Annual expenses - how does a partnership split the costs?

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yachtjim

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Jim
Many of you know I just went through an incredibly expensive annual. Now i am trying to work out the details with my partner. The horse is definitely before the cart on this one. Without trying to sound biased at all I will lay the details out for you. Just looking for opinions on how you all would resolve this.

The problem - he flew just 10 hours since we bought it and I flew 130 hours.

The annual ended up costing us about $7500.

He thinks he should pay just his percentage of hours towards this annual. In other words he would pay 8% and me 92% of the annual.

I think we should figure how many hours were on the parts we replaced when we bought the plane, and split those hours. Then add our hours on top of our half and then pay our percentage. In this case i may pay 54% of the annual and he would pay 46%.

The parts replaced were:
The starter
The spinner bulkheads
The cabin heat box
The tailpipe
The carb heat shrouds
The brake pads
The compass
The spark plugs
The engine shaft seal
The alternator belt
Nose gear torque link
Engine mounts
Elt housing

We finally found out that this was the first plane the AI had inspected by himself. So he went a little overboard on finding things. I was able to take the plane to another a&p and work with him to fix most of this stuff.

So, in your opinions is his method of sharing this cost more appropriate, or mine?
 
Unless your partnership is based on hours alone I wouldnt care if I flew 5 and he flew 150, a partnership is 50/50 unless structured different.

Tell him your gonna sell the plane and he'll get 8% and you get 92%.......
 
You want to fly the airplane - its needs an annual. It should be split 50/50. Alot of that wear occurred before you prob owned the airplane.

You needed to have the discussion with the IA about why he thought everything needed to be replaced. Some of those items were likely deferrable or just a judgment call.

An annual should not cost 20% of the cost of replacing the airplane just because someone takes a new look at it.
 
I think that you should include some of the "cost" of maintenance in a "dry rate" for maintenance that goes into a bank account to pay for expenses. If you haven't established one, figure one out now and determine how much you WOULD have put into that account. I know that a friend's partnership in a M20J was around $40/hour plus $200/month per share.

Anything above and beyond that amount is split equally among the partners I would think.

A nod to the post above - you each own an equal share of the asset. You split the proceeds of the sale of the asset. I agree that there should be some amount that depends on the hours that are flown, but I also think that there should be a base cost to maintain your share.

Edit - this sort of stuff should be determined before the partnership is finalized! =)
 
Lets leave the "would of's" and "could of's" out of it please. We were both buddy's, first time plane buyers, both in our training. So we jumped quickly at the prospect of this plane without hashing out the details formally. So here were are. I am just looking for opinions on which approach is more appropriate to split the annual. Thanks!
 
How did you end up getting into a co-ownership without deciding this before ever signing the paperwork? There's error #1. :mad:

We have always split maintenance equally in our co-ownership, but I can see it being structured both ways. Since you didn't decide up-front, now you're in this situation.

I'm still in shock over the first thread, now that I see the silly list, it's more obvious your shop screwed you. Which of those are airworthiness items? $7500? Wow.
 
However they agreed in the written parntership agreement they executed when they started the partnership.
 
Until a couple of months ago I was in a two person partnership for a couple of years. My partner probably flew less then 30 hours over that time and I flew over 160 hours. We've always split everything 50/50. I took care of everything and would do an accounting once a quarter and send her the bill and she would return a check.

Because she was not flying she wanted to add partners so we created an LLC sold the plane to the LLC, added two new partners and have created a more structured environment with a monthly fee and an hourly fee.
 
I have had many partnerships.
I have one now on my Pitts and my Cessna. I fly and my partners do not fly. We split everything 50/50. that is the only way.
No money put in a pot when we fly. We just pay as something comes up.
I can't believe that annual cost $7500. I think you need a new mechanic... maybe a new partner also.
 
denverpilot said:
How did you end up getting into a co-ownership without deciding this before ever signing the paperwork? There's error #1. :mad:

We have always split maintenance equally in our co-ownership, but I can see it being structured both ways. Since you didn't decide up-front, now you're in this situation.

I'm still in shock over the first thread, now that I see the silly list, it's more obvious your shop screwed you. Which of those are airworthiness items? $7500? Wow.
Click to expand...

