Residual Value of Fractional Investments - Part Two

In my last post, I discussed that an essential, but oft overlooked, aspect of the all-in cost of a fractional share is the residual value you receive when you sell your share back to the fractional jet company. In many cases, by disregarding contract provisions, manipulating the valuation methodology and taking advantage of owners who understandably lack in depth knowledge of the jet market and expertise in appraising aircraft, fractional companies get away with offering less than fair value for these shares—often substantially less. Shaircraft challenges these low ball offers and gets our clients fair value for their shares.

A recent case stands out, however, because the fractional company simply refused to buyback a fractional share even though its contract clearly obligated it to do so. Here’s a thumbnail of what happened.

- The owner notified the fractional company that he wanted to sell. Although obligated to provide the owner with a valuation of the share and a repurchase contract within 10 days, the fractional company did virtually nothing for two months.

- Two months later, the fractional company notified the owner that it would not abide by the valuation method provided in the contract. Instead, the company unilaterally decided that the owner could either (i) hold onto his share for another 6-12 months, or (ii) sell based on a wholesale price for the aircraft. Both options clearly breached the terms of the owner’s contract, which required a 90 day closing and a valuation of the share based on the fair market retail value of the underlying aircraft.

- Shaircraft became involved shortly thereafter and we were able to get the process back on track. Ultimately, the fractional company was willing to do almost anything to keep from having to buy back the share, and so offered free flight time and other credits and incentives to the owner.

Unfortunately, this sort of blatant disregard for the clear and unequivocal repurchase terms of its contracts is, in our experience, more the rule than the exception, with this fractional company. Although perhaps not as blatantly, other fractional companies often try to short change their owners in valuing shares to be repurchased.