How do flying clubs finance aircraft?

bcool

bcool

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Do any of you belong to a flying club that is financing their aircraft?


I was wondering how that would work - here are some of the questions I can think of:
  1. Do all the members need to co-sign for the loan(s)?
  2. How would the financing company determine the club's creditworthiness - based on the member's cumulative credit ratings?
  3. What happens if a member leaves the club?
  4. How does a new member assume the previous member's liability for the loan?
 
I don't think that is a sound plan. I would guess each individual - if they needed to finance their buy-in - would need to do so separate from the club. That would prevent a dead-beat member from affecting the others (at least too much, any how)

Edit - I also think a small club is best served by a membership that can easily and quickly buy-out at least one unhappy member. If someone wants out, it's great to have the others quickly buy their share and then work on re-selling it.
 
So let's say four guys decide to buy an airplane based on their need and financial ability. One of them decides (for whatever reason and whenever it suits him) to bail out. Why should the other three plan to pay him for his piece? And if so, at what price? That makes no sense to me. What if three want to sell?

jhausch said:
I don't think that is a sound plan. I would guess each individual - if they needed to finance their buy-in - would need to do so separate from the club. That would prevent a dead-beat member from affecting the others (at least too much, any how)

Edit - I also think a small club is best served by a membership that can easily and quickly buy-out at least one unhappy member. If someone wants out, it's great to have the others quickly buy their share and then work on re-selling it.
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Wayne raises excellent questions, ones which should be carefully thought through.

What you describe is an "equity club," one in which the club holds title to the aircraft and the members own equity in the club.

As alluded-to by Wayne, there needs to be careful consideration given to how members enter and exit the club, and what happens if they can no longer pull their weight. As a matter of practicality, usually neither the club nor its members have any obligation to acquire a departing member's shares, but do have the option to acquire them before they are sold to an outsider. In addition, the club has a reasonable right to approve any new entrant prior to his or her accession to ownership (this would typically be basic pilot qualification, character and financial ability).

You should solicit input from Kent Shook, who has been actively involved in the management of a successful equity club in Wisconsin for quite a while.

Another model, one used with good success by the RFC Flying Club at Addison, Texas, is membership only- the club owns no aircraft, but rather, leases them from aircraft owners. It works well, if you have the right kind of people involved. RFC has three Bonanzas, a 177RG Cardinal and a Cherokee 180. Great club, and I would never have been able to get into Bonanza flying without it.
 
What I have always wondered is how a newly formed club finances its aircraft purchases? Is it all done with buy in money? If a loan is taken how is it secured other than through the plane? ie does a club member have to "personally sign for the loan?"

The rest of the structure of the club should be fairly easy. What Spike speaks about are issues that are important but iMHO are much easier to determine. ( I agree with Wayne's assement by the way)

I'd think that AOPA has forms and club by laws etc. The financing for a new club is the real unknown, at least for me thats the hard question. perhaps this is what bcool was asking but not sure.

I know of two clubs here one is an equity club. You can buy a share from a member at what ever they sell it to you for or if there are shares still held by the club you can buy it for the assessed share value. There after you pay your monthly dues which include fixed costs and pay your hourly rate tach time wet. If you get behind a certain dollar figure or number of months then you are not permitted to fly and after a certain level of delinquency your share is forfeited back to the club.

Another has no shares and is techincally not a club but has five owners. how the heck that works I'll never figure out as it seems one owner can dig his heels in and the others can't force him out.
 
What I have always wondered is how a newly formed club finances its aircraft purchases? Is it all done with buy in money? If a loan is taken how is it secured other than through the plane? ie does a club member have to "personally sign for the loan?"

The rest of the structure of the club should be fairly easy. What Spike speaks about are issues that are important but iMHO are much easier to determine. ( I agree with Wayne's assement by the way)

I'd think that AOPA has forms and club by laws etc. The financing for a new club is the real unknown, at least for me thats the hard question. perhaps this is what bcool was asking but not sure.

