Sharing light A/C
 

Hi, can someone please help explain the procedure of buying a share in an a/c? Do you pay an initial fee to cover the share cost of the a/c, followed by monthly payments for fuel & maintainence? What does £60hr wet mean?

Regards,

FS

Your capital payment is your share of the aircraft - normally bought from an existing member. What you pay multiplied by the number of Members is (hopefully) what the aircraft is worth. You should have equal rights, if you have equal shares

Any monthly, standing order payments go towards fixed costs (hangarage / parking, insurance etc).

Wet is the hourly rate you pay including fuel. If the rate quoted is dry then you pay that to the group, the fuel you pay for yourself. The idea is whatecer you pay (wet or dry) covers the running cost of the aircraft including maintenance.

Thanks CM.

[pedant] What you pay multiplied by the number of members is (hopefully) what the aircraft and any spares holdings and any accumulated cash (e.g engine fund) or other assets is worth. [/pedant]

A one fifth share in aircraft with a 5k engine fund is worth 1000 quid more than a fifth share in the same a/c with no engine fund.

Mike

I see what you're getting at - but I disagree in part

The aircraft share, if you like, remains the constant.

If you have an engine fund - the value stays the same. However, in your scenario I'd say the share is worth £1000 less if there is no fund.

After all - you're not buying the money someone has already paid in through flying the aircraft. They've flown it, they've put the hours on the engine, they pay for it. It's part of the running costs - not part of the share capital.

Do check whether the group has an engine fund or other reserves. Many don't, but will expect that members will put up any necessary funds as required.

As a 1/5th or 1/10th owner, you will be expectyed to make up any shortfalls as they occur

For example, although it is assumed that an engine might last 2000 hours or so, it may fail at 1000 hours. You will need to put up monies to repair the engine at half the planned life, so never assume the reserves will cover the bills.

Too many share-holders find that they will need to find serious amounts of cash even though the group may have reserves. In my group, recently formed, we have not much in the way of reserves, but accept the risk, in the short term.

So... Before you buy into it, get a financial statement and some financial history, and check whether the "wet" rate indeed does include all maintenance and reserves for replacement parts and such, and that these reserves are, at present, sufficient. (So if the engine is half-time, there should be 50% of the cost of a new engine in the engine fund.)

If you manage to get hold of the financial overview of the last three to five years, then you can easily see if the members were ever required to pay anything above and beyond the monthly and wet price, and see if this was because of bad planning, or because of unlucky circumstances.

And remember that planning your maintenance cost for a very common type (a PA-28, C-172 or something) is fairly easy since there are a lot of maintenance firms and lots of these shared planes around, so lots of experience with the actual maintenance cost of the type. But if you're buying into something unique, less people have experience with maintaining it over a long period, and it is harder to predict the costs of that maintenance.

But at the end of the day you've got to accept that you're owner (even if only part owner) of an aircraft and that you may be unlucky with the engine or whatever, requiring unplanned repairs that are not covered under warranty or insurance, and thus requiring additional funds. If you don't want to run that risk, go rent. (And this equally applies to cars, houses, caravans and other capital goods.)

And there's another tricky thing too. Everybody is interested in low flying cost. So a share in a plane with a 60 euro wet rate will sell more quickly than a share in an identical plane with a 70 euro wet rate. That's because the only thing mentioned in the small ad in the magazine is the monthly fee and the wet rate. Not the present state of the engine fund (if any). So from a marketing point of view it is a good idea to lower the published wet rate, while the members of the group know that they're going to have to put up more money at some point in time to pay for repairs. Not a problem as long as this is out in the open, and you know what you're getting into.

Me, I would get the financial data and prefer buying into the group which seems to have its finances in order, with the wet rate covering all the expected maintenance plus a bit of reserve, both for the 3-5 years past and 3-5 years to come, than buying into the group with the lowest "wet" rate.

Chilli

I think where we differ is in how you value the a/c compared with how I value it.

To me the a/c has a market value, which is what someone would be prepared to pay for it, as it stands, now, in the condition it is in now, with the accumulated hours it has now. This is not related to what was paid for it when it was bought or what was paid for the share last time it changed hands, how many hours it has done since it changed hands, or what has been spent on it since it changed hands. Nor is it related to whatever engine fund or spares holding comes with it.

