Selling a plane with a partnership and maintenance fund

[numl0ck]

I'm involved in a four-way partnership and we decided to start a maintenance fund specifically for engine overhaul, no other maintenance. Right now all costs except fuel are split evenly four ways.

Assume the following example:

$10,000 in the mx fund.
Jim has paid $6000
John has paid $2000
Jane has paid $2000
June has paid $0

My questions are: if we sell the plane what normally happens in this situation? Should the money go back to the people who paid it (Jim gets $6k, John gets $2k etc...), or should the $10k be divided evenly among the partners?

 

[DFH65]

Did they parties put equal amounts of wear and tear on the plane? Was the maintenance fund "pay in" based on hours flown?

 

[numl0ck]

Did they parties put equal amounts of wear and tear on the plane? Was the maintenance fund "pay in" based on hours flown?

The amount of money is based on hours flown. So, Jim did the most flying while June did none.

 

[DFH65]

First let me say that I do not own a plane or am I in a partnership just applying logic here.

In that case I would evenly divide the money assuming that all parties own equal shares in the plane. The logic being that Jim devalued the plane more than June did. If you were to overhaul the engine with that money or do other maintenance before selling it then I would assume there would be no question and you would split the money. In this case the maintenance theoretically has simply been deferred and sits in cash in the bank.

 

[LDJones]

First let me say that I do not own a plane or am I in a partnership just applying logic here.

In that case I would evenly divide the money assuming that all parties own equal shares in the plane. The logic being that Jim devalued the plane more than June did. If you were to overhaul the engine with that money or do other maintenance before selling it then I would assume there would be no question and you would split the money. In this case the maintenance theoretically has simply been deferred and sits in cash in the bank.

That seems logical to me, as well. Presumably the selling price was reduced by the hours flown, which corresponds to the money invested int he mx fund.

 

[dans2992]

Yes, but really your partnership agreement should have specified what would happen.

 

[RickG]

If we could turn the table for a moment, what if partner "John" wanted out and found a pilot to replace his spot at the table. Is it typical for John to be reimbursed the $2k he's contributed to the maintenance fund (i.e. include that in the buy-in price to the new pilot)?

 

[mcmanigle]

If we could turn the table for a moment, what if partner "John" wanted out and found a pilot to replace his spot at the table. Is it typical for John to be reimbursed the $2k he's contributed to the maintenance fund (i.e. include that in the buy-in price to the new pilot)?

I'm guessing not. Think of the maintenance fund contribution just as a cost of flying. The goal is to prevent depreciation of the partnership value. Let's say the plane is worth $60k, and each partner bought in with $15k. Now Bill wants to buy one of their shares, and says "well, the engine is all run out now. The plane is only worth $50k." The partners can respond "that's okay. You're not just buying a quarter of the plane, you're buying a quarter of a $10k bank account too" and hopefully still get (approximately) what they put in for the price of their share. Even June, who did no flying, would be trying to sell a share that's devalued by the amount Jim flew, so it makes sense that she owns 1/4 the mx pot.

The only time I think it would be logical to give the partners back a pro rata share of their contribution would be if there were money left over after overhaul (or some other definable "okay the plane is worth what we put into it again"). In practice though, it probably makes more sense to keep the account as is and adjust the hourly contribution amount.

That being said, this is just logic. Whatever is written down as guiding the partnership is how it works in the end.

 

[jonnyjetprop]

What was the agreement when you joined or formed the partnership ?

 

[poadeleted20]

My questions are: if we sell the plane what normally happens in this situation?

What normally happens when an airplane with multiple owners is sold is the assets are distributed in accordance with the written ownership agreement.

Should the money go back to the people who paid it (Jim gets $6k, John gets $2k etc...), or should the $10k be divided evenly among the partners?

