NAFA Administrator posted an article7 Avoidable Mistakes in Acquiring a Bizjet see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses mistakes to avoid when acquiring a private jet aircraft.
Acquiring a private jet aircraft is fraught with the potential to make expensive mistakes. Yet, a qualified aviation team can help a purchaser achieve optimal results by avoiding these seven missteps:
GOING IT ALONE
Assembling the right aviation team admittedly entails some cost and initial effort. But most purchasers quickly realize that buying a jet is not like buying a car, real estate, or other assets. Rather, a jet purchase or lease is complex and requires the assistance of aviation experts who excel in the subject matter and interact seamlessly on a deliberate closing schedule. Tax-intensive, cross-border, and novel purchases may require additional expertise beyond the core team members described below.
Aircraft broker. Purchasers buy aircraft solo, and that can work out. However, a purchaser might suffer buyer’s remorse or experience negative outcomes such as unnecessarily incurring taxes on the purchase. A skilled broker focuses on the purchaser’s needs and wants, knows the “market,” identifies the best available aircraft for the purchaser, and negotiates business and other terms with the team.
Consultants and pilots. Various consultants perform visual and record inspections, appraise aircraft, supervise pre-buy inspections, organize flight departments (Part 91-private aircraft operations), provide insights into choosing Part 135 managers (commercial/charter use), and may provide broker services. Pilots may support, perform, or lead on some tasks but must collaborate with the other team members.
Aviation lawyer. Aviation law is challenging, so non-aviation counsel should not act alone in aircraft purchases. Instead, they should hire an experienced aviation legal team that understands and regularly structures acquisitions amid conflicting tax, regulatory, liability, risk management, choice of owner entity, and other complex rules. They must also regularly draft and negotiate aviation-specific agreements and, importantly, have even broader financing expertise than just aircraft loans and leases.
Aviation insurance broker. The aviation insurance market is no place for a generalist broker. Aviation insurance brokers know how to navigate aircraft insurance markets and negotiate complex policy terms.
Escrow agent and FAA counsel. With few exceptions, purchasers and sellers should use escrow agents, comprised of escrow companies and FAA lawyers. These agents hold and disburse funds, collect and file documents at the FAA, register interests and parties on the International Registry, and may issue title insurance. FAA counsel can also offer legal advice, write title opinions, and draft multiple documents.
NOT SELECTING THE RIGHT AIRCRAFT
Despite the unquestionable benefits of owning or leasing a whole jet aircraft, notably during Covid-19, a prospective purchaser should first rule out other workable options to fly privately, such as chartering or buying a fractional share of a jet. After that, a purchaser should concentrate first on the aircraft/user’s “mission” before deciding on which new or used whole aircraft to buy or lease.
Generally, the term “mission” is aviation speak for a purchaser’s effort to identify aircraft that will serve all or at least most of the private travel the purchaser envisions. When completed, the mission profile informs the search by purchasers and their brokers in today’s active market with numerous jet makes and models for sale.
NOT PLANNING FOR TAXES BEFORE SIGNING AN LOI
Private jets attract the interest of tax authorities at the federal, state, and local levels. Before signing a letter of intent () to acquire a jet, if possible, a purchaser should use accountants and lawyers to develop tax minimization strategies and structures under federal tax law, including the use of bonus depreciation and other business deductions, state sales/use tax laws, and local property laws. Solid planning may be slower than purchasers expect but failing to do so can wreak tax and financial havoc.
NOT CREATING A LEGAL OR STRONG AIRCRAFT OWNERSHIP/OPERATING STRUCTURE
A purchaser should determine the person or entity, often an , that will own the jet, and then structure the operations of the jet in compliance with the s. An owner that violates the s invites FAA scrutiny and, sometimes, enforcement litigation by the FAA or the U.S. Department of Justice, easily causing owners to incur sky-high legal fees.
One of the most common problems stems from illegal charters, which take various forms. One rampant violation occurs when Part 91 operators lease their aircraft to many unrelated travelers, which is really a fake charter operation. Another violation often occurs when an LLC with no business enterprise operates the aircraft it owns or leases. The FAA views these flight operations as creating an illegal “flight department company.” When structured improperly, neither the leasing nor the LLC operator (allegedly) holds mandatory FAA certifications as commercial operators under the FARs.
Owners also frequently believe the same provides a liability shield for its owners (members) from third-party liability claims. However, in general, the LLC will not protect the owners from any lawsuit or liability that may ensue from illegal aircraft flight operations or violations of federal or state laws. Although insurance helps mitigate this risk, it is a false premise that insurance suffices or will respond to alleged liability. More risk mitigation structuring and financial exposure analysis can pay off.
