NAFA member, Adam Meredith, President of AOPA Aviation Finance, writes about the benefits of aircraft co-ownership.
You could make good use of a light jet for your business, but you’re not likely to fly it more than 100 hours per year. And the capital cost of a brand new aircraft, plus the fixed operating costs, are a bit more than you want to spend, even considering the benefits of warranties and less downtime with a new versus a used aircraft. Instead of looking at a used and/or less capable aircraft, you decide you want a partner.
Co-ownership of an aircraft can be beneficial for you and your partner. (See: “Giving Half a Whole Lot of Thought,” BAA Sept/Oct 2017). A carefully structured partnership can provide many benefits not otherwise available to you by using charter or owning a fractional share, including access, tax advantages, and a dedicated crew, while dividing the cost of ownership in two.
Good news! Another like-minded business owner – either someone you know, or one who has been identified for you by an aviation professional – would like to partner with you on the purchase and operation of an aircraft.
You’re ready for the purchase, but either you or your intended partner prefers to deploy the cash elsewhere, in your primary business or other investments. So one partner requires a loan while the other does not – your first potential conflict. How will you proceed?
The path of least resistance is for the partners to agree to seek financing together, then to arrange some preferential treatment for the less-willing partner, such as a lower allocation of fixed overhead expenses. After all, he or she is agreeing to an unwanted loan.
When one partner is adamant about not taking a loan, you can look for a lender who is willing to work with you, and has procedures in place to help facilitate your purchase.
Here’s how it might work. The non-financing partner signs an acknowledgement with the lender (i.e. a subordination agreement or an extra signature on the security agreement). This gives both partners a formal relationship with the lender. Typically, the documentation will have an acknowledgment that the non-financing partner either will assume any deficiency from the borrowing partner or turn over the aircraft to the lender. The agreement also will ask the non-borrowing partner to acknowledge that the bank has first priority should a problem arise.
For example, an airplane costs $9 million, so each partner must contribute $4.5 million. The non-borrowing partner pays cash, and the other partner makes a down payment of $900,000 and takes a loan for $3.6 million.
Four years later, the airplane has depreciated to $6.75 million, and there remains a $3.1 million balance on the loan. The equity in the plane is $3.65 million. At that point, the borrowing partner has an unexpected life event (e.g. divorce, or major lawsuit), and cannot continue to make the loan payments.
He/she also is in arrears with the partner on hangar rent and other maintenance-related expenses and so decides to surrender his/her equity to the partner. The non-borrowing partner then “cures” any default with back payments and inherits all the equity. At that point he/she either may find a new partner or sell the aircraft for $6.75 million, after originally having invested $4.5 million. If sold, the partner recovers all of his/her original investment, plus $2.25 million to cover any back owed expenses. This scenario also would apply with more than one partner, with each non-borrowing partner agreeing to the same terms as above.
Shared ownership can be an excellent option when your proposed annual flight requirements aren't large enough to justify owning a dedicated aircraft. But when one of the partners prefers to finance his/her share, make certain that the lender selected can structure a deal that protects both borrower and cash buyer alike.
This article was originally published on July 3, 2018 in Business Aviation Advisor.
