Negotiating Price of fractional ownership

[Cici]

I'm looking at getting into a more serious plane. Something I swore I would never do, but the Cherokee 6 my school rents won't get me over the mountains very often or the 182's don't have the kiddie seats or I need 750 hours (and like 200 hours multi) to take the 310 out on my own. All understandable. There's 5 of us, 3 of them are aged 3 to 7.

So, my local 'drome has a fractional share up for a bird that makes over 300 horses, turbo'd, 6 seater and can get me over the mountains on more days than not. I can at least somewhat go around them in most instances. It is in fact the model of bird I was looking at buying outright if I were to ever jump into plane ownership. So, it's a little different than finding your normal "trainer" on a fractional ownership or flying club.

I've read a lot on what to expect and questions to ask. I actually found this great thread that was posted a month ago. https://www.pilotsofamerica.com/community/threads/buying-into-fractional-ownership.114264/

My question is, how does one establish the "Buy in"? I would imagine it's negotiable, as are most things in life? When I multiply the buy in by the number of shares it seems the plane is somewhat overpriced based on listings I've been looking at for the last couple of months (which haven't really moved and I assume means there is at least 10% downward wiggle room). At first I was thinking there may be a justification for a bit of a premium since it's a plane not everyone shares, at my home field etc. On the flip side, I think I'm leaning towards there should be a slight discount on "fair market value" since finding someone to buy my share if I want to move on will be more difficult. The plane is expensive, not everyone wants a fractional ownership and finding someone locally could take some time. Selling the plane alone seems to take some time, let alone a share at at a specific airport.

I don't have many details right now, as I'm going to take a look in a couple days. It's still early and I have a lot of due diligence to do. I'm in a position to buy the plane myself, the fractional thing intrigues me since it will be my first plane, but I'm not going to overpay to share the time with other people (and the other downsides to sharing a plane). I'd also like to step up into something "Bigger" if my family really enjoys general aviation, so the fractional share is attractive as a stepping stone to a bigger and better plane.

I know at the end of the day, what I'll pay is what I'll pay and maybe it works out, maybe it doesn't. I just wanted some input on negotiating the price of the buy in.

 

[catmandu]

If it is a full equity share, appraised value plus any cash reserves multiplied by ownership percentage, plus a little bit for the value of an established situation, or minus a little bit if you are buying from a share owner that really needs to sell.

 

[Ben2k9]

Seems like a good idea for a plane like this just do your homework and pay fair value for the plane. Having a couple more owners flying the plane is likely a positive since it’s much better for a plane to be flying than to be idle.

I would want a contractual exit ramp for the partnership as well. Like every 3 years it winds down and plane is sold unless another agreement is made that allows partnership to continue in some form. Otherwise you might get stuck in it longer than you would like.

 

[Cici]

If it is a full equity share, appraised value plus any cash reserves multiplied by ownership percentage, plus a little bit for the value of an established situation, or minus a little bit if you are buying from a share owner that really needs to sell.

Yeah, the cash part is easy to value. I wasn't expecting an appraisal, and even then I'm not interested in an appraisal for insurance purposes. The rub seems to be in determining the value of the plane itself. But to your point, the price could seem high if they have a ton of cash. I don't think they do since they have a motor with <100 hours and a check is cut each year for hanger, insurance, annual etc. I'm trying to figure out if this deal was 2 partners and they were a little short on cash when upgrading the motor and realized the plane wasn't flying as much and are raising some cash by adding a 3rd.

Which brings me to next question...Is the annual usually viewed as paying for the next year of flying or paying for the past year?

Seems like a good idea for a plane like this just do your homework and pay fair value for the plane. Having a couple more owners flying the plane is likely a positive since it’s much better for a plane to be flying than to be idle.

I would want a contractual exit ramp for the partnership as well. Like every 3 years it winds down and plane is sold unless another agreement is made that allows partnership to continue in some form. Otherwise you might get stuck in it longer than you would like.

Yeah, I get that it can be a positive if you're not flying every week. I'm more concerned about selling my share if and when I want to upgrade, relocate etc. The plane has been in a fractional ownership for a couple of decades, so I'm not sure what the "exit ramp" looks like.

I know a lot of this depends on how much the "partners" like me as well. I'll be rehearsing how to broach these subjects without acting like a turd ball. Which I don't think I am, but to be fair, no one thinks they are.

 

[aftCG]

If it is a full equity share, appraised value plus any cash reserves multiplied by ownership percentage, plus a little bit for the value of an established situation, or minus a little bit if you are buying from a share owner that really needs to sell.

This. If the partnership is well run they have some money in the bank. The new guy shouldn't expect to get a fraction of that for free.
If the partners have NO money in reserve then you need to understand what happens when the plane needs a cylinder, transponder, etc.

 

[AnthonyS1]

Just curious what type of plane it is?? Year, make and model, avionics??

 

[weilke]

'Fractional ownership' typically refers to a setup where you own a share of one of a fleet of planes which are held in a pool. Ownership of the share gives you access to that pool of planes.

What you are talking about is a partnership or more correctly co-ownership.

I am in the process of selling such a share. My formula is:

(appraisal + cash reserves)/n partners = asking price

If someone who is a good fit for my partners makes me an offer lower than that, we'll talk. When I bought, the market was soft and the seller wanted to buy a Yak. I made a reasonable offer below his ask and we came to an agreement in between the two numbers.