SKIPPING AIRCRAFT INSPECTIONS
Although I have seen prospective purchasers bypass independent inspections in buying a new or used aircraft, that omission has led to surprises or disputes without an adequate legal remedy. Purchasers typically arrange a visual inspection of a jet and a review of its records.
If all goes well, an agreed maintenance facility then performs a pre-buy inspection, an in-depth aircraft checkup, and delivers an inspection report to the parties. This report identifies discrepancies that a seller usually fixes before the purchaser accepts or rejects the jet and closes the purchase. Leaving out this step is at best unwise. Beware—finding a facility and completing an inspection may push beyond a closing schedule.
NOT EXPLORING AIRCRAFT MANAGEMENT ARRANGEMENTS EARLY AND OFTEN
Aircraft management companies hold the life of jet owners and passengers in their hands. These companies differ significantly in size, experience, and services. It is critical to conduct due diligence on at least two companies covering safety, service, transparency, integrity, pricing, and FAA status. Choosing based solely on the lowest cost or a referral may needlessly raise personal, asset, and operational risks.
A purchaser that does not consult a manager during an initial jet inspection may forfeit valuable hands-on knowledge about the operations and maintenance of the subject aircraft. In contract negotiations, a purchaser, with certain team members, should secure balanced terms in such key areas as safety practices, including Covid-19 protocols, expense controls, travel scheduling, and services provided.
NOT CONSIDERING FINANCING BEFORE SIGNING A PURCHASE AGREEMENT
Even if a purchaser intends to buy a jet with cash, it is still worthwhile to inquire about leasing or borrowing to finance a jet acquisition before signing a purchase agreement. Most purchasers earn far more from their investments or businesses than the current very low rates. It is ideal to close a lease or loan at the purchase date, but either financing can occur later. Using a non-aviation lender or lessor is feasible, but may result in higher transaction fees, slower negotiations, and sub-optimal terms.
With the support of an experienced aviation team, a purchaser can complete a simple or complicated acquisition of a business jet smoothly and correctly. As aircraft deal activity rises amid Covid-19 safety concerns, it is worth understanding where mistakes can occur and how to prevent them.
This article was originally published by AINonline on November 13, 2020.
Tracey Cheek posted an articleJet Edge Partners Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
EDGEWATER, Md.– September 16, 2019 – National Aircraft Finance Association (NAFA) is pleased to announce that Jet Edge Partners has recently joined its professional network of aviation lenders.
“NAFA members form a network of aviation finance services who diligently and competently operate with integrity and objectivity throughout the world. We’re excited to welcome Jet Edge to our growing organization as we head to our 50th anniversary,” said Jim Blessing, President of NAFA.
Jet Edge Partners is a full-service aircraft broker and dealer formed as a division of Jet Edge International. The aircraft sales experts at Jet Edge work to understand the mission profiles, goals, and operational budget of their clientele to ensure they are connected with the best possible aircraft to meet their individual needs.
The company’s team is connected in real time to the movements in the markets and are skilled in projecting future trends in the aviation industry. Throughout their careers, the sales team at Jet Edge Partners have successfully completed aircraft transactions totaling hundreds of millions of dollars.
With offices and sales professionals located throughout the United States, the company provides clients with the knowledge and understanding of the market needed in order to purchase or sell an aircraft with confidence and unmatched customer service.
Jet Edge Partners not only transacts aircraft, but alongside Jet Edge International, it operates, owns, and manages one of the largest fleets in the world, providing clients with operational knowledge and resources unmatched in the industry.
Much like NAFA, Jet Edge Partners promotes knowledge and understanding of the market for confident and timely transactions. Jet Edge and NAFA are committed to the aviation industry and the highest standards of customer service.
For more information about Jet Edge Partners, visit nafa.aero/companies/jet-edge-partners.
The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit NAFA.aero.
Tracey Cheek posted an articleNeed for Speed see more
NAFA member, Brad Harris, Founder, President and CEO of Dallas Jet International, discusses the shrinking volumes in the pre-owned market.
AH: When we spoke back in January this year, you were pretty optimistic. Now that we are heading into the final quarter of 2018, how are things looking?
BH: 2018 is probably going to be the best year that Dallas Jet International has ever had. In speaking with my friendly competitors and colleagues in the aircraft brokering business,
they are all echoing the same sentiment. Starting in October 2016, our business took off and has not slowed down. It started before the Presidential election in the US, before Trump was even elected as a candidate. We are seeing tremendous activity in the United States and are now seeing Europe, the Middle East and China heating up. In addition, charter hours in the US and Europe continue to be strong. Deals are happening in the US, Europe proper, Russia, the Middle East and China. It is all very encouraging.
