NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses your options when it comes to aircraft payment methods.
In a seller’s market like this one, the ability to act swiftly might make all the difference. So non-traditional financing sources like a margin loan or a home equity line of credit (HELOC), used in limited scenarios, can make sense. However, there are worthwhile considerations to using them over the more traditional methods of paying for an airplane—cash or financing through an approved aircraft lender.
AOPA Aviation Finance (AAF) recently negotiated a great aircraft loan with an extremely competitive financing structure for a client. The client ultimately rejected the loan in favor of using a non-traditional, margin loan to pay for his aircraft instead. A margin loan is designed to allow a stock investor to borrow money to invest in more stocks, using one’s shares as security. Using a margin loan can help a person increase one’s returns. It can also magnify one’s losses, especially if using it to pay for an airplane.
Let’s say, a sudden market correction triggers a margin call. A margin call happens when the investor's equity, as a percentage of the total market value of securities, falls below a certain percentage requirement. Having to make good on a margin call could create a disastrous situation—like selling the airplane to satisfy the margin call or liquidating the equities. Odds are also good that if the stock market falls, so too does the used aircraft market. Losses magnified.
Another client wanted to use her HELOC to pay cash for an airplane. She was tempted because the HELOC had already been approved, just waiting to be tapped. For her, the traditional aircraft financing process was taking longer than she wanted to endure.
Over five years, the average length of airplane ownership, it’s reasonable to predict a major event like roof replacement, foundation repair, or even flood damage might occur. Exhausting the HELOC as a long-term aircraft loan could leave her with zero equity to cover such emergencies. She would then be forced into borrowing against the airplane, or even selling it.
A margin loan or a HELOC used as a stop-gap, bridge loan for a short period of time—think three to six months, might be prudent only until a post-purchase, reimbursement loan is negotiated.
For all intents and purposes, non-traditional financing options are akin to the more traditional method of paying cash for an airplane. About half of all airplane owners will pay cash. Many of them do so with the intention of getting a post-sale, reimbursement loan. While cash and non-traditional financing might increase the speed of the airplane transaction, they also might increase its complexity. That’s why we advise speaking with AAF, or at least with an aircraft financier, before considering such strategies.
Lenders will stipulate certain actions occur prior to a non-traditional aircraft sale before they will even consider financing it. Stipulations like a cash sale be conducted through a third-party escrow company like AAF partner Aero-Space Reports. Lenders are legally obligated to know where all monies related to an aircraft purchase go, who the buyer is, and whether the buyer is an upstanding individual. The third-party escrow company can help verify the identity of the buyer, as well as assist in the title search. Most lenders will stipulate an aircraft have a clean title, or they won’t consider financing it.
AAF, or the lender, can also offer good counsel on the potential pitfalls of buying an “orphan” or obsolete aircraft. That’s right. Lenders are not eager to finance every type of aircraft. To a lender, number of units manufactured, parts availability, and current service availability matter. For example, finding financing for a Beechcraft Duke will typically be harder than for a Beechcraft Baron. Fewer than 600 Dukes were manufactured over a relatively short, 12-year time frame, 1968-1980. All were powered by a variant of the relatively obscure, Lycoming TIO-541-E1 engine. Compare that to the Baron’s 6,884-plus units manufactured since 1961, most of which are powered by the ubiquitous Continental IO-470 or IO-520 engines. You pay a penalty for an orphan/obsolete aircraft, assuming anybody will finance it.
A commoditized aircraft—one produced in abundance—like a Cessna 172 or a Cirrus SR22, will garner far more options for financing over a 20-year amortization than, say, a Navion. The same typically holds true for turboprops, but this rule of thumb does not apply to jets. Rapid technological advancements and limited manufacturing runs tend to render jets obsolete quickly. While there are some options for older jet aircraft, the most options are available for jets manufactured within the last 20 years.
That’s why taking the traditional aircraft financing route is often the best choice for prospective aircraft owners. AAF or the lender will give a reasonable expectation of how much of a loan, and what terms are possible, tailor-made to your situation. We know, in the end, how you pay for an aircraft affects what the aircraft will ultimately cost you.
This article was originally published by AOPA Finance on September 4, 2019.