Buying into fractional ownership

Discussion in 'Flight Following' started by Boiler03, Oct 10, 2018.

  1. Boiler03

    Boiler03 Filing Flight Plan

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    I'm considering buying a 1/5th share in an older Cessna 172 with around 5,000 hours TT on it. Just looking for some advice and/or common pitfalls from those experienced with these kinds of arrangements.

    As a matter of background, I'm a student pilot looking to finish up my training and do my IFR in the plane. It's well within my budget and located at my home airport, so seems like a good opportunity to dip my toes into ownership, but just want to make sure I'm not jumping in blind.

    A few of the specific questions I've thought of:
    Would you have a pre-buy inspection completed in this case?
    Would you do a test flight or ask another owner to fly it with you?
    Specifically with older 172s, are the any particular issues to be aware of?
     
  2. pigpenracing

    pigpenracing Pattern Altitude

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    $5000 don't sound like much cash. Is it a clean airplane or does it look like trash? Talk to the mechanic that does the annuals, I am sure he can tell you is it is a good airplane or not.
    I look at airplanes myself when I buy them, I am not a A&P but you can look at a plane and tell if it is well kept or neglected.
    If it was me I would spend more and get your own airplane.... What if all 5 guys want to fly Saturday afternoon????
     
  3. Terry M - 3CK (Chicago)

    Terry M - 3CK (Chicago) Pre-takeoff checklist

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    I had a similar opportunity at KPWK about 15 years ago and passed. I regret it!

    I don't think you need a pre buy if the 4 are staying in. I would definitely look at the logs, talk to the A&P that did the annual in the logs (different from who did the interim maintenance, or different every year (are they shopping someone to sign off?)). I would definitely fly the plane with an owner, and preferably not the one selling.

    You want to meet the other 4 and see the financials. Is their a note against the plane? Does the partnership own it and you have a share in the partnership (or does the partnership lease it from 1 owner and you don't actually own anything, which is fine as long as you know).

    Doesn't sound like there are any engine or upgrade reserves anywhere at that price.

    Good luck!
     
  4. Ravioli

    Ravioli Final Approach

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    Not sure where @pigpenracing got the price. I don't see it in the OP.

    But, yes, get a prebuy as if you were gonna be the sole owner. And yes, get clear understanding of rates, scheduling policies, mx history. And yes, OF Course you shouldn't buy a plane you haven't flown in.
     
  5. Boiler03

    Boiler03 Filing Flight Plan

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    The cost isn’t 5000, that’s the time on the airframe. Cost is quite a bit more.

    The nice thing for me about a fractional ownership opportunity is that I’m mostly a weekday flier.
     
  6. pigpenracing

    pigpenracing Pattern Altitude

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    I read it wrong.... Now I see 5000 hours and not $5000. LOL!
     
  7. Terry M - 3CK (Chicago)

    Terry M - 3CK (Chicago) Pre-takeoff checklist

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    Ask to see the financials and understand the engine and electronics reserves, and what Ravioli said.

    I disagree on the pre buy. I don't the no it's necessary, but maybe hire an A&P to go through the logs with you.

    4 of 5 are staying in. If it flies regularly, looks well kept, the conversations with their A&P and looking through the logs checks out, I don't see it as that risky.
     
  8. benyflyguy

    benyflyguy Line Up and Wait

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    I think it’s important to know what reserves are set aside with respect to engine time?

    What the breakdown of the hourly rental rate is?

    Do you know any of the owners personally?

    How many hours is it flying a year??
    I’m in a 5 person partnership and for most part it seems like I have the plane to myself. Rarely is there a conflict. Only two of the partners are IFR certified and current. One of those has a twin that he uses all the time so the club plane he doesn’t use much!
     
  9. Ravioli

    Ravioli Final Approach

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    I was on the board of an equity club for many years.

    Everyone who bought a share during my tenure brought their own A&P to look over the planes and the logs.

    I was also Treasurer for the last three years of my membership. I would allow potential members access to all of the financial reports I prepared each month.

    We also gave guest access to the on-line scheduling system so they could discern availability trends.

    OP - feel free to PM if you'd like more specific stuff to consider.
     
