Partnerships: Financing

S

Star Keeper

Pre-takeoff checklist
Joined
Dec 20, 2021
Messages
124
Display Name
Display name:
Star Keeper
As I learn more about airplane owner partnerships I find I'm collecting more questions. I recently spoke with someone who is looking for a partner in a 182. His previous partner was a friend and their partnership was very informal and I think he understands that with someone new we will need to look at formalizing things a bit more. One question I came across though was with regard to financing. The aircraft is currently owned outright by him. As someone entering into an existing partnership are there secured financing options out there for this scenario?

And to take a step back if I were to find a partner first then we look for a plane that fits our needs can we do an LLC with both of us personally signing on the loan using the airplane as the collateral or would we need to come out of pocket.

Thanks for the education.
 
If I was they other fellow, there is no way that I would let you use a plane that I own outright as collateral for a loan. If you need to finance your dreams, find another way.

As to the other question, What happens if the other partner can’t keep up his payments on the shared loan, assuming that you can get a loan in the first place? If he can’t make the payments on the plane loan he probably can’t make the payments on the hanger and insurance and maintenance either. But he still is a partner in the LLC that owns the plane.
Call me negative but I would plan for failure.
 
Last edited:
Morgan3820 said:
If I was they other fellow, there is no way that I would let you use a plane that I own outright as collateral for a loan. If you need to finance your dreams, find another way.

As to the other question, What happens if the other partner can’t keep up his payments on the shared loan, assuming that you can get a loan in the first place? If he can’t make the payments on the plane loan he probably can’t make the payments on the hanger and insurance and maintenance either. But he still is a partner in the LLC that owns the plane.
Call me negative but I would plan for failure.
Click to expand...

With regard to the first section my concern is that he owns it outright but is selling half of that airplane to me as part of the partnership. I would expect that the aircraft would move into a co-ownership methodology such as an LLC or direct co-ownership. So I guess to rephrase my question are there financing options out there for fractional ownerships? Banks and other sources of money lend for stuff much higher risk than that but I don't know if its a thing.

With regard to the partner not keeping up his payments I would expect that just like when you default you lose your share. I don't intend to get into a partnership that I can't afford to carry the entire cost of the airplane if I had to but those are the risks.

Finally I'll give you the benefit of the doubt that you didn't mean it the way it came across but the phrase "If you need to finance your dreams, find another way" seemed a bit rude. Granted that could be me. If so then my bad. I have the capital to pay cash for any of these planes but right now its cheaper to rent money than to spend your own if it can be done. For me if the interest rate is right it might make more sense financially to finance my dreams. At this point I'm just trying to learn what is the generally accepted way things are done in a process I don't have experience in yet.
 
Star Keeper said:
With regard to the first section my concern is that he owns it outright but is selling half of that airplane to me as part of the partnership. I would expect that the aircraft would move into a co-ownership methodology such as an LLC or direct co-ownership. So I guess to rephrase my question are there financing options out there for fractional ownerships? Banks and other sources of money lend for stuff much higher risk than that but I don't know if its a thing.

With regard to the partner not keeping up his payments I would expect that just like when you default you lose your share. I don't intend to get into a partnership that I can't afford to carry the entire cost of the airplane if I had to but those are the risks.

Finally I'll give you the benefit of the doubt that you didn't mean it the way it came across but the phrase "If you need to finance your dreams, find another way" seemed a bit rude. Granted that could be me. If so then my bad. I have the capital to pay cash for any of these planes but right now its cheaper to rent money than to spend your own if it can be done. For me if the interest rate is right it might make more sense financially to finance my dreams. At this point I'm just trying to learn what is the generally accepted way things are done in a process I don't have experience in yet.
Click to expand...
I’m sorry I hurt your feelings. I am old school when it comes to such things. If you really want to know then I would contact an aircraft financing company and ask them. I personally have never heard of such a thing but perhaps there is.
 
