Ballpark Fixed Costs when Doing Math for a Partnership

[bigmo]

I’m the sole member of my LLC owned F. Great plane with about as much upgrades as one wants to put into an F. Well equipped, well maintained, and low time engine & prop (< 600 hours).

My retirement date of 2026 might slide left to 2025 and when that happens I plan on sliding into a home based 135 carrier. When I bought the Mooney, I knew this was a possibility, so the LLC was a kind of preemptive step towards a small 3-4 pilot partnership. I’ve got a pretty good bead on my fixed costs, but as I entertain the idea with some known interested parties, I’d like to have a good-ish ballpark on the hourly mechanic reserves. I’m coming up with about $45 an hour looking primarily at the engine & prop. If I add avionics reserves into that (and there’s really nothing needed now), somewhere about $55 per hour.

For those that have experienced IO-360 Mooneys in a similar situation, does this seem about right? Did you find it smarter to separate the avionics as a separate reserve based upon the partnership group desires and just focus on the power plant?

We’d fund an initial reserve as part of the buy in. I’m going to look at third as a partnership of friends (those interested are coworkers or friends). Common sense folks that’ll treat this like their own plane.

Open to any lessons learned & advice.

Lastly, is 3-4 the magic number of partners?

[Vance Harral]

We've run our partnership for 20 years as of 2024, and have tracked this kind of stuff pretty closely, but only the past couple of years are relevant looking forward.

Regarding engine/prop reserve, there is no way to set an hourly assessment that ensures the kitty is fat enough to avoid out-of-pocket costs at overhaul time, because you have no way of knowing when the engine will actually need an overhaul.  Because of this, we choose to bill an hourly value that tries to approximate the market depreciation on the airplane as more and more time is put on the engine, which presently seems to be about $20-$25 per hour.  This is related to the cost of overhaul and recommended TBO, of course, but it's not exactly the same.  More importantly, the hourly depreciation is the same regardless of whether the airplane has 600, 800, or 1000 hours on the engine when the new partners buy in.  To relate it to your specific question, I'd say $45/hour is much too steep, because the airplane isn't worth $45 less every hour it gets flown.  It sounds like you're getting that $45 number by dividing your guess at overhaul cost by (2000-600), such that over the next 1400 hours you'll build up enough reserve to overhaul the engine for no out-of-pocket cost.  Again, though, you have no idea when the overhaul will be needed, so that's not a realistic financial model.

Instead, all the partners have to share the risk that the engine will need a premature overhaul, and everyone is on the hook for a share of the out-of-pocket cost (they can also share in the windfall if the engine goes well beyond TBO before needing an overhaul).  The only way this works is if the hourly rate is based on market depreciation per hour, not the estimated cost of a future overhaul divided by a wild guess at how many hours it will be before that happens.

46 minutes ago, bigmo said:

We’d fund an initial reserve as part of the buy in.

To each their own, but I would not buy into a partnership that required me to pay an "initial reserve" on the engine, unless my buy-in price discounted the value of the airplane by exactly the same amount as the initial reserve.  It kinda sounds like you're trying to get the incoming partners to cover some of the cost of the first 600 hours of depreciation, even though you were the only person enjoying the use of the airplane during that time.

Regarding non-engine maintenance reserve, ours is currently set at $20/hour, and that's been adequate to cover status-quo upkeep.  But we do a lot of owner-assisted maintenance, and we're also pretty formal about the difference between "upkeep" vs. "upgrade".  For example, when our vacuum attitude indicator timed out a few years back, everyone paid out of pocket for the G5 installation, we didn't claim that installation of a G5 was just "maintenance" of the vacuum AI.  We're not going to "maintain" our UBG-16 engine monitor by installing a GI-275 EIS when it malfunctions, or install a 201 windshield when the stock windshield gets too scratched up, and so on.  If you choose to approach things this way, there is really no difference between the maintenance kitty for avionics vs. the maintenance kitty for tires, shock disks, heim joints, and so on.  Things are maintained by replacing them with exactly the same thing.  Anything different is an upgrade, subject to whatever voting procedures you use for upgrades.