  10. Ken Ibold

    Ken Ibold Final Approach

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    1) How does the group decide on upgrades? If two people want the group to drop $25K on the panel or get it painted, how is it decided and paid for?
    2) How does scheduling work? Some use rotating preferential weeks, some use online calendars, some use phone trees. If three people want to use it for Thanksgiving weekend, how is it resolved?
    3) What is the exit strategy? If you want to sell, do the remaining have approval of the buyer? Is there right of first refusal? What happens if someone cannot/does not pay their bills?
    4) If money is accumulated for engine reserve etc, how is it accounted for? Is one fifth of it "your" equity that you can take with you if you leave?
    5) What are you actually buying? 20% of an LLC that owns the airplane is a different purchase than a co-ownership where each person owns 20% of the airplane.
    6) Is there a note on the airplane? If so, how is it secured and paid? If you are paying cash, what are your rights/obligations if the borrowers default?
    7) How is insurance allocated? Does everyone pay 1/5th of the bill or is it prorated in some fashion with the higher risk pilot (you) paying more?
    8) How is the annual paid? Does everyone pay 1/5th of the annual or is it paid from a reserve built up by use, such that heavier users pay more of the cost?

    You are going into business with these people. There is more due diligence than deciding whether you like flying the plane.
     
  11. weilke

    weilke Touchdown! Greaser!

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    A full-up pre-buy to buy 1/5th of an old 172 with 4 of the other partners staying in the group would seem a less than optimal use of your money. If it was a 3-way partnership and you buy our two of the partners, then maybe its a different situation.

    Ken hit on all the important points. The plane and whether you pay a couple of $$ more or less during buy-in is only a small part of what decides on whether a partnership makes sense.

    I would definitely go fly the plane. They may have a CFI they use for training who could take you up. I don't have much time in 172s, but one of them was so crooked it would fly in circles if you let go of the yoke. Even without much experience in aviation, you can get a feel whether this is a plane you want to buy during a test flight. If it needs a jump-start to run, 1/2 of the avionics are on the 'oh we were planning to fix that' list and the seat is held in place with a vise-grip, maybe you want to hold on to your money a bit longer.
     
  12. Ben2k9

    Ben2k9 Pre-takeoff checklist

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    Presumably there is a usage agreement between the owners that spells out everything including rules of usage, scheduling, how to handle conflicts, and how to exit partnership and anything else that could arise.

    Definitely test fly it.

    Pre-buy seems like overkill, assuming these partners have good reputations.
     
  13. drjcustis

    drjcustis Pre-Flight

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    I bought into a 4 person cardinal ownership. I was a fresh private pilot. I didn’t do much on the prebuy other than go flying with the other guys.

    For a while, it was great, then...

    There was no formal agreement. Everyone had their own ideas on things should run. I refilled the tanks, another guy always left it empty. One guy lost his medical and decided he shouldn’t be paying the bills anymore. And on, and on.

    When it came time to dissolve the group and sell, it was a nightmare.

    So, in a nutshell, my advice is invest no more than you can afford to lose. Spend more on the group agreement. Make certain you get along with the other partners.


    Sent from my iPad using Tapatalk
     
  14. Clip4

    Clip4 En-Route

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    Fractional ownership is governed by FAR Part 91. What you are describing, at least in aviation terms, is not fractional ownership.
     
  15. dennisc172

    dennisc172 Filing Flight Plan

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    It is important that you ask yourself how much you will fly... furthermore IF you will be able and allowed to sell your part again..
    Furthermore if there are rules in the usage agreement like multi day take aways and cleaning the plane.

    I was looking at something like this for a pretty new Diamond 40 aircraft. Someone was selling it's share... the agreement was that all 12 owners could take it away for one week holidays (yikes!) and the price,$17.500, was based on it's initial value when they bought it. They bought it 5 years and many hours ago... So I skipped this and I don't regret.
     
  16. Gerhardt

    Gerhardt En-Route

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    I had a partnership like that many years ago and it worked GREAT!

    * We rotated weeks when one pilot's preferences took precedence, but if no one had it booked it was up for grabs. In the several years we were partners we never had one conflict. Not one. People just don't fly as much as you'd think. When the others would take her out it was usually just for a short local flight.

    * The deal was you returned it with full tanks and paid a small wet rate into the general fund for maintenance. The fund never ran dry, but if it had the deal was the bill would be split evenly.

    I don't know, I try to keep my life simple. And this was as simple as it gets. I'm surprised that there aren't more partnerships in cars.
     
  17. Bill Jennings

    Bill Jennings Final Approach

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    Exactly how our deal works. Plane is returned to the hangar with tanks at the tabs (50gal), we have a small monthly to cover regular fixed costs and a small wet rate as well. Any big items (like right now, we were at TBO and are overhauling) and we split the bill evenly and pass the hat. Everyone is a stand up guy and throws in their share, so no issues.
     