Morgan3820 said:
If you really want to know then I would contact an aircraft financing company and ask them.
Click to expand...
:yeahthat:

As far as financing, I agree with renting money (AKA borrowing) when the interest is less than the return you can get from investments. My house mortgage is about 4.5%. I made 26% return last year (I doubt that'll happen this year.) It would be foolish to use money that makes 8-10% average annual return to pay off a 4.5% loan. And insurance should cover you in case of an accident.
 
Star Keeper said:
…what is the generally accepted way things are done in a process I don't have experience in yet.
Click to expand...

Our partnership is an LLC and purchase of a share requires membership approval of the purchaser. Our members would not consider a purchaser in the scenario you describe and it may even be prohibited in our bylaws, IIRC.
 
Morgan3820 said:
I’m sorry I hurt your feelings. I am old school when it comes to such things. If you really want to know then I would contact an aircraft financing company and ask them. I personally have never heard of such a thing but perhaps there is.
Click to expand...

No worries. I was just providing feedback as to how I perceived it. It takes a lot more than that from a lot more people to begin to hurt my feelings. I got all that crap cleared up during high school.

Yeah as far as strange funding the money lending game is about as close to degenerate gambling you can get and still make a living out of it. Its amazing what people will risk other people's money on. Thats why I figured I would ask.
 
TCABM said:
Our partnership is an LLC and purchase of a share requires membership approval of the purchaser. Our members would not consider a purchaser in the scenario you describe and it may even be prohibited in our bylaws, IIRC.
Click to expand...

Thats interesting. I always wondered about that aspect. If you are in a partnership and one wants to exit the partnership do the remaining partners simply get first right of refusal or do they get rights of approval for the incoming buyer?
 
An airplane is personal, if someone is coming in and wants a secured loan, wah. In theory if they stopped paying, the plane could be repossessed and sold. The other parties may be paid at “market” price but that’s still an unnecessary headache to go through. Partnership reduces costs, and the funds needed are already reduced. I wouldn’t allow any secured financing, I guess that is necessary to put this clause in the partnership agreement as people could probably do it anyway without everyone agreeing to such.

On the other hand if you make high returns, then why not just buy your own plane? You’d have a higher loan amount to gamble with too netting you more dollar for dollar in your pocket. If your returns are sustainable. ;)
 
Star Keeper said:
Thats interesting. I always wondered about that aspect. If you are in a partnership and one wants to exit the partnership do the remaining partners simply get first right of refusal or do they get rights of approval for the incoming buyer?
Click to expand...
There’s another thread on this recently but it’s really up to the partnership to design the rules of the partnership. there are no government agency rules that say this is how you have to do it. it really is up to the people that form in the partnership.
In the partnership I have. we set it up so that the remaining partners have the right of first refusal. AOPA has guidance available for forming a partnership.
 
Star Keeper said:
Thats interesting. I always wondered about that aspect. If you are in a partnership and one wants to exit the partnership do the remaining partners simply get first right of refusal or do they get rights of approval for the incoming buyer?
Click to expand...

Here’s what ours says on various topics

d. Sale of Shares. A vested member in-good-standing may leave the Corporation by selling his share; current members will have the right of first refusal in the event of such a sale. The Board of Directors (BOD) must be notified in writing of the intended sale of share(s). The proposed new member must be acceptable to a majority voice vote of the remaining members. If accepted, a new member must pay to the Corporation an initiation fee to be set by the Board of Directors. New members will be notified in writing from the BOD prior to exercising privileges of a vested member.

e. Payment Policy. A vested member 30 days overdue on any charge shall lose voting and flying privileges until his bill is met. A 10% fee on outstanding charges will be assessed. A vested member 60 days overdue, having been notified by return receipt registered mail 30 days before the expiration of the 60 day period will forfeit his membership and his entire equity of the Corporation property. Forfeited equity will revert immediately and equally to the remaining vested members.