I know of two clubs here one is an equity club. You can buy a share from a member at what ever they sell it to you for or if there are shares still held by the club you can buy it for the assessed share value. There after you pay your monthly dues which include fixed costs and pay your hourly rate tach time wet. If you get behind a certain dollar figure or number of months then you are not permitted to fly and after a certain level of delinquency your share is forfeited back to the club.

Another has no shares and is techincally not a club but has five owners. how the heck that works I'll never figure out as it seems one owner can dig his heels in and the others can't force him out.

Anyway I'd be real interseted to hear how financing the first purchase for a new club works.
 
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Further to Spikes excellent summary (to be expected from a gentleman of his rank and odor) the amount of time, effort and forethought devoted to airplane deals has historically been heavily weighted towards getting in, with short shrift to getting out. History has proven the latter to be much more problematic than the former, and those who pursue such activities should be forewarned and aware of the pitfalls.

Stated differently, airplane deals and marital relationships have many things in common. One of the most important is that getting in is usually easier and cheaper than getting out.

SCCutler said:
Wayne raises excellent questions, ones which should be carefully thought through.

What you describe is an "equity club," one in which the club holds title to the aircraft and the members own equity in the club.

As alluded-to by Wayne, there needs to be careful consideration given to how members enter and exit the club, and what happens if they can no longer pull their weight. As a matter of practicality, usually neither the club nor its members have any obligation to acquire a departing member's shares, but do have the option to acquire them before they are sold to an outsider. In addition, the club has a reasonable right to approve any new entrant prior to his or her accession to ownership (this would typically be basic pilot qualification, character and financial ability).

You should solicit input from Kent Shook, who has been actively involved in the management of a successful equity club in Wisconsin for quite a while.

Another model, one used with good success by the RFC Flying Club at Addison, Texas, is membership only- the club owns no aircraft, but rather, leases them from aircraft owners. It works well, if you have the right kind of people involved. RFC has three Bonanzas, a 177RG Cardinal and a Cherokee 180. Great club, and I would never have been able to get into Bonanza flying without it.
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I was in a shared-equity club at one point.

The club consisted of approximately 70 'owners' which had, at one point in time, bought 'stock' in the corporation (LLC) that owned the aircraft. Your rental rates were affected by how many 'shares' you owned in the corporation. To actually rent the a/c, you had to pay monthly dues. You were able to go 'inactive' at any time with a 30-day notice. Of the 70 shareholders, there were probably only 25-30 active dues-paying members.

I wasn't around at the beginning of the club (early 80's I believe), but I'm guessing a group of guys got together, formed an LLC, and sold 'shares' of the 'corporation' to generate cash to obtain financing for the first a/c. As more members bought stock, they were able to add to the fleet while the monthly dues and rental rates were used for upkeep of the current fleet and pad the monthly load payments.
 
CJones said:
snip ... and sold 'shares' of the 'corporation' to generate cash to obtain financing for the first a/c. ...snip
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I'd like to know what financial institution will finance such a deal where no one personally guarantees the loan...
 
Our club (same club as Kent) had a hack of a time securing financing for the DA-40 without having someone personally cosigning for the loan. Fortunately we have a good relationship with a local bank (all our current loans are through them), and managed to get financing through the club without a personal guarantee. Unfortunately the rates also reflect this.

From my discussions with the club treasurer, most of the big AC financing companies didn't want to deal with a club, so your best bet may be a local bank.
 
skidoo said:
I'd like to know what financial institution will finance such a deal where no one personally guarantees the loan...
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No clue. How does a 'normal' corporation get a loan - does the CEO/CFO/Pres personally sign for a loan?
 
CJones said:
No clue. How does a 'normal' corporation get a loan - does the CEO/CFO/Pres personally sign for a loan?
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In the equity club I was a board member of, somebody (and often someBODIES) had to co-sign for the bank loans, though they were issued in the name of the club.
 