That's up to them to decide before they start the partnership, and incorporate that decision in the written partnership agreement so there's nothing to decide when the airplane is sold, only something to do according to the agreement. If they don't put that all in writing up front, what usually happens when the plane is sold is they argue over it, get into a legal wrangle, and the $10K ends up in the pockets of their various attorneys.

 

[dell30rb]

I think I would split it evenly among the partners.

Here is why -

Say the airplane is worth 45k with a low time engine. One with a mid-time is worth 35k and one that is run-out is worth 25k.

If your airplane was worth 45k when everyone bought in, and now is worth 35k BUT you have 10k in the bank. The total package is still worth the original value.

 

[numl0ck]

Thanks for the input guys.

What was the agreement when you joined or formed the partnership ?

It was a verbal agreement that all expenses get split evenly, but at that time there was no mx fund.

That's up to them to decide before they start the partnership, and incorporate that decision in the written partnership agreement so there's nothing to decide when the airplane is sold, only something to do according to the agreement. If they don't put that all in writing up front, what usually happens when the plane is sold is they argue over it, get into a legal wrangle, and the $10K ends up in the pockets of their various attorneys.

That's what I'm trying to avoid.

 

[Henning]

The fund divides evenly because it is represented in the value (or rather reduction in value) of the plane.

 

[tinerj]

The engine fund typically stays with the plane as long as the partnership is active with at least one of the original members. If the engine fund is realistic, then the selling price of a share can be higher because although the engine may have a lot of hours on it, the final overall will not cost anything -- it is in the engine fund. In other words, the selling price can be as if the engine is zero time since overhaul, or nearly so.

After the buy-in there are typically four on-going costs:

Maintenance fund -- condition inspection, hangar, insurance, and regular maintenance such as oil changes. Usually paid monthly.

Engine fund -- paid by the tach hour by each partner based on the number of tach hours flown by that partner. Usually this money is in a separate account from the maintenance fund and paid quarterly or yearly.

Special assessment -- the partners agree to make an upgrade or an unexpected cost comes up that's not associated with the engine fund.

Fuel -- each partner fills the plane at the end of each flight and pays for it out of his or her own pocket.

 

[frfly172]

Since the money was put in for the engine,everyone must have realized the value of the plane would drop. With a high time engine,it would only be fair for all the partners to share in the fund equally . To make up for the loss in value.

 

[35B33]

If the partners own equal shares, it is of the partnership and its assets, not just the airplane. Worst case would be if partner A did all the flying and, when the engine reached TBO, decided to leave expecting the return of his engine funds. No one would accept that, your current situation is a lesser degree of that example.

 

[Tom-D]

If they don't put that all in writing up front, what usually happens when the plane is sold is they argue over it, get into a legal wrangle, and the $10K ends up in the pockets of their various attorneys.

Nailed it.

 

[tinerj]

EAA has a partnership agreement template that covers most of the possibilities.

 

[Lindberg]

If you have no written partnership agreement, your partnership is governed by the default provisions in your state's business organizations code. You're looking for the provision regarding distribution of partnership assets (that's what your mx fund is) in the event of dissolution of the partnership.

 

[poadeleted20]

It was a verbal agreement that all expenses get split evenly,

Then the only option now is to get all the partners in a room with a good lawyer. The lawyer acts as a mediator/facilitator to get all the partners to agree on how the money is to be divided, then writes up the agreement so it says legally what they agreed it should say. However, if agreement cannot be reached...

That's what I'm trying to avoid.

...you may be unable to avoid that legal disaster.

 

[Cruiser]

Steve, I think you answered your own question in post #3. Each partner paid for their own fuel they used, the engine fund was setup based on hours of engine time used, same as fuel.
A partner certainly would not want more than his equal share of the plane because he burned more fuel than the rest of the partners, he should not get more than equal share share of the engine fund because he used (burned) more hours on the engine.

But as stated before, this should be defined in the partnership agreement.

 

[poadeleted20]

The fund divides evenly because it is represented in the value (or rather reduction in value) of the plane.

