Closing Before the Aircraft is in the Delivery Condition - Exploring the Risks see more
NAFA member Amanda Applegate, Partner with Aerlex Law Group, explores the risks associated with closing before the aircraft is ready.
More often than I would have thought possible, buyers and sellers are motivated by a variety of reasons to close on the purchase and sale of a pre-owned aircraft before the pre-purchase inspection is complete or before the inspection discrepancies are rectified. Sometimes it is because the buyer wants to close in order to start a major refurbishment to the aircraft and there is a long lead time on the correction of certain discrepancies and/or it would be more efficient to fix the discrepancies simultaneously with the refurbishment. Other times the seller wants the aircraft sold by a specific date for financial reasons, to make room for their newly acquired aircraft, or so the seller’s crew can leave for training on a replacement aircraft. Regardless of the reason, as a buyer there are certain risks that should be considered.
If the inspection isn’t complete at the time of closing, the risk to the buyer may be substantial because there could be unknown issues with the aircraft which haven’t yet been discovered. Additionally, if closing takes place while the discrepancies are in the process of being repaired then additional, significant discrepancies could be found, but the buyer no longer has the option to walk away from the purchase.
If the parties understand the risks and elect to move forward and close before the aircraft is in the contractually agreed-upon delivery condition, then there are two options. The parties can agree on a purchase price reduction based in part on the estimated cost to repair the discrepancies or the parties can agree on a holdback amount to be held by the escrow agent after closing, with those funds used to pay for the repair the outstanding discrepancies.
A reduction in purchase price allows the parties to complete the transaction and have no further dealings with one another. The price reduction should not only be for the amount of the outstanding discrepancies but should also include an amount that represents the risk that the buyer is assuming by accepting an aircraft which is not in the required delivery condition at closing. A short amendment should be drafted and signed by the parties which indicates the buyer is accepting the aircraft even though it does not meet the delivery conditions in exchange for the price reduction. The amount of risk being assumed under this option depends on the status of the inspection and/or the extent of the unrepaired discrepancies. One understated benefit of the price reduction over a holdback is that the transaction is completed, thus the seller has no further responsibilities and the buyer is free to do whatever they want with the aircraft going forward.
A holdback allows the seller to remain responsible after closing for paying the cost of the repairs necessary in order for the aircraft to meet the delivery conditions. If the holdback amendment is drafted properly, there is far less risk for the buyer under these circumstances. The buyer should make sure the seller remains responsible for not only the known discrepancies but any new discrepancies found during the completion of the repairs. Furthermore, the holdback amount should be enough so that collecting for the repairs from seller does not become an issue. I recommend the holdback amount be 150% of the estimated cost of the repairs. Additionally, the funds should be released automatically when the invoices are submitted to the escrow agent without further approval by the seller and if the holdback is not enough to cover the cost of the outstanding repairs, seller should remain liable. The escrow agent should be a party to the holdback amendment and they should confirm they understand the terms prior to execution. This will help avoid a dispute over when or how an invoice is paid. The parties will continue to work together until the repairs are complete and the remaining holdback amount, if any, is released to the seller.
There can be legitimate business reasons to close on a pre-owned aircraft prior to the aircraft meeting the delivery conditions as originally agreed upon between the parties. When the parties desire an early closing, it is important that the risk allocation is considered in the financial terms and that the agreement of the parties is clearly documented, including, if necessary, the post-closing obligations of the parties and the responsibilities of the escrow agent.
Please contact Amanda Applegate at 310-392-5200 or email@example.com.
What's Included in Closing Costs? see more
NAFA member Adam Meredith, President of AOPA Aviation Finance Company, answers some of your aircraft closing cost questions.
Question: What is typically included in closing costs and how much should I expect them to be? Currently I’m looking to finance a Cessna 182 and want to determine the total costs of financing.
Answer: Closing costs are the real costs incurred by the lender to document the loan. These typically include fees associated with preparing and mailing the loan documents, credit/background checks, and, in some cases, title and escrow. Most of our lenders’ closing costs run between $500-$800 for a C182. If the lender does not offer in house title and escrow, this would be additional fees. Title and escrow generally costs $600-$700 and is often split between the buyer and seller.
Closing can become complicated if you don’t know what to expect. Let AOPA Finance help you through the process. Give us a call at 800.627.5263.
Question: I have been looking at several Bonanzas, but every time I start negotiations with the seller, they opt for cash buyers. Is there something I can do to get the financing in place before I negotiate the sale?