f. Termination of Membership. With the exception of the sale of share(s) described in paragraph 2.02d, a vested member will forfeit all rights and privileges of membership under the following conditions: 1) nonpayment of overdue charges in accordance with Paragraph 2.02e, 2) a member is convicted of a felony, and 3) reckless or irresponsible operation of Corporate aircraft. Cases of reckless or irresponsible aircraft operation shall be decided by a 3/4 majority vote of the remaining vested members. The forfeited share(s) may be sold by the Corporation in accordance with paragraph 2.02d with all proceeds going to the Corporation.

g. Death of Vested Member. In the event of the death of any vested member, all voting rights immediately will revert equally to the remaining vested members. The remaining members will dispose of the member's shares(s) with proceeds forwarded to the member's legal heirs according to paragraph 2.02d based on the fair market value determined by the BOD and preferably with the majority consent of the vested members.

h. Transfer of Membership. Vested membership in this Corporation is not transferable or assignable, a member may only sell his share in accordance with paragraph 2.02d.
 
Our partnership has a several page agreement modeled after the AOPA agreement. But I view it as a stopgap measure. I wouldn’t go into a partnership with people where I felt I would be using it.
A club of strangers would need precise wording.
 
I think the answer would be a home equity line or financing secured by your personal assets, not the plane.

Most would not sell a share of their aircraft and allow a bank lien on the asset (they owned it free and clear and now a bank could force a sale).

I believe folks that need/want to finance the purchase of a share will finance it outside the partnership assets.
 
It sounds like you want to use your share of the plane as collateral. I would think that's a non starter for others. If you default the airplane gets reprocessed. Sounds like a bad deal to me.
 
PaulS said:
It sounds like you want to use your share of the plane as collateral. I would think that's a non starter for others. If you default the airplane gets reprocessed. Sounds like a bad deal to me.
Click to expand...

How does bank reposess a fraction of an asset? I really don’t know, but I guess it happens. Probably why most partnerships don’t allow a lien to be places in the corporate assets.

I’m sure this would be a niche market for lenders, what lender would want to be in that space? Seems like thats a really small, local market…probably doesn’t cut the risk factor enough to make it worth doing.
 
TCABM said:
How does bank reposess a fraction of an asset? I really don’t know, but I guess it happens. Probably why most partnerships don’t allow a lien to be places in the corporate assets.

I’m sure this would be a niche market for lenders, what lender would want to be in that space? Seems like thats a really small, local market…probably doesn’t cut the risk factor enough to make it worth doing.
Click to expand...
The bank would grab the whole airplane. The current partner would have to agree to this, basically be a co-signer. I really don't see how this could work.
 
PaulS said:
The bank would grab the whole airplane. The current partner would have to agree to this, basically be a co-signer. I really don't see how this could work.
Click to expand...

Yeah, that ain’t gonna work out. A buyer isn’t going to be leveraging all assets for his fractional share considering most partnerships have both real and liquid assets that are being sold in a share.

EX: $100K plane + $25K mx reserves in a five partner setup is $125k/5 or $25k/share. The other partners aren’t going to allow $125K in assets be lost on a $25K loan. That buyer would be viewed as too much of a risk.
 
Last edited:
TCABM said:
How does bank reposess a fraction of an asset? I really don’t know, but I guess it happens. Probably why most partnerships don’t allow a lien to be places in the corporate assets.

I’m sure this would be a niche market for lenders, what lender would want to be in that space? Seems like thats a really small, local market…probably doesn’t cut the risk factor enough to make it worth doing.
Click to expand...

Same as a house. If you buy a 100k house and owe 50k, they still take the house, sell it, pay off the 50k, all of the fees, then distribute the rest back to the owner. The bank might even pay back the single owner who took the loan, in theory that owner could take the money and run with it and come out ahead. So there is a risk with partners.
 
I would expect the airplane to be owned by an LLC or other corp, and each partner owns a share in the corp. How one aquires the money to buy his/her share is their business as long as they have cash to bring to the table.
 
Good discussion. This has always been in my mind. In it's most straight forward form it'll probably have to be an all-cash share buy-in, or via a HELOC or leverage against another asset. Probably would need an LLC for liability purposes too. It'll also depend on the character of the people you're dealing with.
 
