About to buy a share for the first time. Checklist?

[SDB73]

Hi All,

I'm about to buy a share in an aircraft.

The aircraft is owned by an individual rather than a LTD company, and is intended to be transferred to a LTD co once all the share slots are filled. So I would be writing a cheque to an individual in return for a receipt confirming my part ownership of the aircraft.

I've met a couple of the members, and they seem like great guys, and had a fly in the aircraft which seems fantastic. I've also had access to the online booking system and there appears to be lots of availability.

I would very much appreciate some pointers from people with experience of group ownership.

1) Is the personal ownership vs. LTD co ownership ok / does it carry any risks?

2) How do I verify that the owner does indeed own the aircraft?

3) Is there a good resource where I can find a checklist for checking out an aircraft prior to purchasing a share?

Thanks in advance.

[jxc]

This would be a good start

GINFO Database Search | Aircraft Register | Safety Regulation (http://www.caa.co.uk/application.aspx?catid=60&pagetype=65&appid=1)

[Genghis the Engineer]

3) Is there a good resource where I can find a checklist for checking out an aircraft prior to purchasing a share?
Tell us what it is, and somebody might be able to help you!

G

[IO540]

Checking out the plane is the easier bit.

Checking out the other members is much harder but is a lot more important.

Vast amounts have been written here on that topic.

[Fuji Abound]

Discuss with the owner what maintenance needs to be done. Form a critical view as to whether he really knows what he is talking about. If not have a thorough chat with the maintenance company. Comments like it will need a repaint within the next x years, the compression on cylinder 3 is falling, the prop is nearing cord minima etc all add up to impending big bills. If the aircraft is old or unusual establish the availabilty of parts and cost. You havd a big problem if the prop is no longer made and therefore the prop hub governor etc all must be relaced for example. Ask whether all the ads have been done and if there are any pending. Ads can be very expensive. Do this part properly and you will have a good idea of what bills to expect, you can then establish how these will be paid.

How do you exit the group? It is easy buying but getting out can be tough. Shares are not necessarily easy to sell especially if problems develop. If you stop flying for some reason are you expected to go on contributing until you sell your share? If a majority of the owners want to sell is that enough to trigger a sale of the whole aircraft.

Check with the caa who is / are the registered owners and whether there are any charges against the aircraft. Every owner should be on the register with one as trustee. When the company if formed make sure you become a shareholder, the company is registered at companies house and thd m and a s / shareholders agreement is properly formulated.

Check how the bookings work, what happens if you want to go touring for a week or some one hogs the aircraft.

Check the insurance and who is responsible for any uninsured loss.

What is the story on time limited parts - usually engine, prop, govenor. How close are these to the limits, do members contribute to the cost and who pays the shortfall? What happens to the fund when people come / go?

What are the group currency rules, if any.

Just some brief thoughts, good luck.

[SDB73]

Genghis,

Apologies, what I meant was the general / universal things you should do. Not the mechanical specifics of the actual aircraft. For that I will get an engineer to look over the docs and the actual aircraft.

IO540, thank you for your usual helpful reply. I'll get searching.

[SDB73]

Fuji, thanks so much, that's exactly the kind of info I was looking for.

I'm comfortable with the answers to vast majority of that already, but you've given me a couple of important points to consider. Thank you.

[IO540]

You don't say what kind of flying you do etc but common things which cause groups to fall apart are

- mismatched mission profile (VFR v. IFR) causing "I fly with a stopwatch and don't need a DME" disagreements on whether a particular piece of avionics should be repaired

- mismatched funding ability

- "not my responsbility" issues (you need a clear statement of who is responsible for e.g. the insurance)

These things are hard to check out unless you directly ask about them, and look at the history of how/when things were fixed.

[Dan the weegie]

1) Is the personal ownership vs. LTD co ownership ok / does it carry any risks?

Can't see a good reason to have a ltd company rather than a syndicate, a ltd company ties you much more and is harder to sell a piece of from a legal perspective. Check with a lawyer before getting in to it, I've seen a few people set this up as a Ltd company and ended up being tied to a total arr-soul.
A Syndicate is merely a way of dividing ownership, the worst that can happen is that someone runs off with the engine fund.