The parts replaced were:
The starter - the gear on the bendix was getting ground down by the flywheel. 3 a&p opinions said to replace it. 3 shops
The spinner bulkheads - one had 2 cracks, the other had elongated holes
The cabin heat box - mechanism no longer worked. In the words of the a&p that helped me "wow is that thing crispy". It was crumbling
The tailpipe - also crumbling, had holes on the bottom 2 inches of it. The main problem was that it was rubbing the steering linkage. So the whole exhaust had to be shifted to starboard.
The carb heat shrouds - had about 19 cracks in them, not even salvageable at all
The brake pads - wear item, not a major expense
The compass - was cracked
The spark plugs - very old, quite rusty, the mating surface was very pitted. New a&p put some lightely used ones in.
The engine shaft seal - was spewing oil all over the inside of the cowl up inside the nose where you can't really see until you take the cowl apart
The alternator belt - cracking, cheap
Nose gear torque link - cracked
Engine mounts - rubber was extremely cracked and the holes elongated
Elt housing - cracked

So every item on the list was legit.
 
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By the way, for answer "completeness", we split regular MX equally, but we did institute a per hour engine fund. That seemed reasonable ... to us. Every partnership or co-ownership is different.

We also reserved the right to spend the engine fund on other stuff if we all agree.

And the next $30 fuse for the DME is on its way here so we can see if a shop can blow another one. Christ, King is proud of those stupid things.
 
Keep in mind all the work done it has resulted in added value to the aircraft...it wasn't just restoring it to where it was when you started.

That said, I concur with posts above....you guys need to have a fixed hourly cost for operating the airplane designed to cover routine maintenance and, optionally, some engine reserve. You each put that amount into the kitty for every hour flown. In a Cherokee 180 I'd guess something in the $30-50 / hour range would be a starting point. The basic annual inspection fee would be split (you need to have that whether any maintenance is required or not), the the repair costs come out of the maintenance kitty. Any costs above what the kitty covers should be split.

Whatever you decide, commit it to writing so you both know where you stand. If you can't agree, then sell it and find a new partner.
 
Depends how the partnership was setup in writing. I have seen it done many ways, including split evening, hourly rates paid (with excess split evening), etc...

You run into problems when this isn't decided ahead of time, and then a big bill comes...
 
Ours is 50/50

Some people do an engine reserve per hour but to me anything other than 50/50 is problematic......
 
Was this your first annual? Did you buy the airplane sight unseen, no inspection?

This is the problem with not having an annual done as the pre-purchase inspection - literally every single item you identified should have been discovered as part of a pre-buy and certainly as part of a proper annual. How did you guys miss most of that every time you did a walk around?

Well, at least its fixed.
 
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comanchepilot said:
Was this your first annual? Did you buy the airplane sight unseen, no inspection?

This is the problem with not having an annual done as the pre-purchase inspection - literally every single item you identified should have been discovered as part of a pre-buy. How did you guys miss most of that every time you did a walk around?

Well, at least its fixed.
Click to expand...

Search the user's other threads.

It was pre-buy'd by the shop that did the previous owner's MX (red flag number one), and they were told it was a great airplane, then a year later a "new inspector" at that same shop is "over zealous" and squawks a huge pile of stuff (red flag number two), much of which isn't even an airworthiness issue (yellow card foul), the new owners didn't ask the shop to button it up, get a ferry permit, and take it elsewhere (10 yard penalty, 1st down!), and now have a $7500 bill (touchdown, shop team!), and are now arguing over how to divide it (where this thread starts).

At least that's how I read all of it. Getting fleeced is bad enough, now they're going to have to argue out who spends the most time bent over... LOL. Ouch.
 
denverpilot said:
Search the user's other threads.

It was pre-buy'd by the shop that did the previous owner's MX (red flag number one), and they were told it was a great airplane, then a year later a "new inspector" at that same shop is "over zealous" and squawks a huge pile of stuff (red flag number two), much of which isn't even an airworthiness issue (yellow card foul), the new owners didn't ask the shop to button it up, get a ferry permit, and take it elsewhere (10 yard penalty, 1st down!), and now have a $7500 bill (touchdown, shop team!), and are now arguing over how to divide it (where this thread starts).