Feh said:
Good discussion. This has always been in my mind. In it's most straight forward form it'll probably have to be an all-cash share buy-in, or via a HELOC or leverage against another asset. Probably would need an LLC for liability purposes too. It'll also depend on the character of the people you're dealing with.
Click to expand...
Yeah based on my research I'm looking at an LLC to protect my personal assets from the actions of my partner (I know it won't protect them from my actions). Financing I'm still toying around with. If I were to enter a partnership already in progress I would most likely have to come to the table with cash. Where that came from is my problem. If I were to start a partnership from scratch there is the possibility of both of us cosigning on the aircraft to guarantee the loan. That would put each of us at full liability for the entire amount from a debt to credit and loan liability standpoint. Not the greatest position to be in but frankly if I can't carry the entire cost of the airplane then maybe its more plane than I should be getting into. Either way the ownership if the plane beyond the lienholder is with the LLC and the operating agreement would define ownership should a partner default similar to an outright owned aircraft in partnership.
 
Star Keeper said:
Yeah based on my research I'm looking at an LLC to protect my personal assets from the actions of my partner (I know it won't protect them from my actions). Financing I'm still toying around with. If I were to enter a partnership already in progress I would most likely have to come to the table with cash. Where that came from is my problem. If I were to start a partnership from scratch there is the possibility of both of us cosigning on the aircraft to guarantee the loan. That would put each of us at full liability for the entire amount from a debt to credit and loan liability standpoint. Not the greatest position to be in but frankly if I can't carry the entire cost of the airplane then maybe its more plane than I should be getting into. Either way the ownership if the plane beyond the lienholder is with the LLC and the operating agreement would define ownership should a partner default similar to an outright owned aircraft in partnership.
Click to expand...

LLC isn’t just for liability reasons, it is just an easier vehicle to purchase and sell, whereas if you put your name on something and remove/add then I believe sales tax comes into play. Whereas with an LLC you are not transferring the asset, just shares in the entity.

If you buy an airplane with a loan with others, you will be jointly and severally liable for the entire purchase price, it actually is the opposite of your plan to protect your personal assets. IF the value of the aircraft depreciated for whatever reason and IF one person didn’t pay their share (let’s say an accident or medical issue inside or outside of the LLC that caused one person to be at a financial disadvantage - how about if one person died on the supposedly 30 year loan you’re about to take), now you are responsible for FULL payment and loan. Failure to pay would result in a repossession on your personal credit, and any monies owed would be a judgment against you, first to your bank account, and if no monies there then to you paychecks and finally a lien on your home which would be recovered when you sell your home. With a loan, depending upon the terms set forth by the bank, you may or may not be able to sell one’s share without satisfying the balance of the loan, some loans may be assumable to a new person which sounds like you will require this option. Today is great, but you do not know what ones plans or realities will be next year, 5 years from now, 10 years from now, etc. You are letting other person in with frankly no skin (nothing to lose) in the game and it’s very easy to say hey I gotta move to another state, see ya! It’s very likely you will eat to cost to save your hat.
 
Some people will scoff at aircraft LLC's for liability reasons. However, it makes administering the aircraft with partners way easier.

1. Tax Advantages. Here in California, depending on County, you may have to pay over 9% in sales tax on the purchase. If you're buying a plane in an LLC, you can simply buy the LLC or join the LLC and have the old members depart the LLC, thereby avoiding the sales tax. If you were to just buy the plane outright, you'd have to pay sales tax just like anything else.

2. No one will let you come into their paid-off plane partnership with a loan guaranteed by their paid-off aircraft. However, what you can do if you're a property owner, is get a HELOC that's collateralized by your house and use that cash on the plane. Is it a smart play for everyone? No. But it does allow you access to loan money that isn't collateralized by the other partners' already paid-off asset.

