Ship Financing

United States Government support U.S.-flag ship owners and provides ship financing incentives. Like all other government support programs, United States Government support programs are designed to sustain vibrant U.S.-flag merchant marine and robust United States shipbuilding yards. United States Government Financing Programs to support U.S.-flag shipping:

  1. Title 11 of the Merchant Marine Act 1936, government guarantee financing
  2. Capital Construction Fund and Capital Reserve Fund tax incentives

Title 11 of the Merchant Marine Act 1936, authorizes the federal government to issue guarantees of borrowings incurred to construct, reconstruct or recondition a ship in United States shipyards or for certain shipyard technology.

According to Title 11 of the Merchant Marine Act amendments 1994, owner of a ship benefited by Title XI must be a United States citizen. Title 11 of the Merchant Marine Act is administered by United States Maritime Administration (MARAD) in the United States Department of Transportation.

In 2006, 2007, 2008 fiscal years, United States Maritime Administration (MARAD) did not approve any Title 11 of the Merchant Marine Act projects. In 2009, 2010, 2011, United States Maritime Administration (MARAD) approved 6 projects for a total project cost of approximately $1.3 billion. United States Maritime Administration (MARAD) must approve or deny an application for a Title 11 of the Merchant Marine Act loan guarantee within 270 days after the date an application is received. Applicant may seek to extend 270 days period to a date not later than 2 years after the date on which the application is received.

Commercial ships of all kinds are eligible for Title 11 of the Merchant Marine Act guarantee financing, although the maximum amount that can be guaranteed is 87.5% of actual cost. Shipyard technology eligible for Title 11 of the Merchant Marine Act guarantee financing includes proven technology, techniques and processes that enhance shipyard productivity and quality, as well as new techniques and processes designed to improve shipbuilding and related production.

Generally, ship’s Actual Cost includes costs that would normally be capitalized under standard rules of accounting, such as the cost of construction, reconstruction or reconditioning, construction period interest, and the guarantee fee payable to United States Maritime Administration (MARAD).

According to the law and United States Maritime Administration (MARAD)‘s regulations, the federal government will consider guaranteeing indebtedness up to 85% of the cost of the shipyard work plus other permitted expenses with a maximum amortization of 25 years. United States Maritime Administration (MARAD) charges several fees such as application fee, commitment fee and guarantee fee and United States Maritime Administration (MARAD)‘s rules prescribe certain financing restrictions, such as a debt-to-equity ratio that cannot be exceeded. United States Maritime Administration (MARAD)’s decision as to which projects to approve must be reviewed by a Department of Transportation (DOT) credit committee.

Capital Construction Fund (CCF) program permits eligible persons to set up a fund and defer income tax on deposits in that fund and on the earnings on deposits in that fund provided that the fund is utilized to construct or reconstruct ships in the United States. Ships constructed or reconstructed with the benefit of Capital Construction Fund (CCF) funds have their basis for tax purposes reduced by the amount of Capital Construction Fund (CCF) funds utilized. Hence, Capital Construction Fund (CCF) has the effect of accelerating the depreciation allowance otherwise available to a ship owner.

Capital Construction Fund (CCF) is jointly administered by United States Maritime Administration (MARAD) and the Internal Revenue Service (IRS) in the United States Department of Treasury. Capital Construction Fund (CCF) is jointly administered by National Oceanic and Atmospheric Administration (NOAA) in United States Department of Commerce and Internal Revenue Service (IRS). 1996 decision of the Office of Legal Counsel of United States Department of Justice confirmed that United States Maritime Administration (MARAD) and National Oceanic and Atmospheric Administration (NOAA) have primary authority to determine program eligibility, to establish rules regarding eligibility for Capital Construction Fund (CCF) and fund deposits and withdrawals and to administer those rules.

United States Maritime Administration (MARAD) information indicates that more than 150 people and companies are added to Capital Construction Fund (CCF) agreements. United States citizens who own or charter at least one eligible ship can enter into a Capital Construction Fund (CCF) agreement with the appropriate federal agency. Eligible ship:

  • weights at least 5 net tons
  • built or rebuilt in United States
  • United States registered
  • used in commercial United States fishing or operated in United States foreign or domestic commerce.