  18. Ken Ibold

    Ken Ibold Final Approach

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    I was in a partnership where things were going swimmingly for a few years, until 2 of the 3 wanted a panel upgrade. After much angst, 2 split the cost and the 3rd gained unearned additional equity. That issue was the start of a sea change. The 3rd rarely flew, and so when he did want to use it, he thought he deserved priority. As in weeklong trips every holiday. And he would not top off the tanks when he came back. And he never pitched in on things like washing the plane or sweeping the hangar. Eventually the 2 bought out the 3rd, but it was not a pleasant journey.
     
  19. LongRoadBob

    LongRoadBob Line Up and Wait

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    I'm in the same position as the OP. Too soon to even think about it for me yet, but I still do a little.

    But I'm guessing besides all the points I didn't even know about that have been mentioned here (lots of good info to think about)
    I'd want to definitely check first

    - How often is it used now, how often are there conflicts and how resolved on "who gets to fly it". One can check the flight logs, but that assumes it will continue as it has been, so good to know how they resolve if several want the plane on a given day.

    - How do I get out if I want to. That is a biggie! If it turns out to be a bad deal.
     
  20. wayne

    wayne Line Up and Wait

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    ^ This

    I'm in a second partnership, and both have open scheduling. Everyone knows that everyone else also wants to fly, so no one books every Saturday or anything crazy like that. The first one ran 4.5 years and there were only two "real" scheduling conflicts, i.e. two people wanted to go somewhere. The rest of the conflicts were someone decided last minute to fly on a nice day only to see (on the calendar) someone had the plane on a trip; "oh well, another day".

    Even with 4 people the plane mostly sat in the hangar, as we all worked Mon-Fri.

    It is good to have a solid agreement on how the co-ownership operates. Wet/dry rate, monthly rate, how decisions on upgrades are made, how scheduling operates, etc. It greatly helps reduce conflicts. It still boils down to having good partners. One guy said, "You need partners that want the other partners to fly the plane."
     
  21. Stewartb

    Stewartb Final Approach

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    I don't like partnerships. Never have. I especially wouldn't want to be the new guy in a 5 member group. That's just me.
     
  22. weilke

    weilke Touchdown! Greaser!

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    Wet vs dry, makes little difference. We do 'dry' and plane is returned 'at the tabs'.

    Monthly fee pays hangar, insurance, nav-data and 'basic annual'. Hourly charge pays variable maintenance, engine reserve, prop reserve and the unplanned '**** that breaks'.

    For scheduling, at the annual meeting we draw numbers from a hat and re-arrange the chairs around the conference room table. We go around the table and everyone picks a week at a time. Sun&Fun, OSH and Christmas tend to go in round 1. Third week January and middle of November tend to go last. Week starts Friday 0000h and ends Thur 2359h. Some horse-trading through the year. If it's your week it just means you have priority. If someone else wants to go and shoot approaches they send you an email/text.

    Has been working like that for 21 years.
     
  23. bradg33

    bradg33 Cleared for Takeoff

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    People have given you lots of good thoughts on the operational logistics of being in a partnership. Those are all great things to cover. But, IMHO, the absolute, most important piece of a successful partnership are your partners. The details of operating the airplane, etc. can all be worked out, adjusted, etc., but you need to know and like your partners. Bad partners will make a bad partnership regardless of how the rest is setup. I'm in a partnership, but 4/5 of us knew each other going into it, and the 5th guy knew one of the others (just not me). Find time to meet with ALL of the partners, get to know them a bit, subtly try to figure out their financial situation (this is really important), see if they're *******s, etc. I'll say it again: bad partners make bad partnerships.
     
  24. Gerhardt

    Gerhardt En-Route

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    Yeah, if there's going to be a jerk somewhere in the partnership...I'd rather that person was me.
     
  25. Eric Gleason

    Eric Gleason Pre-takeoff checklist

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    Much good advice in this thread. With an existing partnership, there's probably an existing partnership contract, which you should ask to see, along with whatever financial reports they have. Be sure you understand the basic logistics, like how the plane is scheduled, how payments are made and handled, what restrictions there are, how to exit the partnership, etc. AOPA has some example partnership agreements, so it wouldn't be a bad idea to take a look at those to see what to expect.

    You also want to be sure that you're going into a good financial situation. There should be reserves for engine overhaul, airframe repair, paint, interior, and avionics upgrades. My club generates those by simply tacking a premium on to the hourly rate. I think it works out to about $35/hr, and we're doing very well financially. With plenty of money in the bank, there's never any consternation when an upgrade or repair is needed; we just write a check.
     
  26. Landing Fees

    Landing Fees Pre-takeoff checklist

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    Why would it matter what reserves are set aside? A new partner would be responsible for (in this case) his 1/5th of the engine and install. You don't get to benefit from something you didn't pay into.
     