You didn't mention fuel costs, and that implies you plan on dry rates.  Based on experience, I'd like to suggest you consider wet rates instead, that get adjusted a few times a year as fuel cost varies.  I know this sounds like more trouble than a dry rate, but I think what most people miss is that it's simply not possible for every partner to always exactly replace the fuel they use at the end of a flight.  Sometimes the fuel pump doesn't work the day you get home, and you're not able to drive back out to the airport the next morning to gas up.  Other times one partner might ask another to deliberately leave the airplane down on gas so as to carry more payload, etc.  In a wet-rate partnership, partners are simply reimbursed by the LLC for whatever fuel they buy, under any circumstances.  In a dry rate partnership, events like the ones I mentioned create debts directly between partners rather than through the LLC, and that can lead to hard feelings.  A wet hourly rate does deprive frugal partners of the opportunity to save money by gassing up at cheap airports and/or flying at reduced power, but the actual value of those savings is trivial in the scheme of overall airplane ownership, and in my opinion not worth the stress and risk to the partnership of creating fuel debts between partners.

Finally, a word of advice: "add-on" partnerships like the one you're proposing sometimes fail because the previously sole owner never really treats the new partners like equals when it comes to how the airplane is operated.  You've got to be at peace with the idea that you're *selling* the airplane, not merely lending it.  On day 1 of the partnership, the new partners have a fully equal vote on how much gas to leave in the tanks, whether the airplane gets wiped down after every flight, how the seatbelts are stowed, what oil level to run at, whether the tow bar is left on the nose gear in the hangar or stowed in the baggage compartment, and so on.  You need to avoid the feeling that you've got the airplane all figured out, and you'll teach the new partners how to operate it, and that can be pretty difficult.

Regarding number of partners, we've had 3 or 4 at various times throughout the partnership, and that has indeed been a magic number for us.  But... none of the partners fly overnight trips very often.  Maybe 1-2 per year per partner.  Obviously 4 partners isn't going to work very well if each partner wants to have the airplane away from its home base 90 days per year.  That said, it's also worth noting that many people who buy into a partnership fly less than they planned/hoped, especially if it's their first airplane.  I'm unconcerned when new partners approach our partnership stating they're going to fly 100+ hours per year, because I know that historically, most of them fly a little less than that the first year, and even less in the years after that.  That knowledge makes it easy to be generous with scheduling.

Most people are decent, and aren't going to take advantage in the long run, so you can build a really great partnership by being generous with scheduling and operating policies to your new partners in the early going.  You might be a little annoyed that they don't put the airplane away the same way as you, but that seems pretty trivial in the long run when you build a great friendship, and every unexpected cost is split across the partnership rather than borne by you alone.

Best of luck with your plans!

[bigmo]

Thanks @Vance Harral, this is seriously exactly what I was looking for. I’ll rethink the depreciation vs overhaul model a bit more. I know you shared the example about the G5, but do you run a separate avionics reserve of any kind? Ive seen a few partnerships that have an hourly avionics reserve now as it’s arguably the number #2 expense beyond the engine (moreso) than the prop. I thinking of a big item, like the autopilot needs replacement vs repair and there’s a $18-22k surprise. Or is that a “we each pay our fair share” part of ownership?

As for the emotional component, maybe it’s because I grew up on a farm…it’s just a tool. The plane gets me from point a to point b to see my kids & grandkids. I’m not one that sits in the hangar and stares longingly into its nose.

And one last question if that’s ok. I have a local I&A that has a published book (his own) for annuals. It’s $2200 for F w/ electric gear and a Powerflow. I was going to estimate $3400 for annual as a fixed item. Thoughts there is that minor issues can be addressed, and if we bank money it can drive future unseen expenses.

