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Sharing Ownership: Stepping up from Fractional Ownership in Business Aviation
Business Aviation is available in a variety of forms- each with unique features and advantages. Continuing his series on delivery options- David Wyndham explores ownership beyond fractional shares.
In the past- using business aircraft involved two options: you either owned or you chartered the equipment. Today- there are numerous means for accessing business aircraft. If charter does not fulfil your needs but you cannot (or do not want to) pay the full costs associated with whole aircraft ownership- two alternatives are Joint Ownership and Co-Ownership.
While both involve two or more entities owning the aircraft- they differ in terms of who provides the crew.
Joint ownership is defined under US Federal Aviation Regulations (FAR) Part 91.501(c)(3) as “…an arrangement whereby one of the registered joint owners of an airplane employs and furnishes the flight crew for that airplane and each of the registered joint owners pays a share of the charge specified in the agreement.”
The FARs require that all owners be listed on the aircraft registration. One registered owner may provide the flight crew and the other registered joint owner(s) may pay a share of the fixed ownership costs (such as hangar- insurance- etc.) as specified in the agreement. Each joint owner is responsible for individually covering their variable operating costs (fuel expenses- maintenance reserves- landing fees- etc.).
To be eligible- the aircraft must fall into one of the following groups:
• The aircraft has a maximum takeoff weight of over 12-500 pounds;
• The aircraft is a multiengine turbojet aircraft (regardless of size); or-
• The aircraft is a fractional program aircraft (regardless of size).
The NBAA has coordinated with the FAA for a 'Small Aircraft Exemption' to allow piston airplanes- airplanes weighing below the 12-500 pound limit- and all helicopters to make use of the cost reimbursement options allowed under Part 91- Subpart F. For additional information- NBAA Members should visit the Small Aircraft Exemption Web page: www.nbaa.org/admin/options/exemption/
While the FAA has not established a minimum percentage of ownership- the relationship must be a true joint ownership and not just a token ownership interest.
Regarding taxes- the IRS has determined that a joint ownership agreement- if executed correctly- is Non-commercial for tax purposes. This is based on each of the registered joint owners paying their pro rata share of all fixed costs and each also paying the variable operating costs when they are on board their aircraft. The rules are somewhat convoluted- thus it is best to consult an aviation tax authority for guidance.
Co-ownership is very similar to joint ownership whereby each of the owners is a registered owner of an aircraft. But- instead of one designated owner operating the aircraft for all of the owners- each owner is responsible for employing their own pilots. Under co-ownership the respective owners independently can either:
• Fly the aircraft themselves-
• Hire a pilot- or
• Hire a management company. (With large- turbine business aircraft- the most common scenario involves the use of a professional management company to crew and maintain the aircraft. The management company may be given the option to charter the aircraft when the owners are not using it.)
Successful shared ownership requires consideration of the Three Cs: ‘Compatibility’- ‘Compromise’ and ‘Contracts’.
Compatibility: There needs to be a degree of compatibility between the owners. The type of aircraft must be suitable to the owners' missions. A turboprop that is capable of getting into small airports will not be suitable for long-range travel with large passenger loads. Just as important is NOT having similar travel schedules. If both owners need to use the aircraft every Monday through Wednesday- sharing cannot work.
Compromise: Even if the owners have compatible aircraft requirements and complimentary travel schedules- there needs to be compromise. There will be times when you need flexibility in the schedules.
Contract: Lastly- there needs to be a contract outlining the sharing of the costs- the responsibilities of each owner (and management company)- and perhaps most important- a way to end the shared ownership.
I had one client who shared the ownership of an aircraft with one other entity. Both parties used the aircraft to fly between the US East and West Coast. But as their usage of the aircraft changed- conflicts arose. Not being able to compromise- they tried 'first come- first served' for scheduling. Then they attempted to set aside certain times when each owner used the aircraft. Nothing worked satisfactorily.
When it became clear that the arrangement no longer served each company- the owners could not easily reach an agreement regarding who sells to whom as the contract was not explicit in how to dissolve the partnership. The Co-ownership did end without legal action- but a friendship ended. Sharing the ownership of an aircraft can lower the cost to access the advantages of Business Aviation- but everyone involved needs to work together to maximize the utility of the aircraft.
Do you have any questions or opinions on the above topic? Get them answered/published in World Aircraft Sales Magazine. Email feedback to: Jack@avbuyer.com