The National Aircraft Finance Association (NAFA) Celebrates 50 Years of Aviation Finance Expertise see more
FOR IMMEDIATE RELEASE: February 24, 2021
Contact: Tracey Cheek
The National Aircraft Finance Association (NAFA) Celebrates
50 Years of Aviation Finance Expertise
Edgewater, MD: 2021 marks the 50th anniversary of NAFA’s inception. The occasion comes at a pivotal moment in the world of aircraft financing—a time when the professional education, lender access, and networking opportunities NAFA provides are more important than ever.
The History of NAFA
NAFA was born in the late 60s when Tom Harvell, Bob Beech, Carol Davis, Jim Peters, Victor Hermey, Bob Keeling, William Staub, and other lenders who financed aircraft in large volume came together with an idea: improve and facilitate the lending process to support aircraft buyers.
Their first order of business? Figure out who was lending on aircraft. For that, they reached out to a local Oklahoma City title and escrow firm, which conducted research to identify this common core of entities. Over the next few years, the group began meeting in a more formal way as the Aircraft Finance Association, or AFA for short. In its early years, the AFA worked to develop a streamlined FAA escrow process to immediately secure lienholder interest in aircraft—a process that, at the time, was an uphill battle requiring much litigation. They also worked to improve the process of reporting aircraft interests, with an end goal of better grasping how exactly to value an aircraft, specifically when it comes to financing used assets. The solution, in part, lead to the formation of the industry’s first comprehensive aircraft value guide for both business and general aviation.
What started as a small, scrappy group of lenders figuring out how to corral the industry grew, by the 1980s, into a network of approximately 70 member companies. It was at this point that AFA rebranded to become the National Aircraft Finance Association, or NAFA.
Fast forward to today, and the organization has grown to nearly 200 member companies, including the five largest banks in the United States. In addition to niche financiers, NAFA is home to certified appraisers, aviation attorneys, title and escrow firms, aviation tax specialists, aircraft insurance firms, aircraft manufacturers, brokers, and dealers—essentially anyone involved with the touchpoint of buying and/or financing an aircraft. This diverse representation has allowed NAFA, over the past 50 years, to successfully facilitate the exchange of ideas and capital that finance the world’s business and general aviation aircraft.
Key tenets of the organization include:
- A world-class network
NAFA hosts a complete network of lenders and product/service providers, all of whom regularly convene via in-person or live video events to discuss and resolve key, timely industry issues.
- Industry expertise and education
NAFA members obtain comprehensive education on the latest industry developments, laws, and regulations from a vetted group of experienced professionals.
- Unparalleled access to lenders and borrowers
With NAFA, all aircraft financing needs are housed in one organization, with tailored solutions for first-time and experienced buyers alike that not only support but promote aircraft finance.
The Future of NAFA
50 years in, NAFA is showing no signs of slowing down. Aircraft purchasers are leaning on financing more than ever as a way to become more liquid while maintaining their cash reserves. There is also an uptick in first-time aircraft buyers (people entering the market who haven’t owned before as well as entities who may have owned an aircraft 15-20 years ago and are now returning)—a large percentage of whom are financing their purchases. This all coupled with historically low interest rates is fueling an increase in financing demand.
NAFA is primed for the surge in demand with a 2021 plan that includes:
- Expanding educational offerings through articles and newsletters. During COVID-19, NAFA also launched webinars, which covered topics such as best practices in aircraft lending, how to manage a loan portfolio in this unique economic environment, and impending regulatory changes in the market.
- Developing and growing NAFA as the voice of aircraft finance by closely tracking activity and changes in the market and publishing recurring market updates on the state of aircraft financing.
- Collaborating with other aviation associations as a way to expand access to aviation and aircraft ownership.
- Investing in the future of aviation professionals with a newly established NAFA Foundation, and a scholarship program that supports aircraft finance students from universities across the country.
According to Jim Blessing, President of NAFA, “Many things may have changed over the past 50 years, but NAFA has retained the founders’ love of aviation and original purpose: to promote aircraft financing and the organizations that support it.”
About NAFA: The National Aircraft Finance Association (NAFA) is a professional association that has been promoting the general welfare of aircraft finance for 50 years. Our network of members is comprised of lenders and product service providers who work together to finance general and business aviation aircraft. NAFA sets the standard for best practices in aviation finance by educating its members with the most up-to-date industry trends and best practices. Government legislation, market influences, and industry insights allow member companies to provide the highest quality services the industry has to offer.
- A world-class network
Texas Partners Bank Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE: March 5, 2021
Contact: Tracey Cheek
Texas Partners Bank Joins National Aircraft Finance Association
Edgewater, MD: National Aircraft Finance Association (NAFA) is pleased to announce that Texas Partners Bank has recently joined its professional network of aviation lenders under the leadership of Alan Smith (Executive Vice President, Specialty Finance Group) and Sam Marshall (Vice President, Specialty Finance Group).