At least that's how I read all of it. Getting fleeced is bad enough, now they're going to have to argue out who spends the most time bent over... LOL. Ouch.
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Ok Nate - thanks for not making me users other threads!
 
denverpilot said:
Search the user's other threads.

It was pre-buy'd by the shop that did the previous owner's MX (red flag number one), and they were told it was a great airplane, then a year later a "new inspector" at that same shop is "over zealous" and squawks a huge pile of stuff (red flag number two), much of which isn't even an airworthiness issue (yellow card foul), the new owners didn't ask the shop to button it up, get a ferry permit, and take it elsewhere (10 yard penalty, 1st down!), and now have a $7500 bill (touchdown, shop team!), and are now arguing over how to divide it (where this thread starts).

At least that's how I read all of it. Getting fleeced is bad enough, now they're going to have to argue out who spends the most time bent over... LOL. Ouch.
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Bingo. Except i did take it from the first shop. I just had them replace the shaft seal, starter and alternator belt while the prop was off. Everything else was done at the new place I took it to. See, I did listen to the advice of the board. I did get the pitted landing gear deferred. I really don't know what we could have removed from the final list. It was all legit stuff. But whats done is done. Live and learn.
 
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yachtjim said:
Bingo. Except i did take it from the first shop. I just had them replace the shaft seal, starter and alternator belt while the prop was off. Everything else was done at the new place I took it to. See, I did listen to the advice of the board.
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That actually makes me feel better. At first it sounded like you were going to hang with that first goofy shop and that didn't seem very good. :)
 
denverpilot said:
That actually makes me feel better. At first it sounded like you were going to hang with that first goofy shop and that didn't seem very good. :)
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The new place I found allows owner assisted annuals. So moving forward annuals should be much less expensive. Hopefully back down to about $1500 where they belong.

Let's hear some more opinions about how to split this bill.
 
I am in an unequal partnership, we have 5 owners, each contributed what they could afford to purchase the aircraft. we have a 45% owner, two 20% owners, and a 15% owner. We charge an hourly rate for the airplane that estimates our annual expenses, usually we are a bit short at the end of the year. We then each pitch in our share of the shortage to make up the difference.

I have to admit I think your partner has a bit of a point.
if you divide the $7500 by the 140 hours you have flown the annual has cost about $53/hour. If you had been paying normal rental rates for the plane you would have paid almost enough to pay for the annual at a $60/hr Dry rate. Your partner on the other had would have to pay almost $750/hr dry to pay for the annual. If you just split it 50/50 your partner is essentially subsidizing your flying.
I do think you should have planned for about a $2400 per year annual and should split that amount 50/50. Anything above that should be split based on hours of usage. This lowers the hourly cost to about $36/hr. Then you should agree on an amount per hour to set aside for future maintenance, that is essentially what I am recommending doing but your doing after you have flown the hours and know what the actual costs are.

Hopefully that isn't too convoluted thinking but maybe it will give you some ideas on how to approach it.

Brian
 
The difference Brian, is that if partner #2 wants to fly the airplane, it needs to be in annual. All of the repairs required need to be made in order for the aircraft to be airworthy and operable. If he owned the airplane outright it would cost him $7500. If he shared ownership he only owes $3750 - he is ahead $3750 regardless.

You can always allocate expenses however you want - but look at it this way . . .

The cost of the 'annual inspection' is really only about $850 - not $7500 - the cost of repairs and maintenance is $6650. THAT is the amount that can be properly allocated in accordance with use and that is how we estimated costs when I had a partner.

We split insurance, tie down, and the expected cost of the annual inspection and one oil change a year 50/50. Everything else was estimated and we paid into a fund the hourly cost of the remaining expenses. If we did not each fly the airplane 50 hours per year we were responsible for a minimum of 50 hours dry expense and were to leave the airplane fuel tanks full when we returned from whereever.

This is another way to operate since the cost of the annual inspection itself is required.

The real question is how do you handle unexpected and huge repair bills like this - and since it is year 1 - I think it is split the same as the acquisition cost since it is apparently something that needed to be done at delivery and should be part of the acquisition expense and allocated that way.
 
