The History Behind the International Registry see more
NAFA member, Aircraft Guaranty Corporation, discusses the history of the International Registry.
The concept of multi-country international laws governing the financing of aircraft was the brainchild of Jeffrey Wool, who understood the global nature of airline financing and knew that more favorable international laws were needed to encourage investment in startup airlines.
Originally referred to as UNIDROIT, which is French for one law, he envisioned countries around the globe adopting a set of laws favorable to lenders that would encourage international financing of aircraft.
It would include a central international registry where rights and interests of international lenders would be registered in one place.
The Concept of Global Financing
Global financing for aircraft and airlines is of huge importance. You can read about this in ourblog, Why an Aircraft Should be Registered in Trust.
Starting a new airline is no small undertaking – with a long list of requirements needed to get a new airline off the ground, not the least of which is capital investment. Emerging markets are traditionally not affluent enough to provide start-ups with capital, so new airlines look to more prosperous economies for assistance.
The continuing increase in global air travel is overwhelming current supply chains, creating opportunities for new airlines to handle the demand. Start-ups around the world are adopting the low-cost carrier model, and opportunities to invest in these start-ups abound. Investors need to feel comfortable, however, with the business model of the airlines with which they are investing.
Investors around the globe are more willing to invest in startup airlines if they can be assured that they have the right to repossess the assets of the new business if the burgeoning new airline doesn’t make it and can’t pay off their loan.
The Cape Town Convention
In response to this need, the Convention on International Interests in Mobile Equipment was held, creating a set of uniform laws to encourage the financing of aircraft, particularly for developing countries. The original convention was held on November 16, 2001 in Cape Town, South Africa, and has therefore become widely recognized as the Cape Town Convention.
Signing the treaty was only the first step, and only represented an intent to participate in the Convention. To fully participate in Cape Town, signatories to the Convention had to ratify the treaty. This meant that participating countries had to change or adopt certain laws to make them more favorable to lenders financing the airlines.
To get Cape Town fully up and running, eight countries had to ratify the treaty. This took a while, so although the Convention was signed in 2001, not all of the provisions were fully up and running until March 1, 2006.
The original participating eight countries were Ethiopia, Ireland, Malaysia, Nigeria, Oman, Panama, Pakistan, and the United States. Today, the Convention has been signed by 77 different countries, and all but seven have fully ratified the treaty.
So, What About the International Registry?
The Cape Town Convention had a provision for creating an International Registry (IR), where the rights of all these international lenders could be filed for the world to see. The concept is much like the FAA, where all interests in the United States are filed in one place (Oklahoma City).
Unlike the FAA, however, the IR is an electronic-based registry that only gives notice of an international interest against an aircraft. In order to see the actual documents creating the interest, one must go beyond the IR to the country where the interest was created.
The IR was originally designed to show only liens against aircraft. As the concept of the Convention grew, many people felt that ownership interests should be registered as well. Many wanted it to operate more like the FAA’s title-based registry, so that interested parties could get an understanding of the aircraft owner’s current identity, not just whether there were any liens against it.
Registration of Ownership Interests were therefore added to the scope of the treaty, and the IR now allows for notices of ownership interest called contract of sales.
Is the International Registry in Cape Town, South Africa?
While the treaty was signed in South Africa, the question of where to place the IR was a big one, and political. Many countries vied for the right to host the IR, but it came down to two main contenders: Canada and Ireland.
A lot of deliberation went into making the final decision, but in the end, Ireland was selected, and the IR was placed in Dublin where it is currently managed by a company named Aviareto.
Now that we’ve given the history behind the Cape Town Convention and the creation of the International Registry, our clients may wonder about the need to register – please consult with Aircraft Guaranty Corporation to determine if you are eligible to register with the IR or not.
This article was originally published by Aircraft Guaranty Corporation on August 28, 2019.
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 firstname.lastname@example.org.
An Overview of Aircraft Loan Structures see more
NAFA member Adam Meredith, President of AOPA Aviation Finance Company, discusses how to determine which aircraft loan package is right for you.
The best way for an AOPA Finance expert to determine the right loan package for its members is to ask them the right questions, starting with, “What’s important to you?”
Most have the same answer: “The lowest interest rate possible.” From experience, we know they really mean “lowest rate possible for their specific situation”. Three questions help us frame their specific situation:
- What have you budgeted for a monthly payment?
- How long do you want to own this plane (and keep financing in place)?
- How much are you looking to put down?
How the member answers determines whether a fixed, floating or a hybrid financing structure fits best. Their financial complexity might require us to recommend an asset-based approach.