Other pitfalls are many and varied some described above.

Syndicates are cheap but can be an unbearable pain in the ass, also make sure if you buy a share that it's a desirable aircraft that you can easily sell your share in, and by easily I mean within 6 to 12 months, any money saved can often be lost if you end up having to pay for a plane you can't/wont fly.

I've been in one syndicate, it was fine but I didn't like the constant potential for flare ups and decision making was horrific. any more than 6 people in the group and you'll never make a decision :). I've owned several of my own planes, much more expensive but way more fun.

[IO540]

I don't think there are particular issues with a limited company syndicate, provided all people who fly the plane are formal shareholders.

The HMRC Benefit in Kind attack requires some flyer(s) to be non-shareholders.

The advantage of a limited company is that if somebody prangs the plane, the other group members cannot be held liable, whereas in a Partnership they would be. Under the UK Civil Aviation Act the owner/operator has strict liability for 3rd party damage. However this is relevant only in the case of a loss not covered (or not fully covered) by the insurance, obviously.

There is more admin to do with a ltd co. but a cheap accounting program takes care of that OK.

I used to do this for a few years.

the worst that can happen is that someone runs off with the engine fund.Short of a straight fraud I don't know how one could do that.

I've owned several of my own planes, much more expensive but way more fun.

Of course, and worth every penny :)

[Fuji Abound]

Can't see a good reason to have a ltd company rather than a syndicate, a ltd company ties you much more and is harder to sell a piece of from a legal perspective. Check with a lawyer before getting in to it, I've seen a few people set this up as a Ltd company and ended up being tied to a total arr-soul.
A Syndicate is merely a way of dividing ownership, the worst that can happen is that someone runs off with the engine fund.

That is not the case.

The rules of a company are equally covered by the m and a s, and the shareholders agreement as a syndicate agreement. Moreover the rules are likely to more clear because there is a well established infra structure for setting up a company. Shares are at least as good a vehicle for selling a part owbership as anything.

Sorry, but there is no validity to your view.

[FleetFlyer]

Not sure about Ltd company versus plain syndicate but from personal experience I can say that you need to be absolutely clear, in written format, what the group funds are for and what individual members are liable for.

Also, you should establish some sort of rulebase with regard to currency and checkouts. We have none of this in our syndicate and we have had several prangs. (not me I hasten to add:})

A well thought out constitution that can be amended when necessary and sound accountancy are the bedrock of a good group.

[BackPacker]

Take a good look at the financial statement, balance sheet and so forth. If you're not comfortable with those yourself, get an accountant to take a look.

Look at the reserves that have been built up. For instance the engine fund and paint fund, and check whether these reserves are being built up according to the expected expense some day. E.g. if a replacement engine is 24.000 and has a TBO of 1200 hours then you need to put 20 in the fund for each flying hour.

[Dan the weegie]

Short of a straight fraud I don't know how one could do that.
That's what I was alluding to.

Suffice it to say that it requires everyone to be sane/honest and be able to afford it and that also goes for any future members. You'd be amazed at the number of people who buy in to syndicates that lack one of those three key ingredients.

Here is my advice

Be careful who you get involved with falling out can happen over the smallest stuff, consult a knowledgeable lawyer and buy a plane that does the flying bit well, is relatively cheap to run and has easily available parts. If you have no plans to fly training or IFR/Night flights then apply serious consideration to permit aircraft.

As for making sure the aircraft is sound, depending on how much money you're going to spend on the plane, you can for about £400 or so get a pre-sale inspection done by an engineering firm, they'll highlight everything about it but if you give them some guidelines you will be best informed of all the useful information.

[Maoraigh1]

Think about how much the share is costing, before spending a large amount of money on accountant and lawyer bills. How many hours must you fly to show a profit over renting? For years I haven't been able to persuade the low usage guys in our group to up the hourly charge for engine fund, etc. But I'm still getting cheap flying, even in a worst case scenario - writing off my £1600 investment would now be about £1.20 extra per hour since 1990.

[IO540]

I get a lot of people contacting me regarding Socata aircraft, and one curious thing I have seen is that prices of shares seem to be advertised for a lot more than the whole plane could possibly fetch (share price x # of shareholders).

