyers? Who’s buying? What types of things are they looking for? Any shifts in the industry?
Steven Myers: You know, I think there’s been a number of new builders emerging since COVID, particularly at the Cannes Boat Show. Cannes is a good show internationally to see new brands, particularly on the new-build side. Monaco, of course, is the super-yacht—at the pinnacle of the super-yacht industry. The boats there just increasingly become larger, and there’s an entire fleet in the Port of Monaco. But then if you look offshore, it looks like a city at night. There’s so many yachts anchored off at night.
You’re seeing a lot more involvement of private family offices involved in the industry, a lot more financial analysis and looking at it more like a business, because some of these are $250, $500 million assets and basically they are a small —or larger— corporation running. And so the level of professionalism has risen and there’s challenges with that. In our industry we’re trying to address the crew and constantly evolving the crew. There’s a lot of effort to improve that.
Also, there’s a big effort to show the world the good that yachting is doing. There’s a lot of good being done in the yachting industry, and certainly the economic impact of yachting is extremely positive. So I think as an industry, we’re working to do a better job of conveying that message and the positive impact, both environmentally. You’re seeing a lot of new construction with state-of-the-art power initiatives based on green energy as well as the whole footprint and the green footprint. That’s a big initiative of our industry as well.
Stephan Shipe: You’re talking about family offices stepping in and starting to treat this more as a business. Because of that, are you seeing more impact of economic factors on the yacht market?
Steven Myers: Well, I mean certainly there’s been a boom in the market since the new legislation passed in Congress this year, the big, beautiful bill and the financial aspects of that. But the high end of the market has been extremely strong for the past 10 years and is continuing to grow, and charter continues to emerge as another high-growth area, as well as new construction, new builds. So we’re not at the 2022-2023 exuberant levels that we hit, but certainly it’s a strong, steady market—good opportunity for buyers, and also a decent market for sellers as well.
Stephan Shipe: It’s really interesting that the family-office dynamic is starting to commit to treating these like businesses because the profit and loss is the expenses. It’s a complex ownership structure. Has the proportion of buyers shifted more toward people who are focused more on chartering out their yachts or trying to create some additional revenue stream, or has that stayed constant, it’s just more organized now?
Steven Myers: No, I think that definitely increased with the tax incentives that have come along with this new legislation. It’s actually renewed—it was in play in the previous term of this administration, so that’s back in play. Having your i’s dotted, your t’s crossed to make sure that you’re in full compliance, whatnot, it’s a very serious task and there’s a whole community evolving around that. And I think we’re seeing family offices attending more seminars, getting definitely more entrenched in the business of yachting, so to speak, than we ever have seen in the past, which is great.
Stephan Shipe: I assume that some of the stuff they’re having to learn are all the different dynamics of the cost associated with ownership and types of revenue sheet—what does that look like? Are there rules of thumb that you use or you talk to clients about? When we look at homes, it’s easy to look at things like, well, 1% of value is a rough estimate of maintenance and all of these rules of thumb. Are there similar rules of thumb?
Steven Myers: Yes, there are, but depending on the levels in the market, those rules can change, but there are certain parameters that can pretty much be followed surrounding. Building a team of professionals is a really important part of the process of super-yacht ownership or yacht ownership at any level, but particularly at the super-yacht level and the professional charter commercial operations, and really fine-tuning that. But yes, you can put together a P and L for a charter program with a very good percentage of accuracy in today’s day and age with the right professionals.
Stephan Shipe: The two things that come to mind are who’s on this team and what types of professionals, and then how is that managed from especially a crew perspective. Is there a certain point at which your AC crew is full-time from a revenue perspective or a cost perspective compared to more of contracted services? Or can you talk about those options?
Steven Myers: Yeah, I mean, I think when you get to certainly 23 meters and above, you’re looking at usually a full-time crew, and certainly those numbers increase beyond that. You know, there are vessels with 20, 40, 50 crew on board, which isn’t uncommon, particularly when you come out of the Med, et cetera, and at the super-yacht level.
But, you know, bringing it down to the 50- to 80-foot market, for the most part most people are working with a full-time captain at least, and maybe some part-time staff depending on the size of the boat in that range and the use of the vessel. That’s one thing if a vessel is sitting behind a home with a caretaker there looking after it on a regular basis, but it’s another if it’s a charter operation or if hundreds of hours a year are being spent on the vessel taking it through The Bahamas or up to the Northeast for the summer or wherever you may be.
Stephan Shipe: We commonly hear of boats as depreciating assets as a whole, and you have all the horror stories that kind of go along in that book. What are the biggest factors in your mind that can dispel that myth?
Steven Myers: No, we’ve all, we’ve also heard the horror stories, but most of it is, it’s usually from a buyer that thinks that they’re smarter than everybody and that they think they can save money and they can do it on the cheap, and in the end they usually get burnt that way. I remember when I was the Pershing dealer for the United States and Riva Yachts dealer, and I had a client, and he used to love to come for free tickets for the boat show and come and basically tell me about all these great opportunities and deals that he’s finding and why he wouldn’t pay the money for a mainstream product that I was selling, even though he loved it on the pre-owned market.
And then he got into building a vessel in a market that was emerging. I’ll leave it nameless ’cause the market is actually a very strong and there’s a lot of good boat builders there now, but at the time—if this was 20 years ago—this market was emerging and he thought he was smarter than everybody else in the room.