Answer: If you have an age range and purchase price in mind, it would be recommended to get pre-approved. The pre-approval will take care of the credit underwriting so that when you find an aircraft you can confidently make an offer. Closing can be completed within a few days upon signing a purchase agreement if a pre-approval is already in place. Approvals are typically valid for 90 days with the rates locked for the first 30 days.
If you are ready to get pre-approved, please call us at 800.627.5263 and we can send you an online application to get started.
Have questions for Adam? He is happy to answer them. Submit your questions here. Great rates. Great terms. Helpful and responsive reps. Three good reasons to turn to AOPA Aviation Finance when you are buying an airplane. If you need a dependable source of financing with people who are on your side, just call 800.62.PLANE (75263) or click here to request a quote.
This article was originally published by AOPA Aviation Finance Company on March 29, 2019.
Need 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.
Avoid Misconceptions About Aircraft Costing see more
NAFA member, David Wyndham with Conklin & de Decker, discusses the costs to owning an aircraft after the initial purchase.
What are some common misconceptions about aircraft costs? David Wyndham details some that he comes across on a regular basis, providing advice on how to avoid them…
Most misconceptions about aircraft cost result from connecting something that we’re familiar with (such as the cost of running an automobile or building a house) and using those as an analogy for the unfamiliar cost of owning and operating an aircraft.
The biggest misconception is focusing too heavily on the acquisition cost, to the detriment of operating costs and asset value over time. Let’s illustrate with an example…
I have a client who has a maximum acquisition budget of $20m. This is a real limit and not one to exceed. There is, however, a possible misconception that can arise if we were to look at Aircraft A (with a selling price of $20m) and Aircraft B ($17m) and conclude that Aircraft B is the less costly option.
The only way to know which aircraft costs “less” would be to evaluate the total costs to acquire, operate and dispose of the aircraft. Two of the major costs that must be factored are the operating costs (including maintenance) and the estimated residual value after a set timeframe.
Hourly Variable Costs
Looking at our current scenario (represented in Table A), Aircraft A has a lower fuel consumption than Aircraft B while the engine maintenance costs are similar. Aircraft B has lower airframe maintenance costs, meanwhile.
Yet even in factoring variable costs, there’s more to consider. For example, Aircraft A flies 8% faster than Aircraft B. The faster aircraft will use fewer hours to fly the same trips form point of origin to destination. Therefore, if Aircraft A flies 400 hours annually, Aircraft B will require 432 hours to cover the same missions.
Annual Variable Costs
Table B sets out the annual variable cost for each aircraft, factoring the required annual hours. As depicted, Aircraft A costs almost 10% less in variable cost per year than Aircraft B.
With both aircraft having about $650k per year in fixed costs, the annual operating budget favors Aircraft A slightly. While not enough to make up the $3m price difference, it does account for about $1m over 10 years. But before we can draw any conclusions, there is more…
Life Cycle Costing
Let’s assume Aircraft A is a popular model and is currently selling better than Aircraft B. Current market values for Aircraft A are being maintained better than for Aircraft B – therefore, after 10 years the estimated value (in dollars and percent) is higher for Aircraft A. Table C represents our ten-year Life Cycle Cost for each aircraft.
Aircraft A costs about the same to own and operate as Aircraft B. Our analysis has shown that making the purchase decision based on acquisition price alone doesn’t tell the entire story.
In the above example, we needed to evaluate parameters beyond the costs alone to determine which aircraft would provide the better value. And once you’ve achieved a solid cost analysis, there are additional factors to consider. Does Aircraft A have better support and a longer range than Aircraft B, for example?
Never let a spreadsheet make a purchase decision for you. And, never just look at a single cost item when evaluating the aircraft that best fits your budget. Aircraft are not commodities sharing essentially the same characteristics, which is why I stress to my clients to look for a best value when making the aircraft buying decision.
Costs are a very important part, but even the total costs do not tell the entire story. For the record, my client has yet to make the final decision on which aircraft to purchase…
This article was originally published on AvBuyer.com on July 16, 2018.
2018 Aircraft Transactions - Final Quarter Countdown! see more
NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses the top 10 items to consider if your aircraft transaction closes in 2018.
As we approach the last quarter of 2018, analytical data and industry experts are predicting a quarter that will be extremely busy with both aircraft purchases and sales. Personally, I have a number of clients who are ready to proceed immediately with a purchase or sale once either the right inventory can be sourced or once a buyer is found for the aircraft that is listed for sale. Assuming the right aircraft can be found for buyers or the right buyer can be found by sellers, as transaction volumes increase those providing support services such as aircraft consultants, insurance agents, escrow companies and pre-buy inspection facilities may start to see the stress of the demand. As always, having a well-established acquisition or sales team and a process plan can help insure that nothing gets missed, that the closings go as planned and are completed in the 2018 calendar year. Ten items to consider to help closing occur in 2018:
1. If you are considering selling in 2018, list the aircraft for sale as soon as possible to allow enough time for the sales process to conclude before the end of the year.
