Is fractional ownership a timeshare?
No, fractional ownership does not utilize the timeshare provisions as defined under FAR 91.501(c)1. A timeshare is a wet lease and includes crew, with limited reimbursement as specified in FAR 91.501(d) 1-10. Fractional ownership is an overall concept utilizing (1) shared ownership, (2) exchange of dry leases, which allows the exchange of aircraft between owners, and (3) use of a management company.
What is a share?
A share is contractually-defined and allows an undivided interest of a single aircraft to be sold to multiple owners on the basis of 800 occupied hours per year and sold in fractions as small as one sixteenth
What is the length of commitment for fractional ownership?
Most fractional programs typically have a five-year commitment with early out and/or extensions available at a cost.
I have purchased a new aircraft; using fractional ownership, will I fly only on new aircraft?
Although you purchased a portion of a new aircraft, it will become a member of a fleet of the same type of aircraft. The age of each aircraft in the fleet will vary; however, they typically will be similar in exterior and interior appearances. Each trip will be flown on the program aircraft that is most readily available, taking into account schedules, fleet availability and itinerary, among many factors. In some cases, non-program charter aircraft or larger program aircraft may be substituted for program aircraft.
What documents will I sign when I buy a fractional share?
You will sign numerous documents, but the three major documents in the purchase are:
- A purchase agreement establishes the terms and conditions whereby an interest of a specific aircraft transfers from the provider to the buyer. Limited power of attorney allows the provider to change the name(s) on the registration each time a share is sold.
- A management agreement establishes the terms, conditions and level of service that the fractional program will provide.
- An owner agreement must be signed by all of the owners of a specific aircraft.
What is residual resale value?
Residual resale value is the expected value of your aircraft share at the end of the agreement. You will agree to some method of determining the resale value at the time of purchase that may or may not take into account high aircraft utilization. Assuming an average traditional flight department annual utilization of 430 hours and a fractional aircraft utilization of 1,000 to 1,200 annual hours, the value of an aircraft in a fractional program most likely will be less than the average traditional flight department aircraft due to the increased flight hours and cycles. The 1,000 to 1,200 hours is based on annual 800 hours sold and up to 400 additional hours for repositioning.
Am I an owner for tax purposes if I possess a share in a fractional aircraft?
Yes, as owner of a fractional share in an aircraft, you are an aircraft owner for tax purposes. Consult with your attorney for details.
Will I have the same crew for each flight?
You will most likely not have the same crew for each flight.
Will my purchase of a fractional share be subject to state sales tax?
Possibly. A state sales tax generally is triggered by first use or taking delivery in those states with a sales tax or without an appropriate exemption. Check with your aviation tax counsel for more details.
Will my purchase be subject to state use tax?
Possibly. The use tax is a backstop to the state sales tax. The use of the aircraft in a state is the potential trigger, not the place of delivery. Use tax can be levied by practically any state where the aircraft is used. Check with your aviation tax counsel for more details.
Are my flights subject to the transportation of persons tax?
Yes, on the occupied hourly rate only. The provider will bill monthly and remit the appropriate percentage transportation of persons tax plus the segment fee.
Does the direct operating cost per hour rise as hours purchased increases?
No, direct operating cost is an occupied hourly fee for fuel, maintenance, engine reserves and pilot fees. The hourly rate remains the same despite use. However, you have given up control over these costs. You will be dependent on the fractional provider to control the direct operating as well as fixed cost.
Does the management fee rise as hours purchased increases?
Yes, the management fee increases with the size of share purchased and is a pro-rata share of fixed cost. Examples include hangar, administrative cost, insurance and training. This is a disadvantage to the fractional at high aircraft utilization rates and an advantage at low utilization rates.
May I fly over my allotted hours for the year?
Yes, with limits. Owners might be able to go over the yearly allocation by borrowing from the next year’s allotted time, prior to the last year of the contract. There are restrictions on how much you can go over in a single year. Some providers might not allow unused hours to be carried forward without significant restrictions.
What advantages in flexibility does fractional ownership offer over full ownership?
If available, you can match the aircraft to your trip requirements by trading up or down in aircraft size from the type you own. You have access to multiple aircraft for simultaneous trips – for example, if your flight department needs more than one aircraft for an event like a board meeting.