Club loan

T

Tony R

Pre-takeoff checklist
Joined
Mar 12, 2019
Messages
200
Display Name
Atrosa
My club (equity based) is adding a plane to the fleet and offers to the members the option to lend money to the club and they will pay 8% interest. I'm an accountant and licensed investment broker, so from the financial side I kinda got that covered. Although, I always listen to other opinions to make sure I don't have a blind spot.

I've never loaned money, let alone to a flying club. I've reviewed the financial statements and we a solid club, even a bit over reserved. Has anyone done this? It is 10 AMUs over 10 years. The cash flow happens to approximate my monthly dues. While nobody wants to lose 10 AMUs it really doesn't change my world if it goes sideways. Thoughts....?
 
In the middle of a member loan for a portion of the 182 we just bought and a director of the club.

Happy to share details via PM or in a call later this week.
 
Tony R said:
The cash flow happens to approximate my monthly dues. While nobody wants to lose 10 AMUs it really doesn't change my world if it goes sideways. Thoughts....?
Click to expand...

That pretty much says it. My only question is will you continue to be paid if you left the club? If so, and if you like the club, the planes, and the members go for it!
 
this appears to be a good approach. Are there ways to protect you by securing the loan to the new asset? Clubs can change, people change roles, etc so having some assurance on recovering funds would seem prudent if things do go sideways.
 
I wouldn't lend money toward a purchase of an aircraft without a secured note in return. Even that's not a guarantee of repayment. And I would not do a secured note without legal advice (well, actually, I would but, then again I was in banking law for the last 18 years of my full time legal career and I have a fool for a client).

With there being potentially multiple private lenders, I think it's even more important that the specific terms and conditions be set out in writing.
 
TCABM said:
In the middle of a member loan for a portion of the 182 we just bought and a director of the club.

Happy to share details via PM or in a call later this week.
Click to expand...
Hmm, are you based out of KHFD? I know another club on the field just bought a 182.
 
I would not loan to a club. My experience with clubs has been less than stellar, so I have a bias against them.

If a club can afford to pay 8% interest with rental fee's then they are more than able to charge 10% now, build up a pile a cash and buy outright, or use the existing capital as collateral in a new loan.

If the members vote down the increase then that tells me that the majority don't want a new plane.
 
midlifeflyer said:
I wouldn't lend money toward a purchase of an aircraft without a secured note in return. …..
Click to expand...
Yep. Also filing the lien with FAA and being a loss payee.

Multiple lenders isn’t the answer, though; there are several ways for a club to finance a purchase and a multiple private notes at 8% is one of the uglier ways I can envision doing that. For $10K/member, it’d be easier to adopt a special assessment instead.
 
I did that. The actual aircraft was the collateral, I was on the FAA records as lien holder and was named separately on the insurance policy as lien holder. Failure to prepay the insurance a month in advance grounded the plane.

There was a major financial downturn, and I nearly became the sole owner of a very nice plane. Sole ownership was not my desire, I wrote checks to the club equal to the monthly payment, the treasurer endorsed the checks to me for 3 or 4 months, to keep the ownership in the club.
'
'The club recovered without missing a payment, and still exists today.
 
TCABM said:
Yep. Also filing the lien with FAA and being a loss payee.

Multiple lenders isn’t the answer, though; there are several ways for a club to finance a purchase and a multiple private notes at 8% is one of the uglier ways I can envision doing that. For $10K/member, it’d be easier to adopt a special assessment instead.
Click to expand...
Definitely filing or it means next to nothing.

You make a good point about "ugly." Competing security interests needs to be dealt with. And, sometimes the club is soliciting down payments from members but getting a bank loan, which will have first priority, for the remainder.

I'm not so sure about special assessments, though. That might nor be possible in a true "club" in the 501(c)(7) sense, even if it's equity-based to begin with. And if it's really just a basic multi-member LLC, it's going to depend on what the operating agreement says about assessments.
 
What if you want to sell your share of the club? What if you get voted out of the club, or you need to vote a money lender out of the club? Club officers may change in 10 years, your financial situation may change, etc.