A fully amortized, fixed rate loan with the longest possible term might be ideal for somebody intending to own the plane for a decade or more. The risk is the interest rate locked in at the beginning of the term might be higher than the going interest rate at the end. But the trade-off in peace of mind knowing the guaranteed monthly note is compatible with one’s long-term spending plan makes the extra cost worthwhile. For example, for non-commercial use, there are lenders who will execute fully amortizing, fixed-rate loans with 15 or 20-year terms for turboprops still in production.
When it comes to length of ownership, many of our clients answer, "about ten years.” Data AOPA Finance has collected shows the typical length of ownership is actually no more than five. That's why floating, balloon or adjustable rate (ARM) loan structuring might make more sense.
A floating rate loan has no fixed interest rate, while an adjustable rate (ARM) loan starts out fixed but then changes (to either a new fixed rate or a floating rate). Following the initial period, an ARM floats, based on a benchmark reference rate like the Federal Home Loan Bank (FHLB). The initial period is typically three to five years. Another term for an ARM is hybrid. In the current interest rate environment and forecasting into the foreseeable future, these financing packages can offer better savings compared to fixed rates with similar amortizations.
Balloons are another option; however, the amortization period is longer than the actual loan term. An example might be financing a turboprop on a five-year term with a "balloon" and a 15 to 20-year amortization. That package might work best for members who a.) are looking purely for the lowest rate possible, and b.) know they’re going to own the aircraft (and/or keep the loan) less time than the normal average.
Balloons allow the borrower to delay paying the principal until the very end, thus keeping the monthly outlay low. At the end of the term, the entire unpaid balance comes due. That small monthly note balloons into one large final payment.
Sometimes members come to us comfortable with the complex structures of floating or ARM financing, but the complexity of their own finances prohibits them from using those options. Take for example, a real estate entrepreneur who owns 30 different properties. Each property is a separate ownership entity. They have partners on some of these properties and are a majority owner, or half owner or some variation of percentage, across the entire real estate portfolio. Despite the positive cash flow, there are lenders who will not do a deal without them putting a guarantee on all the entities they have equity in, as well as a personal guarantee from themselves. Even if they aren’t restricted by covenants from doing so, the cost in money and time is frequently not worth it. The financial complexity surrounding their business might mandate a simpler, asset-based loan configuration.
In fact, asset-based deals can be further simplified if the client can increase their down payment. The more you put down up front, the more options lenders have available. A loan on an older airplane or one with higher-time engines becomes doable if the borrower can afford a higher down payment. Whereas a newer plane might be approved with a 15% down, 20-year amortization, the same situation for an older turboprop might go from “no deal” to “deal” with 30% or 40% down. Likewise, a relatively mainstream turboprop that has been produced in significant numbers might normally see a 15-year amortization. Without a larger down payment, older or rarer turboprops might cause lenders to shorten the amortization period, or even refuse to make the loan.
Jet financing has its own unique requirements which might also necessitate a higher down payment. That’s because the frequency of engine advancements and avionics upgrades as well as new products tend to render those aircraft obsolete faster than others. That’s why asking the right questions of our members allows AOPA Finance to give them the best picture when it comes to securing the best financing package for their unique situation.
This article was originally published by AOPA Aviation Finance Company on April 12, 2019.
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.
A Decade of Aircraft Finance Evolution see more
NAFA member, Ford von Weise, Global Head of Aircraft Finance at CIti Private Bank, shares why now is a good time to buy your business aircraft.
A decade ago, the question of whether or not you could finance your business aircraft acquisition had a complicated answer. With the economic crash of ’08, the bubble burst and the lending industry became harsh, especially for what were deemed illiquid investments, including business assets such as aircraft. Unless you met the significantly increased financial requirements, encompassing net worth and capital liquidity, as well as having “investment grade” credit and a well-established relationship with the bank, then financing an aircraft likely wasn’t an option for you.
Many banks raised interest rates across the board or got out of aircraft lending completely. This move was due to much tighter regulations that more than doubled the capital reserves requirement (new Basel III loan reserves), along with the quickly declining market value of both new and used aircraft. With these developments, coupled with heightened loan covenants (restrictions on borrower activities that could jeopardize their ability to repay), lending decreased and fewer transactions resulted. If you still pursued that aircraft investment, you either paid with cash, or waited for the aircraft market to shift again.
That shift began taking place with the recovering economy. The demand for light and mid-size aircraft increased. New (non-bank) lenders began filling the space in the middle of the aircraft market, capital started flowing back into aircraft finance, and loans on aircraft once again became an appealing investment. The diversity in lenders brought diversity in financing options, and opened up the aircraft market to older models (although mandatory avionics technology upgrades – cost-prohibitive for some – now had to be considered).
