From Gulfstream G550s to Cirrus SR-22s, we can turn any aircraft - turbojet, turboprop, or reciprocating single-engine land - into a fractional ownership opportunity. We can turn both new and pre-owned aircraft into fractional aircraft. We also can organize a fractional program that involves two or more aircraft.
Our clients are typically fractional aircraft program managers or fractional shares sellers or investors. They hire our Firm to handle the planning, drafting, presentation, negotiation, and closing of fractional transactions, or any combination of these tasks. The process takes between four and sixteen weeks. The drafting component only takes about two weeks.
Discussion of the Fractional Aircraft Ownership Transaction:
Turning a tangible asset like an aircraft into fractional shares and satisfying the needs and expectations of fractional investors and a program's manager is a challenging feat. It must be well-planned and executed by counsel.
Our associates have organized and executed all manner of arrangements among fractional investors and managers. We have identified over 80 variables to the fractional transaction. These relate to the division of expenses, ongoing access to the aircraft, permissible (and impermissible) uses of the aircraft, insurance, contingencies for arrearages and bad debt, buyouts and first rights of refusal of other investors, risk of loss, and other vital issues. A fractional investment opportunity that does not consider, address, and resolve each and every variable will inevitable lead to claims, disputes, unhappy owners, unnecessary financial losses, or litigation (of which there are now many well-documented cases).
The fractional transaction consists of not one, but a minimum of three (and usually five) agreements. They are as follows:
a. Fractional Purchase Agreement: This agreement sets forth the terms and conditions of the sale of an undivided ownership interest in an aircraft. Terms include the purchase price of the fractional shares, the closing date, delivery conditions, what percentage the purchaser is obtaining, what warranties are being conveyed, and an explanation that the fractional owner is taking interest as a tenant-in-common with all other persons possessing ownership interests in the aircraft.
b. Fractional Management Agreement: This is a standard turn-key management agreement setting forth the terms and conditions of the management of the fractional owner's aircraft as well as charges payable by the fractional owners for flight services. The manager contemplated in the agreement is often the company handling the sale of the fractional aircraft, but it may also be a third party, or sometimes one of the fractional owners.
c. Fractional Owners Agreement (also referred to by some as the "Interest Holders Agreement" and in the case of an LLC, this can be the Operating Agreement): This document lays out the rights and responsibilities of fractional owners to each other and as to the entity they have created to hold title to the aircraft. This agreement usually specifies the nature of the relationship among the owners, which typically is that of tenants-in-common, and that fractional owners will be severally, but not jointly, responsible for its pro rata share of the costs of operating the aircraft (so that a responsible party does not bear the burden for a delinquent one). It also addresses tax depreciation benefits, dispute resolutions, liability, insurance to be maintained, and other issues, including required regulatory provisions.
d. Master Interchange Agreement (also known as a "Master Cross-Leasing Agreement"): This agreement is also entered into among all of the fractional owners. The agreement contains the "rules of the road" to make the sharing of the aircraft possible and as hassle-free as possible. It also addresses various Federal Aviation Administration requirements. Structurally, the agreement is in nature a lease by which each fractional owner agrees to lease its interest in the aircraft, from time to time and on an as-needed basis, to the other fractional owners. Many (but not all) fractional Interchange Agreements are structured as "dry" leases. That means the aircraft comes without fuel, flight crew, catering, etc. These are supplied by the fractional owners in a dry arrangement. In a "wet" transaction, these would be supplied by the management company pursuant to the management agreement.
e. Fractional Program Deposit Agreement: Although last on the list, this is usually the first document signed. The Deposit Agreement will precede execution of all of the other Fractional Ownership Governing Documents. It details the amount of the deposit, when it is due, the nature of the deposit, and any conditions for refund.
The Flow of Work in a Fractional Transaction
Step 1. Discussions and Conclusions About Your Fractional Project: A fractional project begins with a meeting between you, our client, and our team to determine your expectations, learn about the proposed equipment you intend to fractionalize, calculate the costs and prices of the operation, and much more.
Indeed, if you are planning to manage the program yourself, or will be hiring a third party manager, it is essential that we understand the cost structure and your profit predictions and requirements. That is because the fractional transaction documents will pre-determine most of these, and thereafter they are difficult to renegotiate with fractional investors.
If you do not have a handle of the costs that will be passed through to fractional owners (or if you are entering the fractional market for the first time), that is not a problem. We can help you and make suggestions based upon our experience.
Step 2. Drafting of Fractional Legal Agreements and Project Prospectus: After the variables have been identified and your needs are accounted for, we proceed with drafting the legal agreements. When complete, we recommend that they be integrated into a prospectus for potential fractional owners. Our Firm can assist with this element of the project.
Step 3. Discussions and Negotiations with Potential Fractional Purchasers: Once potential fractional investors have been procured, we can help you discuss and explain the transaction with your potential customers and their attorneys or agents. Our presence, as a leader in the field, will bring credibility to any such dialog. In most cases, fractional investors of turbojet aircraft will have counsel. Assuming there is common ground on prices, we move to the final step.
Step 4. Closing and Escrow: Our Firm handles the closing, escrowing of funds, aviation title insurance (through Wright Title, LLC), and all other matters relating to the transfer of title and commencement of the fractional project.
Given the size of many fractional owners' investments and the complexity of what must be done by fractional managers to keep equipment flying and at the ready for owners, it is no surprise that a fractional aircraft ownership project is confusing. It is even a mystery to most attorneys, even some who practice aviation law!
If you would like to consult with an attorney regarding a legal matter, or if you have questions about what you have read on The Florida Lawyer Website, then please contact us at (800) 934-5999.BKN Murray. LLP has offices in St. Petersburg, Tampa and Denver CO.