It's a price you think the aircraft would fetch now on the open market.


However the buyer may not just be buying a share in the aircraft, he might indeed be buying a share in the engine fund, and one fifth share of 5k in the bank is 1k.

I suspect you're looking at what the vendor paid for his share as the basis for valuation, I'm looking at the value of the aircraft.

Mike

Mike - I don't think we differ that much, just in how we present it.

The aircraft share is worth the market value - agreed? (judging by your posting I'm guessing yes).

Now - if there's money in the engine fund then the share is still only worth the market value - there is no premium to add on to the price for that money. (which your post suggests there is).

However - if there is no money in an engine fund that aircraft (and proportionally the share) is worth LESS than market value by that amount, and if I were buying I would offer accordingly.

Your post suggests that money in the bank is worth a premium on the share price at market value. (Forgive me if I read it wrong). My attitude is I don't care what's in the bank - aircraft depreciate, they have a market value, that's all I'm paying - I'm not buying a chunk of engine fund, that comes with the aircraft.

Hope that's slightly more clear.

I rather think that Mike and Chilli are looking at the same thing just from different directions. At the end of the day you are looking at a share of the group assets no matter how those assets are made up, aircraft/cash/hanger full of spares/farm strip (if owned)/hanger on said strip/teapot in the hanger. If the group own it it comes into the assets and forms part of the share value.:p

OK Chilli, Here's the deal.

You go and buy an aircraft, let's say you drive a hard bargain and are satisfied that it's worth the 30k you paid for it and that it's market value is therefore 30k.

Now put 10k of your own money into an engine fund. I'll buy a half share of the aircraft and engine fund for half the market value, 15k. Fair dos?:ok:

Alternatively if you reckon that 5k should be knocked off if it doesn't have an engine fund I'll buy a half share without the engine fund for half what you paid less 5k. Can't say fairer than that can I?:p

Mike

It transpires we're probably both right.

Your example - owner who buys an aircraft outright and then decides to sell a share. In that case yes - add the representative amount of the fund to the share value if you have added that amount of cash to the fund, without putting the time on the engine.

My example - existing syndicate, say 5 shares (for example) which has built up an engine fund through use. 1 shareholder decides to sell his share. His share is worth market value - NOT market value plus what they've put into the engine fund because they've paid for their use of the aircraft and engine in the hourly rate. In that scenario the engine fund is ringfenced.

Make sense now?

to start, I have no interest in sharing, however I wonder about Insurance ? I assume that all group members would contribute a share towards it, what happens if ( god forbid ) one member has a momentary lack of reason, and say clips a hedge on landing, causing severe damage to the ac, The insurance would pay, who would be liable to the considerable excess ? all or the group member ?

I guess you can handle it how you like. In my group we are signed up to a syndicate agreement - if you dent it you pay the excess. We have enforced it and it has worked - nothing serious just paintwork but like everything, costly and time consuming

Down to the Group Rules.

Ultimately you have to consider a winding up scenario. You all fall out or there is an expense you can't afford or the a/c is totalled. In that case the assets are disposed of, the debts paid off and the balance distributed among the shareholders in proportion to their shareholding, just like winding up a Company.

Re Tango Victor's question, in the first group of which I was a member, just after purchase the aircraft promptly had a mechanical failure and a hefty resulting bill, mostly covered by insurance. It just so happened I was P1 at the time but the incident was evidentially not down to me; by consensus, we split both the excess and the uninsured cost.
The second group I was in, a group of friends, decided that we would not want to fall out about linking 'blame' with responsibility for the excess (we can all make mistakes, after all), so we decided to put in the bank, up front, a float to cover the insurance excess as well as some working capital. When the aeoplane was unfortunately written off, the unlucky member on this occasion accepted responsibility and, as a true gentleman and good friend, reimbursed the other members pro-rata for the loss of the remainder of the annual premium, and also covered the full excess.
I make no comment as to whether these two instances are typical of groups in general; I strongly recommend that rules are agreed and written before they're needed!
Slip