More customized financing, in the form of capital leases, operating leases, or traditional loans with varied terms, became available. The big banks leaned toward financing new or “like new” aircraft with secured loans, while non-bank lenders trended toward more varied aircraft and types of loans. Credit quality, along with the aircraft’s residual value, still were big factors for both. However, credit requirements lessened and residual values rose, preparing the aircraft lending market to take off. It wasn’t an awful time to buy a business aircraft anymore, but it also wasn’t the best, yet.
The big variable in financing terms had to do with the unpredictability of aircraft residual values. While it became easier to know what an aircraft was worth (compared to the years following the recession), residual values still were inconsistent. This situation was largely informed by the increasingly faster technology cycles in avionics, combined with new manufacturers’ discounting. Because banks look at an aircraft as an asset and need to secure collateral for its underlying worth, the make, model, and technology with which it is equipped (among other factors) influenced residual value and financing terms accordingly.
Demand for business aircraft continued to grow, along with financing capital in the aircraft finance market. Combined with more varied loan options and increasingly favorable terms, competition in the space soared. Banks revised their risk acceptance criteria in order to buy more volume, reducing financial requirements even more. Now, with lower interest rates, lower market values for business aircraft, mostly stable residual values, and an increasing number of buyers, “covenant light” transactions are increasing.
The developments in the aircraft finance market during the last decade may be complicated. Yet the question of whether or not to buy a business aircraft no longer is complicated: there’s no better time to buy! While we’re not back to the crazy deals of non-recourse lending seen prior to ’08, there’s little reason to wait to make an investment in business aircraft. However, borrow with caution. If you’re on the verge of acquiring a business aircraft, be sure to seek a lender with aviation specialization.
This article was written by Ford von Weise and originally appeared in Business Aviation Advisor May/June 2019.
NAFA Announces New Officers and Board Members at its 46th Annual Meeting see more
Dear Fellow NAFA Members,
At the close of the 48th Annual NAFA Conference it became my distinct honor to take the helm of such a distinguished organization as we head toward our 50th anniversary.
The 2019 Conference was an excellent event in many respects, with presentations from industry experts, aircraft manufacturers, our keynote and economist, and lively discussions on the issues that are most topical to the NAFA membership. We are especially appreciative of our conference sponsors who have given NAFA the ability to invest in increasing the quality and content of the event year over year. Your feedback from the event is critical in our development of future years’ Conference programs. Please take the time to complete the post-conference survey if you have not already done so via the link: https://www.getfeedback.com/r/cuVU44p8.
At the Annual Meeting NAFA announced a new Code of Ethics for our membership, and the final version is attached here. We would welcome you to review and comment on the document by April 30th, as our intent is to implement this soon thereafter.
Organizationally, NAFA welcomes the addition of Ed Medici to the Board of Directors. Ed is a 20+ year veteran of the aviation industry and serves as the Managing Director at Banc of America. In addition, Jim Simpson, Senior Managing Director with First Republic Bank joins the NAFA Executive team as NAFA’s new Vice President. We are also thankful for the renewed support of our officers; Karen Griggs - Executive Director, Tobias Kleitman - Treasurer, Tony Kioussis - Secretary, and David Warner, NAFA’s General Counsel.
We received excellent feedback during the Conference on what you want to see from your NAFA membership. With this in mind, we have a lot to accomplish, and we are looking for active participants for our Committees. Please consider participating in one of the below committees:
- Website Development
- Annual Conference Planning
- Other Networking Event Planning
- Membership Committee
- Regulatory & Advocacy
- Marketing Committee
- Strategic Planning
- Sponsorships & Fundraising
If you have an interest in joining one of the above initiatives, please feel free to reach out to Karen Griggs or I (email@example.com).
In moving our focus forward, we ended our event in Fort Lauderdale with an announcement as to next year’s conference dates and locations. NAFA’s 2020 conference will be hosted by the Meritage Resort in Napa Valley, California and is scheduled for April 28-May 1. We hope you will make plans to join us!
President, National Aircraft Finance Association
Adam Meredith, President of AOPA Finance, shares prebuy tips when financing a turboprop. see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, shares prebuy tips when financing a turboprop.
We highly recommend getting a pre-buy inspection. It could save you thousands of dollars over time. Here we’ve summarized some important points to consider as you move through the purchasing process.
- ALWAYS have a prebuy done. No bank should let you finance a plane without it.
- The shop doing the prebuy should specialize in the type of airplane you are buying. We also recommend selecting a shop that has no ties to the airplane.
- Give yourself plenty of time to get the prebuy done. Typically, they take 1-2 days, however you might want to add a buffer so you don’t end up getting rushed as a closing date approaches.
- Typically, the buyer pays to reposition the airplane and the seller will pay for correcting any maintenance issues relating to airworthiness.
- Use the Purchase & Sales agreement to define the sales price plus conditions such as the amount of time to complete the prebuy, who pays for what, and who pays to move the airplane.