When it came to it, in the end the boat really couldn’t get up on plane, and in the end it sunk, and it was just a set of nightmares. So I think he had a newfound respect for following the process. What do they say? Trust the process. So yeah, a good captain friend of mine gave me that line, and he’s, “Chuck, trust the process,” with a good English accent.
Stephan Shipe: It’s hard not to when the boat sinks as the end of the story of not following, right?
Steven Myers: Yeah. I mean, you know, the way to look at yacht ownership, I feel, is not look at the purchase price. Too many people look at the purchase price, but rather what is the total cost of ownership, thinking ahead to the day that you sell it.I think a lot of people do that with home investments. They do that with financial investments. They may not necessarily do that with marriage or boats, but, you know, certainly I think you want to look at the full cost of ownership through the life cycle of it.
So take for example, if you buy a yacht for a million dollars and you only put $50,000 a year into maintaining it and on a skeleton budget, and compared to another vessel that is really good quality that’s gonna kind of deliver the same value, and that’s $2 million, let’s say. And that person might maintain that vessel and put 10, 15% into it to do a good job of maintaining that one.
In the end, that million-dollar vessel might sell over, let’s just say a short period of time — a couple years — that might sell, let’s say theoretically, because it was an off-brand and it was a great value at new, and they sold it for $500,000. So it was a $500,000 net loss. And that’s not counting the maintenance, but just add that in there. That’s a $600,000 net loss when you add in two years at $50,000.
Now take the same scenario at $2 million. It’s really well maintained, maintaining it at 10% plus a year, and that vessel could ultimately sell for $1.85 if it’s really well maintained, or $1.9 after the two-year period.
At the end of the day, you’ve got a better quality vessel, you’ve had a better experience, and your total cost is less than the great value that you thought you had the other way. So, you know, really looking at those numbers and looking at it from the full total cost of ownership I think is important.
And there’s another price that should be added to it, which is intangible, and that is the quality of the experience. Nobody buys a vessel as a pure investment. It’s an investment in life — to enjoy life with your family. It’s one of the few things you can do in life that the whole multiple generations can enjoy it. From grandma and grandpa down to the youngest new granddaughter and grandbaby, everybody can fully interact and have a wonderful time together.
It’s hard to do on a golf course. It’s hard to do outside of a home environment, and yachting delivers that. So there’s that. And enjoying the experience — if you’re nickel and diming everything and not investing in the maintenance of it, not investing in a good crew, not investing in a good quality product from the beginning — it’s probably gonna be a lot of headaches.
So true yachtsmen that get that early on, they really enjoy yachting and they’re passionate about it, and that’s why they might own 5, 10, 15, 25 yachts over the course of a lifetime or boats even. It’s because they recognize the experience and the value of investing in that to truly enjoy it and get a pleasant experience from it.
Stephan Shipe: That’s a great pitch for yacht ownership there. It definitely goes against the horror stories. So if somebody hears this and says, that sounds great, that’s exactly what I want for me and future generations to experience — how do you go from someone listening to this to going to 15 vessels purchased over their lifetime?
Steven Myers: When I was selling complicated motor yachts, European yachts, oftentimes I’d have somebody who sold a business or inherited money or just decided to start to invest in boating. I would often encourage them to go down the docks and buy a mass-produced manufacturer boat, for example like a Sea Ray that’s mass-produced, and go and use it for a year or two. Maybe buy a used one on your first go so that you can quickly resell it without the depreciation. Get to know boating, get to understand it, and then step into it.
Now, certainly if you have the budget, you can go to a super-yacht or a crewed vessel — that’s a whole other thing. But to try to get into a multimillion-dollar yacht as an owner-operator with a part-time captain, it’s not a good idea. So taking those steps or surrounding yourself with a good team and making sure that when you get into a crewed vessel from day one, you’ve got the right crew, you’ve got the right vessel, it meets the requirements that you’re looking for. If you’re building it, have the right project manager, having the right captain and the right representative for the vessel — all those are, again, coming back to where we started — having a good team surrounding you.
You wouldn’t start a business, a multimillion-dollar business, and not have a good management team for that business and try to do it, “Oh, I’m gonna do it part-time and I’m gonna bring in my nephew and, you know, and this guy and the guy down the street.” You know, no — you would hire the right professional.
So I would encourage people spending seven figures or more just to take it seriously, do it right, or don’t do it at all. Because the net result, if you don’t do it right, is you’re not gonna have a positive experience. And so I would encourage you — the old saying, do it right or don’t do it at all — is probably a good phrase to think about.
Stephan Shipe: That’s a great note to end it on right there to wrap up all the insights you gave us today. Look, thank you so much for coming on. This has been very helpful and answers a lot of questions that I know we receive sometimes of people looking to jump into this world.
Steven Myers: My pleasure, and I encourage your audience to check out our website, YATCO.com — Y-A-T-C-O.com — and we’re a marketplace of yachting professionals and we try to make sure that our data is accurate and that the professionals representing it are quality, and happy to answer any questions that anybody may have personally anytime.
Stephan Shipe: That’s great. Thank you so much.
Steven Myers: All right. Take care.
Outro
Stephan Shipe: That’s our show. Thanks for listening, and we’ll see you next week.
Hey, this is Stephan Shipe. Thanks for tuning in to the Scholar Wealth Podcast. If you have a question you’d like us to tackle on a future episode, share it with us at scholaradvising.com/podcast. We’d love to hear from you. Until next time.
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