You're getting 8%, but what is the risk vs risk of a S&P 500 index fund over 10 years that will pay more than 8%? I'd think the club is riskier than the market IMHO over a 10 year period. Net net, you're probably loosing money, subsidizing the club. IF the risk was better than the market, if the risk was that low, then why wouldn't a bank or credit union offer the loan? If they would at a higher rate of interest than 8%, then again why would you gift the club part of your wealth through an essentially subsidized loan?

In a nut shell, I'd say no. Agree that the club should just stock pile money to buy or have a hefty down payment and get traditional financing.
 
WDD said:
What if you want to sell your share of the club? What if you get voted out of the club, or you need to vote a money lender out of the club? Club officers may change in 10 years, your financial situation may change, etc.

You're getting 8%, but what is the risk vs risk of a S&P 500 index fund over 10 years that will pay more than 8%? I'd think the club is riskier than the market IMHO over a 10 year period. Net net, you're probably loosing money, subsidizing the club. IF the risk was better than the market, if the risk was that low, then why wouldn't a bank or credit union offer the loan? If they would at a higher rate of interest than 8%, then again why would you gift the club part of your wealth through an essentially subsidized loan?
Click to expand...
I can think of several but the bottom line is that it's like any aircraft purchase - rarely financially justifiable.
 
True. But a person should do irresponsible sending on himself vs funding others.
 
Last edited:
Tony R said:
My club (equity based) is adding a plane to the fleet and offers to the members the option to lend money to the club and they will pay 8% interest. I'm an accountant and licensed investment broker, so from the financial side I kinda got that covered. Although, I always listen to other opinions to make sure I don't have a blind spot.

I've never loaned money, let alone to a flying club. I've reviewed the financial statements and we a solid club, even a bit over reserved. Has anyone done this? It is 10 AMUs over 10 years. The cash flow happens to approximate my monthly dues. While nobody wants to lose 10 AMUs it really doesn't change my world if it goes sideways. Thoughts....?
Click to expand...
I've lent money for the purchase of airplanes. The loan and security were structured so that I expected to come out ahead whether I got paid or took the collateral. Hard money lending can be profitable. Or a loser.

Based only on what you've written here, what would give me a pause would be a) I don't think the interest rate is enough higher than what I could get for safer uses of my money, and 2) having multiple unrelated lenders.

On the other hand, if you're really doing it to support the club, and you'd be okay losing some of the ten grand, maybe you aren't concerned about those things.
 
  • Like
Reactions: WDD
If you plan to fly the 182 and the other planes, you might ask that your time in the plane(s) count toward your loan repayment instead of paying more to the club.
Sort of like buying a block of pre-paid time, that earns 8%.
One of the flight schools here did blocks of time at a 10% discount, which I took advantage of when renting.

This of course assuming they could handle the lack of that particular cash inflow, but it was mentioned they are a solid club w/reserves, plus they don't have to come up with as much cash to repay you, just write it off.
You would get your money back faster, especially if you were able to include your monthly dues in the write off as well, thus reducing a little long term risk, and actually saves them on interest over the long haul.

May not be feasible, but just a thought.
 
The only thing that would give me pause is a ten year loan term. IMHO, that's kinda crazy to repay a 10k$ loan. Personally, I'd be looking at a 2-3 year time table (max) in an arrangement like this.
On both the club and member-lender side, a lot can change in 10y. You could lose medical, leave aviation, switch clubs, hate the new members/directors, move, etc... I wouldn't want to have this lingering loan outstanding for that amount of time.

... Then again, if we go back to a prolonged period of 0% rates, collecting 8% for 10y will feel quite nice :). So some upside duration risk!
 
iu
 
Doc Holliday said:
Now I find that hard to believe........
Click to expand...
I ain't the only one that has not had great club experiences.

When your club president/safety officer tells you you MUST make a flight in weather with active SIGMETS and local t-storm activity, and gusts up to 25kts (local Charley METAR was IFR and the last 6 approaches went missed) you gotta question their 'safety first' mantra. All this because I had to divert the PREVIOUS day due to, well, active SIGMETS, local t-storms, gusts up to 25kts and the local Charley METAR being IFR.

