By default the physics engine seems to place the lowest point of the model against the top of the water terrain. This causes the rudder and propeller to be above the water which is obviously too high.

Anyone know the strategy to resolve this?

Thanks!
-Bruce

I have no idea really, but my guess is that the origin of the model is too low for your purposes. Did you already check the origin of the boat in MED?

I'm not sure, but try attaching underwater part (passable entity) to non-underwater. (you will need to split your model). Then make a simple script for underwater passable ent to stay linked with main boat.