Established in 2020, Texas Partners Bank is comprised of three independent banks that merged under a new charter: The Bank of San Antonio, The Bank of Austin, and Texas Hill Country Bank. Under this new alliance, Texas Partners Bank has deep resources and strong local ownership to provide greater accessibility and enhanced service opportunities for Central Texas businesses.
“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 Texas Partners Bank to our growing organization as we celebrate our 50th anniversary,” said Jim Blessing, president of NAFA.
About Alan Smith:
Alan has more than 34 years of banking experience with a majority of those spent in San Antonio, Texas. He currently runs the specialty finance group at Texas Partners Bank, which focuses on lending in niche sectors, specifically aircraft finance. Before joining Texas Partners Bank, Alan was VP of Private Client Services at Compass Bank, where he focused on providing trust, investment, banking, and insurance services to business and private clients. Alan holds an M.S. in Finance from Texas A&M University and is a general aviation enthusiast who currently has his private pilot’s license (PPL).
About Sam Marshall:
Sam has 8 years of banking experience, with 7 of those spent in commercial lending. He currently manages the specialty finance loan portfolio at Texas Partners Bank, which consists of an eclectic mix of niche business sectors, including aircraft loans. Before joining Texas Partners Bank, Sam held commercial lending positions with Intrust Bank and Iberia Bank. He holds a BBA in Finance from the University of Mississippi and is a general aviation enthusiast who is currently working towards his private pilot’s license (PPL).
For more information about Texas Partners Bank, visit https://www.nafa.aero/companies/texas-partners-bank.
About NAFA: The National Aircraft Finance Association (NAFA) is a professional association that has been promoting the general welfare of aircraft finance for 50 years. Our network of members is comprised of lenders and product service providers who work together to finance general and business aviation aircraft. NAFA sets the standard for best practices in aviation finance by educating its members with the most up-to-date industry trends and best practices. Government legislation, market influences, and industry insights allows member companies to provide the highest quality services the industry has to offer.
What Drives Private Aircraft Ownership? see more
NAFA member, PNC Aviation Finance, shares four key factors that drive private aircraft ownership.
Although some may consider private aircraft ownership to be a vanity asset and a mark of wealth, the truth is that private aircraft ownership is a necessity for many businesses.
The driving factors for industry leaders and those who are charged with protecting capital to invest in private aircraft can be distilled into four key factors: Privacy, Security, Efficiency and, yes, Luxury.
A 2017 study by Ledbury Research of London, commissioned by aircraft manufacturer Airbus1, shows that the world's billionaire population is growing.
Most of these individuals, the study finds, are concerned with preserving wealth for the next generation or maintaining their business and family legacy. Though they do invest in comfort, convenience and luxury items, they are less likely than younger generations to spend their wealth on status items and are more concerned with discretion.
"While the media likes to paint billionaires as exhibitionists, this is an inaccurate picture. Most are discreet individuals," Ledbury Research reports.
For these individuals' enterprises, privacy can be the primary priority for buying business aircraft. Avoiding the hassles and exposure of large airport terminals, in favor of smaller, local airport terminals, can reduce stress and provides greater discretion.
The need for privacy is a key driver of private jet use," Ledbury Research states.
Security concerns also play an important role in the decision to buy a private aircraft. Not only do high-net-worth individuals want to keep their business dealings private, but they often travel with an entourage of family and staff, as well as security personnel.
Flying on a private aircraft can also be more efficient. Certainly, there is a shorter queue at an FBO checkpoint than an airport checkpoint, as well as other time factors to consider.
Owning a private aircraft allows corporate executives to fly on-demand, and at short notice, instead of being locked in by airline scheduled flights.
Private aircraft can also allow more convenient landings, with some business airports located closer to the end destination.
One of the greatest efficiency gains come from capitalizing on flight hours for meaningful meetings and phone calls. Discussing sensitive business information in public spaces, like a commercial aircraft cabin, can be ill-advised, even if flying first class.
For this reason, business magnates prefer to own and fly on private aircraft that include conference room settings and state-of-the-art communication facilities, including live TV and high-speed satellite-based Wi-Fi.
The greatest luxury of all for high-net-worth individuals is time, which is what makes having a private aircraft on-demand so appealing.
"The demands of business and wealth mean they have little free-time to enjoy themselves. What time they do have is often considered a luxury, and they value ways in which they can get more time, as well as great service that allows them to enjoy it more," Ledbury Research states.
Are You Considering Private Aircraft Ownership?
Learn more about private aircraft ownership and financing options by connecting with an experienced PNC Aviation Finance representative.
This article was originally published by PNC Aviation Finance on January 14, 2019.
Finding Growth in a Changed World see more
NAFA member, David Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, shares his perspective of business aviation amid the pandemic.
Shifting markets are creating new opportunities in a world altered by COVID-19. Here are some to consider.