[76Srat]

Wow.  Kudos @Vance Harral.  Your explanation and detail of what a healthy, proper aircraft (and operating) partnership should be goes immediately into the Hall of Fame of posts on this entire website.  In a former professional life, I was deeply involved in commercial aircraft and engine leasing.   Your analysis of expenses, anticipation of scheduled and unscheduled maintenance items and also things that go in the "supplemental" category is spot-on.  Far be it for me to even *try* to guild the lilly of your brilliant undertaking above by merely suggesting a "partnership rent*** structure" (so to speak) that consists of three categories:  base rate (think in terms of monthly rent that escalates (or not) based on predetermined rates of rent on an annual or semi-annual basis.  This base rate is calculated based on all fixed costs strictly related to the hull value or overall aircraft market value, such as hangar rent (if the partnership wishes to amort such a cost assigned to the actual aircraft itself, or some other leasing structure that can be as complicated or simple as the partners wish), hull insurance and/or whatever other basis/bases the partners can agree on ahead of time, as long as its fixed and relates strictly to the standing value of the aircraft.  This base rate is then a function of a lease rate factor of 1.1x X or whatever); supplemental rate (hourly rate charged based on utilization--think of this in terms of @Vance Harral's very good example of diminution or depreciation of value of the aircraft, based on an hourly rate) and a third "reserve" category for expendables such as subscriptions, avionics upgrade reserves, etc.  

So the simple way to break this down on the rates of what to charge the partnership, they'd be:

1.  Fixed base rate on a monthly basis:  monthly, based on aircraft valuation, diminishing.

2.  Supplemental rate:  hourly, based on Hobbs time/utilization, monthly.

3.  Reserve rate:  hourly, based on Hobbs time/utilization, monthly.

@Vance Harral:  now that I've showered you with praises, any chance you can share a sanitized form of your partnership agreement?  Pretty-please?  I'd love to see it.

***please don't overthink my use of the term "rent", because I wholeheartedly agree with anyone who yelled at their screens, saying "this isn't an aircraft lease deal, its a partnership deal".  Totally agreed.  I'm just using the "rent" term very loosely, for lack of a better word to use when charging-back or, more accurately, calculating what a partner owes a given partnership pro-rata for the ownership/use/upkeep of a partnership-owned aircraft.

 

[802flyer]

Quick thought on the wet vs. dry rate topic: A club that I used to fly with charged a wet rate, and reimbursed fuel purchases at a fixed dollar-per-gallon value that was roughly average for our area (updated once or twice a year to track the market). So if you end up going out of your way  to buy fuel cheaper than the assigned rate, that actually brought your cost down for the trip; if you decide to visit the most expensive FBO at a Class B airport, you've still got skin in the game when buying their $10/gal fuel.

At the end of the day, the club is paying fair market value for fuel, and individual partners still get some autonomy in their actual fuel costs for their given trips. If a member asks the plane be left more/less full than usual, hopefully you've set the rates such that your home field's price is aligned with the assigned price, and therefore debts between parties are not worth calculating (plus everyone knows the reimbursement price ahead of time, so they can plan accordingly when deciding to tanker fuel home, asking for tanks to be left low, etc.). Seemed to work really well.

[Vance Harral]

6 hours ago, bigmo said:

do you run a separate avionics reserve of any kind?

No, but I think doing so is entirely reasonable for pilots with plenty of interest in avionics (which is most of us).

A lot of this has to do with what kind of equipment is in the airplane now, and whether the partners are really interested in just maintaining that exact same capability (and style), vs. staying at some Xth percentile of avionics cache' in the community.  The former can be done less expensively, but a lot of pilots would say the latter is the real definition of "maintaining the avionics".  Basically, they'll acknowledge they don't need an upgrade every time something breaks, but in the end they can't really stand the thought of flying with yesteryear's panel.  As a specific example, you can't get a GNS430 repaired any more, and some people interpret this to mean that if their unit breaks, they "must" at least install in an Avidyne 440 (at considerable cost), because there is "no other option".  But there are always other options, e.g. accepting a prolonged period of time without an IFR certified GPS, while hunting around salvage yards for a serviceable old GNS430, the same way one might have to do for a serviceable fuel selector or intake boot or landing gear actuator.  If you take the latter attitude, the old GNS430 in your airplane is merely a $3-5K time bomb, not a $10-20K one.  You can make similar arguments about autopilots, engine monitors, etc.  Heck, we're still maintaining our Brittain autopilot, and we're not the only ones.

