What’s An Aircraft Partnership Agreement?
Aircraft Partnership Agreements Overview: Essential Guide for Co-Owners of an Aircraft
What is an Aircraft Partnership Agreement? Subject to some exceptions, there are really just two broad ways to own an aircraft. On the one hand you could own the whole thing yourself (as in one entity owns 100% of the gates, engines and tires). Alternatively, you could join with others to acquire and own the plane as tenants in common, with each owner having a certain percentage undivided interest in the aircraft. Additional terms can be negotiated depending on your unique situation, but get ready for some supplemental documentation. Enter the aircraft partnership agreement (APA). As its name suggests, an APA is the document under which multiple entities agree to jointly acquire, own, manage, maintain and/or operate the aircraft. In general it’s a vehicle by which aircraft owners seek to divide up the responsibilities that come with owning a plane and the associated costs. Sometimes you may see an APA referred to as an aircraft joint venture agreement. An APA is similar to a business partnership agreement but that’s where the similarity ends. In an APAs context, "partnership" simply means: "jointly owning and operating the aircraft in a manner similar to business partnership." What is not intended by the term "partnership" is the notion that the owners or their respective interests will be combined in a joint account or be jointly owned in a "partnership sense . " Various types of entities may enter into an aircraft partnership agreement including individuals and both for profit and not for profit. What owners have in common when they execute an APA is a common interest in the aircraft (including its assets and liabilities). Parties to an APA (as co-owners) each have a certain proportionate share of the overall aircraft "pie". So at least initially, parties agree that each of their respective shares in the aircraft is undivided and not allocated to any particular gate, engine or tire. Instead it’s the whole plane’s value on the line. APAs can be as simple or complicated as the owners want and can be structured in any way that satisfies the parties. After all, each partnership is different, and it’s up to the parties to agree upon the relevant terms. Depending on the preference of the parties, the APA can be brief or be of significant length and complexity. If you’re a "keeping it simple" type of person, the APA may contain limited terms and simply identify the parties, the purpose of the agreement (jointly purchasing, owning and operating the aircraft), the aircraft and the proportions of ownership each owner is purchasing. Or the APA may be lengthy and include additional provisions, even detailing how ownership may be increased or decreased over time and who decides. Despite the additional provisions, the underlying idea remains the same: creating terms by which the owners agree to jointly purchase, own, manage, maintain and operate the aircraft. The APA is usually signed prior to close and referenced in the purchase agreement.
Aircraft Partnership Agreement Essential Components
When bringing together multiple parties to an aircraft transaction, it is crucial to focus on the value of the relationship and the terms of the agreement. No two aircraft partnerships are the same because no two owners are the same. Understanding the needs of the parties, their financial status, their expectations for the partnership, and their ability to trust one another serves as a starting point for the negotiation of an aircraft partnership agreement. Understanding the needs of the parties is essential to writing an equity split that will not result in future litigation, and understanding each parties’ financial situation helps avoid drafting an unreasonable purchase price for the aircraft. Understanding the parties’ expectations of the relationship is also essential, as it helps tailor the use of the aircraft to each party’s needs.
Ownership: Every aircraft partnership must address issues related to ownership and equity shares of the aircraft. Ownership is typically addressed in three ways: equity positions, purchase price, and sale of the aircraft. The equity position in the aircraft typically ranges from 1/8th to 1/2, with other shared arrangements also accepted. Each party’s equity position will then correlate with their pro rata share of responsibility with respect to maintenance costs, storage fees, taxes, insurance, and financing. In addition to the purchase price of the aircraft, any additional fees the co-owners agree to pay should be disclosed, such as repair fees, refurbishments, or modification fees for the aircraft. Lastly, the agreement should address the sale of the aircraft. Much like the purchase price, an accepted manner for sale of the aircraft should be disclosed, such as public auction, private sale, or the advertisement of availability to co-owners prior to sale. While included in the sale of the aircraft, the use of any proceeds of the sale of the aircraft should also be addressed, such as division between owners, reimbursements, and the purchase of a new aircraft.