CJones said:
No clue. How does a 'normal' corporation get a loan - does the CEO/CFO/Pres personally sign for a loan?
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If it's a sizeable loan based on the company's business, deposits, asset base, other factors, the answer is yes. And his wife too.
 
A few thoughts on this, I'm on the board in a 40 year old, non-profit, non-equity club that owns 3 and leases 5 aircraft with about 120 members. I'm also in an LLC with 3 others.

In the real club, when we have to borrow money we borrow it from members. In the 6 or seven years I've been on the board we've done that a few times to pay the $50K insurance bill at one time and to buy the 3rd plane from a member who lost his job. The plane was already in the club and a favorite of the members. Establish a fair interest rate and payment schedule, and everybody is happy.

In the LLC we each had to put up cash, loans were done individually.

Wayne's comment on leaving is especially pertinent. In the club people come and go all the time. There's a deposit and initiation fee and that's about it. Although we do have regular and associate members. it's a bit tougher for the associates to join.

In the LLC we spent a LONG time working out the procedures to leave. We considered one person wanting to leave, 3 people wanting the 4th to leave, and someone dying, divorcing, or somehow getting a piece of the LLC through the legal system. It's complicated to be fair to everybody in those situations.

Joe

PS. I don't think you can have an LLC with 70 shareholders, Chris. I assume that is just a "what do you call it" mistake.
 
Areeda said:
PS. I don't think you can have an LLC with 70 shareholders, Chris. I assume that is just a "what do you call it" mistake.
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Indeed. You can't have any shareholders in an LLC. They're called members. The hold a membership interest, not stock.
 
For our soaring club, we keep it internal to the members.
We borrow from our members, offer CD rate interest.
Written agreements to pay back $xx over x years.
The members names are not on the glider.. no lien is registered with the FAA.
 
wabower said:
So let's say four guys decide to buy an airplane based on their need and financial ability. One of them decides (for whatever reason and whenever it suits him) to bail out. Why should the other three plan to pay him for his piece? And if so, at what price? That makes no sense to me. What if three want to sell?
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You make a good point. I guess I was thinking about the ability to get a sorry SOB out of my life and those of the other members. Might be the cheapest money we'd ever spend.

I suppose I was thinking the 3 would buy out the 4th at an amount determined upon entry (or at least based on a formula known at entry) and then offer the 4th share for sale on their own.

Right of first refusal to the club makes sense, as does pre-approval of any new members (by a leadership team for a big club or the other members in a small one)
 
In my club, the financing comes from the members themselves.

Some of it comes when a new member joins, as he pays a "share price". If you make that share price high enough, then it can represent that member's share of the cost of the planes, in which case no financing is needed. But the problem is that you now limit your membership to only those members who are willing and able to commit that much money up front, which is a lot to ask a new member just trying something out.

So in our club some members volunteer to lend money to the club, and the club pays those members interest. This is a pretty good system, because it allows the pay-in for new members to stay low, and when members first join that's when they're least willing to make a big commitment to a club. Meanwhile the members who have been with the club for years are more likely to be willing to entrust some cash with the club.

So, in the end, some members "pay in" much less than their share of the purchase price of the planes, while some other members pay in much more than their share, and the members who pay in more are compensated with interest payments.

There was some investigation of getting bank financing, but the banks have generally wanted individuals to cosign the loan and provide some collateral.
-harry
 
Harry do the other members of the club guarantee repayment to the higher payers or do the higher payers have a security interest in the clubs aircraft?
 
SCCutler said:
You should solicit input from Kent Shook, who has been actively involved in the management of a successful equity club in Wisconsin for quite a while.
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Thanks Spike - Looks like Pete beat me to it, and got the general idea:

vontresc said:
Our club (same club as Kent) had a hack of a time securing financing for the DA-40 without having someone personally cosigning for the loan. Fortunately we have a good relationship with a local bank (all our current loans are through them), and managed to get financing through the club without a personal guarantee. Unfortunately the rates also reflect this.

