Aircraft joint ownership can take many forms. Which one is right for you?
Joint ownership qualifies as the oldest form of aircraft ownership, having originated with the Wright brothers. The primary advantage of joint ownership is one of economics. When an aircraft owner does not need access to an aircraft on a full-time basis, joint ownership arrangements allow the owners to reduce hourly costs by sharing fixed costs (including crew costs) with other owners. The greatest challenge is to make sure that everyone has equal access to the aircraft.
Most joint ownership arrangements are conducted under Part 91. Fortunately, there are many different ways to structure a Part 91 joint ownership arrangement, including:
A traditional joint ownership arrangement – sometimes called co-ownership – where the users purchase the aircraft jointly.
A Part 91.501 joint ownership arrangement where one joint owner can provide the pilot and can transport the other joint owner(s).
A leasing company arrangement where a jointly-owned company (usually an LLC) purchases the aircraft and leases the aircraft to the members.
Because of the amounts involved, all joint ownership arrangements should have a written “joint owners agreement” or, in the case of a leasing company, a “joint operators agreement.” Ideally, the document will ensure that each owner has access to the aircraft in proportion to ownership and will provide for sharing of aircraft costs in proportion to both ownership and usage. The document will also contain provisions relating to the transfer or termination (voluntary or involuntary) of the joint ownership arrangement.
Types of Arrangements
1. Traditional Joint Ownership
A traditional joint ownership is an arrangement whereby two or more participants invest in an aircraft and share access to that aircraft. Some people describe this arrangement as “co-ownership” since the FAA allows joint owners to register
The joint owners of an aircraft can operate the aircraft under Part 91. The joint owners must exercise operational control over the aircraft on their respective flights and must provide their own flight crew. This does not mean that the joint owners must all find different flight crews. Just as joint owners can share the same aircraft, they can also share the same flight crew. The joint owners can enter into an arrangement where they share access to a single flight crew and share flight crew costs.
2. Part 91.501 Joint Ownership
Many years ago the FAA adopted FAR 91.501, in part, to allow increased aircraft utilization by expanding the kinds of operations allowed under Part 91. One of the operations allowed is a “joint ownership arrangement,” defined 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.” This was apparently intended to allow an aircraft operator who employs a flight crew to sell a portion of his aircraft and to avoid the need for a complicated arrangement to share a flight crew.
Furthermore, according to the preamble to FAR 91.501, “It will be presumed that the joint owner employing and furnishing the flight crew is the operator of the airplane” and that “[u]nless otherwise agreed to by the owners, he is responsible for compliance with the safety regulations applicable to that flight.”
The FAA recognizes that, because of these advantages, an aircraft owner might be tempted to create a charter operation by selling token interests. For this reason, the FAA amended the regulations to require the owners to be “registered” joint owners. The FAA also requires that the ownership percentage bear a reasonable relationship to actual use.
One disadvantage of a FAR 91.501 joint ownership arrangement is that the definition apparently precludes the owners from leasing their interests to related parties or others. This effectively prevents joint owners from using a leasing company arrangement.
3. Leasing Company
In a leasing company arrangement, the operators create a jointly-owned leasing company that purchases the aircraft and leases the aircraft to the operators and others. This arrangement arguably provides the owner with additional protection from liability on flights taken by other joint owners. There are also various tax benefits to putting an aircraft in a leasing company, such as the ability to pay sales tax on lease payments rather than the purchase price.
One downside is an IRS tendency to argue that any leasing company is subject to the hobby loss and/or passive loss rules even where the aircraft is used exclusively in an active trade or business. To avoid this problem, some joint owners utilize a multiple leasing company arrangement where the joint owners have their business entities each form a single member LLC leasing subsidiary that jointly purchase the aircraft and lease the aircraft to the business entities. For income tax purposes, the LLCs are disregarded and the business entities are treated as the owners of an aircraft, rather than a leasing company. However, the sales benefits are preserved because the states generally do not disregard the LLCs for sales tax purposes.
The Joint Owners or Operators Agreement (“JOA”)
Every joint ownership arrangement is slightly different and each should have a written “joint owners’ agreement” or “joint operators’ agreement” (“JOA”). Here are some helpful provisions.
1. Administrative Matters
Although joint ownership is not a business, the owners
will generally find it helpful to appoint one joint owner to act
as “manager” for purposes of scheduling maintenance, computing amounts due from each owner and maintaining the aircraft schedule. The owners will also want to open a joint ownership bank account to facilitate payment of expenses and collection of payments from the owners.
2. Sharing Usage and Access
The Wright brothers used a coin toss to determine who got
to fly the aircraft. The rules regarding sharing of use and access should be written in the JOA or a related document. At a minimum, the JOA should guarantee each owner a certain number of hours or days. Some give the owner who has fallen behind in usage the first right to schedule the aircraft. Some contain procedures for sharing use on “high demand” days, such as holidays. Most arrangements contain procedures for reserving the aircraft, including setting a maximum “lead time” and a maximum amount of time the aircraft can be automatically reserved.
3. Sharing Costs
The JOA should describe how the owners will share aircraft costs. Some agreements allocate all costs in proportion to ownership. However, this creates distortions where the percentage of usage is significantly different that the ownership percentage. Consequently, most agreements try to share
variable costs based on usage by requiring each joint owner to pay their own fuel costs and to pay an hourly charge for using
the aircraft. This hourly charge should cover anticipated maintenance and overhaul costs. The owners can either retain those hourly charges in the joint bank account or can distribute them to the owners in proportion to ownership,
with the understanding that the owners will later contribute
toward actual maintenance and overhaul costs in proportion to ownership.
4. “Buy Out” Provision
The “Buy Out” provision is one of the most important provisions in the JOA. Since nothing lasts forever, the provision should contain rules governing termination of the arrangement or transfer of an interest. Some agreements provide for automatic termination and sale of the aircraft upon departure of any joint owner. However, most contain a “right of first refusal,” that gives remaining owners the right to buy out departing owners or to terminate the arrangement. The Buy-Out provision should also cover the worst case scenarios, such as where there is an involuntary transfer due to death or bankruptcy or where a joint owner refuses to follow the rules.
Joint ownership is an increasingly popular method of
reducing aircraft hourly costs and sharing administrative burdens. Using a written agreement that spells out the rights and obligations of the owners will generally help reduce the risk of unpleasant surprises.