Usage: The aircraft partnership agreement must also address the use of the aircraft and the manner in which scheduling is handled between owners. First, allow for the co-owners to plan trips and schedule flights that do not conflict. Assuming that scheduling does not conflict, the aircraft agreement must also address in some form the method in which a co-owner can reserve the use of the aircraft in a time of emergency or when necessary to fulfill a work obligation.
Maintenance: The parties must also address the maintenance of the aircraft, including the standard of care required in maintaining the aircraft. Typical standards for maintenance include compliance with the maintenance schedule required by the manufacturer, specifications of the aircraft, and instructions in the aircraft’s logbook. In addition to the required maintenance, the partnership should also address which party pays for costs associated with the repair of the aircraft, pursuant to the owner’s pro rata share. If the repair or maintenance activity results in large reoccurring expenses, the parties should also address whether any of these charges exceed an agreed dollar amount and whether a cost exceeding the agreed price would be subject to the approval of the remaining members of the partnership. Lastly, any service contracts with outside service providers should also be disclosed.
Insurance: As with any business agreement, insurance is a vital component in providing comfort to the parties involved. When consenting to the execution of an aircraft partnership agreement, it is beneficial to have your attorney review the insurance policy prior to executing the agreement. First and foremost, the policy must cover all named parties in the agreement, as well as describe the duration of coverage. While more common insurance policies have recently broadened, the insurer should be notified of inclusion of all named parties in the agreement. Additionally, if the agreement permits use of the aircraft for commercial purposes, these uses also need to be disclosed and quantified to ensure that the policy covers the parties in the event of an accident. Second, the policy should be properly measured. Insurance policies require varying amounts of insurance depending on the type of aircraft, the total number of owners, the type of use, and the region. While most are aware of tailored policies, the insurance required for the aircraft portion of a transaction is typically insufficient to cover all costs and liabilities. In addition to the standard policy, additional coverage is also available, such as umbrella coverage, passenger liability coverage, and protection and indemnity coverage. Third, the policy should be consistent with the coverage already provided to the co-owners. Fourth, the policy should be current and not lapse upon the signing of the aircraft partnership agreement. A lapsed insurance policy may void any protection afforded to the co-owners. Finally, all renewals of the policy should be provided to all named parties in the agreement.
Advantages Of An Aircraft Partnership
The first and most obvious benefit of entering into an aircraft partnership is the cost savings. Sharing the costs with co-owners means that each party will need to pay less than if they owned the aircraft individually. This reduction in costs can be substantial and covers not only the costs of acquisition, but the costs of maintenance, operations, taxes, insurance, fuel, hangarage and financing as well. Equipment and services can be purchased in bulk at a discount. Insurance premiums can also be lower.
Importantly, up to now we have only been considering the cost savings, but there are now added benefits to being able to share the costs. One of these is the increased availability of the aircraft for flying. As a result of these cost savings, it is likely that you may consider purchasing a more capable aircraft whether that be a larger aircraft or an aircraft with a greater range. The ability to purchase a more capable aircraft through a partnership is an attractive benefit of an aircraft partnership.
On a less tangible note, you will be entering into an agreement which requires you to deal fairly with the other owners. Without a partnership this fairness consideration does not apply to you in commercial transactions. You have agreed to fly together so that you can share the costs. You will now be expected to act in the other owners best interest as well.
The potential increases in aircraft availability may be tempting for some types of users. For corporate users with a full time pilot on call twenty-four hours a day or a fractional user who intends to use his aircraft only once every month or so, these benefits might not be as important as the cost savings. Other users may find the cost savings to be meaningless if they are forced to give up many days of their aircraft. However, if you have commercial obligations that you wish to use the aircraft for and you can satisfy those obligations with another owner who has similar commercial obligations, then the increase aircraft availability can become a very important factor.