- Don’t forget to ask for a fresh annual during the prebuy. This is oftentimes required by banks unless one has been completed recently.
- If you end up with a reduced purchase amount after the prebuy, that doesn’t mean you can reduce your down payment by that amount. Most lenders require the lesser of loan to value OR loan to purchase amount.
Competitive rates and terms. Custom financing options. Helpful and responsive reps. Three good reasons to turn to AOPA Finance when you are buying a turboprop or turbine 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 February 4, 2019.
Futile Search: Are You Ready to Buy But Can't Find Your Airplane? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses the futile search you may face when buying an airplane.
You are pre-approved for a loan, have a hangar secured, and now all you need is the turboprop of your dreams. You know exactly what you want. The only problem is there don’t seem to be any on the market, or at least at what you think is a reasonable price.
This is where a broker or dealer that specializes in the particular make and model your looking to purchase can be of tremendous value. Let’s say for sake of discussion you’re looking for a TBM 850. A good place to start is your local new TBM dealer. While they may not currently have an 850 available for sale, chances are they’ve sold one and may know someone looking to purchase a new TBM if they could only sell their used one. In the real estate world, agents frequently have so-called “pocket” listings where they have talked with owners who are interested in selling someday and the aircraft world is no different. Their property may not be listed on the market. If you choose an aircraft that is in high demand, it is not unusual for a broker to know about an aircraft that is not for sale…yet.
Should that approach fail, take a look at your search. What is it about your dream plane that is limiting your results? Do you need to shop for similar aircraft that nearly match, but not exactly match, your ideal model?
Here’s the good news. In general, there is enough of an aircraft inventory out there that, unless you are looking for something really unique, you should be able to find what you want. If not, there is still a final plan. Find someone who has what you want but has no intention to sell, and make a generous offer, you may be surprised.
Doing so may necessitate an appraisal to justify the value of the aircraft, however, even if the appraisal comes in less than what you’re paying, most lenders are still more than willing to provide a loan. Virtually all lenders lend on the lesser of a loan to value or loan to purchase amount. You may just need to put a little more down than you were originally planning.
When the buying fever strikes, AOPA Aviation Finance is here to help you find the lender that is right for your specific purchase.
Considering aircraft ownership? AOPA Aviation Finance will make your purchase experience as smooth as possible. For information about aircraft financing, please visit the website (www.aopafinance.com) or call 1-800-62-PLANE (75263).
This article was originally published by AOPA Aviation Finance on January 4, 2019.
Lending Associates joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
FORT LAUDERDALE, Fla. – September 1, 2018 - National Aircraft Finance Association (NAFA) is pleased to announce that Lending Associates has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add Lending Associates to our association,” said Ford von Weise, President of NAFA.
Lending Associates is a provider of financing solutions for recreational and commercial aircraft acquisitions, working with a large network of quality lenders to ensure the most competitive loan rates. With years of experience, their team of experts are available to answer client questions throughout the process, helping consumers and industry professionals alike navigate today’s complex financing process.
Lending Associates matches the best lender to their clients’ specific financing needs, maintaining the utmost privacy and confidentiality. Their loan specialists work to design a financing program to best meet each unique situation. From the initial consultation to loan closing and ongoing servicing of the loan, the company is committed to the needs and goals of the client.
"Lending Associates is proud to join NAFA in its efforts to support private aviation. From what I have seen, the members of this association have a passion for aviation and a history of moving the industry forward from all aspects, not just finance," stated Grant Smalling, President of Lending Associates.
Much like NAFA, Lending Associates is dedicated to fostering quality, professional service throughout the aviation finance industry. Lending Associates and NAFA promote excellence in aircraft finance through their commitment to the consumer’s goals.
For more information about Lending Associates, visit https://www.lending-associates.com/.
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 www.NAFA.aero.
Chemical Bank Commercial Finance joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
FORT LAUDERDALE, Fla. - October 23, 2018 - National Aircraft Finance Association (NAFA) is pleased to announce that Chemical Bank Commercial Finance has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add Chemical Bank to our association,” said Ford von Weise, President of NAFA.
Chemical Financial Corporation offers a full range of traditional banking and fiduciary products and services, and is the largest banking company headquartered and operating branch offices in Michigan. The corporation operates through its subsidiary bank, Chemical Bank, with 212 banking offices located primarily in Michigan, northeast Ohio and northern Indiana. At June 30, 2018, the corporation had total assets of $20.28 billion. Chemical Financial Corporation’s common stock trades on the NASDAQ Stock Market under the symbol CHFC and is one of the issuers comprising the NASDAQ Global Select Market and the S&P MidCap 400 Index. They are also an FDIC member and equal housing lender.
