NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about cash-paying partners on aircraft loans.
Many lenders require that all partners are on the lien, even if one of those partners is paying cash. In particular it’s fairly common with lower-dollar loan amounts. And frankly, it’s a tradition that should be changed.
Lenders need a formal agreement with all parties involved in the ownership of the asset—the aircraft—stating that the lender has a first-priority interest in the aircraft in the event the loan goes into default.
Generally speaking, there are two methods to achieve that aim. The most efficient way is to have all parties to the transaction attach themselves to the loan, the lien. The second way is by drawing up an addendum document, commonly known as a subordination agreement. The subordination agreement doesn’t tie the cash-paying participant to any of the debts or other obligations assigned in the loan. It’s a stipulation of first position rights by the lender and an acknowledgment by the cash party of that stipulation.
One of these options is more customer friendly than the other. One is more traditional than the other. Our belief is in an age when loans have become as commoditized as they have become, lenders should emphasize customer service over tradition.
Lenders might argue that the extra fees generated from creating a subordination agreement is not customer friendly. For instance, for loans between $20K and $50K, that extra cost could approach 4 %. In many a lender’s mind, that additional financial burden on the borrower is more nuisance than convenience.
In more upmarket transactions, a PC-12, a TBM or a Cirrus, for example, where the loan amount is well north of half a million, lenders tend to be more willing to accommodate. That’s because the added cost as a percentage of the total loan is much smaller and therefore only minimally impacts them.
We live in a world where people are more willing to pay for convenience. It would behoove banks to offer the option of drawing up subordination agreements for lower value loans if the borrowers believe that to be in their best interest. Doing so relieves the cash partner of loan default liability and credit exposure. And the bank can rightly charge for the convenience.
This article was originally published by AOPA Finance on July 30, 2020.