Aircraft Partnerships: Risks And Challenges
Potential Challenges and Risks in Aircraft Partnerships
Like most other business ventures, aircraft partnerships can be fraught with challenges and risk. These might relate to conflicts among partners, difficulty scheduling or sharing the aircraft, maintenance issues, liability for accidents or incidents, and the handling of the potential sale of the aircraft. Conflicts among partners are likely to arise when the purchase of the aircraft is not handled properly in advance. As discussed above, the partnership agreement is critical to the proper selection of a partner and precautions must be taken to reduce the aviation risks.
Without some vehicle for resolution, disputes may not be resolved quickly, leading to indecision about the use of or access to the aircraft. Ideally, the partnership agreement should address in detail how disagreements will be resolved, including mediation and/or binding arbitration, when necessary. In addition, clear lines of communication should be established from the outset so that partners feel they are being heard.
With more than one or two co-owners, scheduling conflicts will inevitably be complicated by divergent work and family schedules and outside business obligations. The partnership agreement should have a detailed schedule to minimize conflicts that have not been resolved otherwise. Top priority on holidays, weekends and prime departure times should be accorded to all members in equal measure and restrictions should be placed on ad hoc trips requiring short notice, to allow other members to plan accordingly. A system for booking prime slots should be established and made available to each partner though a shared calendar or other mechanism. In addition, penalities should be imposed for cancellation and, on the flip side, for extending, cancelling, changing or advancing a scheduled trip.
Once again, the partnership agreement should be very specific with respect to maintenance. Maintenance requirements, scheduling, and excesses should be clearly detailed and published to avoid any ambiguity. In addition, a reliable contact should be established to report problems that must be addressed immediately. All trips should include brief pre-departure inspections to detect new or previously reported problems (and confirm repairs) that have not been reported.
A major risk is the financial cost associated with an aircraft. In even the best planned partnerships, there are times when a partner cannot make a required contribution or is slow to pay his or her share of a bill. It is important that partners have cash reserves or substantial credit available in their names to cover any delinquencies. To minimize risk, many partnerships attempt to secure individual partners’ guarantees for renewal of construction, liquor and freight bonds. All partners should have some exposure and risk because no one wants to invest a significant effort for the benefit of a potentially unreliable partner.
Perhaps more difficult to anticipate is the impact on partners and the partnership when a significant life event occurs. This could include divorce, separation, death or consider death, employment changes or changing spending habits. Again, the partnership agreement must provide for contingencies. A distinction must be made between divorce, which could lead to a litigation, and the need to sell the aircraft in the event of separate lives or death. Conversely, partners should clearly define who will handle unanticipated events.
The primary concerns, of course, are ownership interest, residual value and company structure. On the sale of an aircraft, we often see partners agree to pay more than the plane may be worth or fail to formally disband the partnership. Perhaps more troublesome is where a spouse or former spouse suddenly insists on his or her "rights". Disputes over a valued asset like an aircraft are not uncommon in recent years — the former spouse of a famous actor, the widow of a famous football player, the family of an early aviation legend, and the executor of a deceased aircraft builder, among others.
Life doesn’t always go as planned and some partners tend to change the economic and social rules of the game halfway through the partnership. Every partnership should establish protocols so that these and other potential risks are anticipated and minimized based on mutual consent.
Aircraft Partnership Legal Questions
The legal considerations for aircraft partnerships are numerous and include contract, liability, real-estate, tax and regulatory issues. It is critical that aircraft co-owners, before forming or implementing a partnership, consult an attorney with experience in legal issues related to aircraft use. A well-drafted partnership agreement (or co-ownership agreement), although often ignored for years after formation, may play a pivotal role on the following issues:
Contract law considerations
Partnership issues are governed in part by the common law of contracts, which requires any partnership agreement to list a specific object for the agreement to be binding. Lawyers protecting partners’ interests usually achieve this by strictly limiting the purposes for which the aircraft may be used. By listing specific uses (such as business-related travel only) in appropriate contract language, lawyers limit the types of claims that a finder of facts (such as a judge or jury) may make in the event of a dispute.