From my discussions with the club treasurer, most of the big AC financing companies didn't want to deal with a club, so your best bet may be a local bank.
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I was the treasurer from 2005-2009 and did most of the prep work for the aircraft purchase as well as securing other loans for the club. One thing that is VERY much in our favor is that the club has been around for over 50 years, and we've been with the same bank as long as anyone can remember. We've had many loans (things like engine overhauls used to be 100% financed, more recently we've been adding reserves to the hourly rates).

Fairly late in the game, our bank decided that we would need a 25% down payment, and their rates were never the best - But when the new treasurer went to find loans elsewhere, he was unable to find another place that would give us a loan without a personal guarantee. So, we took the deal our bank gave us.

A new club might have difficulty financing an aircraft without a personal guarantee, but I think that your best bet is probably to ask around at your local airport and see which local banks are friendly towards aircraft loans, and see what you can get from them. Our bank's position is that since they've spent the time and effort to learn about the aircraft market and how to work with the FAA that it is beneficial for them to use that knowledge and write aircraft loans! However, banks with no aircraft experience are unlikely to work with you. That's why you need to go to the airport first.

Also, be prepared to show evidence of the actual value of the aircraft. Vref, NAAA, etc. (there's one more I can't think of offhand). It's likely to be less than the asking price. Be prepared to pay the difference, if there is one, between the appraised value and the price you actually buy for. You're probably not going to buy the first plane on your list! The plane we bought was one of 17 that we seriously considered (offers were made on about half that number), and the active shopping process took about 5 1/2 months after the previous airplane was sold. Be patient! Those months did pay off - The airplane we bought was one of the best-equipped ones we looked at, had reasonable times and history, and I think we got an excellent value out of the deal. If you buy the first plane you see, you probably won't be as satisfied.

Good luck, and let us know how it goes! :yes:
 
Oh, I should also mention how my "other" club works.

They have 8 airplanes, and while the club owns the airplanes, they have investors who put in $10,000 towards the airplanes, guaranteed by the airplanes, and the club pays them on an interest-only basis. When one investor wants out, there is a waiting list of people wanting to jump in. Especially in this economy, having an investment that's extremely low-risk with a decent return can be a great thing.
 
mantakos said:
So in our club some members volunteer to lend money to the club, and the club pays those members interest.
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My club does the same thing when we want to finance a new airplane. Interested members specify their maximum loan amounts and requested interest rates. The board of directors then chooses the lowest bidders.
 
Our club paid cash for the Dakota acquisition last year. :D and then we sold the Archer.
 
Ours is a membership club that has pretty much zero net worth.

You might at first think that having no net worth sounds like a bad thing, but actually it has a couple of significant advantages. For one, there's no big payment a new member must make and nothing that a quitting member is owed or owes. So it's a painless experience when members come and go. Also, the liability exposure is attractive -- the members have pretty much nothing to lose if the club is sued because they have no equity tied up in the club.

The way to have no net worth is to borrow everything and own very little. The two main assets that the club needs are planes and working capital, and the idea is to get these by debt financing instead of equity financing. Debt financing is done by leasing the planes from a few of the long-time members, and borrowing the working capital from investors, who are also members who elected to invest in notes sold by the club in order to earn interest). The members who chose to invest by leasing planes or buying notes are exposed to a bit of risk of losing their investment, but that's something they chose individually. Most of the 100+ members don't invest.

While having no net worth seems like a good thing, it does have a disadvantage shared by any business that is highly leveraged: if you run out of cash and can't borrow more, then you fold.
 
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AdamZ said:
Harry do the other members of the club guarantee repayment to the higher payers or do the higher payers have a security interest in the clubs aircraft?
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The "non-lending" members of the club make no personal guarantees of any kind. The value of the planes well exceeds the amount of the loans, so the club has a positive "net worth", and the planes serve as collateral for the loans.
-harry
 
NoHeat,

I don't suppose you're in the awesome Green Castle Aero Club? That's one of mine, too. :)
 
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