Since 1917, Chemical’s approach to banking has been focused on community banking, highlighted by local leadership and decision making, a devotion to community and personalized service.The company offers flexible equipment loans designed to meet the various needs in financing equipment purchases, helping to put their clients’ cash to work in other ways. Whether financing the purchase of a new vehicle for a business, the cost of new equipment for a plant, or large asset acquisitions such as aircraft for corporate travel, Chemical Bank designs personalized programs specifically customized to their clients. Their team of loan professionals is known for their detailed attention throughout the loan process.
Much like NAFA, Chemical Bank Commercial Finance is dedicated to helping their clients develop, finance and accomplish their dreams. Chemical Bank and NAFA promote excellence in leadership, offering expert advice in the aviation finance industry and sharing in the satisfaction of their clients’ successes.
For more information about Chemical Bank Commercial Finance, visit www.chemicalbank.com.
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 www.NAFA.aero.
Buyer Behavior Over the Next 10 Years see more
NAFA member, Chad Anderson, President of Jetcraft, discusses how findings from their 10-year market forecast reflect real-world trends in the private jet market.
The annual NBAA-BACE trade show is defined by one thing – an industry-wide interest in, and passion for, aviation.
Which is why Aerion’s announcement – that the first transatlantic supersonic jet since Concorde would soon be taking to the skies – was greeted with such enthusiasm at this year’s show. Aerion announced that the jet is on track to fly in June 2023, with the first transatlantic crossing the same year, 20 years after the celebrated Concorde flew its last.
Click to Enlarge
The faster-than-sound business jet will undoubtedly be a market disruptor, particularly given its anticipated intercontinental capabilities, which will be a key indicator of its market performance. According to Jetcraft’s new 10-year market forecast, those regions where business needs are increasingly globalized will take the lead in terms of unit deliveries. North America is set to account for 60% of deliveries (5,241 units) over the forecast period, with Europe taking second place at 18% (1,572), and Asia Pacific third at 13% (1,136).
Looking beyond new models to the pre-owned market, inventory levels are finally back to pre-recession levels, resulting in an increase in market competitiveness – and often more than one buyer for each aircraft. Some of the best deals are now made before an aircraft is even advertised. So, for both buyers and sellers, the need has never been greater to work with a consultant that has inventory visibility and can provide up-to-the-minute market insight.
It’s important to note, however, that buyer profiles have shifted slightly. Our analysis shows that some Fortune 500 companies have yet to return to historical aircraft transaction levels, as businesses are focusing on other financial priorities, such as share buybacks and paying down debt. This means they may not jump back into purchasing aircraft as quickly as we would have hoped.
Nevertheless, we anticipate that the increase in individual buyers will more than offset this. Worldwide wealth creation has spurred growth in family offices that are now offering a wide variety of specialized services, including business aviation. Together with the increase in block charter and fractional programs, this is exposing more ultra-high net worth individuals to the industry than ever before.
The lessons learnt in the industry over the past decade, since the economic downturn, have meant a slow return to optimism. But we’re confident that these lessons will ensure sustainable growth in business aviation for years to come, which is reflected in our 10-year market forecast. Ours is an enduring industry, and one with a buoyant future ahead.
Scaling the Heights see more
NAFA member, Brian Proctor, President and CEO of Mente Group, reflects on a record 2018.
Q: It seems that 2018 is turning out to be a year when a lot of aircraft get bought and sold, how has it been for you and Mente Group?
BP: We are having a record year, both as far as buying and selling aircraft are concerned. We are already up on the whole year 2017, and we still have the fourth quarter in front of us. At this rate, and with the transactions already in the pipeline for the fourth quarter, I would expect 2018 to be around 40 percent better than last year, for us.
At the same time, our appraisals business is up around 200 percent on last year. We started this business two years ago and it is growing rapidly. That is a good sign because it means that the banks and finance companies are seeing a lot of demand from people who want to finance aircraft transactions.
Q: Is it mostly the banks and insurance companies that you are doing appraisal work for? And is that mostly for pre-owned?
BP: It is the banks and leasing houses that are keeping us busy. We do a lot of new aircraft appraisals as well. You have to remember that every negotiation with an OEM over a new aircraft purchase is different, and every aircraft is optioned differently. So, lenders want to make sure that what they are financing has the value that they have been led to believe it has.
Much of what we do is document driven rather than going out on site and actually examining the aircraft. The banks use our appraisal to work out the loan-to-value structure for the deal that they feel comfortable with.
We started the appraisal business around two years ago and we have made significant investments in the business since then. We have added another experienced aircraft appraiser to the team, plus a data scientist who manages our online database. We have put a lot of money into this and it allows people to go online and manage their portfolio of aircraft. Last year our database quoted 700 aircraft transaction datapoints and it is up almost as much again so far this year.