2. If you are considering buying in 2018, you should already be looking for the right aircraft. Inventory is lower in many aircraft categories than it has been for years. Therefore sourcing the right aircraft is taking longer than it has in the past and may require expanding the search to outside of the United States.
3. Many inspection facilities have long wait times to schedule a pre-buy inspection. As soon as an aircraft is sourced or a buyer is found (or perhaps even before), look for a pre-buy slot and try to hold it if possible. As a seller, if certain inspections are coming due, perhaps scheduling these in conjunction with a potential pre-buy inspection may help with reserving a slot.
4. If you have an existing aircraft and plan to replace it, consult your tax team early in the process. Your tax team may recommend that both transactions occur in the same year since 1031 like-kind exchanges are no longer available.
5. If you are seeking depreciation in 2018 (bonus or straight-line), then the aircraft being purchased needs to be placed into service and used for business (preferably exclusively for business if closing is near the end of the year) before the end of the year.
6. When support service providers are busy, checklists and a team leader become imperative. There must be one person leading the team who is checking to make sure all aspects of the transaction are completed prior closing (i.e. assignment of mx. programs, insurance, funds, lender agreements, management agreements, international registry account set up, etc.).
7. The last day of the year in 2018 is on a Monday. In the past, the FAA registry has closed early on holidays and also for weather. It is recommended that 2018 closings be completed no later than December 28, 2018 in order to allow time for the aircraft to be placed into service before year end and avoid any unexpected closings delays that could occur.
8. Lenders are starting to require all ancillary documents be in place prior to funding. If the aircraft is going to be managed, chartered or on maintenance programs, the lender may require all of these documents be in place along with its own consent agreements, prior to closing. It is likely that these documents will not be allowed to be done as post-closing items, so plan enough time to get all relevant documents in order prior to year-end. Alternatively, consider paying cash and arrange financing after closing.
9. If the transaction is a cross-border transaction, make sure all parties are realistic on the amount of time the import/export process will take.
10. Having upgrades done at the same time as the pre-buy inspection often saves downtime on the aircraft for the buyer. However, it may also push the closing into 2019. Therefore, if a 2018 closing is important a close review of the calendar should be made to make sure the upgrades can be completed and the aircraft returned to service prior to the end of the year.
Please contact Amanda Applegate at 310-392-5200 or firstname.lastname@example.org.
Risks and benefits of doing aircraft upgrades prior to closing. see more
NAFA member, Amanda Applegate, Partner at Aerlex Law Group, discusses the risks and benefits of doing aircraft upgrades prior to closing.
For the past decade, the preowned aircraft market has been a buyer’s market. There has been an ample supply of inventory to choose from in all categories. After the first quarter of 2018, we are now seeing a more balanced market in most categories, and some categories are actually shifting further toward a seller’s market. In certain aircraft categories, it is difficult to find high-quality aircraft. The lack of high-quality aircraft has resulted in more buyers planning immediate and extensive upgrades to the aircraft they are purchasing.
If the aircraft being purchased is undergoing a major inspection as part of the pre-buy inspection, or if the discrepancies found during inspection will take a significant amount of time to repair, then there may be an opportunity for the buyer to perform some of the planned upgrades simultaneously, prior to closing. However, with this opportunity there are also risks.
The benefit to the buyer of doing the planned upgrades on the aircraft prior to closing is to decrease the down time of the aircraft so that the buyer can start flying on the aircraft sooner rather than later. The buyer will pay for the upgrades on an aircraft he does not own on the assumption that the closing of the aircraft will be finalized.
Prior to upgrading the aircraft in advance of ownership, the following items should be considered:
- What happens if the purchase does not close? If the seller defaults, does the seller get the benefit of the upgrades completed at buyer’s expense? If significant problems with the aircraft are discovered during the inspection process that make it impossible or impractical for the aircraft to ever meet the delivery conditions for the sale, does buyer still have to pay for the upgrades?
- If the aircraft is damaged in the course of performing the upgrades, who is responsible for the damage? Does buyer have insurance in place if buyer is assuming this responsibility?
- If additional discrepancies are discovered during the installation of the upgrades, who is responsible for paying to repair the discrepancies?
If, after considering the risks, the buyer still wants to proceed with the upgrades prior to closing, then the seller will need to consent to such work. If consent is given, completing the upgrades would require an amendment to the purchase agreement, unless the upgrades were previously addressed in the original purchase agreement. When possible, it is advantageous to consider the upgrades during the drafting of the purchase agreement in order to ensure there is a meeting of the minds on this issue prior to execution of the purchase agreement.