Maybe this reflects the fact that more people can part with say 10k than with say 50k, so a 1/5 share in a 50k plane might go for 15k rather than 10k.

But that will make it difficult for the group to make realistic decisions on what to do about an ageing plane - because their "investment" in it is so much more than it is worth and nobody wants to face that. So instead of replacing it, they carry on pouring money into it.

[FleetFlyer]

You'll also find that the opposite to IO540's example can be true.
I have a share in a type that generally sells for £20,000 (whole aircraft). My share cost me £2000, which values the aircraft at £12,000 (no. of shares x their market value).

This is obviously great when looking to buy into a group in a depressed market, but not so great if you are one of the founders of the group looking to sell a share that cost you £5000.

[IanPZ]

Fleetflyer, isnt that just part of standard depreciation of an asset. The club I am learning at will allow you to buy into a syndicate aircraft at £3000 per share (Eurostar). The deal is that each year, the investment depreciates by £500, until you still have a share, but effectively worth nothing. That probably reflects a greater rate of depreciation of the aircraft than is realistic, but part of that is because the £3k is a flat start fee, irrespective of how many in the syndicate in total.

I suppose what I am saying is someone who buys into an early syndicate at £5k per share surely can't be expecting to recover £5k if they sell it 5 years later.....or am I just too naive?

For me, I just treat the syndicate as an upfront payment of £42 per month over 6 years. If I want to sell earlier, I get a proportion back. After 6 years, my share is worth nothing unless the overall scheme goes bust, at which point I get 1/20th of the remaining value after dispersements. More importantly, I have a share of a 6 year old aircraft (well, probably 7.5 years old) with no further effective monthly cost.

Ah well, its all a long way off for me, but I am very interested in the whole idea, as I know I can never afford a plane by myself....just the maintenance and hangerage would beggar me!

IPZ

[Genghis the Engineer]

IanPZ - I would steer clear of that.

These club-managed syndicates have been operated in microlight schools for years, and are a bit dubious legally. They are starting to become increasingly unattractive to the schools, and there are a few people already ending up with financial difficulties as a result. Also, because of the school involvement, your availability will be much poorer than for a true syndicate.

Buy into a real syndicate, run by and for it's members, or rent - these halfway houses are not necessarily very healthy.

G

[FleetFlyer]

Ghengis is absolutely right. Why spend £3000 on a 1/20 share (which in reality is closer to a joining fee to a rental club) Your asset will always depreciate if its written into the group constitution whereas with a 'real' group your asset follows its real market value.
You could spend the same and get 1/6 of an aeroplane with the same performance as a Eurostar. I do and my monthlies are £45.
I looked at the school/club run share schemes when I got my license and when you compare the financials to a real group it quickly becomes clear that they're a con.

[IanPZ]

G, thanks for the advice, which I certainly will bear in mind.

I would love to think in terms of renting, but the only place in the south that seems to rent microlights is clearprop, and I think the microlights are all from their wiltshire base. That's a heck of a drive, and they also insist on 50 hours P1. Well, once I pass, I have to somehow get that 50 hours :-)

Be more than happy if you happen to know where else you can rent microlights. Otherwise, purchase is a real challenge for me. Ah well, still plenty of time to look. No lessons today, as the damn thing can take off without actually taxiing!

Ta...IPZ

[IanPZ]

Fleetflyer, sorry, just saw your post. But do you mean light aircraft, or microlight. Former isn't going to fly (groan!!) on an NPPL(M) :-)

[Genghis the Engineer]

G, thanks for the advice, which I certainly will bear in mind.

I would love to think in terms of renting, but the only place in the south that seems to rent microlights is clearprop, and I think the microlights are all from their wiltshire base. That's a heck of a drive, and they also insist on 50 hours P1. Well, once I pass, I have to somehow get that 50 hours :-)

Be more than happy if you happen to know where else you can rent microlights. Otherwise, purchase is a real challenge for me. Ah well, still plenty of time to look. No lessons today, as the damn thing can take off without actually taxiing!

Ta...IPZ

Try searching on places like AFORS, TheHangar, and UKGA - there are usually a fair number of shares going if you look and ask around. Or just admit here where you live, and there will probably be a few suggestions forthcoming.