 

6 hours ago, bigmo said:

I thinking of a big item, like the autopilot needs replacement vs repair and there’s a $18-22k surprise.

I understand the concern, and I think there is no way around this risk in certain cases, e.g. a Mooney with a non-WAAS G1000 panel is a major liability due to a combination of integration, and how the STC is held by Mooney.  But most of us don't have these corner case panels, certainly not in the vintage birds.  What's a little more perilous/expensive/frustrating is how the system can change out from underneath you in ways that are out of your control.  When we bought our airplane in 2004, a transponder was a dull gizmo that we didn't think much about, and had no plans to ever upgrade.  We didn't set aside separate funds for "transponder maintenance" any more than we did for tires.  But we had to shell several thousand dollars out of pocket for a new transponder in 2019 in order to continue legally operating the airplane in the metro area where we live.  That was an unexpected cost, essentially a "forced upgrade".  One could make the same argument about VOR receivers in the future, or even transponders again (I'm waiting for the powers that be to dictate we must have ADS-B diversity antennas in the US).  So putting specific dollars per hour into an avionics kitty is certainly fair, and I wouldn't avoid a partnership that did so.

Long story short (too late), I think you should talk with your partners about what it really means to "maintain" avionics, since there's a much wider swath of opinions about it vs. maintaining O-rings, rod ends, brake pads, etc.  In general, I'd say a partnership of scroungers doesn't need a separate avionics fund, while a partnership of panel junkies does, even if both partnerships start with exactly the same equipment in the panel.

 

7 hours ago, bigmo said:

maybe it’s because I grew up on a farm…it’s just a tool.

Excellent, this attitude will server a partnership nicely.  I don't begrudge those who feel differently, I just wouldn't want to be partners with them.

 

7 hours ago, bigmo said:

I was going to estimate $3400 for annual as a fixed item.

That sounds like a great number to me, as long as everyone understands that some annual inspections uncover discrepancies that must be addressed immediately and vary wildly in cost.  Whether to attribute such things to "the annual" vs. "maintenance that was coincidentally performed at the annual" is a regular source of discussion in our partnership.  It's always complicated (and kinda fun, actually), but one guideline we use to decide is if we feel the affected component broke or wore out due to use (flight time) or just age (calendar time).  In our case, we have separate logical funds for fixed vs. operating expenses, but the fixed expenses include maintenance items in addition to things like hangar rent, insurance, etc.  The annual inspection is itself a fixed expense, so it's not a stretch to say that certain things addressed at the annual are fixed expenses as well.  A trivial example of this is fuel-cap O-rings, which you might replace on a 1 (rubber) or 5 (fluorosilicone) schedule at the annual, regardless of number of flight hours.

Most of the sole owners browsing this thread have quit reading at this point, after rolling their eyes right out of their sockets that anyone in a partnership really agonizes over the bookkeeping of O-rings.  But I trudge on...

7 hours ago, bigmo said:

Thoughts there is that minor issues can be addressed, and if we bank money it can drive future unseen expenses.

One of the most difficult things to figure out in a partnership is how the partners really feel about "banking" money.  Of course you want a kitty, but you need to treat the partners like grownups, and not overdo it.  Requiring partners to bank money toward future maintenance expenses reduces the risk of someone coming up short,  but it also requires them to pay opportunity costs for things that might never happen.  Everyone has (or should have) a limit beyond which they're not willing to give a corporation they're affiliated with an interest-free loan.  Even if that corporation is made up of their friends and fellow airplane pilots.