Liability
Limitations on aircraft usage may also help limit the liability of co-owners to third parties. Passengers harmed in an aircraft accident in the United States may sue the co-owners of the aircraft if they can show that the co-owners used the aircraft in violation of ownership and use limitations listed in the Federal Aviation Administration’s Part 91 rules. However, such limitations will be ineffective against claims under California’s Family Code because California judges and juries have denied such claims made in the wake of divorce trials. To address this concern, California divorce lawyers often require that divorcing spouses stipulate to having a specific child custody schedule based upon the domestic use of the aircraft.
Real-estate considerations
Many owners believe that a partnership agreement forms a true partnership rewarding all co-owners the wealth generated by any increase in the value of the aircraft . However, timely scheduling of any sale is often disputed, and many partnership agreements approve joint use of an aircraft without spell out the apportioning of any of the proceeds from a sale. When co-owners’ objectives differ, disputes may arise. Many co-owners seek to exclude any joint ownership by spouses. Whether a spouse enjoys a community property interest in an asset usually depends upon whether the money used to purchase the asset was earned by one spouse or jointly during marriage. If the funds were earned jointly or the purchase was made so shortly after marriage that the only funds available to the buyer were commingled (non-marital) property, then the spouse acquiring the asset may erroneously believe he or she owns a substantial interest in it. Moreover, husbands frequently make down-payments from their pre-marital fortunes. The wife in such cases often believes that her husband’s wealth is reflected in the purchase price of the aircraft when, in fact, she may own a 50% "community property" interest in the aircraft. Recent settlement agreements have addressed these concerns by assigning one-half of the wife’s "community property" interest to the husband as his separate property. Such settlements have prevented the wife from acquiring a 50% interest in the aircraft while the husband remains an owner.
Tax considerations
Without careful planning, the co-ownership of an aircraft can result in unexpected tax liabilities or disallowances of tax benefits. Aircraft co-owners should consider forming an LLC to hold the aircraft if there is a possibility that any of the co-owners is a foreign citizen or resident. Tax-law developments either propose or threaten onerous tax consequences for foreign citizens who own interests in aircraft or appoint foreign agents to oversee aircraft.
Drafting An Aircraft Partnership Agreement
A strong aircraft partnership agreement is carefully drafted and must include the following three steps:
Preparation
The aircraft co-owners should prepare a list of all of the issues that they desire to address in the aircraft partnership agreement. Once prepared, the co-owners should use their own respective attorneys to draft the final aircraft partnership agreement, including the list of issues that they have prepared.
Negotiation
Once the aircraft partnership agreement has been drafted by the attorneys for the co-owners, they should simply exchange proposals back and forth to settle on the final form of the agreement. The parties should be flexible and use common sense in reaching an agreement. Generally speaking, the process should result in the co-owners each having to give a little (and receive a little) in order to reach an agreement.
Finalizing
Once the agreement is finalized, it should be signed, dated, notarized and properly recorded, if appropriate. An original agreement is desired for each co-owner and each entity, if any. A digital copy should be maintained by each co-owner for future reference.
Successful Aircraft Partnerships: Case Studies
To illustrate how aircraft partnership agreements can work in practice, we can look at two successful examples. While these cases are hypothetical rather than actual, they draw on the experiences of many real-world aircraft co-owners.
In our first case, four individuals come together to purchase a 2015 Beechcraft Baron GS55 with the goal of splitting the ownership and use of this $600,000 general aviation twin engine for a private flight operation. Each owner agrees that all insurance proceeds beyond the bank loan amount will be used to purchase a replacement aircraft. Each co-owner contributes $50,000 to pay off the loan and the remaining $200,000 balance is funded through an installment note. Through their aircraft partnership agreement, the owners allocate their pro rata share of the debt secured by the aircraft, meaning if they sell the aircraft before the debt is paid off, they must pay their allocated share. The terms of the partnership agreement also require each co-owner to pay $250 per flying hour to cover the cost of MX, fuel, hangar space, and any other pro rata shared expenses. At $250 per hour, each owner could fly up to 12 hours per month, or 144 hours per year, before incurring additional hourly fees (which would also be shared equally). Costs outside of the time-share agreement (such as landing or hangar fees at destinations) must be shared by all the owners pro rata – although with a reasonable limitation. In this case, all parties are happy with the $3,000,000 insurance policy that fully protects the investment of the airplane owners.
