Valuation Methodology Considerations for Internationally-flagged and Jones Act Marine Assets

This article by Basil M Karatzas, ABV, ASA, CMS, was originally published in "The MTS Journal", American Society of Appraisers, in October 2019.

Appraisal of commercial marine assets can, on occasion, be a challenging assignment: the list of commercial marine assets can include drillships (with top-tier 8th generation drillships having up to $900 mil replacement cost, new) to lowly inland barges that can be valued as low as a few hundred thousand dollars each; in-between these two extremes, there are big and small crude oil and chemical tankers and gas tankers, big and small dry bulk vessels, big and small containerships, offshore platforms and supply vessels, construction vessels, dredgers, pipe-laying vessels, etc The types and technologies of each type of these vessels can vary widely (thus, replacement cost can vary widely, as well), but also market drivers and profitability (affecting Fair Market Value (FMV) and values based on the income approach) vary widely among these types of vessels.

For an appraiser of marine assets, expertise and track-record in all these types of assets is a mandatory requirement in order to be able to provide accurate and reliable appraisals, and also being able to provide in-depth expertise to their clients in each of these niche markets that sometimes may only be connected by the fact that the surface of the water keeps afloat all these marine assets.

While one could elaborate extensively on appraisals by type of marine assets, we would like to focus in this article on valuation concepts and methodology having to do with the “flag” and registry of the marine asset rather than the type of the vessel itself, and specifically for vessels flying the flag of the United States. Generally speaking, there are two types of “flags” and registries for ships, the country where a vessel is registered and the flag which the vessel flies (which incidentally, is also that country’s law and jurisdiction that applies onboard of the ship and permeates all its operations and management):

  1. International registries or “open registries” (also known as “Flags of Convenience” (FOC)), such as Panama, Liberia, Bahamas, etc, which are based offshore, are open to any nationality shipowner and usually require minimal taxation and documentation, and allow for such vessels to trade internationally - but not to engage in intra-trade in national territorial waters of other countries; and,

  2. the National Flags (such as the United States, the United Kingdom, the Norwegian flag, etc) that allow for international trade but also provide for exclusive trading rights within national waters of their perspective country (also known as cabotage trade).