With careful planning, shared ownership could be the best way to go
|$500-Per-Month Airplane “Gotchas”|
So, you’ve met your partners, everyone is in agreement on an airplane and its care and operation, the partnership agreement has been signed, and you have your insurance quote. The last item is the m-o-n-e-y.
Your first option is to pay cash, but some of the partners may not be able to do so. It’s awkward if some partners pay cash and others finance the airplane, because the whole airplane will be taken as collateral for the note. The partners who pay cash would be pledging their share of the airplane to the note for the sake of the other partners. It may be simpler for the whole group to take out a loan for the airplane; then, everyone’s equity is equally at risk. The good news today is that aircraft financing is still readily available.
The present credit crunch from the fallout of subprime mortgages hasn’t affected aircraft financing. The two keys to getting an airplane loan are showing good credit and the ability to comfortably make the payments. For a partnership loan, each partner will need to submit a credit application and two years’ tax returns, and each partner will be required to sign on the loan, with joint and several liability. This means that in the event of a default, the bank can look to any one partner for the entire loan balance. Strong partners need to understand that they might have to carry weak partners in the event of a default, but that’s one of the give-and-takes of a partnership.
Banks generally want to see a minimum credit score of 650 or better. If you have a low score, but there are very valid reasons for it and you’re showing good income, you may still be able to get the loan. Normally, the minimum airplane loan is $50,000. Expect to put 10% to 20% down with a rate of about 7.5%. Some loans are 15-year terms with a balloon at five or seven years (the payments are calculated on a 15-year amortization schedule, but the entire loan is due in five or seven years); other loans can be obtained with a fixed 15-year term. I generally recommend a long-term, fixed-rate note. According to Bob Howe at Dorr Aviation and Kathy Sterling, an independent aircraft loan broker, there are a number of different options in aircraft financing right now. They can match your needs and abilities with a bank that has a program to best fit your specific requirements. Their fee is paid by the bank, because it saves the banks a huge marketing overhead, and their services save you a lot of time and trouble searching out a bank that can deal with your specific needs.
Sound good? Act now. With plentiful financing (for good credit), a good airplane and good partners, why delay? A 10% down payment spread out among five partners means you’ll soon be at 6,000 feet, flying a great airplane with only about 2% out-of-pocket cash up-front. On a $50,000 airplane, as little as a $1,000 down payment gets you (with partners) a pretty decent flying machine. See ya at 6,000 feet…flying your airplane.
Steve and Gary jointly own a Cessna 210. They have each owned much larger airplanes, but in slow business periods, the bigger airplanes weren’t utilized much and became a financial drain and had to be sold. Their flying patterns indicated that 95% of both of their trips were in a 300-mile radius. And each of them would probably fly 50 hours per year. Gary needed to fly during the week for quick business trips, and Steve only flew on the weekends to golf outings. According to Steve, “We decided to buy a nice Turbo 210 together and ‘see’ if joint ownership would be the answer. We agreed that top-notch maintenance was a priority and that state-of-the-art avionics would be the norm, and that bills would be paid on time with adequate reserves ‘in the bank’ to cover unexpected maintenance issues.” They signed a formal partnership memo that spelled everything out. “We even signed a ‘buy-sell agreement’ whereby one partner could buy out the other or get bought-out if things didn’t work out,” Steve added. Gary sometimes fantasizes about buying a CJ-1 Citation, and Steve admits to occasionally thinking about a Navajo or Cessna 340A, but then they both ask themselves “Why?” By splitting the cost of the annuals and the hangar and insurance, the expenses are hardly noticeable, according to the partners.
Now, eight years later, through good and bad economic times, the Turbo 210 partnership is working fine, and both parties intend to keep the airplane forever.
What doesn’t work, and what changes a joy into a problem, is a partnership that’s quickly thrown together on emotion, with a lack of forethought regarding the financial side of the deal and the expectations of each partner’s usage and care of the airplane. Partners who can’t really afford the airplane sometimes band together, creating a poorly capitalized endeavor that comes apart at the first problem. Partners can have unexpected problems and so can airplanes. A partnership that’s barely staying afloat and has no ability to buy out a financially troubled or problematic partner, or cover an unexpected mechanical problem, can create a bad situation for everyone involved.