That the magnitude of the expense makes it difficult for the partners to agree isn't surprising. Some questions I would ask if the three of us were together are:

1. When you envisioned this deal and thought the annual cost would be ~$1,500, how did you plan to split it?

2. Did you contemplate the disproportionate use of the plane when you bought it? If so, was any skewing of cost-sharing formula discussed or considered? Will it foreseeably continue?

3. It's generally agreed that a high percentage of each year's MX budget will be spent at the time the annual inspection is performed. Do you consider all of the expense to be "operating expense" rather than "ownership expense" or the opposite, or some of each?

4. Brakes are a good example of wear items that will eventually be replaced due to use. They don't wear out while sitting in the hangar (unlike a battery that can easily do so) so there's little argument that they wore out from use. How often do you think they will wear out? Should brake costs be allocated to the year in which they were installed, or over the period of years they are expected to last? They're clearly operating costs vs. ownership costs, but how thin do you want to slice each element of these costs?

5. If the two of you were advising another pair of potential owners about how these costs would be shared, what would you tell them?
 
yachtjim said:
Many of you know I just went through an incredibly expensive annual. Now i am trying to work out the details with my partner. The horse is definitely before the cart on this one. Without trying to sound biased at all I will lay the details out for you. Just looking for opinions on how you all would resolve this.

The problem - he flew just 10 hours since we bought it and I flew 130 hours.

The annual ended up costing us about $7500.

He thinks he should pay just his percentage of hours towards this annual. In other words he would pay 8% and me 92% of the annual.

I think we should figure how many hours were on the parts we replaced when we bought the plane, and split those hours. Then add our hours on top of our half and then pay our percentage. In this case i may pay 54% of the annual and he would pay 46%.

The parts replaced were:
The starter
The spinner bulkheads
The cabin heat box
The tailpipe
The carb heat shrouds
The brake pads
The compass
The spark plugs
The engine shaft seal
The alternator belt
Nose gear torque link
Engine mounts
Elt housing

We finally found out that this was the first plane the AI had inspected by himself. So he went a little overboard on finding things. I was able to take the plane to another a&p and work with him to fix most of this stuff.

So, in your opinions is his method of sharing this cost more appropriate, or mine?
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Some expenses occur whether or not the plane flies and those ought to be shared 50/50. Other costs are obviously a function of flight hours and in a fair arrangement those would be apportioned according to usage. Unfortunately there are many costs that fall into a grey area between the other two. One option for those would be to share half the cost 50/50 and the other half according to use.

Additionally the cost to replace long term items on a relatively new (to you) airplane should really be considered to be part of the acquisition cost and shared accordingly the first time. IMO that would apply to most of the items you listed.
 
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In my last partnership we did the following:

- Fixed expenses split 50/50: Hangar, insurance, annual inspection fee (approx. $1,000)
- Hourly maintenance charge for each hour flown (about $40 / hr. today)
- Each paid for own fuel...left it full after each flight.
- Routine maintenance paid out of maintenance fund. Any shortfalls resulted in 50/50 capital call for the reserve fund.
- Upgrades split 50/50

Sit down with your partner and establish what's a fair hourly rate going forward. Kick in that amount for your hours, he kicks in the same for his, and you split the remainder 50/50 and move on.
 
LDJones said:
In my last partnership we did the following:

- Fixed expenses split 50/50: Hangar, insurance, annual inspection fee (approx. $1,000)
- Hourly maintenance charge for each hour flown (about $40 / hr. today)
- Each paid for own fuel...left it full after each flight.
- Routine maintenance paid out of maintenance fund. Any shortfalls resulted in 50/50 capital call for the reserve fund.
- Upgrades split 50/50

Sit down with your partner and establish what's a fair hourly rate going forward. Kick in that amount for your hours, he kicks in the same for his, and you split the remainder 50/50 and move on.
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This is almost the EXACT way we had our 4 way partnership split. Probably is the exact way, we just spent a lot of time estimating what the hourly dry rate was and that all revolved around what is a fixed cost (GPS updates) and what is a variable cost (engine, oil change, tires, etc). Avionics repairs were a bit of a discussion. Funny thing is that we agreed that most avionics expenses were fixed, but we went ahead and estimated a repair cost and hours and rolled it into the hourly maintenance charge.