And you no doubt have law on point or case precedent in the state in which this is occurring which says that?

 

[poadeleted20]

EAA has a partnership agreement template that covers most of the possibilities.

That's great for someone assembling a shared ownership group, but doesn't help these folks, who already formed their shared ownership without anything in writing and now are going to pay the price for their lack of foresight.

 

[Henning]

And you no doubt have law on point or case precedent in the state in which this is occurring which says that?

He asked for opinions, not legal precedent. You don't need a law to know or do what is right, you only need a law to force people to do what is right. If people act in fairness and good conscience, no legal interference is required. The use of the airplane devalued the engine and therefore the resale value of the plane. That effects everybody equally if they all have equal shares. The fund was built by how much each person contributed to that devaluation. The fair thing to do is disburse the fund equally.

 

[poadeleted20]

He asked for opinions, not legal precedent.

Actually, the OP asked "what normally happens?" That's not the same as Henning's opinion on what should happen. And the answer is that "what normally happens" is the money is distributed in accordance with the dissolution instructions in the written partnership agreement. Absent that, "what normally happens" is the partners get in a legal wrangle where only the lawyers win.

 

[jonnyjetprop]

A couple of "ifs"

If you're selling the plane and the partnership is buying a replacement, I'd say roll it into the next purchase as a down payment.

If you're selling and you'll never see the guys again, fight it out depending on your position in the fund. The fund will be gone by the time you pay for the lawyers, so it won't really matter in the end.

If you're selling and you'll have to spend any time with at least one of your former partners, sit down and work something out. It's better to take a couple grand hit and maintain your relationship.

Next time, figure it out before you join and get it in writing.

Since nobody asked for my opinion, I feel free to give you mine. The value of the plane has dropped because you guys flew it, because of the engine time. You stated the express reason for the fund was to overhaul the engine. Nothing else. Because of this I'd do one of two things. I'd sell the plane, use the fund to pay for the selling expenses and distribute what's left over. I'd bet the differential will be much smaller and the fighting less. The other way is to spend the money on something to improve the plane for sale and add something back to the value of the plane. That way, everyone is "made whole".

 

[Lindberg]

Then the only option now is to get all the partners in a room with a good lawyer. The lawyer acts as a mediator/facilitator to get all the partners to agree on how the money is to be divided, then writes up the agreement so it says legally what they agreed it should say. However, if agreement cannot be reached...

...you may be unable to avoid that legal disaster.

Or, they could consult state's partnership statutes, which will resolve issue by supplying the provisions missing from the partnership agreement.. no lawyer required. I'd bet a dollar that it says, absent agreement to the contrary, profits and losses divided equally. That's what usually happens.

 

[onwards]

I own 1/3 of a (lovely) 182.

The fund is comprised of equal shares. I "paid for" my part of it when I bought my share. When I sell my share (which will happen because I really really want a faster 6-seater platform), the buyer will then "own" that part. However, that is money for the engine overhaul, period. We don't distribute it between us or anything like that.

If the entire plane sold, we would distribute the money evenly.

 

[N747JB]

I thought about this a couple different ways, but the only solution that I can imagine is split the money equally. All the partners own a % of the asset, which in this case is the airplane and reserve account. The partner that paid the most in also used the airplane the most and caused the most depreciation, correct? I would view the engine reserve as cash from the sale vs a seperate asset. Sell the plane, take the cash from the sale add it to the cash from the sale of any other assets in the partnership (handheld GPS, traffic system, tow vehicle etc) and divide according to % owned.
This should be handled in the beginning of the partnership, not the end. A pre-nuptial agreement is easier to get signed than a divorce agreement.

I own 1/3 of a (lovely) 182.

The fund is comprised of equal shares. I "paid for" my part of it when I bought my share. When I sell my share (which will happen because I really really want a faster 6-seater platform), the buyer will then "own" that part. However, that is money for the engine overhaul, period. We don't distribute it between us or anything like that.