If ship is used commercially in the United States fisheries, Eligible ship:

  • weights between 2 net tons and 5 net tons
  • built or rebuilt in the United States
  • owned by United States citizen
  • home port in the United States

Deposits into Capital Construction Fund (CCF) may be derived from the earnings of eligible agreement ships, amount of depreciation taken as a deduction on such ships, the net proceeds from the sale of such ships and earnings on the funds deposited in Capital Construction Fund (CCF) account maintained by the ship owner or lessee. Generally, Capital Construction Fund (CCF) deposits generally must be used to construct ships or reconstruct ships in United States to be utilized either in United States foreign trade or in the United States non-contiguous trade. Transportation between 48 states and Alaska, Hawaii and Puerto Rico is considered non-contiguous trade. In 2007, United States Congress enacted an amendment to Capital Construction Fund (CCF) program that permits the use of Capital Construction Fund (CCF) deposits to construct or reconstruct roll-on/roll-off ships or certain container ships to be used in contiguous trade. United States contiguous trade consists of the transportation of goods or passengers between points in 48 states of the United States.

Capital Construction Fund (CCF) program can be utilized for offshore supply ships and crew boats. Transportation of supplies and personnel from the coast of the United States to platforms, rigs and other devices attached to the seabed on United States outer continental shelf is considered noncontiguous  trade (transportation between 48 states and Alaska, Hawaii and Puerto Rico) and therefore such ships can be financed with Capital Construction Fund (CCF) deposited funds.

There is a financial penalty if a ship built with Capital Construction Fund (CCF) is used in the prohibited contiguous trade. Financial penalty must be paid by a ship owner which utilizes a ship constructed or reconstructed with Capital Construction Fund (CCF) funds in the prohibited contiguous trade. Tanker which was built to carry crude oil from Alaska to 48 states built with Capital Construction Fund (CCF) funds would have to pay a financial penalty. If that tanker loaded cargo in New Jersey and discharged it in Florida. Financial penalty consists of tax at the highest applicable marginal rate of income taxation and interest.

Deposited Capital Construction Fund (CCF) funds must be utilized within 25 years. Amounts not withdrawn from Capital Construction Fund (CCF) account in 25 years are taxed as a non-qualified withdrawal. Generally, Capital Construction Fund (CCF) is reserved for the generation of new construction or reconstruction in United States shipyards rather than to refinance existing ships.

Capital Construction Fund (CCF) agreements and fund can balances be transferred. United States Maritime Administration (MARAD) has permitted agreements and fund balances to be transferred by permitting a purchaser to buy the entity which is Capital Construction Fund (CCF) agreement counterparty with that agency.

Unqualified Capital Construction Fund (CCF) withdrawals are taxable at the highest applicable marginal rate of income taxation together with interest. Under the Capital Reserve Fund (CRF) program, an eligible person or company can defer taxes on the earnings from the sale of an eligible ship so long as the funds are utilized for a qualified purpose.

Capital Reserve Fund (CRF) funds may only be used to construct, reconstruct or acquire a ship constructed or reconstructed in the United States. Capital Reserve Fund (CRF)funds can be used to acquire an existing ship so long as the acquisition occurs no more than 5 years after its construction.

  • ships that are weights less than 2,000 GT (Gross Tons)
  • average speed of less than 12 knots

must be found by the Maritime Administration to be militarily useful. Ship owner who deposits the gain from sale of a ship into Capital Reserve Fund (CRF) avoids recognition of income tax on that gain so long as deposited funds are utilized in accordance with Capital Reserve Fund (CRF) requirements. Funds deposited in Capital Reserve Fund (CRF) must be obligated under a contract to construct or acquire a new ship within 3 years of deposit, at least 12.5% of the funds must be expended or irrevocably obligated during that 3 years period and at least 5% of the work must have been completed during that period. United States Maritime Administration (MARAD) must also have determined that price of a new ship is fair and reasonable.