So yeah.. it must be me being difficult. lol
 
All kidding aside, clubs can change quickly. Some new people get elected, new rules, new "who do we really want to join our club" ideas come up, etc. Maybe not bad, but different. Maybe you like it better, maybe you like it less. Maybe it does go bad, who knows.

Another angle. How would you feel if the club voted to suspend loan payments for a while because of a cash crunch? How will you like the club if the payments started getting late?

Kind of like loaning money to friends or worse your family members. The acid test: if it would interfere with your friend and family relationships if you had to harp on them about not paying on time, if you have to sue, don't lend them money.
 
Skyrys62 said:
One of the flight schools here did blocks of time at a 10% discount, which I took advantage of when renting.
Click to expand...
I did the same, but would not do it again. You need to put in a large enough seed (like $10,000) to get a decent return ($1000) and hope that the school doesn't close, the plane doesn't go into extensive annual/repairs and fly enough to warrant putting up $10,000.

Honestly 10% isn't a large enough discount. A school renting a paid for 172 and renting at $180-200/hr is making way more than 10% on every flight hour.
 
  • Like
Reactions: WDD
pfarber said:
Honestly 10% isn't a large enough discount. A school renting a paid for 172 and renting at $180-200/hr is making way more than 10% on every flight hour.
Click to expand...

So what would you consider a fair profit for the school? And what would you consider to be a fair discount?
 
TCABM said:
Heh. The school is running leasebacked planes and is irrelevant since the proposed loan to a member loan to a club.
Click to expand...

Agreed. But since pfarber interjected with his flight school statement, I was interested in what he considers "fair".
 
Tony R said:
My club (equity based) is adding a plane to the fleet and offers to the members the option to lend money to the club and they will pay 8% interest. I'm an accountant and licensed investment broker, so from the financial side I kinda got that covered. Although, I always listen to other opinions to make sure I don't have a blind spot.

I've never loaned money, let alone to a flying club. I've reviewed the financial statements and we a solid club, even a bit over reserved. Has anyone done this? It is 10 AMUs over 10 years. The cash flow happens to approximate my monthly dues. While nobody wants to lose 10 AMUs it really doesn't change my world if it goes sideways. Thoughts....?
Click to expand...
I was part of a club that borrowed money from members and I think some "acquainted non-members" as well, with great success. I didn't participate in loaning them money, but it was sought after enough that there was a waiting list to give them money. IIRC, though, they paid 10% at a time when that was a very good ROI compared to anything else with that low of a risk.

Do your due diligence, and if everything looks good, go for it.

Lindberg said:
I, for one, would be very interested in a thread on what you have had great experiences with.
Click to expand...
I think he's been very happy with the social events for Curmudgeons Anonymous. :D
 
The cost to get adequate legal advice and properly document a secured $10k loan may exceed, or at least eat up a lot of, your expected return. In a normal circumstance, the Borrower (here, the Club) will be required to pay those fees for the Lender (here, the member) as part of the loan process. Is the Club prepared to do that?
 
Depending on the corporate structure and tax status of the club, the IRS considers private benefit and private inurement verboten.

Particularly, the IRS is looking at unjust enrichment of members, directors, or employees by the organization. Unjust enrichment usually is a result of an insider receiving personal gain from the organization’s income or assets.

This is usually discovered on the 990 filing.
 
  • Wow
Reactions: WDD
TCABM said:
Depending on the corporate structure and tax status of the club, the IRS considers private benefit and private inurement verboten.

Particularly, the IRS is looking at unjust enrichment of members, directors, or employees by the organization. Unjust enrichment usually is a result of an insider receiving personal gain from the organization’s income or assets.

This is usually discovered on the 990 filing.
Click to expand...
The one I'm aware of, I believe "Flying Club, Inc." borrowed the funds from "Flying Club Lender, Inc."... If there's one thing I've learned over the years, it's that if there's a rule that says you can't do X with a corporation, there's a way to get around that rule by having another corporation!
 
You must log in or register to reply here.
Back
Top