3. If you start your own LLC and look for partners, you'll all have to qualify on the loan individually. The process is more like a home loan than a vehicle loan. They want two years of W2's, tax returns, bank statements, pay stubs, etc. Someone mentioned, "if your partner leaves will you be able to make the payment?" Well, that is kind of moot because if you can't make the entire payment yourself (using DTI calculations) then you won't qualify for the loan to begin with. That is, if your monthly loan payment is $1,000 and you have a partner, they don't look at it as $500 to each partner, they will make both of you qualify for $1000.
 
Plane owned by a corp, each partner owns a share of the corp. How each partner gets their money to buy the share in the corp is their business.
 
Bill said:
Plane owned by a corp, each partner owns a share of the corp. How each partner gets their money to buy the share in the corp is their business.
Click to expand...
For most people, owning the plane in a corporation is a pain and makes life more complicated for no reason. You'd elect to be taxed as an S-Corp (unless you have some underlying reason to be a C-Corp) and then at that point, you should have just be an LLC.
 
Keep in mind that the minimum tax on an LLC is $825 per year. Plus you have to file tax returns. Money paid into the LLC (engine reserve, maintenance reserve, etc.) is taxable in the year it was deposited. You’d have to consult an tax accountant to see if you can get it back when you spend it on a new engine or maintenance—I don’t think you always can.
 
JScarry said:
Keep in mind that the minimum tax on an LLC is $825 per year. Plus you have to file tax returns. Money paid into the LLC (engine reserve, maintenance reserve, etc.) is taxable in the year it was deposited. You’d have to consult an tax accountant to see if you can get it back when you spend it on a new engine or maintenance—I don’t think you always can.
Click to expand...
The fee is based on the state where you organize. Montana is $35/year which is why a lot of people organize their aircraft LLC's there. The tax return is easy but ya, you hire someone to do that. We pay for a Quickbook subscription and I keep track of all the bookkeeping (which is simple). This makes it easy and cheap for your tax professional. The money is taxable but you'll ultimately spend enough in a year of aircraft ownership to offset any income. Everyone gets issued a K-1 and you can write that off against your personal 1040.

I'm not tax expert, none of this is official tax advice. It's just my understanding owning an aircraft in an LLC for awhile. It's actually super easy.
 
JScarry said:
Keep in mind that the minimum tax on an LLC is $825 per year. Plus you have to file tax returns. Money paid into the LLC (engine reserve, maintenance reserve, etc.) is taxable in the year it was deposited. You’d have to consult an tax accountant to see if you can get it back when you spend it on a new engine or maintenance—I don’t think you always can.
Click to expand...
That is a California rule to get extra money from freelancers and the gig economy, and quite unique and definitely not the norm. You can form a LLC in any state or jurisdiction. Go where you are treated best.

Taxes for an LLC are pass-through to the members, and if you are not earning income from this LLC (which is probably the normal case), then there is nothing extra to do here unless you are trying to claim expenses.
 
Not an accountant but I’m pretty sure the LLC has to file Federal tax returns, and, at least in CA, state tax returns as well. If you are careful about managing expenses and income, you probably can avoid any taxes. But if the LLC charges members for flight hours toward reserves they would end up paying taxes on their personal returns.

“If the LLC is a partnership, normal partnership tax rules will apply to the LLC and it should file a Form 1065, U.S. Return of Partnership Income. Each owner should show their pro-rata share of partnership income, credits and deductions on Schedule K-1 (1065), Partner’s Share of Income, Deductions, Credits, etc. Generally, members of LLCs filing Partnership Returns pay self-employment tax on their share of partnership earnings.”

LLC Filing as a Corporation or Partnership | Internal Revenue Service

Review information about the Limited Liability Company (LLC) structure and the entity classification rules related to filing as a corporation or partnership.
www.irs.gov www.irs.gov
 
I heard a story recently about a plane with several loans on it. Each lender thought they were in first position.

Certainly sounded like the title company searcher bot forgot there are 50 states….or some lenders didn’t file their paperwork or …
 
You must log in or register to reply here.
Back
Top