Aircraft Co-Ownership: Making The Relationship Work
By Gregory J. Reigel
© 2005 All rights reserved.
Co-ownership of an aircraft can be a beneficial relationship for individuals who would like to share the aircraft ownership experience. However, it is a lot like a marriage. Compromise and some give and take are necessary to make it work. Open and honest communication regarding expectations is critical. Co-owners must also be compatible. At the end of the day, just like marriage, the arrangement is right for some people and wrong for others. Before you jump into an aircraft co-ownership situation, you need to do some research and planning to determine whether it is the right arrangement for you and to ensure that if you do enter into a co-ownership arrangement, it will be a happy marriage rather than simply a honeymoon before an ugly divorce.
Owner Compatibility. To determine the compatibility of prospective co-owners, you will need to ask and honestly answer a number of questions. Will each owner be flying for business, pleasure or both? What kind of aircraft does each co-owner want? Is it the same aircraft? Will it perform the missions desired by each co-owner? Can each prospective co-owner really afford to be a co-owner? Do the co-owners get along? These may seem like obvious questions, but more than a few people have ventured into aircraft co-ownership arrangements without asking these questions and have ended up in a less than pleasant situation. The answers to these questions will help you determine whether you and your prospective co-owners will have similar goals and expectations.
Formation of a Legal Entity. Once you have determined that you and your prospective co-owners are compatible, you will need to address the legal relationship between the co-owners. Will it be a partnership or perhaps some type of limited liability entity, such as a corporation or a limited liability company? I usually recommend that co-owners form a limited liability type entity for liability protection. It is not mandatory to form such an entity. However, unless you can insure for the full potential liability you might be exposed to if an accident or injury occurs, the protection of such an entity is likely worth effort and expense.
Besides, in today’s aircraft insurance market, most aircraft insurance policies only provide limits of liability of $100,000 per passenger and $1,000,000.00 per accident. If a serious injury or death occurs, the potential damages will be well in excess of these limits. Although it may be possible to obtain higher liability limits, the premiums for such limits are exponentially more costly, downright unaffordable or, in some situations, just not available.
Once you have determined that the potential co-owners are compatible and decided upon the legal structure of your co-ownership arrangement, you will need to discuss the details of that relationship. Some, but certainly not all, of the issues that should be addressed and questions that need to be answered include the following:
Owner Information. Who will be the owners? Will each owner be an individual or maybe an entity owned by the individual? How much is each contributing? What percentage of ownership will each owner hold? Are all of the owners, whether individuals or entities, U.S. citizens? You will need this information to form your entity and to ensure that you are able to properly register your aircraft.
Management/Administration. Who will handle the administrative and management functions relating to the aircraft? Will it be the same person or will it rotate between owners? Who will keep the books and records, pay the bills, and report on financial matters to the other co-owners? How detailed and in what form will these records be maintained? Will this person maintain custody of all of the documents relating to the aircraft? Will decisions regarding ownership of the aircraft be made by majority vote or unanimous vote of the co-owners? Agreeing upon how these tasks will be handled is critical to ensuring that the business aspects of owing an aircraft will run smoothly. Documenting these tasks is equally important to provide written guidance for all of the co-owners’ use and reference.
Insurance. What limits of liability do the owners want or, more importantly, can they afford? Will any of the co-owners need additional training or ratings to qualify for coverage under the aircraft’s insurance policy? Is an umbrella policy or excess coverage desired or an option? Although the answers to these questions may be dictated by the current aircraft insurance market and qualifications of each co-owner, I recommend that you purchase as much insurance as you can afford.
Aircraft Use and Limitations on Use. How will the aircraft be scheduled? Will each co-owner’s use be limited by a minimum or maximum number of flight hours per year? Will you have restrictions upon where or under what weather conditions the aircraft can and cannot be flown? Will you have currency requirements that are more restrictive than the aircraft insurer or FAA impose? May an owner use the aircraft for flight instruction or some other commercial use? Will you allow someone other than a co-owner to operate the aircraft? Who will perform the maintenance for the aircraft? At what intervals and to what standards will the maintenance be performed? Here again, a written document delineating the co-owners’ agreements regarding use and limitations on use is essential to avoid future misunderstandings.
Expenses. What will you charge for use of the aircraft? How will the co-owners pay fixed expenses such as hangar, insurance etc. be paid? How will the co-owners pay operating expenses such as fuel, oil, reserve for maintenance etc.? When will the expenses be paid? Who will pay the insurance deductible if a claim is made to the aircraft insurer? What happens if a co-owner does not pay the amounts he or she owes when due? Aircraft ownership is not cheap. By addressing these issues in advance both verbally and in a written agreement, you will hopefully limit the money disputes that could arise down the road.
Dispute Resolution. If disagreements arise between the co-owners, how will they be resolved? Do you want to provide for formal procedures short of civil litigation such as mediation or arbitration? If the dispute involves the payment of money, will the co-owner who has not paid sums allegedly due be able to fly the aircraft before the dispute is resolved? Because co-ownership is similar to a marriage, the last thing you want to do when a dispute arises is run to the courthouse. Having written, non-litigation, dispute resolution procedures established in advance will hopefully provide a mechanism for the co-owners to resolve disputes without necessarily ending the co-ownership relationship.
Exit Strategies. What happens if a co-owner wants or is forced to sell his or her interest in the aircraft? Must the remaining co-owners consent? Will the remaining co-owners have a right of first refusal? What happens if a co-owner dies, becomes unable to fly, files for bankruptcy or is divorced? Will the departing co-owner’s interest be purchased with cash or financed? The answers to these questions will give remaining co-owners security in knowing that a new co-owner will not be forced upon them and that they will be able to continue their co-ownership arrangement in spite of the departure of one of the co-owners.
Although the issues that arise between co-owners are similar to other co-ownership situations, how they are resolved is as unique as each co-ownership arrangement. The best approach is for you and our fellow aircraft co-owners to discuss and agree on these issues and as many others as you can think of and then to meet with an aviation attorney who can then draft a document formalizing your agreements.
Although most business attorneys can probably document your agreement for you, hiring an aviation attorney who understands these types of arrangements is usually more efficient because you won’t have to educate the attorney. Additionally, an experienced aviation attorney will be able to point out issues you may not have discussed with your co-owners and help make sure that your written agreement addresses all of the key issues.
Finally, if you are considering a co-ownership arrangement, a variety of resources are readily available on the subject. AOPA and EAA both have information available for their members. Additionally, several books have been published on the subject that provide further insight into aircraft co-ownership arrangements and the potential advantages and disadvantages of this type of aircraft ownership. With the proper research and planning, you can make sure your co-ownership of an aircraft is a marriage made in heaven.