What You Need to Know about Preowned Fractional Shares

If you’re like most fractional aircraft owners, you’ll keep your share until the ownership contract expires or upgrade to another model in the program before then. But what if you want to get out of your share before its term ends? 

A change in lift needs, financial issues, or disappointing program performance are among the reasons shareowners might wish to exit their contract after meeting its minimum terms. That’s where the preowned-shares market comes in—or doesn’t, depending on your program and your contract. More on that shortly. 

For both share sellers and buyers, “private transactions, especially where the program allows the transfer of [unused] hours [from the current year or past years], can be phenomenally attractive,” says Daniel Herr, founder of shareowners’ consultancy Fractional Law.

“The benefit is price,” notes John Brown, an attorney with aviation law firm McAfee & Taft, which has represented owners in share sales. “Owners can usually get a higher purchase price than the ‘fair market value’ offered by the fractional manager, and buyers usually get a lower purchase price than the manager offers.”

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On the buy side, for example, “a share in a new Phenom 300 would be about $640,000 for 50 hours [per year, plus hourly costs and management fee],” says Dan Dugger, president of FracTrade, a listing service for aftermarket shares. “We had one on my site for $298,000—the same plane, the same everything. It’s the same way with [Citation] Latitudes, Gulfstreams, [Bombardier] Globals.” 

Sellers get more than program providers would pay under their repurchase agreements while buyers, for the remainder of the contract period, enjoy the same benefits as someone who buys a new share.

Dugger, a former NetJets salesman, has been preaching the benefits of buying preowned since founding FracTrade in 2006. “I want to be the advocate for the end-user—I’m not here to negotiate, I’m here to educate. The owners like doing their own negotiation,” he says. He charges owners a flat $7,500 fee for his share-listing service.

Dugger’s message hasn’t sparked an exodus to the aftermarket among sellers or buyers; most customers don’t seek discounts and savings when shopping for a fractional program, as Flight Options learned after it launched in the late 1990s as a low-cost provider using refurbished jets.

New Barriers to Secondary Markets

Nonetheless, in recent years programs have added assignment clauses, fees, and restrictions that negate resale rights, and “luckily for the providers, these provisions often are overlooked by unsuspecting fractional owners,” says James Butler, CEO of consultancy Shaircraft Solutions.

Along with his consultancy, from 2007 to 2014, Butler operated Shaircraft Connections, a free online marketplace for aftermarket share buyers and sellers. But “over time, providers created more and more barriers to the development of a secondary market in fractional shares to the point that a secondary market essentially became unfeasible,” Butler says.

Agrees Herr, “From the time I started helping fractional owners almost 20 years ago, one major program increased its transfer fee from zero to $30,000,” along with adding new resale prohibitions. 

In the early days of fractional programs that Herr harkens to, shared aircraft ownership was largely unknown. To attract customers, providers offered a guaranteed buyback policy: they would repurchase the share at market value if the owner wanted out. That made buy-in a no-brainer for many. The fractional companies made their money on the share sale and on resale when customers upgraded; management and hourly fees were kept purposely low. 

The buyback policy had little impact on owners or providers as the industry grew. But in the aftermath of the financial crash of 2008, when strapped customers needed to cash out their shares, providers were struggling to survive and had to play hardball on buyback values (and provide other inducements to keep owners in the program). More than a decade later, the fractional market has yet to rebound, with resale restrictions added to providers’ conservative valuation repurchase policies.

Among the restrictions: depending on the provider, you may be prohibited from transferring under-flown hours; perquisites above the standard that you negotiated may be covered in a non-transferable clause explicitly stating that benefits disappear in a resale; “public listing” of shares for sale may be prohibited, and the provider might have right of first refusal. 

The restrictions may sound like restraint of trade and incompatible with the concept of ownership but, says Herr, “There is nothing inherently illegal about a contract that restricts the transfer of property. There is a wonderful advisory opinion—(Gap TSB-A-00(3)S)—by the New York State Department of Taxation declaring that fractional owners don't enjoy ‘ownership in the typical sense.’"

What Major Fractional Programs Allow

BJT asked major fractional programs about their resale provisions. Flexjet allows aftermarket sales but retains right of first refusal. (This can quash deals due to the uncertainty it creates for buyers.) Share buybacks are offered within 90 days of notification.

Airshare and Nicholas Air declined to disclose their share resale policies. So did NetJets, but BJT obtained a copy of one of its contracts, valid as of December 2020, whose resale stipulations for third-party transfers include the right of first refusal on the same terms; a fee of $30,000 for each 6.25 percent (i.e. 50-hour per year) interest; forfeiture of unused hours and any contract enhancements; prohibition of partial sales (e.g., selling a 50-hour-per-year share of your 100-hour-per-year contract); and use of third-party brokers.

PlaneSense, which operates an all-Pilatus fleet of PC-12s and PC-24s, has no buyback guarantee, and no prohibitions on members’ resale of their shares.

“We don’t want to have people held prisoner in our program,” says PlaneSense founder and CEO George Antoniadis. “Clients have many valid reasons to leave the program: situations change, people move. As long as the new buyer meets our creditworthiness and travel profile, we’re happy to let the owner do the direct transaction or do it through us.”

The message for shareowners in the ever-tightening preowned-share market: some programs are more flexible than others about amending transfer clauses. When buying, have a professional review your contract, advise you on any such terms, and negotiate accordingly. Once you sign the contract and agree to any transfer restrictions, it will be too late to make changes.

If you’re a buyer who finds a preowned share available, have it thoroughly vetted by an aviation attorney. “Be clear what it is you’re getting—and not getting,” advises Butler. “Determine the contract is in good standing and fully paid up, and there are no hidden liabilities that you’ll be assuming. Know that, by design, the fractional company is looking to make any such transaction difficult and inconvenient.”