WITH EVERY NEW YEAR COME HOPES FOR A BETTER WORLD, and 2021 is fairly bristling with them. Of particular relevance to equipment finance companies is the Equipment Leasing & Finance Foundation’s 2021 Equipment Leasing & Finance U.S. Economic Outlook, which forecasts 7.8% growth in equipment and software investment this year, and 4.7% growth in the U.S. Gross Domestic Product. Heartened by plans for widely distributed vaccines against COVID-19, industries and the companies within them are re-tooling to apply permanently many of the technologies and efficiencies necessitated by the pandemic. Equipment Leasing & Finance spoke to leaders in several equipment sectors experiencing changes that are leading to growth.Here’s what we learned:
There’s a Window in Trucking
Howard Shiebler is President of Crossroads Equipment & Finance LLC and Chairman of Velocity SBA, both in Rancho Cucamonga, California. Financing commercial trucks for transportation companies gives him a strategic view of one of the largest and most dynamic sectors in equipment finance. “We’re in an abnormally strong market now, both with values and the demand for tractors and trailers,” he says. “For those financing in this space, new business volume is up and repossessed inventory is selling quickly, and at good prices.”
The big question is how long current conditions will last. Increased consumer spending, much of it done online, helped freight markets recover quickly from initial pandemic shock. If economic recovery continues, Shiebler expects the strong transportation market to last well into 2021.
“Additionally, manufacturers of trucks and trailers have had their supply chains and work forces impacted by the pandemic, and the corresponding shortage of new equipment has driven demand and prices for used equipment to unusually high levels,” Shiebler notes. He adds, “I think some e-commerce-driven demand will become permanent, and manufacturers will eventually catch up with market demand, leading to a more typically cyclical transportation finance market.”
Nonetheless, Shiebler says equipment finance companies must still do a thorough job of underwriting in the space or risk getting into trouble. “When the economy slows, we’ll see freight rates drop, defaults increase and used truck prices drop fairly quickly,” he warns. “Lenders that understand this cycle underwrite to it, and they also properly staff collections and remarketing operations to deal with increased defaults.”
Healthcare Providers Want More Options
Jon Biorkman is President of Healthcare Financial Services at GE Healthcare. As the dynamics of the medical equipment market change, he sees healthcare providers revisiting budgeting, capital structure and other fundamentals of corporate finance to re-evaluate strategy and develop multiple scenarios for use in times of economic uncertainty.
“To account for variability, leadership teams are examining operating and non-operating cashflows, liquidity sources and cash on the balance sheet,” says Biorkman. “And as market dynamics continue to change, we’re bringing optionality to the table. This can be in terms of structure that allows for the deferment of a more permanent position, or increased liquidity to protect against unpredictable variability in patient volumes, payors and reimbursement trends.”
One such option is an escrow agreement that pre-funds capital for future equipment acquisitions. “The benefit is to lock in interest rates today, and secure capital for upcoming needs,” says Biorkman. Another option shortens the lease term, enabling equipment usage without full capital outlay.
“Creativity is something that matters to customers, and if we look at the market we’ve been operating in, it’s been incredibly dynamic,” Biorkman observes. “We view our role as providing customers with options for a future that may not be certain. We’re having candid conversations with them, being very grounded as it relates to financial projections—where they were before, where they are now, where they’re going. Liquidity and cash on the balance sheet have always been important, but today, customers are placing a premium on both—and alternative financial structures can really provide more tools.”
Aircraft Has Pockets of Promise
David Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, in Dallas, says the COVID crisis created a potential cash crunch for some owners of aircraft, and that a significant number of these are refinancing or entering into sale-leasebacks to cash out their equity in the equipment. “This is a global phenomenon, also driven in part by lower interest rates,” says Mayer. The upshot: opportunities exist in sale-leasebacks for those able to take residual risk, not just in tax leases, but in true or operating leases.
Mayer says there are also leases in which the credit advanced is fully paid out and the asset is sold for a purchase price at the end, which can be as low as $1 or another agreed price. “These deals have been active since the emergence of the pandemic and since rates have dropped,” he says. “I expect this trend to continue into 2021.”
Mayer has handled a number of such transactions and sees a particular market for the refinancing of larger jets with a value of $7 million or more. “One challenge for equipment finance companies will be to persuade customers that they won’t suffer ‘brain damage’ from engaging in a financing transaction,” says Mayer, tongue in cheek. “I say that because, compared to purchasing or borrowing, leasing is a more complex transaction.” Another deterrent among high-net-worth individuals and companies is pride of ownership and reluctance to use a financing product or allow a lessor or lender to control use of their aircraft.
“Make no mistake, the market is under stress and the pandemic is not helping,” Mayer cautions. “Companies that buy, lease or charter aircraft are leaving the business. But financiers are ready, able and willing to finance, and are doing more secured loans than true leases because they’re unable or unwilling to take the risk on the value of these assets.”
The aircraft market was on a downslope that started in 2019, and prices dropped another 10 to 15% at the start of COVID-19 before showing later indications of stabilizing. “But owners didn’t panic and sell; they were smart enough to stand by and wait—unlike what happened in 2008,” says Mayer. “Now equipment finance companies can provide these owners with smart and viable solutions in the form of true leases, tax leases, loans and sale-leasebacks.”
Small Businesses Need Your Capital
Marlin Capital Solutions provides equipment financing, working-capital loans, vendor financing and franchise financing to approximately 100,000 small businesses throughout the U.S. Thus, the company’s portfolio is a small-business index for sentiment and economic health, and CEO Jeff Hilzinger says the pandemic put the company “right at the center” of the 2020 economic storm.