Q: What are you using to drive data in this database?
BP: We have a number of sources for the data, but most of it is driven organically by our own researchers and sales folk, plus the business development people. We qualify the database by the quality of the data source and we prioritize our own data, and that of our contacts, since we know this data is going to be good.
Q: How important to you is the appraisal business?
BP: It has been very good for us and we are working at extending the reputation and reach of our appraisal service in the market. What is really good for us is that it touches a different clientele and is also more stable in terms of cash flow, so it is a very useful additional revenue stream for us.
Q: How much do you think Trump’s 100 percent expensing of new and pre-owned aircraft is driving the current deal flow?
BP: It has been very significant. Remembering back, the Bill was signed off on the 18th of December 2017 and by the end of the year, or inside of two weeks, we had two clients come forward and buy aircraft. Moreover, those transactions were not even on our radar on December 18th. So that shows the kind of catalyst the Bill was for deals.
Right now, we have a number of clients working to get closure on deals before the end of calendar year 2018 so that they can claim the 100 percent depreciation against the current year’s profits. It is a huge incentive.
However, we have two headwinds in the market right now. The first is that it has become increasingly more difficult to find good quality aircraft. The second is that when you do get them it is getting very hard to get them into an MRO to get pre-appraisal delivery work done on the aircraft. The MROs are all struggling with maximum capacity. Where it used to be possible to phone them up and get a plane booked within a week, now you are lucky if they can fit the job in next month or the month after.
Q: Playing Devil’s advocate for a moment, do you worry that sales are perhaps bunching up and you could be looking at a long at spell a bit further down the track as far as transactions are concerned?
BP: What I say is bring on the sales. I never worry about sales bunching up. But there is certainly price pressure out there now. I have seen several clients who were looking for pre-owned aircraft, shift to considering new aircraft because the price differential between the two is no longer as attractive as it was.
Clearly, it is becoming a very good time to be a seller, though finding a good replacement aircraft when their existing aircraft goes away, is likely to be a problem. We are not back yet to the crazy days of 2007, but I would liken the current period to what we saw in, say, 2004 or 2005.
Q: What are you seeing with respect to the slimming down of pre-owned inventory?
BP: We have done six G550 transactions in the last two months. When we started the search for suitable G550s for a particular client back in February this year, there were about 30 of them on the market. We began to whittle the choices down and the numbers kept shrinking as we were evaluating them. We ended up with just three aircraft that we could show the
client. The point is that you cannot even say that there is, say, 3.2% of the fleet of a particular model available in the pre-owned market. If you have a discerning client with reasonable constraints on what they are looking for, you could end up with just two or three aircraft to pick from, even if there was 10 percent of the fleet available.
Q: An impossible question, admittedly, but how long do you think the present upturn can last for?
BP: North America is booming, and we are starting to see a lot more interest in aircraft acquisitions out of Western and Eastern Europe and Africa. The Middle East is still quiet and has yet to turn up. So, I would say there is at least a year of strong demand out there that has yet to make its way to the market.
Another point is that if you see the US dollar turning down, that will really stimulate demand for aircraft from Europe and Asia, since it will be tantamount to a big price discount on US manufactured aircraft.
This article was originally published in Business Aviation Magazine, August 2018, p. 26.
What to Ask When Your Aircraft Lease is Expiring see more
NAFA member, Steve Day, Head of Sales - Americas with Global Jet Capital, discusses the questions you should be asking when your aircraft lease is expiring.
Your aircraft lease arrangement is coming to an end and decisions need to be made on what to do next. What are the questions you need to be asking?
1. Should I stay in my current aircraft?
If you like your aircraft and it continues to fit into your business goals, it may be very easy to extend your lease to retain the same plane.
The advantages of sticking with your current aircraft are obvious including retaining the same staff and (likely) the same hangar space, no need for additional certifications, and no new maintenance requirements—the list goes on.
Not only that, you’ll probably be looking at minimal, if any, additional capital outlay as you move into the extended agreement. You may even be able to roll in some additional upgrades and improvements.
That adds to the peace of mind you’ll have when you stay with something that’s been working well for you.
A lease extension can also be a useful stop-gap measure if you’re not ready to transition. If you don’t have a plan in place or things are in a state of flux, a lease extension can help you find time to regroup.
Let’s assume you want to move into a new aircraft, but the model you want won’t be available until a year after your lease expires. A flexible financing partner will work with you to create terms that will accommodate your timeframe and move you into the new lease seamlessly.