We paid everything from the kitty and then split any remaining expenses. Since we were accruing for engine overhaul, this was never and issue. I bailed out before we got to an overhaul so the question of what to do when the overhaul fund isn't sufficient for an overhaul never came up. I'm pretty sure we would have agreed to split equally and then have adjusted the hourly rate to make up the perceived gap.

One of the key things is for everyone to be flexible. I would NOT want to be in a partnership where one partner spent a LOT of time worrying about what is fair and what isn't. Come to a logical agreement, put your big boy pants on and move on ... sometimes you'll get the better end of the deal, sometimes you won't. At the end of the year, discuss and adjust accordingly.
 
Each of the owner must split the cost of the inspection, an pro-rate the repairs, neither must subsidize the other s flying.
 
yachtjim said:
Lets leave the "would of's" and "could of's" out of it please. We were both buddy's, first time plane buyers, both in our training. So we jumped quickly at the prospect of this plane without hashing out the details formally. So here were are. I am just looking for opinions on which approach is more appropriate to split the annual. Thanks!
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Here's what I'd do. You're buddy's and it sounds like you want this to continue to work in the future. I'd come to a mutually agreeable solution for the maintainence done to date. I'd then think long and hard about what you guys want to do in the future. Keep in mind the following:

The inspection part of the annual should be split 50/50. It has to be done no matter if you fly or not. Your maintainence budget for items after that should be covered by some form of an hourly cost reflecting wear and tear. I have always thought that a pure 50/50 split is unfair to the lower flying partner. I'd rather overcharge myself an hourly rate and have the money there than not having enough and then coughing it up when you need it.

I was a partner many years ago and we did 50/50 for everything. When it became clear that I was flying more, I voluntarily chipped in more to avoid hard feelings.

The main thing to consider is how badly do you want this to work and get whatever you decide in writing for the future.

John
 
Tom-D said:
Each of the owner must split the cost of the inspection, an pro-rate the repairs, neither must subsidize the other s flying.
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Pretty much agree with this in principle, but understanding this is a fairly new ownership scenario, some things (i.e. exhaust system) have a longer life than the hours put on the plane, so there should be some accommodation for the future benefit to both owners.

For that reason it makes sense to agree on an hourly mx cost on a forward-looking basis (not necessarily backwards), pony up based on that and split the shortfall.

If the non-flying partner throws $100/hr. out as a mx cost, you know he's not serious about the partnership and keeping the plane.
 
LDJones said:
Pretty much agree with this in principle, but understanding this is a fairly new ownership scenario, some things (i.e. exhaust system) have a longer life than the hours put on the plane, so there should be some accommodation for the future benefit to both owners.

For that reason it makes sense to agree on an hourly mx cost on a forward-looking basis (not necessarily backwards), pony up based on that and split the shortfall.

If the non-flying partner throws $100/hr. out as a mx cost, you know he's not serious about the partnership and keeping the plane.
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I was answering the OPS question.

I would never wait until I was holding the bill before trying to set up rules.

Day 1, set up a LLC to own the aircraft.
Day 2 each pilot rents at the price that will cover the annual, and repairs.
 
Tom-D said:
I was answering the OPS question.

I would never wait until I was holding the bill before trying to set up rules.

Day 1, set up a LLC to own the aircraft.
Day 2 each pilot rents at the price that will cover the annual, and repairs.
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Yep.

One other partnership tip: we alternated weeks Thur - Wed. If it was your week the plane was yours unless other partner called to see if you were planning to fly. Worked well for us. In ten years probably had less than a handful of conflicts all of which were easily resolved with a little flexibility on both parts.
 
I am in the process of setting up a partnership as we speak. Should close later this week. The way we are setting it up, is anything not based on hours flown (anual, hanger, GPS fees, online scheduling tools, etc) is covered by a yearly expense. It does not matter if you fly 150 hours, or 3 hours. You pay the same.

Things based on hours flown (engine reserve, oil changes, breaks, etc) are covered with an hourly rate charged. So if you fly more, you pay more. Makes sense, because the cost of doing these things is based on hours flown.

I think that's a very common setup.
 