“After ensuring the safety of our employees and the stability of our financial portfolio, we transferred people from our front office to our servicing team and immediately began reaching out to customers,” says Hilzinger. “We processed almost 6,000 requests for payment relief, most of them during April and May. And because we own a bank, we have an SBA license and were able to lend under the PPP program. We quickly created a platform to do that. Along with the payment relief we were providing, our goal was to preserve as much liquidity for our borrowers and in our own portfolio as possible.”
As Marlin helped its customers, the company also saw an opportunity to help itself. “The PPP platform we obtained was digital, and we’d always known we needed to become more digital,” says Hilzinger. “Once we took care of our employees, partners and customers and saw that the pandemic would last a while, we realized it could be a crisis of opportunity for us. We decided to dramatically accelerate our digitization and have been focused on it since June.”
In 2015, the New Jersey-based, small-ticket Independent had introduced a working-capital loan product to compete against fin techs. “We were always careful with it, because it hadn’t gone through a complete business cycle,” says Hilzinger. “But it turns out that the product performed much better than we expected, so now we’re redoubling our efforts
Because the small-business market resides next to the consumer market, Hilzinger says much of what consumers do with their personal credit can be projected for use in small business. “Once customers can access us digitally, we’ll be able to offer lines of credit and other micro-ticket products that were too much work to provide when our processes were manual,” he says. “Now we can offer these in ways that will be exciting to small businesses, and of economic benefit to us. Going digital definitely opens up new opportunities.”
Schools Urgently Need IT
Insight Financial Services (IFS) in Costa Mesa, California began studying the nuances of the k-12 school market about six years ago with the goal of doing business there. Through networking, they were introduced to OETC, an Oregon-based consortium that offers contracts for products supplied to K-12 schools and universities throughout the Pacific Northwest. “Needs were starting to change for schools at the time, and one of our customers suggested we talk to OETC about the consortium developing an RFP for school districts to lease IT,” says Andy Hashimoto, Vice President.
Over the next year, Hashimoto and Colleen O’Donnell, IFS Senior Vice President of State, Local and Education Business, explained to OETC the benefits municipalities and schools could leverage through leasing. A contract with IFS would allow OETC-member schools to acquire equipment without requesting proposals.
“What we found with many schools is that their previous plan had been to put equipment in the classroom with teachers and keep it until it didn’t work anymore,” says O’Donnell. “But the idea was evolving that schools need a sustainable strategy for IT and a budget to support it. They need technology that matches the curriculum, technology for both students and teachers that brings digital learning to life.”
COVID-19 greatly accelerated the need, and this past October, IFS was awarded a three-year contract as an approved IT equipment leasing services vendor in California. The contract is in addition to a nationwide agreement IFS already has with OETC, and expands the services the company can provide in California.
“This is a growing market for us, and we’ve experienced significant growth over the last couple of years,” says Hashimoto. “Today, school districts need large numbers of devices, and these can be acquired through a leasing contract that manages the entire life cycle.”
To that point, Hashimoto says much of IFS’s growth in the school market is attributable to asset management services included in the company’s contracts. “The asset management is geared to specific devices and allows school districts to be in control of what happens to the equipment,” he says. And because IFS tailors its leases to individual school-district budgets and needs, IFS is able to serve every customer. “We invest the time with each school district to customize the solution so that it works specifically for them,” says O’Donnell. “We structure from beginning to end to help them have the technology they need to support learning in the classroom and from home.”
Asked for suggestions for other equipment finance companies considering the school market, Hashimoto and O’Donnell have several thoughts. “Colleen and I have joked that we are evangelists for leasing, but it’s true that customers need to be educated about how leasing can help them,” says Hashimoto. “Our message about this has been the same since we started with the education market, but with COVID-19 driving and accelerating the need for IT equipment, what we had to say became that much more important and understandable. Communicate often with your customers, and explain clearly how leasing can be a solution for budgets, for obtaining the equipment they need, and for controlling what happens to that equipment at the end of the lease.”
Adds O’Donnell, “I’d say the willingness to be nimble, to explore the market deeply and invest time communicating with prospects and building relationships, is extremely important. Working this way is a cornerstone of our business, and by doing it, we’re in a position to respond immediately when needs change or a crisis arises. It’s how we provide solutions our customers are looking for.”
This article originally appeared in Equipment Leasing & Finance Magazine's Jan/Feb 2021 Issue.
What Happens Once I'm Approved? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, shares two important final steps when securing an aircraft loan.
What happens once I’m approved for an aircraft loan? There are still two steps remaining to secure a loan. Approval means the bank has approved both you and the airplane. Now the question is, are you ready? The second step, post-approval, is getting the bank everything needed to fund.
Once a lender is comfortable with the aircraft, the borrower, the ownership structure of the borrowing entity, and the global financial picture of the entities in which the owner or owners have a controlling interest, they’ll signal they are OK to scheduling closing. How do they get there though?