Sorry Chilli I don't see how you work that. If the aircraft is worth 15,000 and you have £5,000 engine fund then the group assets are £20,000 and a 1/5th share is £4,000 not £3,000, otherwise if you sell the aircraft and close down the group where does the extra £5,000 go? It may be that you bought the aircraft for £20,000 and built up the engine fund, but with the hours flown off the engine the value of the aircraft will be (say) £15,000 instead of £20,000 because of the lower engine life - Just the same as our aircraft has had the engine zero houred so the aircraft is worth a lot more than it was but we now have no engine fund.
Also I would point out that the person selling his share has donated into the engine fund so why should he not benefit from it? The way you seem to have it a new member can buy into a group that is just about to replace the engine, he buys in for £3,000 (1/5th share of £15,000 aircraft), the group replaces the engine from the engine fund and the market value is now £20,000 so he can sell his share for £4,000 - let me know of any group you know that operates like that as I could do with a quick £1,000.:}

Foxmoth - disregarding the group winding up scenario (because that's not what the original poster asked - RTBQ), ask yourself this:

Why should the share buyer pay the share vendor for the use the vendor has had of the aircraft?

That is, in effect, what you're saying should happen.

I am with chilli on this. the engine fund has grown out of the hourly rate and is ring fenced. think of it as deferred expenditure. it will have to be spent eventually.

if there are 4 in a group, the aicraft is valued at £20k then a share is worth £5k. If the engine needs replacing then then engine fund is spent on it as the fund exists to cover the flying that has already occured. The remaining bill is covered by the group.

Perhaps it would be easier to think of it as paying the engine fund money directly to the maintanance company every hour and when the engine fails you get a cheap engine with the cost split between the group.

The engine fund should be there to cover a growing liability in the group accounts and is not an asset which is partly owned by the members.

Unless the group is dissolved in a scenario where the aircraft is scrapped, in which case all bank balances can be divided up between members.

The problem is that there are countless ways one can work out what the engine fund should be, and it will never be exact because engine overhaul costs vary so much according to where you go and what they find needs doing. One could be conservative and budget for a new engine (or some other known-cost option). But if you are conservative on this, you will have a higher hourly rate than other groups... and if you are not conservative then new members will end up subsidising the flying of previous members.

And that's just the engine fund. On the average 30 year old spamcan there is usually a constant stream of bits that need fixing, and somebody selling a share will know more about this than somebody buying a share ;) This is pretty significant; for example the engine fund might need topping up at £15/hour, but if the next Annual brings a suprise £5000 bill and the group did just 100 hours, that is another £50/hour. I suspect that on most old planes the normal maintenance cost well exceeds the engine fund.

There is no perfect way to do this.

Check out the finances over the last three to five years and you've got a pretty good idea on how much the "reserve" in the wet rate (with this I mean you take the wet rate, deduct direct expenses such as fuel, so that you are left with an amount of money that goes into a reserve fund, regardless of whether this is called "engine fund" or something else) is enough to cover the unexpected expenses, or the expected but unpredictable expenses (such as an engine overhaul).

Very easy to do this. Look at the financial statements and point your finger at any income of the group that's not the monthly fee or the wet rate. Ask questions, see if you're satisfied with the answers.

I'm with foxmouth on how to value the engine fund. Suppose you have two groups who fly completely identical aircraft - their serial numbers are only one-off. Each aircraft is in the same condition with the same equiment, number of hours flown and each engine is exactly half-time. Both aircraft are officially and accurately 1valued (if such a thing would exist) at, say, 20.000 euro and this value takes into consideration the current time on the engine. Both aircraft are operated by a group of four, but the groups are managed differently, leading to the situation where group A has an "engine fund" which contains, at this moment, half the expected amount of money for an engine overhaul. For arguments sake, assume the engine fund contains 2.500 euro. The other group is managed differently, and has no engine fund at all - it relies on the members to cough up the money as and when required.

Both groups have a 1/4 share for sale. Which share shall I buy?

If I buy into group A, I get a 1/4 share of the aircraft, valued at 20.000 euro, and I get a 1/4 share in whatever the other assets are of the group, meaning 1/4 share in the engine fund. So a fair value for this share would be 5625 euro (1/4 of the airframe + 1/4 of the engine fund).