If the entire plane sold, we would distribute the money evenly.

 

[onwards]

I thought about this a couple different ways, but the only solution that I can imagine is split the money equally. All the partners own a % of the asset, which in this case is the airplane and reserve account. The partner that paid the most in also used the airplane the most and caused the most depreciation, correct? I would view the engine reserve as cash from the sale vs a seperate asset. Sell the plane, take the cash from the sale add it to the cash from the sale of any other assets in the partnership (handheld GPS, traffic system, tow vehicle etc) and divide according to % owned.
This should be handled in the beginning of the partnership, not the end. A pre-nuptial agreement is easier to get signed than a divorce agreement.

Yeah.

I'm currently the heaviest user of the plane so contribute more to the engine fund than anyone else does, but I do acknowledge that I am also the one responsible for bringing closer faster the trigger for use of that same fund... it all evens out in the end. After all, they end up subsidizing my heavier use in fixed costs which are split evenly between the partners too.

 

[JoseCuervo]

The overhaul fund is an asset of the partnership, and as such, would be shared equally among the same percentages as the ownership share of each partner.

It may have been paid in at different rates because of different usage, but the depreciation of the engine as it is used is supposed to be offset by the overhaul contributions.


I have seen partnerships that have too much money in the overhaul fund, and that is a poor use of each partner's money.

(My Homeowner's Association has a couple of people who are always advocating we should have a reserve or "rainy day fund" so that we can be prepared for some unexpected emergency in the future. I have no idea why I would want the HOA operating my savings account for me. No thanks.)

 

[poadeleted20]

The overhaul fund is an asset of the partnership, and as such, would be shared equally among the same percentages as the ownership share of each partner.

There is nothing in writing which says that. We don't even know whose name is on the account. As a result, it is subject to considerable legal wrangling, which if the account is only $10K, will probably cost the participants more than they're arguing over.

 

[kyleb]

The right thing to do is sell the airplane, then divide the sum of the selling price and the maintenance fund by the number of partners.

The intent of the pro-rated maintenance fund is to put back whatever value the members extract from the airplane through use. Guys who fly more (and use up more value) also pay more to reimburse the partnership for the usage. At the end of the day, the value of the assets of the partnership are unchanged and should be split evenly among the partners.

 

[AdamZ]

Thanks for the input guys.


It was a verbal agreement that all expenses get split evenly, but at that time there was no mx fund.


That's what I'm trying to avoid.

That's as good as no agreement reduce it to writing.

 

[poadeleted20]

The right thing to do is sell the airplane, then divide the sum of the selling price and the maintenance fund by the number of partners.

What if the contributions of the various partners were not equal (that being the case here)? Would it be "right" for June who put nothing in the fund to get a $2500 windfall while Jim who put in $6000 sees $3500 of his money disappear?

Don't get me wrong -- I'm not saying I know what is right at this point, but there's no way for any of us to say what's equitable without a whole lot more information on the history and agreements made by the four individuals, and since none of that is in writing, it's nothing but "he said/she said" all the way to the civil court.

 

[Henning]

What if the contributions of the various partners were not equal (that being the case here)? Would it be "right" for June who put nothing in the fund to get a $2500 windfall while Jim who put in $6000 sees $3500 of his money disappear?

Don't get me wrong -- I'm not saying I know what is right at this point, but there's no way for any of us to say what's equitable without a whole lot more information on the history and agreements made by the four individuals, and since none of that is in writing, it's nothing but "he said/she said" all the way to the civil court.

Yes, because June is hit by Jim's extra depreciation of the asset. Had Jim not flown the extra hours, June would get more money from the sale. Add to that June had been subsidizing Jim's fixed costs all along. The engine fund goes against the depreciation of the asset, not cost of operation.

There is no "he said she said" this is all documented information.