 

[benyflyguy]

Is a member selling the share that they own or the club offering another share? If club offering share then not all the negotiable I imagine. But if it’s member “selling “ his share (which is how I bought into my club) there there is a lot of wiggle room

 

[Ravioli]

@Cici - the thread you linked was an okay one. There was another one about the same time with more of the "what to ask" stuff in it. Should be easy to find.

@weilke is on the right track. Don't forget that the plane might have debt, so (net equity + cash reserves) / # of peeps = estimated value.

I'd consider that estimate my NOT TO EXCEED price of the share.

 

[MIFlyer]

also, the most important things in this deal are probably

1. your relationship and compatibility with the other owners
2. the policies and rules around scheduling, upgrading, paying, exiting partnership
3. the health of the partnership (people, planes, reserves and financial)
4. the lowest one - how much you pay for the thing

I'd rather be in a partnership 20% worse of a deal than I could have driven, with great partners rather than being in a scenario where i ****ed them all off on my way in by fighting about every nickel and dime

 

[Lndwarrior]

Part of the dilemma is the valuation of the plane. The more expensive the plane, the greater variance in the valuation.

As a buyer you might value it lower. As an owner they might value it higher. Hiring a professional to provide the valuation may have both sides unhappy.

I dealt with this dilemma a few years ago. I felt the buy-in was a little high but the partners, and the mx on the aircraft, gave me a warm and fuzzy and I pulled the trigger. It turned out to be great for me. In the end I sold my share very quickly for a little more than I paid for it.

Part of the question if you feel the valuation is high is - will this really hurt you if you have to resell at what you think the valuation is?

What if you consider that, say, after 3 years of flying at the reduced cost of a partnership as opposed to paying for all the mx on your own plane? Maybe then a $10K loss on resale, for example, doesn't sound so bad? Especially if you have had access to a great plane with 1/3 the cost.

In my opinion, if you feel comfortable with the partners, they have a clear and reasonable written agreement and the have demonstrated responsible care of the aircraft, I would care a lot less about the valuation/buy-in. Assuming it's not too far out of line. You can't know what someone may pay for your share 3 years from now. It may be less, it may be more.

If you can afford the upfront cost, and can live with some loss on resale, then I would set aside this part of the equation. Just look at the partnership itself and how the plane can improve your life.

 

[Cici]

Part of the dilemma is the valuation of the plane. The more expensive the plane, the greater variance in the valuation.

As a buyer you might value it lower. As an owner they might value it higher. Hiring a professional to provide the valuation may have both sides unhappy.

I dealt with this dilemma a few years ago. I felt the buy-in was a little high but the partners, and the mx on the aircraft, gave me a warm and fuzzy and I pulled the trigger. It turned out to be great for me. In the end I sold my share very quickly for a little more than I paid for it.

Part of the question if you feel the valuation is high is - will this really hurt you if you have to resell at what you think the valuation is?

What if you consider that, say, after 3 years of flying at the reduced cost of a partnership as opposed to paying for all the mx on your own plane? Maybe then a $10K loss on resale, for example, doesn't sound so bad? Especially if you have had access to a great plane with 1/3 the cost.

In my opinion, if you feel comfortable with the partners, they have a clear and reasonable written agreement and the have demonstrated responsible care of the aircraft, I would care a lot less about the valuation/buy-in. Assuming it's not too far out of line. You can't know what someone may pay for your share 3 years from now. It may be less, it may be more.

If you can afford the upfront cost, and can live with some loss on resale, then I would set aside this part of the equation. Just look at the partnership itself and how the plane can improve your life.

Thanks for this. The big dilemma is when the price of the plane drifts into six figure territory and then you're multiplying the "buy-in" by 3-5, differences in prices really get magnified. I'm going into it open minded and (I hope) not overly emotional. If the "partners" are cool, the flying schedule seems pretty open (I'm burning thru flight radar24 free subscription right now). Right now though, I think they're about 15-20% "high." Which if we're talking about a couple grand or couple "stacks of high society" may not be that big of a deal. I'll check out the plane, do some due diligence and if really interested on both sides, I'm sure we can make a deal happen.

 

[MIFlyer]

I think you're on to something. 20% of 120K is some actual money. Most folks are getting into 182 partner ships where each share is 20-30k so 3-4k doesn't seem worth the fight and hassle.

 

[James331]

Having a couple more owners flying the plane is likely a positive since it’s much better for a plane to be flying than to be idle.

Depends on who the other owners are, sometimes not.

 

[bradg33]

I’d personally discount the value of buying into an existing partnership (buying a share from an exiting owner) due to the illiquidity of the share. If you want out later, you’ll find that a share may be harder to sell than a whole plane.

 

[Cici]

I’d personally discount the value of buying into an existing partnership (buying a share from an exiting owner) due to the illiquidity of the share. If you want out later, you’ll find that a share may be harder to sell than a whole plane.

I'm with you on this one. Especially a non-"trainer." Now I'm looking for a single person, willing to share, who is interested in the same make and model, gets a long with the "others" AND is happy with the location. Is that a rarer bird than someone with the money to buy the plane outright? There seems to be some value in how this all gets setup and as others have called "exit ramp."