G

[BackPacker]

My share cost me £2000, which values the aircraft at £12,000 (no. of shares x their market value).

That might not be a completely proper calculation.

When you buy a share in the aircraft, you are also buying a share into the engine fund, the paint fund, the spares parts collection, and even a share in any liabilities (eg. still outstanding landing fee/maintenance bills) that the syndicate has collected.

Now I'll readily admit that the plane itself is by far the largest asset in a syndicate, but you can't simply say that the value of the share should be the value of the aircraft divided by the number of shares. You do need to take all other assets and liabilities into account.

That's why I said, if you don't feel comfortable looking over financial statements yourself, get an accountant or somebody else with a financial background to look them over.

And then still. Buying an aircraft as a whole is partly an emotional business and it's therefore very hard to put a proper rational value on it. Maybe when the aircraft was new you could tally up the parts and the labour, apply an uplift for design, marketing, sales, profit and so forth, and come up with a more or less rational price. But what's the value of a 30-year old aircraft? What's the value of a 70-year old aircraft?

So to an extent share prices will be affected too by the emotional value that people associate with an aircraft.

[Maoraigh1]

Look at e.g. AFORS. What are people asking for Jodels today? What did they cost new in the 60s? Assuming people get at least 50% of the asking price, writing off a syndicate share over 6 years seems a bad investment, if you've payed for the proper maintainance over that period.

[FleetFlyer]

Hi IanPZ, I meant either a microlight or a group A aeroplane. (They're both aeroplanes, just one weighs more than the other) The aeroplane I have a share in is currently registered as a microlight but its a cheap paperwork exercise to register it as a group A aeroplane.

As regards other assets; The group funds and history of cash calls should be well investigated. Don't just talk to the chap who is selling the share, but talk to whoever in the group is responsible for managing the group's financials.

The group I bought into had built engine fund of around 2/3rds of the cost of a replacement engine already saved up. We've never had a cash call. I was careful to check on this before buying the share and financially, things have worked out well.

Also, don't confuse 'market value' with 'estimated value'. The market value of anything is what someone is willing to pay for it. The estimated value is what the sum of all the financials involved. The second is only useful in helping you figure out if the market value is likely to leave you with an asset worth someone else's money. My £2000 share bought me assets worth around an additional £2000. This demonstrates the difference between real and market values.

[Keef]

I've been in various group for 20+ years. Limited Company has a lot going for it - it keeps the other group members honest, for a start. A non-limited group is OK if you trust all the other members totally.

There is much good advice on here and other forums, but most of it is applied common sense.

IO540 is absolutely right that the most critical issue is the other members of the group. That's where most problems will arise.

What helps is a "group gaffer" - a competent member who is in charge and whose word carries weight. He will tell you, for example "The aircraft is IFR legal and will remain so". Hence you don't find the navaids placarded "inop" for months on end (which I have seen).

In a limited company group, you do NOT want any "friends" members who aren't shareholders or directors. That will interest HMRC.

[SDB73]

Thanks so much for the excellent advice and pointers.

I think we have a deal, so I want a very simple contract drawn up (I know some of you will say "it can't be simple, there is a lot to consider", but the heads of terms mean that many aspects will be extremely simple), but ideally by a lawyer who is experienced in aviation.

Any suggestions?

[BackPacker]

No personal experience, but I think the LAA has boilerplate contracts available for setting up these kinds of groups. Alternatively check AOPA, BMAA and similar likely suspects.

Why reinvent the wheel?

[FleetFlyer]

I while back I saw an example on the LAA website. As the previous psoter said, why re-invent the wheel?
Things to consider if they are not already included are clauses that cover what happens if a member can no longer pay their monthly fee, what happen's when a member damages the aircraft at both before the insurance excess threshold and after it.
What currency limitations do you impose and how are restrictions lifted (do you stipulate a ride with another member if having not flown for 6 months? or should it be with an instructor?)

Fuel is best managed by setting up an account at your home base and all fuel being paid from hourly group funds. All off-base fuel purchased is then re-imbursed on submission of reciepts.

Make damn sure that you have a designated accountant in your group who is paid in some way (either cash or 1/2 an hour per month). You can't rely on the group to collectively account because that won't work.