 

[poadeleted20]

Yes, because June is hit by Jim's extra depreciation of the asset. Had Jim not flown the extra hours, June would get more money from the sale. Add to that June had been subsidizing Jim's fixed costs all along. The engine fund goes against the depreciation of the asset, not cost of operation.

Your statement assumes that reduction in selling price of the asset is directly equal to hourly maintenance costs. That ain't so. And June has not been "subsidizing Jim's fixed costs all along" since the fixed costs should be shared equally using some sort of fixed monthly payment -- and we know nothing about their revenue structure beyond that the maintenance fund is based on hours flown. Given the lack of information about cost and revenue structure, and the lack of any written agreement on how the dissolution should proceed, we're back in lawyer-land.

 

[Keith Lane]

Did anyone mention yet that you should have all this stuff written down in the blood of a virgin lawyer before the prop ever turned???

Oh, wait... never mind. No such thing.

 

[drgwentzel]

I'm involved in a four-way partnership and we decided to start a maintenance fund specifically for engine overhaul, no other maintenance. Right now all costs except fuel are split evenly four ways.

My questions are: if we sell the plane what normally happens in this situation? Should the money go back to the people who paid it (Jim gets $6k, John gets $2k etc...), or should the $10k be divided evenly among the partners?

The answer is, it depends.

It depends on how each partner bought into the partnership.

If a partner bought into a 1/4 share of a partnership based on the 1/4 share value the airplane PLUS a 1/4 share of the value of the engine fund (eg. plane worth 20k with 1800 hours on the engine and an engine fund in the bank worth 10K) then they should have ponied up 7,500.00 for their 1/4 share ownership. In this case if the airplane is sold, the value of the sale plus the engine fund should be merged together and divided by 4 and split among the partners.

Here's another example:

4 people buy an airplane worth $60,000 with a 0 time engine (Assume all other things being equal for this example regarding this airplane)

A new engine cost $25,000

The engine should be replaced at 2000 hours

Therefore, for every hour the plane is flown $12.50 should be put in an account for the engine overhaul ( probably more for the removal, reinstallation and it shipping it in 2 directions, but I digress)

For every hour the plane is flown, the value of the plane decreases by $12.50

The engine fund however increases by $12.50 making it a wash

Therefore, the value of the aircraft remains stationary between the value of the aircraft and the bank fund

You all own the aircraft equally

Therefore, when the aircraft is sold, the partners should divide everything equally.

It doesn't matter if one partner flew 1900 of those 2000 hours and the rest of the partners flew the remaining 100 hours. If the airplane has 2000 hours and there's 25,000 dollars in the bank account, the money should be divided equally if the plane is sold at that point.

If the plane reached 2000 hours and the new engine was indeed put on and the bank account was now 0, if the plane was sold the next day, you would all divide the money equally, right? It seems simple to me, at least in these examples.

Gene
with a 1/2 share in a '71 Cardinal RG with an engine at 1900 hrs. and an engine fund of $25,000...So I've been considering this quite a bit.

One last thing: it also depends heavily on how the Partnership Agreement was drafted between the partners.

 

[JoseCuervo]

There is nothing in writing which says that. We don't even know whose name is on the account. As a result, it is subject to considerable legal wrangling, which if the account is only $10K, will probably cost the participants more than they're arguing over.

It is people like you would would always be the ones to ruin a partnership experience. There is nothing to question, and there is nothing worth "considerable legal wrangling".

Whatever shares of equity in the partnership the various partners had at the origin is the same percentage of equity the various partners have in the Engine Fund, the Left Wing, the Headliner, and the air in the right tire.

Nobody gets to increase their equity ownership by flying the plane more than another partner.

It ain't that complicated, that is why you have partnerships. No judge would give more equity in the plane and parts of the plane based on who depreciated the plane the most.

Riddle me this: If they convert the engine fund into a brand new engine, does the ownership shares of the various partners change?