2. How does my transition plan fit into my business goals?
Perhaps recent tax changes have made you take a closer look at your approach to aviation. Perhaps your current aircraft is no longer meeting your needs. Perhaps you’re expanding into new jurisdictions. There’s certainly no guarantee that your aircraft needs will be identical to what they were when you first signed a lease that’s due to expire soon. But change is rarely a simple proposition.
Larger aircraft don’t just come with a higher price tag—they also come with different operator certification requirements, maintenance needs, more expensive insurance and higher costs for hangar space.
Together, those new requirements can be a larger-than-estimated drain on cash flow and time.
Smaller aircraft, while typically less expensive, can create their own logistical struggles. Even changing where you’ll be keeping your aircraft can be a minefield. A holistic and proactive approach to transition goes a long way towards preventing budgetary surprises, and experienced operating lease providers can be a big help during this process.
3. Do I have a conceptual transition plan?
If the answer isn’t yes, you may be in for some turbulence. To leverage the flexibility advantages of leasing, a proactive approach to transition is key. If you don’t start planning early, especially if the aircraft you’re considering could take more than a year to deliver, you might be setting yourself up for problems as the end of the term draws near.
In the best case scenario, a prepared lessee can move from one aircraft into another with minimal issue and little to no overlap or gaps in lease terms.
In the worst case scenario, an unprepared lessee can find him or herself without an aircraft due to production availability of new aircraft, or difficulty finding the right plane—which can create huge logistical problems.
Alternatively, the unprepared lessee might find him or herself paying for, maintaining and managing two aircraft at once while the initial contract wraps up.
That’s why it’s generally a good idea to start making your transition plan 18 months before the end of the lease if you’re planning on leasing a new aircraft. If you’re planning on leasing a used aircraft, 6-12 months should be sufficient.
4. What obligations will I be responsible for as I move out of this lease?
Most lease obligations aren’t solely financial or limited to regular lease payments. Obligations to manage, insure, maintain and store the aircraft you’re leasing are important components of lease agreements, and can be a large component of the overall expenses.
In addition, the return conditions specified in the lease will come with its own obligations – specifically written to protect the expected value of the returned asset.
If you’re unprepared, you might find yourself blindsided, or underbudgeted as the lease term ends.
You’ll find that an experienced lessor should be flexible in order to maintain an ongoing relationship, even if it’s a pre-expiration move into a different aircraft. In such cases, it’s usually possible to amend or extend the existing contract as necessary.
Early termination accommodations also exist, and they don’t necessarily have to come with a hefty penalty. Speak directly with your lessor and clearly articulate your needs and concerns as you plan your transition to find out what may be possible for you.
5. What kind of obligations am I getting into if I transition to a new lease?
Not all contracts are created equal. Depending on the experience of the lessor and how the agreement is structured, your obligations may be reasonable—or they may be draconian. Lessors that are focused on the corporate aviation market, typically take the time to fully understand their customer’s needs.
They manage their business models with a long-term view. They’re much more likely to structure transactions that are truly win/win agreements.
Both financial and non-financial obligations (maintenance, operation, etc.) affect the expenses, so it’s important to fully understand what you’re in for with a new lease and plan accordingly.
If you’re looking for a flexible operating lease that meets your requirements with minimal bureaucracy, you’ll likely want to consider a partner that has the expertise and market presence that cultivates customized solutions for its clients.
For more information, visit Global Jet Capital.
This article was originally published on AvBuyer on May 9, 2018.
Private Aviation Tax Considerations for Prospective Aircraft Buyers see more
NAFA member, Essex Aviation, discusses aviation tax considerations for aircraft buyers.
Acquiring a private aircraft for personal use is an exciting experience, one that opens innumerable doors for frequent travelers — however, to ultimately realize the benefits of your investment, you must first ensure that you’ve fully accounted for all financial considerations, especially aviation taxes.
Too often, private aircraft owners aren't fully informed of certain taxes that are involved in the ownership and operation of the aircraft; which are important as it relates to their operating budget and the overall aircraft ownership experience. That’s because tax considerations should be structured not only during the initial transaction, but throughout the ownership lifecycle, and can affect how you decide to utilize your aircraft.
This article was originally published by Essex Aviation.
Is a Business Jet Lease Right for You? see more
NAFA member, Keith Hayes with PNC Aviation Finance discusses business jet leases.
Has the aircraft lease market changed since the Great Recession? What are the popular lease types available to business jet owners? AvBuyer spoke with PNC’s Keith Hayes to discuss how leases can benefit certain companies and individuals.
Keith Hayes began a lengthy career in the finance sector with GE Capital in 1985, having joined straight out of college. Starting as an internal auditor, he held several roles within the company transitioning into a credit role and then into a sales/finance role covering a multitude of asset types.
In 2004 he joined the GE Corporate Aircraft group as the National Sales Manager and has been in the aviation finance sector ever since. Today as the National Sales Manager for PNC Aviation Finance, he is well placed to offer insights into the Business Aviation finance market. He is based at the company’s Boise, Idaho offices.