[Vance Harral]

4 hours ago, 802flyer said:

So if you end up going out of your way  to buy fuel cheaper than the assigned rate, that actually brought your cost down for the trip; if you decide to visit the most expensive FBO at a Class B airport, you've still got skin in the game when buying their $10/gal fuel.

That's the way our partnership works, and I was really enamored of the idea in the early years.  I'm not disenamored with it now, but I also don't care about it as much as I used to.  It turns out it that people who spend a lot of time advocating for this kind of thing are largely missing the forest for the trees.

The majority of fuel bought will always be at the home airport, because any other strategy quickly runs afoul of the hourly cost just to fly the airplane to the airport with cheap gas.  So pilots are only going to leverage this delta on cross-country flights.  A really active partnership (not a flight school) might have partners who each fly 100 hours per year at roughly 10GPH.  That's 1000 gallons of fuel per partner, most of which will be bought at home.  Even if a partner with particular wanderlust buys fully half their fuel away from home, and manages to save or spend an absurd average delta of $2 per gallon, the resultant "savings" or "subsidy" vs. other partners is $1000 in this extreme example, and in reality it's much less - maybe a few hundred bucks.  Compared with the cost of owning and operating the airplane in the first place - especially the uncertainly discussed above - this just isn't a whole lot of scratch.

That's not to say it's not still a good idea.  But when forming a partnership, you really want to look for cues about whether the individuals are more concerned about the health of the partnership and friendships, or more concerned about "getting their fair share".  People who put a lot of energy into arguing about how wet rates aren't fair tend to be in the latter category, though that's of course not an absolute.

Just my two cents.

[Vance Harral]

5 hours ago, 76Srat said:

@Vance Harral:  now that I've showered you with praises, any chance you can share a sanitized form of your partnership agreement?  Pretty-please?  I'd love to see it.

Thanks for the complements.  I'm willing to share our documents, but I first owe my partners the courtesy of getting their consent to send them to third parties.  I'll ping them when I get a chance, it will take a few days.

One thing I will say immediately is that it took us a while, but we finally figured out that one should have one simple document which addresses the business of the LLC and its members only in general terms, independent of what business the LLC might be engaged in (things like how shares are tracked, rules for meetings, etc.); and a separate and usually more complicated agreement that details how aircraft owned by the LLC are operated, maintained, and funded.  Don't mix and match the two, as doing so winds up creating conflicting information and generally just becomes a headache.

[bigmo]

Stellar continued conversations - appreciate it. For fuel, we're in a unique situation as we get an 'urban fee' of VERY high 100LL on airport, but have 3 airports within 40 miles that are $2.50-3 a gallon cheaper. Like $4.30 vs $7.20 (today's prices). Almost all the GA 'normal' folks hangared there fill up nearby and at a very minimum top off those few gallons on base or not at all. About the only aircraft that use the FBO for fuel are transients or .money don;t matter' crowd. That'll be something we can figure out. 

Mins for partners will be 500TT and an instrument rating (ins company gives some pretty hefty breaks there), and of the guys I know interested, having an a/c safe for real IMC work is important, but that can all come out in the conversations.

I will say that building this will be more like a 4 way marriage than a business partnership. I've spent this year getting everything fixed and frankly, it's a fabulous plane now. About the only thing it doesn't have is an AP with vertical coupling (does have altitude hold, however). Flying approaches to mins is a non-issue once you know how the plane feels inside the FAF.

And I'm reading every word lol - keep them coming!

@Vance Harral You'd make a great 4 hour speaker at Mooney Summits - just sayin'!

[76Srat]

On 12/13/2024 at 4:05 PM, Vance Harral said:

Thanks for the complements.  I'm willing to share our documents, but I first owe my partners the courtesy of getting their consent to send them to third parties.  I'll ping them when I get a chance, it will take a few days.