After reviewing the risks, if the buyer does not want to move forward or the seller will not agree to allow the upgrades prior to closing, an alternative approach might be to close before the completion of the inspection and/or the repair of all of the discrepancies. Under this scenario, the parties would need to estimate the outstanding costs for the inspection and discrepancy repairs and agree that seller will pay for such repair costs post-closing. For protection, the buyer could request a certain amount of money be left in escrow from the sale proceeds as a holdback until the inspection and discrepancy repairs are complete.
The Importance of Consent and Joinder Language in Aircraft Purchase Agreements see more
NAFA member, Debbie Mercer-Erwin of Wright Brothers Aircraft Title discusses the importance of consent and joinder language in aircraft purchase agreements.
In the 15+ years we’ve been in business, we have witnessed the good, the bad, and the ugly when it comes to private aircraft purchases and sales. Whenever possible, we like to share experiences with our customers and readers to prevent you from having an unpleasant transaction.
Prior to preparing a sales agreement, there will be an offer letter. While the terms of the offer letter are not binding, pay close attention as it does represent a commitment and is often used to draw up the sales agreement. The terms of a sales agreement are binding barring a legal reason for being enforceable. It’s important that you understand what is and what is not included. Most likely, buyers and sellers are having agreements drawn up by professionals, but it is still prudent to understand what you’re signing. Surely this sounds like common sense, but it’s worth pointing out.
Before you find yourself preparing for an aircraft closing – either as a buyer or seller – we’d like to help you understand the intricacies of aircraft purchase agreements; in particular, the importance of including Consent and Joinder language.
What is the purpose of a purchase agreement?
A purchase agreement outlines the terms and conditions of the sale. It lets the seller know that you are serious about purchasing the aircraft, and if it meets all the requirements of the agreement (it’s everything it’s represented to be), the aircraft should not be sold to someone else during this time. To protect you from the unforeseen, a buyer should be sure that the deposit given when the purchase agreement is signed is refundable or the trigger for nonrefundable treatment of the deposit.
Whichever party you are in the transaction, understand that the terms are negotiable. Do not agree to or sign anything that makes you uncomfortable. Even if a contract format has worked numerous times in the past, that doesn’t mean it contends with the specific terms and conditions of the current transaction in which you are involved. What has worked in the past could be a trap for the unwary in the present. Don’t sign a contract until it’s revised to meet your needs.
Sales and Purchase problems
Consider this possible scenario without clarity as to the deposit in a purchase agreement:
A buyer puts money in escrow as a deposit on an aircraft. At this point, there are no rules guiding what the escrow agent is supposed to do with the buyer’s funds, because the escrow agent has not been made a party to the agreement.
The buyer changes his mind and decides he doesn’t want to make the purchase. He asks for his money back. Because the escrow agent who is holding the funds is not a party to any of the agreements that exist, there is no clear obligation to anyone except for the depositor of the funds.
When there’s an aircraft purchase agreement, it is often a trigger that obligates the purchaser and makes the deposit nonrefundable. Otherwise there is no direction to an escrow company that says the funds are nonrefundable.
Consent and Joinder language in a sales agreement will help guide an escrow company. It would then be up to a court to determine who gets the deposit money through an interpleader action.
Avoid Problems with Consent and Joinder Language
When aircraft purchase agreements are written or put together by either the legal counsel or the sellers or the buyers, they should include what is known as Consent and Joinder by escrow agent so that they become a party to the agreement.
If you don’t take the time to include this information, you could find yourself in an unexpected situation.
- Under what circumstances does the deposit become nonrefundable?
- What is the seller responsible for with regard to the condition of the aircraft?
- What is each party responsible to do prior to closing?
At minimum, Consent and Joinder language included in your purchase agreement should include the following:
- The Escrow Agent accepts appointment by the Purchaser and Seller hereby as document holder and stakeholder for the sale and purchase of the Aircraft
- The Escrow Agent is acting as a document holder and stakeholder only
- They are not the agent or trustee for either of the parties
- They are not liable to either of the parties for any act or omission unless it involves willful misconduct or negligence on its part.
- The deposit is held exclusively for the sale of the aircraft based on the terms of the Agreement only
These observations are merely points to consider and should not be construed as legal advice or guidance to take or refrain from a particular position. As we discussed in our blog, Can’t I Handle my own Aircraft Closing, parties to an aircraft transaction should seek the advice of legal counsel.
This article was originally published in Wright Brothers Aircraft Title Blog on July 23, 2018.