AvBuyer spoke with Keith to discuss the types of leases commonly available to prospective business jet owners; trends in the aircraft lease market; and advice to buyers considering lease as an option for their next business jet purchase.
AvBuyer: How has the aircraft lease market developed/changed over the past few years? Do you foresee further change in the short- to medium-term?
Hayes: The biggest changes have taken place post-recession. Prior to the recession, a lot of aircraft were leased under 10- to 12-year leases with flexibility for the lessee to terminate early within years 4-6 of the lease.
Following the recession, when aircraft values began to plummet, lessees generally found they were ‘under water’ in their leases. Many had no choice but to continue to lease the airplanes until the end of the lease term before returning them to the lessor (the bank).
This was not a positive experience for the lessee or the lessor. Due to the challenges associated with selling the returned aircraft, many lessors stopped offering lease products altogether. Others, PNC Aviation Finance included, continued to offer the product and, now that aircraft values are stabilizing (along with the recent changes in the tax laws), lessors are seeing an uptick in lease activity.
Looking ahead, there are changes taking place in certain accounting rules coming into effect in 2019 and 2020 that will cause leasing to not be as advantageous for financial reporting purposes.
Among the changes is a requirement from the Financial Accounting Standards Board for organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases, and to provide disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.
However, we believe aircraft leasing will continue to be a value-added structure for certain owners.
AvBuyer: We’re hearing various forecasts of continued growth in the new and used aircraft sales marketplace during 2019. Would you expect to see aircraft leasing influence the aircraft sales trends over the coming year? If so, how?
Hayes: I have always said that financing does not drive the behaviour of aircraft owner. The average aircraft owner changes their airplane every four-to-five years regardless of whether they paid cash, financed or leased their airplane.
Some would argue that when banking ‘became tight’ during the last recession, aircraft sales were impacted, but I question if this was truly a factor. Cash has been, and continues to be, the number one method of paying for an airplane.
But as the global economy continues to thrive, I anticipate our industry will continue to grow; as companies and wealthy individuals continue to have opportunities to deploy cash into high-return assets, they will elect to finance or lease as opposed to paying cash for a ‘non-earning’ asset. Meanwhile, the lease versus finance question typically is driven by the owner’s tax appetite or financial reporting needs, not simply the drive to buy or not buy.
AvBuyer: For those weighing-up whether a lease is right for them, what are the common lease options, and what type of aircraft owner is each tailored to?
Hayes: In short, there are two types of leases: A tax-oriented operating lease (in which the lessor owns the airplane for Federal Income Tax purposes); and a synthetic lease (in which the lessee owns the plane for Federal Income Tax purposes).
Typically, an owner may enter a synthetic lease for a variety of reasons, including deferral of state sales tax and/or financial reporting and off-balance sheet treatment. Under a synthetic lease, the lessee would have full availability of all tax benefits for Federal Income Tax purposes.
Meanwhile, an owner may enter a tax-oriented operating lease for the same benefits realized in a synthetic lease but, most likely, they would do so because they cannot fully utilize the tax benefits.
There are a number of reasons why this would be the case including their level of personal use, passive versus active income, carrying forward of net operating losses, and more. Under a tax-oriented operating lease, the tax benefits are ‘passed’ to the lessor, and the lessor in return offers a lower cost of funds to the lessee.
Commonly, these tax-oriented leases are structured with eight- to ten-year terms with early buy-out options at a point determined by the lessee.
AvBuyer: For those considering whether an aircraft lease is the route they want to take into aircraft ownership, what are the most important things for them to understand?
Hayes: There are a number of variables an owner would want to keep in the front of their minds when leasing an aircraft.
While the documentation process for a lease (versus that for a loan) is not overly complicated, there are certain conditions you want to make sure are ‘market’ ones, including the return provisions, usage provisions and reporting requirements.
Additionally, the inclusion of an early buyout in the lease is an option the lessor may or may not offer. It is up to the individual lessee and their specific requirements to decide if this option is important.
Also worth considering, some lessors have a tax appetite while others do not. The lessee should recognize a lower cost of funds which can be analysed through the early buy-out in exchange for passing the tax benefits to the lessor. If it appears the rate of return is equivalent to debt financing, it could mean the lessor has no tax appetite.
Lastly, in many states, sales tax is paid on the rentals via use tax (as opposed to upfront payment). This can result in a significant deferral and, in some cases, avoidance of sales tax altogether (i.e. if the lease is terminated at an early buyout point and the airplane is then sold, the use tax on the remaining rental is potentially avoided).
This article was originally published on AvBuyer on January 7, 2019.