AH: How are the tax changes introduced by President Trump’s December 2017 Tax Cuts and Jobs Act, impacting aircraft sales and purchases? I am thinking specifically of the fact that the Act withdrew the Section 1031 “like-kind exchange” rules, that allowed someone to sell an aircraft and buy a new aircraft while deferring the recapture of depreciation.
BH: I thought the elimination of the 1031 like-kind exchange provisions in the Act would show up as a negative impact on aircraft sales; however, in reality, the fact that the Act brought in 100 percent expensing of not only new aircraft but now, pre-owned aircraft has been very positive. We have had a number of our buyers wanting to get an aircraft deal done by year-end so that they can take advantage of Trump’s 100 percent expensing. I see this having a real impact for closing numerous deals before the end of the year. We are currently telling our clients that if they plan on selling their aircraft or purchasing an aircraft, prior to year-end, they need to engage us now so that we have enough time to complete their aircraft transaction before December 31, 2018. Since there is no longer the 1031 like-kind exchange, in order to offset any recapture on an aircraft sale, the new or used aircraft would need to purchased and expensed all in within the same year of 2018.
AH: How long does it take to close deals in this kind of environment?
BH: It really depends on the type of aircraft you’re trying to close. A typical transaction takes between five and six weeks to complete. We tend to deal with larger aircraft, which translates to longer transaction timeframes. In this scenario, and depending on the complexity of the transaction, it can take upwards of six to twelve weeks to close. As a result, by the time it gets to mid-October, the purchaser or seller runs the risk of not closing by year-end. However, as the broker, we would most likely recommend to close the transaction by year-end for tax purposes and leave holdback money in escrow to be disbursed as needed for pre-buy discrepancy costs, test flight costs or any other transaction-related expenses.
AH: Determining the amount to be left in escrow could be a difficult conversation!
BH: Absolutely. For example, we recently had a transaction where the buyer wanted to close early on a Gulfstream G450. Our seller agreed to close early and we negotiated to leave
$200,000 in escrow for post-closing expenses. However, the post-closing expenses ended up being $346,000. In this rare situation, the buyer ended up having to come out of pocket the additional $146,000 because our agreement of the holdback was final at $200,000. Since December 2018 will likely yield higher-than-normal closing numbers with Trump’s tax law, a
holdback may be necessary if the aircraft is not returned to service before December 31, 2018. As brokers, we need to be mindful of the holdback amount and make sure it is enough to cover any estimated expense plus any unknown expense. I would recommend a higher holdback amount and make sure you protect your client.
AH: How is the supply and prices of the pre-owned aircraft market?
BH: As little as a year ago, brokers and dealers were complaining that there was an overabundance of pre-owned aircraft on the marketplace. However, in the last 12 months there has been a significant change in regards to low-time, well-equipped US aircraft aged fifteen-years and newer in the pre-owned aircraft marketplace. Which results in a limited supply of good and available pre-owned aircraft. Historically, ten percent of fleet for sale dictates a buyer’s or seller’s market. For example, if there is more than 10 percent of the fleet for sale, then it’s a buyer’s market. If there is less than 10 percent of the fleet for sale, it’s a seller’s market. Today, the percentage of pre-owned Falcon 2000’s on the market is 4.1 percent of the fleet, G450’s for sale are at 6.8 percent of the fleet and shrinking. There are only ten G650 aircraft available on the market today, which is just 3.2 percent of the fleet. The Global 5000 pre-owned market is down to 5.6 percent and the Global 6000 pre-owned market is at 3.6 percent. There are currently no Embraer Legacy 450/500’s on the market for sale. As stated
above, the historic norm for all categories is around 10 percent which is a significant Seller’s market. So, the tightening of the pre-owned market is very visible. I recently spoke at Embraer’s Industry Collaborators Summit in August 2018 and one of the points I made is that our customers need to grasp just how dramatically the market has changed. If you find an aircraft that meets your needs, the client needs to be prepared to act immediately and the buyer has to be ready to pay a reasonable price. As stated above, it is no longer a buyer’s market. We as brokers and dealers need to be smart about how we communicate with our clients. It is okay to tell our clients that the market is tightening up but that there are still good
deals out there and they should be patient but also be ready to move quickly when we send them the right deal. This is an exciting time to be an aircraft broker.
The original article was written and published by Noel Barton with Business Aviation Magazine, Issue 7, Autumn 2018, p. 48.