You now do your part by providing the remaining paperwork—any missing financial documents necessary, copies of the ownership documents (the EIN document, the articles of organization, and the operating agreement), if applicable. Note if you intend to have a holding company own the aircraft, the time to form the company correctly and completely is earlier on because the lender will need to verify the legal structure and documents before it can approve the loan and issue loan documents.
It’s been our experience that people frequently take the organizational structure of an aircraft holding company too lightly when they shouldn’t. Lenders take it very seriously. There’s a legal difference between how a member-managed LLC signature block is executed versus a manager-managed LLC. So get, and heed, good advice and do so before getting approval (otherwise let the lender know it’s in the works and discuss the specifics).
Next, a title and escrow company will review the aircraft’s ownership and title history and share that with the lender. The lender will review the aircraft’s logbooks for completeness, the purchase and sale agreement, as well as the pre-purchase inspection or signed off documentation from an A&P to confirm that the airplane is in airworthy condition. The title and escrow company handling your transaction may even assist with the last document required prior to closing, the certificate of insurance (COI).
The escrow and title company will also handle the coordination of payments to the lender, you, and any third-party vendors attached to the aircraft at the time the lender releases the funds. Finally, the lender will authorize the release of funds once any requested supplemental documents have been received and vetted.
This article was originally published by AOPA Finance on October 23, 2020.
Ready to Buy and Fly? Teaming Strategies for a Successful Aircraft Acquisition see more
NAFA member, Christopher B. Younger, GKG Law Principal, discusses several factors to consider for a successful aircraft acquisition.
Are you considering purchasing an aircraft? Perhaps you outgrew using charter or your fractional hours. Or you have health and security concerns and want the certainty of flying on board your own aircraft. Whatever your reason, you’ll first want to consider several key factors as you make your decision.
Begin the acquisition process by retaining two key industry professionals to assist you. Assembling the best team, or failing to do so, can make or break a deal.
A business aircraft acquisition expert will work with you to clearly define your mission profile and the best aircraft makes and models to meet your needs. He or she also will identify and source available aircraft, and perform an initial evaluation of the aircrafts’ pedigree, including a visual inspection and preliminary review of documents, to determine which of the available aircraft merit your further consideration.
A business aviation attorney will enable you to move quickly once you’ve identified an aircraft to purchase. He or she will work closely with you and your aircraft acquisition expert to draft and negotiate purchase documents, such as a letter of intent and/or aircraft purchase agreement, that clearly describe the purchase terms and conditions. These terms include:
- purchase price
- deposit amount and refundability
- rights to oversee a new aircraft completion or conduct a used aircraft prepurchase inspection
- aircraft delivery condition requirements
- the scope of the seller’s obligation to repair any discrepancies from the required aircraft delivery condition, and
- the purchaser’s right to terminate the purchase agreement if the aircraft cannot meet the delivery condition requirements or if the seller defaults on its obligations.
A business aviation attorney with tax expertise will fill a dual role on the aircraft acquisition team by advising you on the optimal aircraft ownership and operating structure to minimize liability for sales or use tax and personal property tax, maximize income tax deductions originating from ownership and operation of the aircraft (for example, an engine overhaul which can be expensed 100% in the year in which it is performed, rather than depreciated over time), and ensure that the aircraft ownership and operating structure also complies with FAA and other regulatory requirements applicable to business aircraft ownership and operations.
Once the purchase contract is signed, the acquisition expert will work closely with you to oversee the acquisition process. He or she will provide hands-on oversight of the aircraft assembly or prepurchase inspection process (employing a knowledgeable and qualified technician, if necessary) to be certain that they are completed in accordance with the requirements of the purchase contract, prepurchase inspection work scope, FAA regulations, and industry best practices.
In addition, your team should provide guidance regarding whether you will be setting up your own flight department, or hiring an aircraft management company. If you choose to use a management company (particularly if the manager also will operate the aircraft in charter), it is very helpful to have the manager and/or the assigned maintenance technician involved during the aircraft completion/inspection process. This will help ensure that anything the manager requires for operation of the aircraft can be addressed prior to purchase, if possible.
Your acquisition team also will include a banker, if you plan to finance the aircraft, lease the aircraft from a commercial lessor, or borrow against the aircraft’s value at or after closing. If the aircraft will be imported from another country’s registry, you also will need to retain a customs broker and Designated Airworthiness Representative.
Ensuring a positive aircraft acquisition is a multi-faceted process. Hiring a team of experienced and well qualified aviation professionals will lay the surest foundation for success.
This article originally appeared in Business Aviation Advisor July/August 2020, Volume 7, Issue 4.
Return to Lender see more
NAFA member, George Kleros, Senior VP, Strategic Fleet Management and Fleet Support for Jet Support Services, shares nine things you need to know when leasing an aircraft.
When leasing an aircraft, what are your maintenance obligations during and at the end of the lease term to ensure that the returned aircraft maintains its value?
Focused on that residual value, the lessor will designate a qualified inspector or auditor to perform periodic records reviews and/or asset inspections, throughout the lease period. The intent is to verify the aircraft’s general condition and ensure it remains in compliance with lease requirements.