One thing I will say immediately is that it took us a while, but we finally figured out that one should have one simple document which addresses the business of the LLC and its members only in general terms, independent of what business the LLC might be engaged in (things like how shares are tracked, rules for meetings, etc.); and a separate and usually more complicated agreement that details how aircraft owned by the LLC are operated, maintained, and funded.  Don't mix and match the two, as doing so winds up creating conflicting information and generally just becomes a headache.

Spot-on, yet again.  I tried to highlight your word "operated" above (not sure if its legible in the final product here).  A deep and abiding conversation needs to be had with each partner's CPA and a keen understanding of local and State tax regs is always best, e.g., if one partner is using the aircraft in the course of a business (even as simple as business travel, and thus writing off such travel as a deduction), then doing so might affect the tax status/reporting requirements of the other, "personal-use" partners who may never deduct any such aircraft or operating expenses, etc.  Suffice it to say that none of this is impossible, nor disallowed, but my point is it needs to be done in black-letter compliance with the tax man's rules.  

Bottom line:  the partners really need to have a mutually-agreeable, written understanding about what is allowed and not allowed by way of operating the aircraft because one partner's use of it will always affect the other partners' interests, whether they were the operator or not, especially come tax reporting time (if applicable).

A few other "tip of the iceberg" topics to be considered, and by no means is this exhaustive:  

Taxes:  Most tax authorities relegate the aircraft property tax issue at the State level to, on average, 1.5 persons who are a) overworked and b) paid in precisely opposite proportion to their workload.  So one single person will usually have jurisdiction to figure out upwards of thousands of aircraft registered in his or her State.

Naming the partnership:  Don't name your entity after the airplane by make, model or N number.  It's just not a good idea.

"Business" of the partnership:  be very specific that at no time shall the partnership operate the aircraft in a commercial or business pursuit, i.e. the acts of one partner bind the entirety of the partnership.  Consult your favorite knowledgable attorney for what this really means.  In the simplest of terms:  if you and your partners are merely forming the partnership to tend to the usual ownership and costs associated with owning the aircraft, then you're fine.  If there are any business pursuits directly associated with and require the aircraft (such as one partner using the aircraft commercially or instructing others outside of the partnership in the aircraft), then you have a different ball of wax that should be the subject of a different thread.  Sticky wicket, indeed, if one partner is a commercial business involving the aircraft***.

Partnerships (LLC formation and membership) specifically:  It isn't spoken of very often on here, but the issue of FAA Civil Aircraft Registry regulations and guidelines involving LLCs and other partnerships is very straightforward, but also very detailed and complicated to the uninitiated.  Consult your favorite competent aviation title lawyer or aircraft title escrow agent in OKC for further help on this very important step before you choose how to structure your LLC or other partnership.  And don't be fooled by thinking you don't have a de-facto partnership just because you haven't formed a formal LLC or other corporate entity; if you and another person own an aircraft together, you have a partnership, full-stop (even your spouse, believe it or not).  It just depends on what State you each live in as to how that's treated for tax and property purposes.  Look at the options on the 8050-1 for the list of types of ownership the FAA recognizes.  

Another "wow, I never knew that" moment:  the FAA Registry has its own viewpoint, regardless of what your local law might have to say otherwise, about spousal ownership and registration of aircraft:  they're either "co-owners" or "partnerships", unless otherwise stipulated by you when you file your ownership and registration docs with OKC.  Don't assume your friends at the Registry have a working understanding of your structure.  Chew the FAA Registry's food for them by consulting local OKC knowledgable people first--you'll be better off if you do.  Getting these seemingly simple documents and elections wrong at Registry filing can literally be the $2.00 o-ring that causes major headaches later (morbidly, don't leave your estate to figure this out later--it can be a nightmare with no end).     

***edited to add that the "partners" comprising the partnership can be any number of legally-recognized "persons" or "entities".  The FAA Registry has differing views of this versus most State laws governing partner entities within a partnership.  Be wary.