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Home Alternative Lift Costly Assumptions
 * Alternative Lift


COSTLY ASSUMPTIONS

Understand Fractional Fair Market Value

By
Dan Dugger
-
February 28, 2018

A s a fractional share owner, you don’t want to hear that your aircraft share
value has diminished, especially as you exit the program.

If you’ve not recently reviewed your contract, you may be surprised to hear from
your sales representative that the exit value is much lower than you expected.
You may assume that an error was made, and the rep might gently suggest that you
re-read what you signed.

When you do, you’ll find the term “Fair Market Value (FMV)” describing your exit
value.

The American Society of Appraisers defines FMV as: “An opinion expressed in
terms of money, at which the property would change hands between a willing buyer
and a willing seller, neither being under any compulsion to buy or to sell and
both having reasonable knowledge of relevant facts, as of a specific date.”

You might reasonably assume that the FMV of your aircraft share is comparable to
the price of a share in an aircraft of comparable age. But most aircraft of a
comparable age average fewer than 400 flight hours annually – fractional fleet
aircraft average more than twice that. And most non-fractional aircraft are
enrolled in an hourly cost maintenance program for engines and airframes.
Fractional aircraft like yours are enrolled in a customized airline fleet
maintenance program, and its current value likely is not comparable to that of
non-fleet aircraft.

That means that the value of your aircraft share is comparable only to the value
of other fractional fleet aircraft, not to all similar aircraft on the market.
So instead of the “average of comparable sales” you might expect to define the
value, it actually is based on some very specific criteria and assumptions about
the aircraft’s condition.

FMV IS AN “OFFER” BY THE FRACTIONAL COMPANY TO YOU.
IT IS NOT AN APPRAISAL.

If the offer is not what you expected, how might you do better? Assuming you are
leaving the program, you can:

 * Sell your share to someone else, keeping the provider’s offer as a back up if
   you cannot find a better deal.
 * Ask to arbitrate the price. The rules are spelled out in your contract. Be
   prepared with an aviation dictionary and $5,000 to have a certified appraiser
   complete a “desktop appraisal” (one based on the aircraft’s age, and total
   airframe and engine hours; no visual inspection is involved).
 * Ask your attorney to write a letter expressing your displeasure. This option
   could cost you one or two additional months of management fees plus legal
   fees, just to tell your fractional provider that you are upset.

Arguing over FMV and exit penalties may be an unpleasant end to what otherwise
was probably a good relationship and a safe flying experience. Avoid
misunderstanding and disappointment by following these three tips:

 * Read the contract carefully before you purchase, renew, or reinvest in a
   fractional share, to avoid any surprises when you leave. Be sure that the
   definition of “FMV” used by your fractional provider aligns with the ASA
   definition.
 * Pay particular attention to the company’s return policy, and any possible
   penalties. Leaving the program before term end is never to your advantage,
   but may be necessary due to a change in your personal or business
   circumstances. Be prepared to pay the price for an early exit. And if you
   plan to re-up with the operator, use your newfound knowledge to negotiate
   better terms in your next contract.
 * Once each year, ask your manager to send you a written estimate of your
   aircraft share value, and compare that to a current desktop appraisal. Recent
   market fluctuation and regulatory requirements could have a substantial
   negative impact on the value of your share.

Keeping abreast of these developments can help prevent “reverse sticker shock.”
BAA

ABOVE AND BEYOND: THE BAA PODCAST SERIES


DAN DUGGER: COSTLY ASSUMPTIONS

In this podcast, brought to you by JETNET, Dan Dugger of Canvas Aviation, and
author of “Costly Assumptions” in our May/June issue tells business jet and
turboprop fractional share owners how to avoid “reverse sticker shock.” Listen
in, and find out what you need to know when you are ready to re-up, upgrade, or
sell your fractional share.


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Dan Dugger
http://www.canvasaviation.com
Dan Dugger is President of Canvas Aviation. With 25 years in aviation, he was VP
Sales for both NetJets and Marquis Jet. A Board member for JAARS, he is a
commercially licensed private pilot.



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