If I buy into group B, I only get a 1/4 share of the aircraft, but no share in any reserves because there aren't any. So a fair value for this share would be 5000 euro.

If the shares for A and for B are indeed priced as calculated, then a second consideration would come into play. And that's whether the group is well managed, has its finances in order and has an idea on the future costs. With group A, at least somebody has done some homework and came up with a plan. Whether the assumptions in that plan come true is another matter, but at least someone tried to forecast the future costs and build reserves for that. With group B, although the share price is lower and the hourly rate is lower, I'm also buying into a big liability, because I have no idea whatsoever on the additional costs I'm going to have to pay for in the near future.

I do agree with bose-x though, in that the engine fund and any other reserves are ring fenced. They cannot be used by the members as a checking account for paying their daily bills and such. In fact, if done properly, the administrator of the group should produce a balance sheet regularly (at least once a year) with separate entries for "engine fund", "paint job", "unexpected repairs" and a number of other reserves split out, even though the money might be collected into one big checking/savings account. But that's just good bookkeeping.

Obviously not all costs are predictable, as IO540 has said. There's a thread somewhere here on new aviation sayings and quite a few are applicable. One I like is "an aircraft is a hole in the sky that you throw money in." The older and more unique the airframe is, the more the costs become unpredictable, but they're always higher than expected.

However, it's a buyers market:

Group A = 5000 Euro

Group B = 4375 Euro

You are still missing the point (except Chilli). The engine fund is taken from the per hour costs and covers wear and tear that has ALREADY occured but you have not yet had to pay for. It does not exist to meet future bills.
So a share is worth a percentage of the airframe value.
Look at it like this: A new engine is £10,000 with 2000hr TBO. Thats £5 per hour put away for wear that has ALREADY occured. The engine fails at 1000hrs you have £5k in the fund that pays for those 1000hrs that were used. The group members split the outstanding £5k and it all starts again.
You don't pay into an engine fund in advance of flying the hours you pay into it after the event. So you should not expect to value a share based in what is sat in the bank raised to cover wear that HAS happened.
If you are buying into a group with no engine fund then the share is worth less than the market value of the aircraft divided by the shares as you are taking on greater risk.

True enough, Chili, unfortunately.

I assumed that the appraisal of the aircraft would be for true current market value, taking into consideration things like the hours on the airframe and the engine, and such. Unfortunately we have the situation where appraisals can easily be inflated (for sales, insurance-payout or mortgage purposes) or deflated (for tax, insurance-premium or buying purposes), depending on who pays for the appraisal.

Appraisals would be much fairer if there would be a rule that said that if somebody appraises the value, he could be forced by the person who ordered the appraisal to buy the item in question for, let's say, 90% of the appraisal value, or sell a similar item for, let's say, 110% of the appraisal value.

Nevertheless, Chili and Bose-x, I'm glad you all agree that the contents of the engine fund does have an effect on the purchase price of the share, all other factors being equal. The difference is probably in how we define "market value". I defined it as "the current state of the aircraft, considering the current hours on the engine", while bose apparently defines it as "the current state of the aircraft, but assuming it has a zero-timed engine". In the one case the engine fund is a premium on top of the market price, in the other case it's the balance between the actual current value and the market value. At the end of the day, it all comes to the same thing.

I was going to give up but what the hell:rolleyes:

If you can't sell it for the prices backpacker mentioned then the valuation is not accurate. The Market Value of something is not what you offer it for sale at, it's what someone will pay you for it.

Chilli and bose are I suspect not working on Market Value. The Market Value of an airframe with a half-life engine in it is not the same as one of similar age and condition with a zero-timed engine in it.

So you get an airframe with a zero-timed engine worth 30k, you then fly 1000 Hrs in it. Is it still worth 30k? Of course not. Let's say the group put 15 quid an hour into an engine fund. Is the airframe worth any more because they did this? No.:ugh: :ugh: :ugh:

Mike, exactly.

Aircraft valued for fair market value, zero-timed, at 30K. Since then 1000 hours flown, meaning 15.000 in the engine fund. If everything (particularly the engine fund uplift) has been predicted correctly, the airframe (with its 1000 hour engine) should now be worth 15K on the open market, meaning the total assets of the group are still 30K.

