Buy, borrow or lease
By Jeff Burger - August 1, 2010
You've analyzed numerous variables, including where, when and how often you fly. You’ve determined that a fractional share makes sense for you and figured out which aircraft model best suits your needs. You’ve even picked a fractional provider. Time to call the company, sign the paperwork and break out the margaritas?
Not so fast. You still face one big question–the same one that those acquiring whole aircraft must grapple with: Should you buy outright, finance the purchase or opt for a lease? This isn’t a simple decision and, given the amounts of money involved, it’s as important as it is complex. So your best bet may be to seek help from a professional adviser. Before you do, though, it’s smart to have at least a basic understanding of the choices that confront you.
Buying a share outright, which is what most fractional customers do, is the easiest option to grasp and the most expensive in terms of initial outlay. You simply pay the cost in full up front, own the share for the contract term and then sell it back to the provider or renew your contract. Advantages include the ability to recoup residual value and, if your situation permits, to deduct depreciation on your taxes. A major disadvantage is that you tie up a large sum for an extended period–money that you might be able to use more productively elsewhere. (Fractional contracts typically run five years, though you can generally resell your share to the company after three years at most.) Also, your investment could be at risk if the provider goes bankrupt.
If you don’t want to buy outright–or can’t spare the cash–you might consider financing, which still allows you to build equity. Here, your alternatives range from traditional financing of all or part of the purchase price to interest-only payments. Keep in mind, though, that financing isn’t as easy to get or as flexible as it used to be and that you’d better have great credit if you’re shopping for a no-money-down deal.
Your third option is leasing, and it makes sense if you simply don’t want to own a share, financed or otherwise. Why might that be? Maybe you’d prefer not to show an owned aircraft on your company’s balance sheet. (A lease will be mentioned only in the footnotes.) Or perhaps you plan to use the airplane primarily for pleasure and therefore can’t take advantage of tax-depreciation benefits.
Perhaps, too, you don’t want to worry about what portion of a large investment you’d recoup when your contract ends–a serious matter these days, when values of many models are declining faster than usual. If you lease, the aircraft’s fair market value at the end of the term isn’t your concern. Also, you may not be in a position to take on additional debt–something you don’t have to do if you lease.
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