After each check, the inspector will send the lessor a report with the graded condition of the aircraft and any specific findings. If anything can or might affect the residual value, you’ll be required to take corrective action to bring the aircraft into compliance.
At term end, the lessor will conduct an “off-lease” inspection (similar to a pre-purchase inspection) at a factory-owned or authorized service center. All components and systems must be in full working order; or repaired if not. If the major components are near their life limit, you’d be responsible for covering these costs: either a pro-rated percentage based on time consumed, or 100% of the cost to overhaul if it’s close to the event.
If the aircraft requires repairs for damage or corrosion, you are responsible for the repair cost. Once any repairs required by the lease are completed, any diminution in value due to damage history will be the lessor’s responsibility.
So what can you do to preserve the value of the aircraft?
- Review the lease document fully to understand the operation, maintenance and return of the aircraft requirements. A good lease-return scenario always starts with a well-defined and documented set of return conditions. Ask questions for clarification prior to signing, to be sure you fully comprehend the broad scope of your obligations.
- Keep the aircraft clean and polished to protect from corrosion and paint deterioration. Unprotected aircraft deteriorate faster than you might expect. The aircraft interior will be inspected for wear, cleanliness, and damage. The exterior will be checked for oil leaks, paint condition, and structural damage.
- Store the records in a secure, dry, fireproof storage cabinet or safe. Damaged or missing records devalue an aircraft and will change residual value. The lessor will come out either annually or bi-annually to see the aircraft and review the records for accuracy and airworthiness.
- Keep up with routine and scheduled maintenance tasks, even if the aircraft is not flying for extended periods of time.
- Address interior and exterior wear items immediately. Waiting can compound the problem and cost more to correct.
- Assume the lease document allows for the aircraft to operate under different regulations or use than originally defined. If the aircraft flies only for you under FAR Part 91 regulations, don’t move your aircraft into a for-hire Part 135 air-taxi arrangement without consulting the lessor; it may not be allowed.
- Leave the aircraft outside. Store it in a hangar when not in use. Sun, humidity, and high temperatures deteriorate interiors and paint exterior, diminishing the residual value.
- Let the aircraft sit inactive for long periods of time. Your aircraft still needs to be flown and systems exercised to keep systems lubricated and reduce risk for damage.
- Ignore missing paint and erosion strips. This leads to corrosion and will be expensive to correct.
The lessor always requires hull insurance at a specific dollar amount, and generally seeks high liability insurance limits. If you acquire an hourly cost maintenance program (HCMP), it can help ensure that the aircraft meets return conditions. The lease should state clearly that the maintenance program was current at lease inception and that the HCMP will be transferred to the lessor. An HCMP is very desirable in a lease transaction. It helps preserve the aircraft’s residual value, and helps you avoid penalties and extra costs.
This article originally appeared in Business Aviation Advisor on November 3, 2020.
You Don't Need All This Financial Information, Do You? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, lists the financial documents you need when purchasing an aircraft.
"You don't really need all of this financial information, do you?" It’s a question often asked by AOPA Finance clients. Yes, yes we do. If you want the lowest rate, the most competitive structuring, the least amount down, and the lowest payment, an exhaustive analysis of your credit worthiness must be made.
IRS Schedule Cs or Schedule Es are not enough. While they may indicate whether the ownership structure has any pass-through income on an individual's tax return, the description of that pass-through income is summarized as a line item or two. Likewise, K-1s only indicate percentages of a shareholder’s income and liabilities. Line items and percentages don’t tell the whole story. Full tax returns do.
Global Cash Flow
Your tax summaries may show cash going from one related entity to another. But are you actually taking from the “left pocket and putting it in the right pocket?” If so, that isn't real money, is it? The lender will net that out of your “global cash flow.” Global cash flow—also known as a Consolidated Statement of Cash Flows—is a listing of all the various entities in which a person has ownership and what their net cash flow from all the entities is.
And then there’s the global debt schedule.
Global Debt Schedule
What is a global debt schedule? It’s a comprehensive list of all the ownership entities. It’s a listing of the actual total debts of each entity in which the individual has ownership. It details what the total amount owed is, and to whom. What the monthly payments are. How much is interest versus how much is principal. It also includes maturity dates for all debt.
Depending upon what one’s business relationship is with his partners, the lender may require additional documents to help fill in holes in the financial picture. Those might include hypothecation, subordination, or even side agreements. A hypothecation agreement could be submitted from the controlling party acknowledging the CEO emeritus is entering into a financial relationship.
Speaking of partners, imagine a borrower has two partners and he owns one-third of the business. Some lenders may require the other two partners’ to be party to the transaction.
For some, that’s just too much. They’re only going to have the loan for three years so the “pain-in-the-neck” factor is not worth their time and effort. Other folks just don't want to disclose all their financial information for personal reasons. Still others have obligations with lenders elsewhere that restrict them from guaranteeing debt or have covenants in place from other business debt. For these individuals, a collateral-based loan might be the more appropriate option. The trade-off is simplicity for a little bit higher interest rate.