  27. KramerK

    KramerK Filing Flight Plan

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    I disagree w/ the above. Reserve should be there to cover the new engine and install once it is necessary. Why would someone buy into a partnership and turn around and owe 1/5 on a 100% TBO engine? The reserves should be paid for usage to cover the M&E (or at least factored into the buy-in).
     
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  28. Salty

    Salty Pattern Altitude

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    But the buyer will have to pay his share into the reserves. 4 guys and 40k, buyer would have to pay $10k into reserve as part of his "buy in".
     
  29. KramerK

    KramerK Filing Flight Plan

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    Shouldn't the reserves be created through usage? I am considering the same thing. It just seems inequitable to say the engines been used 1700-2000 SMOH, and he walks in and has to pay 1/5 of the cost when he didn't fly any of it getting to that point. Just me and partnership experience; but plane partnerships are a new bird.
     
  30. gkainz

    gkainz Final Approach

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    our buy-in in set as 1 ownership share, while the reserves are funding through allocations of the hourly rate for each airplane. The new member buys in and begins funding his share of the reserves through use, not "catch up"
     
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  31. Katamarino

    Katamarino Line Up and Wait

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    I'd expect any reserves to be included as part of the valuation of the share price.
     
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  32. Ken Ibold

    Ken Ibold Final Approach

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    I agree. But that should be spelled out in the partnership agreement. Too many are just handshake deals with vague descriptions of what the agreement actually IS.

    I know of one partnership where a partner wanted out, and expected to get his share of the cash reserve refunded to him. His buyer, meanwhile, did not want to pay the that amount into the reserve, because it was money paid for operations that had already taken place. The partnership agreement was mute on the issue. That one was messy, because the seller was (perhaps intentionally) misstating the nature of the reserve.
     
  33. Boiler03

    Boiler03 Filing Flight Plan

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    Thanks everyone for the input. Lot's of great information here. Sounds like it can be a great way to get into ownership with the right people and solid rules in place.

    I'm continuing to pursue this pretty seriously, but definitely going to slow down and make sure I evaluate everything carefully before making a commitment.
     
  34. Ben Diss

    Ben Diss Pre-Flight

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    This. This. This. 100 times over. The people are the important thing. Everyone has to agree on how the airplane should be maintained and flown or there will be conflict. Everyone needs to have equally deep pockets or there will be conflict.

    Ask for a copy of the partnership agreement. Read the exit clause. If it's missing, that's a red flag.
     
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  35. bradg33

    bradg33 Cleared for Takeoff

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    To that end, if you ask for the partnership agreement (or LLC agreement, or shareholder agreement) and the answer is "oh, we don't have one," walk away.
     
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  36. weilke

    weilke Touchdown! Greaser!

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    As for the reserve account. Just as the wet/dry question, it doesn't matter how it is handled, it just matters that everyone is on the same page during buy-in and buy-out.

    Some people feel the partnership shouldn't 'waste money' by having cash sitting in a bank account. They calculate the share of the overhaul based on usage when it comes time to write the check. If everyone is in a strong financial position and knows that he has to do this, there is nothing wrong with doing it that way.

    Btw. you can also run it without any allocation of overhaul reserves by usage. When it comes time to overhaul everyone chips in equally.

    If there is no account with actual overhaul money, the price for the share just changes with usage relative to TBO. You buy in right before TBO it's going to be cheaper than with a fresh engine.

    You can skin the cat from the head or the tail, the soup tastes the same.
     
  37. LongRoadBob

    LongRoadBob Line Up and Wait

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    That point about the partners all working m-f seems like a good point to consider.
    It might be a strategy to try and get a few retirees, or folks that had days free in the week.
    On the other hand, you mention it wasn't that big a problem.
     
  38. SkyDog58

    SkyDog58 Touchdown! Greaser!

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    That’s BS. Walk away, my ass.


    RUN!!!!


    :D
     
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  39. FlyBoyAndy

    FlyBoyAndy Pre-takeoff checklist

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    I disagree with this. I'm in a 5 partner partnership with an incredibly crappy agreement right now. Our process for obtaining the plane and the friendship among the group lead us this way. At this time we may have a complete change in partnership, and we will take the opportunity to create a comprehensive partnership agreement. So, I in this case, I would take the opportunity to build a good agreement if I was to enter a new partnership.
     
  40. weilke

    weilke Touchdown! Greaser!

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    A poor or absent agreement with good partners is better than a 50 Page lawyered tomb with one bad partner.

    The agreement does very little for you if things really go sideways. With the money at stake for an older trainer, it's not even worth to litigate if someone doesn't keep up with their obligations.

    It's a bit like a pre-nup. No prenup with the right spouse is infinitely better than the opposite.