I'm in a 5 way partnership and we split the cost this way:

All fixed expenses are split evenly:
Tie down, insurance, DB updates,

Maintenance:
All costs are split evenly on the theory that things break whether you use them or not: We don't bake these costs in to our hourly charge but rather pay separate assessments for items.

Hourly costs:
Fuel , oil changes and other items tied to number of hour flown are part of the hourly charge.

Upgrades are split 5 ways as well.

At the last partners meeting there was talk of boosting the hourly rate to include more maintenance money so as to shift the costs to those flying more but as we had to raise the hourly rate again for fuel costs we decided against that. We charge ourselves a wet rate and there are some of us who want to change that to a dry rate so we can better control the costs by choosing to fly at reduced power settings and being better shoppers for fuel but that got shot down because we do not have self serve at our home airport and it was felt that it would be a logistics nightmare.

This seems to work for us but your mileage may vary
 
yachtjim said:
he flew just 10 hours since we bought it and I flew 130 hours ....

The parts replaced were:
The starter
The spinner bulkheads
The cabin heat box
The tailpipe
The carb heat shrouds
The brake pads
The compass
The spark plugs
The engine shaft seal
The alternator belt
Nose gear torque link
Engine mounts
Elt housing
Click to expand...

I think 140 hours are so few, compared to the expected lifetime of most of these parts, that your annual was pretty much like a pre-buy that should be split 50-50.

Going forward, I think you should have a written agreement that is very specific so that there's no dispute like the one you currently have.

By the way, I recently had a bad cabin heat box. It's a simple aluminum box with a flange to fit a hose from the muffler shroud, and the flange had a broken weld. I'm told that is fairly common. The first service center said they could only replace the box with new, and they quoted a cost of $1100 for the part plus 2 hours of labor. So I called another, which welded the old one at a total cost of just 1.5 hours of labor with nothing for the part. I wouldn't have known except that I use Savvy, and they helped me find the cheaper solution.
 
yachtjim said:
The parts replaced were:

The spark plugs - very old, quite rusty, the mating surface was very pitted. New a&p put some lightely used ones in.
.
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$7500 and they didn't throw in new spark plugs? I have never owned a plane so if this is normal excuse me!

These repairs are ownership costs, not wear items. If I were to join a partnership they should be split 50/50. At least $30 should be 'billed' per hr to build up a reserve for a new engine. Maybe more if you're closer to Tbo.

Experimentals sound more appealing everyday.
 
NoHeat said:
By the way, I recently had a bad cabin heat box. It's a simple aluminum box with a flange to fit a hose from the muffler shroud, and the flange had a broken weld. I'm told that is fairly common. The first service center said they could only replace the box with new, and they quoted a cost of $1100 for the part plus 2 hours of labor. So I called another, which welded the old one at a total cost of just 1.5 hours of labor with nothing for the part. I wouldn't have known except that I use Savvy, and they helped me find the cheaper solution.
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I found a lightly used one (looked new) for $270 and installed it myself.
 
Sounds like most of the repairs were the result of a "pre-existing condition" and not due to you flying 130 hours... Plus, they should add some value (or at least not be subracting value) to the aircraft. Which, to me, suggests that they should be allocated about the same way as the original purchase.

But, there is no such thing as fair. So, at least one or two people will come out on the short end of this deal.
 
jtheune said:
We charge ourselves a wet rate and there are some of us who want to change that to a dry rate so we can better control the costs by choosing to fly at reduced power settings and being better shoppers for fuel but that got shot down because we do not have self serve at our home airport and it was felt that it would be a logistics nightmare.
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Interesting.

We don't have self service either. We are going to run ours like the 172 share that's been here for 31 years does it.

When the FBO hears the plane coming in (they listen to the tower), they fire the truck up and meet the plane at the hanger, and fill it up. The pilot signs the slip, and thats that.

At the end of the month, the accountant (one of the members) collects the slips and bills each of us for our fuel use. He does this, because he is the one who flys the most, and prefers the convenience of it each time he flys, over the work it adds at the end of the month.

Not only is it nice, but the plane holds 92 gallons, and if I am low on fuel when I am coming back, I can stop at an airport 13 miles away, and get gas at around $1.50 a gallon cheeper.

If I need 60+ gallons, it's worth it.
 
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