A share in the group should cost 15K airframe + 15K engine fund divided by the number of shares.

Unfortunately most light aircraft are bought with emotion rather than reason and not every buyer does this calculation properly.

Market value is market value. If it is worth £10k today and £8k in 1000hrs thats normal depreciation. Put a new engine in and the value will not rise back up to £10k despite what you may hope. The engine fund is just a way of buying your way free of a massive bill when the donk fails. Think of it as HP for liability. This is nothing to do with the value of the airframe.

I was only involved in a group once I bought a share for £8k. The engine fund stood at about £10k. I flew a few hundred hours in it and paid the wet rate. £20ph went into the engine fund to offset my libaility for the hours I had "worn" on the engine. When I sold the share the buyer bought my share and continued to pay into the engine fund offsetting there own liablity. Effectivly they were buying into the group knowing they did not have to cover my wear and tear on the engine but knowing that they were buying into possible liablity if the engine failed early.

Surely a share in an aeroplane with an engine fund is worth more than a share in an identical plane without?

In the same way, we paid £10,000 for a hangar for 5 years, which means £2500 each. So if any of us sold a share of the aeroplane, it'd be the market value of the aeroplane /4, plus the pro-rated remainder of the £2500 for hangarage. This is the TRUE price of the share, if not nescessarily the true value of the aeroplane.

As it happens, we don't have any funds at all. We pay £40 per hour wet which so far has managed to cover fuel and the annual. For all other bills we split 4 ways, with majority rule. I'm going to start my own engine fund ;)

Indeed a share without an engine fund is worth less than a share with an engine but that is buyers choice not a valuation of the aicraft itself. The straight value of a share is the value of the aicraft divided by the number of shares. No engine fund I would be knocking money off the value of the share but would not add value to the share just because a fund existed. Putting a new engine in does not magically restore the devaluation of an airframe that arises from an extra thousand or two hours being put on it!

Lets buy a diamond DA40 new. £100k (easy maths) spllit it 4 ways, £25k each. Fly it for 2000hrs. Put a new engine in, is it still worth £100k? No it has devalued in addittion to the engine wear. But a new engine in using the engine fund is the share still worth £25k? I would say by that point you are looking at a 5 year old aicraft and would say the share is only worth £20k now.

Mike has it right.

An open market value is what a willing buyer will pay for it, from a willing seller, in the condition that it is in. Is is not what the airframe is worth with a zero timed enging.

Quite true, but if you have the choice of two aircraft in identical condition, and one has 1000 hours on the engine, and one has a zero timed engine (straight sale, no engine fund) which would you pay more for?


___________________________________________________________

Lets ask a different question.
There is a 1/5 share in a group aircraft for sale.
The engine in the aircraft has a 2000hr TBO. It currently has 1000 hours used up, and is expected to be good for the other 1000 hours. The cost of replacing the engine is £20,000.

On the open market, the aircraft would sell whole (no engine fund, just a straight sale) for £50,000.

How much would you pay for the share if

A) there was no engine fund?
B) there was £10,000 in the group engine fund?

Englishal, if everything you say here is open and said to a prospective buyer of a share, then that's a perfectly legitimate way (legally and morally) of running the group. The buyer knows what he/she's getting into, and can expect bills (possibly rather large bills) above and beyond the monthly fee and wet rate. Setting up your own private engine fund is a good idea then if your personal financial situation is tight.

Personally, if the aircraft required an "annual" instead of a "100 hour check" I would make sure the annual would be covered by an uplift in the montly fee, instead of an uplift in the wet rate. But that's just me and my personal opinion on how to make "fixed" cost "variable"...

I am not arguing that a share with an engine fund would be more attractive, its a buyers market. But the engine fund is ring fenced not divided by the number of shares. You cant as suggested here divide the engine fund by the number of shares and add it to the value. The fund belongs to the aircraft not the shareholders.

Dublinpilot:

A) £8000

B) £10000

Stop thinking of the engine fund as an asset (it isn't, unlike EA's paid for hangarage, which is), and more like IO540's explanantion of hedged funds to cover a liability.

Exactly!

