Searching for a Better Way

Financing the Municipal, Tax-Exempt Workboat Sector.

Poring over any of the many marine publications that seemingly arrive daily in your mailbox or inbox, you can get an idea of the depth and breadth of the current state of U.S. commercial marine vessel shipbuilding. Given the tumult in the oil market and the number of cancellations of vessels previously on order, it can safely be said that things certainly have looked better. Beyond this, the uncertainties of a domestic maritime industry that is so inextricably entwined with oil and gas makes predictions about what comes next, at best, difficult.

For some shipbuilders, the empty slots and shrinking order books have already spelled disaster for those with less than robust operations. With some exceptions, including a pair of coastal cruisers being built for Lindblad Tours, another batch of tugs for Vane Brothers and the Great Lakes Group and a few more Chesapeake Shipyard-built cruisers, a fair amount of the new boatbuilding business now seems to be centered in the tax exempt, municipal workboat market. 

Selling and building boats for that market, success demands patience, persistence, perseverance and popularity. The shipbuilder must wait through the budget and appropriations process, has to survive while designing and producing a product that suits the market and proves attractive and necessary to the targeted end user. But, the tax exempt/municipal market, like the commercial marine market, comes with its own sets of rules, protocols, requests, notifications, publications, RFPs, RFQs and submittals. In some cases it may take years to complete the process of budgets, appropriations, specifications, meetings, bid evaluations, comments and negotiations and finally, award. There may be a better way. More on that later.

A Primer: Tax Exempt Entities
What or who is a tax exempt entity? Simply put, these are noncommercial, public sector enterprises that may be excused from one or more taxes imposed by regulatory or other governmental laws. More specifically, these can include:

• all bodies corporate and politic and government agencies;
• cities, states, towns, municipalities and local governments;
• school districts, BOCES and boards of education
• fire and police departments
• water, sewer and electric authorities; sanitation/refuse districts;
• housing authorities;
• not-for-profit 501 (C)3 organizations financing through conduits or 66-20 corporations
• port authorities
• colleges, universities and hospitals

In most cases, the vessels purchased, built and owned by these entities provide necessary services to a community that is not normally provided by a commercial entity. Nearly every port in the United States has one or more fireboats or patrol craft. From Bay Constables to research vessels, the universe of service boats is nearly unlimited. And, this fact presents an arguably golden opportunity to fill the many empty slots at our U.S. shipyards. Beyond this, the variety of workboat missions is endless.

Before we get to the better way, we should follow the vessel procurement process in a bit more detail.

In the lengthy procurement process, budgeting and appropriating funds plays the major part of putting a new hull in the water. Debt constraints aside (New York City’s fireboats have run as much as $27 million per unit), a case must be made that the acquisition is necessary, sometimes to replace an aging asset or sometimes to expand a fleet due to increased demand or more sophisticated technology.  NYC’s newest fireboat, which only cost $4.7 million, the William M. Feehan, was named after FDNY’s First Deputy Commissioner who perished in the World Trade Center on September 11, 2001. She was christened last November. In addition to pushing water out at 8,000 gallons per minute, she incorporates the newest technology in firefighter protection from chemical, biological, radiological and nuclear hazards. Needless to say, she was specified and built to meet the challenges of this century’s threats which have evolved to demand ever more sophisticated solutions. 

After the specification stage has been completed, vessel cost becomes the issue to be considered. As the end user submits a request to be included in the budgeting process, once approved, funding requires an appropriation be made for the funds. Funds are sourced either from internal or external resources and may entail complicated bond issues, construction loans, or increasing taxes to pay for the equipment. Increasing debt, increasing the budget or raising taxes to generate revenue is not the most effective way for a politician to win friends. Conversely, for the shipbuilder and end user it is just one more hurdle to be overcome.

As technology moves ahead, whether skimmer technology, counter terrorism, construction, energy or other public services, new vessels will always be, for those tax-exempt or municipalities that can afford them, a necessity. Certainly a big city like New York, Chicago or San Francisco has the resources to buy the newest, most advanced technology available. But what about those smaller communities whose tax base does not support the newest and best service vessels available?

A Better Way
The better way is for the tax-exempt or municipal user to lease rather than purchase the vessel. Leasing is a ‘win-win’ for the shipbuilder, the lessor and the lessee. Consider this: the shipbuilder sells and builds a service vessel that is purchased by a lessor who could be a bank, an insurance company and/or a pension fund which offsets the cost of the vessel by depreciating and renting/leasing it to the end user. The end user enjoys a highly reduced cost of ownership by paying monthly rent, which smoothes out any bumps in the budget or appropriations (easing the tax burden on the taxpayers) and has the ability to exit the lease when new vessel or systems technology arrives that improves the safety, performance or reliability of the current rental vessel. It keeps skilled workers employed and goods and services related to the design and building of the workboat.

In addition to stimulating the new boat building industry in these challenging times, the secondary market for the “last” generation of vessel technology may have found increased popularity in purchasing or leasing these used or off-lease vessels by the end users whose demand (and pocketbooks) do not require the sophistication of a boat like the William M. Feehan.

(As published in the January 2016 edition of Marine News - http://magazines.marinelink.com/Magazines/MaritimeNews)