Collateral Based Loans
A collateral-based deal might proceed more quickly from initial inquiry to funding but it does come with a different paperwork burden. Even so, the process is usually far less onerous. Banks will conduct an exhaustive search on the quality of the individual as well as on the aircraft. For the individual, they want to know if this person has filed bankruptcy. Do they have tax liens against them? Are there pending lawsuits on them, for any reason? A person applying for a collateral-based loan should be crystal clear how good or bad their character looks on paper.
Every time an AOPA Finance advisor must request additional information because our client’s paperwork is incomplete adds additional stress to the process. Bottom line-- there are no shortcuts. A transparent, painless credit deal requires in-depth financial paperwork.
This article was originally published by AOPA Aviation Finance Company on September 29, 2020.
Asset Insight Aircraft Ownership Lifecycle Podcast: Understanding Aircraft Finance see more
NAFA member, Jim Blessing discusses how Airfleet Capital, a well-respected entity within the aircraft finance community, has been helping aircraft buyers finance their aircraft since 1994, and what differentiates his company’s services within the Business & General Aviation finance community. Areas covered include:
- The typical characteristics of an aircraft loan. What to expect expect in the market today in searching for financing, especially as it relates to the impact of COVID-19?
- Financing small business owners who are also pilots: what is unique to financing these individuals and how might the financing process be different?
- Changes in financing requirements as collateral size increases; moving up from a piston aircraft to a turboprop and then to a light jet.
- Unique financing considerations should people keep in mind?
- The differences between financing a business aircraft and a second “fun” airplane.
Click here to listen to the podcast or read the transcript.
This podcast was originally published by Asset Insight.
First-Time Buyers: What You Need to Know Before Buying an Aircraft see more
NAFA member, Sean O'Leary, Jetcraft's Sales Director, Northern Europe, answers the 10 most-asked questions from first-time aircraft buyers.
With more than 55 years’ experience helping our customers buy and sell their private jets, we regularly talk to new people who are taking the first step into aircraft ownership.
The Covid-19 pandemic has brought safer travel into sharp relief in recent months and we’ve received an increasing number of inquiries from first-time buyers who are looking to business aviation as the route to safe, flexible and controlled travel. Here, we answer their most frequently asked questions.
What do I need to consider before I buy?
There are certain factors we need to understand to find the right jet for a buyer’s mission. Where do you want to fly to? How many people will be traveling at any one time? What’s your budget? Have you considered finance, or are you a cash purchaser? Once we’ve talked this through we start looking for the best aircraft.
If a potential buyer is not yet able to answer these questions, we will sit down with them and help them think about what they need and whether purchasing a jet is the right path for them.
Should I buy a new or pre-owned aircraft?
This really comes down to personal preference and budget, as there are clear benefits to both. Buying new, you will avail of a five-year warranty, which can be comforting to those unused to ownership.
We see some first-time buyers who want to test out having an aircraft, to help them understand whether it will work for them long-term. In this situation the decision might be made with short-term ownership in mind where the buyer will reassess their aircraft and the value it brings themselves or their company in a few years. In this case pre-owned provides an opportunity to experience ownership at a lower initial point of investment.
Concerns about safety and reliability shouldn’t put you off acquiring an older jet – a ten-year-old aircraft is maintained to the same standards as one that is brand new. Furthermore, we minimize the risk of older aircraft owners incurring potentially higher maintenance costs by performing extensive pre-purchase inspections. We also partner with JSSI to offer a free six-month, post-purchase, unscheduled maintenance program on select in-service aircraft purchased through Jetcraft, to provide extra peace of mind to our buyers.
Can I demo an aircraft before I buy?
Yes, and we’d encourage you to demo before purchase. If you haven’t flown in that model before, consider finding a charter company that operates the aircraft type and test it out on what would be a ‘typical’ mission for you. This is also a good way to try out different models or manufacturers so you have a feel for how big the cabin is, the comfort of the seats and the noise levels.
Should you wish to demo the specific aircraft on the market, usually the seller will look for some form of commitment, such as a letter of intent and a refundable deposit in escrow, before arranging a flight.
Can I purchase an aircraft from overseas during Covid-19?
Absolutely. Our boots on the ground global structure means we can find a deal anywhere in the world. Although travel is currently restricted, we are still keeping transactions going. For example, I’m currently working on a deal with a European buyer and a US seller, and my counterpart locally in the US is handling the pre-buy inspection and full review of the aircraft on my team’s behalf.
Should I disqualify an aircraft due to cosmetics?
It’s natural to gravitate towards details such as the color of the paint or leather; however, changing cosmetics is relatively simple and inexpensive compared to the overall cost of the aircraft. Replacing soft goods such as seat material and carpet is a cost-effective way to tailor the jet to your taste. Altering the configuration of the cabin is more expensive, but it can sometimes make sense to take that step, if the aircraft is otherwise right for you. If you are considering an aircraft that might need some updates, we can connect you with a completion center in your region.
Can I charter my aircraft to offset costs?