You didn't pay 8k because that was the Market Value of the share in the airframe. You paid it because 8k was the Market Value of the share in the airframe AND the share in the 10k engine fund.
So what did you sell it for? did the buyer pay Market Value for a share in an airframe or did he pay Market Value for a share of the airframe AND a share of the (now enchanced) engine fund, exacly as you had?
Ye gods! The concept of ownership by inanimate objects, whatever next? Does it have its own bank account and credit cards as well?

Bose-X, I agree that depreciation is another factor you have to take into account. And this is possibly an even more complex subject than the valuation of the engine fund.

For years, the depreciation on the 30-year old spamcans (PA-28s, C-172s) was virtually negligable. But since a few years I've got the feeling that they're depreciating like mad again, due to two factors:
a. The advent of modern composite airframes (Diamond and Cirrus being examples) and a whole class of new ultralights, microlights and whatnot that are far cheaper to run & maintain your license for.
b. The advent of new engines, particularly the Rotax 912 and Thielert diesel, which all promise to make fuel costs in the aircraft that have them, far less. And generally live up to these promises (admittedly with a few teething problems).

As a result of this, the average 30-year old spamcan now has so much competition from newer designs that are cheaper to operate, insure and sometimes even to purchase (2nd hand spamcan vs. new microlight) that they now depreciate like mad again.

To give you an idea, at my club the IFR DA-40 is cheaper per hour wet than a VFR PA-28! Now you can discuss the flying qualities and training properties of the DA-40 vs the PA-28 but my wallet is the overriding factor in choosing the DA-40 if it is available.

For me, at this point in time I would not buy a share in a 30 year old spamcan under any condition. If I had a share I would try to get rid of it while I could still find a sucker to buy it off me for a good price.

I've got the feeling that a lot of owners of 30 year old spamcans will be very disappointed in the years to come, when they're trying to sell their airplane/share and find that simply nobody is interested anymore.

The bottom started to fall out of the certified market 2-3 years ago. Prices actually paid have fallen some 30% just in the past year or two.

Now, a 5 year old IFR tourer in perfect condition, bought for £200k and with another £100k spent on it, might fetch £130k. An original model would have "merely" halved in value in 5 years. And this is aluminium - composites are worse affected (for whatever reason).

Planes have turned into cars. It's going to take a while for people to accept this though!

The only way to get one's money out of a plane is to do what one would do with a car: keep it for a long time, 10 years at least.

Everyone arguing their corner and repeating the same things each time - this is right up my street!!!

Take the share out of the equation - If I have a C150 and buy it for £16,000 fly it for 1,000 hours and put some cash to one side to cover a new engine, do I sell it for £16,000 and give them the engine fund? no i sell it for a figure commesurate with what it's now worth (say £14,000). It may equate to what I have in my engine fund, it may not.

If I'm buying a share in an aeroplane I'll look at it's value and offer a share of that. If there is an engine fund then I'll count myself fortunate, I won't buy a share of the cash in the fund though. Someone has already paid that for the time THEY flew it.

I agree with Bose and Chilli. An aeroplane isn't worth more because it has a fund, it's worth LESS because it DOESN'T.

Take the share out of the equation - If I have a C150 and buy it for £16,000 fly it for 1,000 hours and put some cash to one side to cover a new engine, do I sell it for £16,000 and give them the engine fund? no i sell it for a figure commesurate with what it's now worth (say £14,000). It may equate to what I have in my engine fund, it may not.

You are right in the drift, but you won't get 14k for a C150 with a genuinely run-out engine. And if your engine has done 1000hrs and your fund is 16k, that implies a C150 engine can be overhauled for 32k. Actually it can be done for far less than that, and your fund is well overfunded.

Look at the prices paid for old piston twins - close to the engine value; the hull is close to worthless.

Yes I know my figures were a bit random and wild - I'm counting on £10-12k to sort out our 150 engine!

No, but you still have that cash, with most groups any cash belongs to the group, if you sold the aircraft and folded the group then the cash would be split amongst the group, selling a share though you do not normally get your share of any cash in the fund when you sell your share so you must also sell your share of that cash - if not you are giving the new share owner your cash!:=

And you are buying a share of the aircraft not the shareholder so if the fund goes with the aircraft you must also be buying a share of the fund!