In our second case, two individuals plan to purchase a Cirrus SR22 GTS with a 2006 model year and a market value of $200,000 for personal use flights. One owner agrees to contribute half the cost, making it a 50-50 co-ownership, and the second owner agrees to 13 hours per month. In this case, the cost of the aircraft purchase is split down the middle and secured by a $100,500 bank loan. The terms of the aircraft ownership arrangement stipulate that all costs associated with the aircraft will be split evenly between the two owners. Any fee structure will be subject to a reasonable limitation (for example, the parties agree not to spend over $500 per engine per flight hour). In this particular case, the aircraft partnership agreement does not contain a limitation on the amount of insurance that must be maintained.
Is An Aircraft Partnership Right For You?
Entering into an aircraft partnership is a very big decision. This is a commitment for not only the level of financial contribution, but it typically involves a contractual obligation that spans a minimum of three to five years. There is no "out" of an aircraft partnership without incurring the prepayment of taxes for the remaining partnership term, and the new co-owner is on the hook as well. So, only do this if you are sure it is right for you. We have seen partnerships work. We have also seen partnerships end up in very negative situations with lawsuits, criminal charges, or partnerships that have broken up. First, be sure you can "live" with the co-owners before you commit. After the newness wears off, the real personalities of the co-owners will reveal themselves. In a recent partnership situation, the aircraft was owned by two families. One of the families insisted flying together for trips, but was always late and wanted the other family to pay for their share of the trip. Very negative. Now, the families cannot stand each other, the aircraft flies less than anticipated and they are having trouble selling it. Second, look at the financial commitment before you do anything. Of course, everyone will claim they are in a sound financial position – until something happens. A co-owner could lose his job, could get divorced, could have other financial issues that then makes it impossible to share the cost of operating the aircraft. Make sure the financial situation is well structured and that the co-owners understand what happens if someone walks away from the deal. Third, understand there is a multi-year commitment. Buying an aircraft is usually a 10-year commitment (for lifestyle purposes) and the partnership is typically 3-5 years. Be sure the co-owners will be able to overcome their differences long enough to sell the aircraft . There are ways to do this without breaking the contract the airline you to sign – but be sure it is done right. One way we have seen partnerships work is when it seeks to limit staffing on the aircraft and not "share" personnel. In this situation, only one pilot and one flight attendant is on the aircraft. The co-owners can decide if these "staff" are paid or unpaid. To look at it, an unpaid staff member is cheaper, but you are using YOUR money. Staff cost is divided by the fixed costs like hangar, insurance and financing. But, there are some tax advantages to the paid staff. We recommend that a partnership NOT include the ability to add pilots and flight attendants into the cockpit and cabin. This "part time" staffing is expensive because of insurance, medical, training, etc. It also creates additional liability since FAA Part 92.3 requires the pilot to be evaluated for proficiency by someone who is "credible". The decision of who is credible is made by the PIC. When the PIC decides to put the safety of everyone on the aircraft in the hands of someone who may or may not take flying seriously, this is a recipe for disaster. It should not happen. Consider the ramifications. 77 people died in the 2014 Pressbox crash because a university employee who could not land the jet took the controls. Your money may be better spent on a fractional ownership. Be careful if you are thinking about going down this path. We have seen fractional owners sued for not following the rules of the fractional program – especially when it comes to unequal flying, improper limits and over-utilization of the aircraft. So, it is not a clear path. As with partnerships, there is inherent risk involved with joint ventures. Be certain you know what you are getting into before you commit.