Charter is a great way to offset some of the costs of ownership. Most buyers will have chartered before, so the process is familiar, but you should consider whether you’re happy with someone else flying in your aircraft – and the more available it is for charter, the less time you’ll have for your own private use. Another consideration when you’re choosing an aircraft is ensuring it’s capable of flying commercially in your region – certain countries and regions have specific rules and equipment requirements.
Who should I consult when purchasing an aircraft for the first time?
For a first-time buyer, it can seem daunting how many parties are involved and we recommend working with an established broker who will be able to walk you through all the steps and ensure you talk to everyone you need to ease the process.
You’ll have an aviation specialist lawyer; a maintenance facility doing the pre-purchase inspection; maybe a management company onboarding the aircraft; and corporate service providers all involved in a transaction.
We’d also always recommend seeking tax advice. If you don’t know where to look, we’ll point you in the right direction.
Can I choose my crew?
Yes, you can choose your crew. This is an important factor as they’re going to be on the aircraft every time you fly. This is a discussion you’d have with your operator, and you can be involved as much or as little as you want in the selection process. If you don’t have an operator, we recommend you seek out someone who has experience managing a flight department who can assist with finding your crew and managing your schedule and maintenance.
Do I have to travel through the commercial terminal to access my aircraft?
Most airports will have a private terminal or FBO reserved for private jet users. This means no queues at security, minimal interaction with other people, fewer touchpoints and a streamlined journey through the airport and onto your aircraft. At many business aviation terminals you can transfer direct to the aircraft from a car or helicopter, so travelers won’t have to enter a terminal building.
Can I bring my pet on board?
Yes you can, as long as your pet has the relevant permits to travel. This summer, Jetcraft has had a pop-up booth at Nice Airport in the Côte d’Azur, and we have seen many dogs disembarking from private jets with their owners.
Flying privately is entirely flexible and, as well as your pets, it’s much easier to transport many types of luggage on your aircraft, including ski or golf equipment, breakables and valuables – however you are still liable to follow customs regulations when bringing anything in or out of a country.
Everyone is thinking about how to mitigate risk and stay safe while traveling. Speak to your local Jetcraft representative to start your journey towards owning a private aircraft today.
This article was originally published by Jetcraft on 09/24/20.
7 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.
Bonus Depreciation in a COVID World see more
NAFA member, Air Law Office, P.A. writes about aircraft depreciation bonus under the 2017 Tax Act.
The IRS is pretty strict when it comes to 100 Percent Bonus Depreciation under the 2017 Tax Act, especially on the fundamentals.
- Was your aircraft acquired and placed into service after September 27, 2017 and before January 1, 2027 – this one is fairly straightforward
- Is your aircraft ‘qualified property’
- Is your depreciable property of a specific type, including tangible property with a recovery period of 20 years or less, such as commercial and non-commercial aircraft – this one is probably affirmative
- Was your original use of the aircraft the taxpayer’s use or the aircraft was not used by the taxpayer at any time prior to purchase – this one can be a bit tricky
- Is your aircraft predominantly used for a qualified business use – this is going to be tough in the time of COVID and if you don’t meet 51% ore more qualified business use then you will need to explore an alternative depreciation system (ex., Five Year MACRS)
- Is your aircraft used predominantly in the United States – this one can be a bit tricky
There are, of course other nuances like “under contract” and “alternative deprecation models” and if you use your aircraft significantly for nondeductible entertainment travel (ex., vacation) you may be able to take your depreciation and use disallowance percentages to deprecation on a straight-line basis.
The Bottom Line: With face-to-face interaction at an all time low, many owners are in danger of loosing their bonus depreciation benefits. Check in with your financial and legal teams ASAP, before it is too late to address potential pitfalls! Remember, this article is intended to inform you about issues that you should discuss with your financial and/or legal team and is not intended as legal advice or opinion, you should not act on any information contained in this (or any other) article without directly consulting legal counsel.
This article was originally published by Air Law Office, P.A. on August 5, 2020.
Why Does A Cash-Paying Partner Need To Be On An Aircraft Loan? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about cash-paying partners on aircraft loans.
Many lenders require that all partners are on the lien, even if one of those partners is paying cash. In particular it’s fairly common with lower-dollar loan amounts. And frankly, it’s a tradition that should be changed.
Lenders need a formal agreement with all parties involved in the ownership of the asset—the aircraft—stating that the lender has a first-priority interest in the aircraft in the event the loan goes into default.
Generally speaking, there are two methods to achieve that aim. The most efficient way is to have all parties to the transaction attach themselves to the loan, the lien. The second way is by drawing up an addendum document, commonly known as a subordination agreement. The subordination agreement doesn’t tie the cash-paying participant to any of the debts or other obligations assigned in the loan. It’s a stipulation of first position rights by the lender and an acknowledgment by the cash party of that stipulation.
One of these options is more customer friendly than the other. One is more traditional than the other. Our belief is in an age when loans have become as commoditized as they have become, lenders should emphasize customer service over tradition.
Lenders might argue that the extra fees generated from creating a subordination agreement is not customer friendly. For instance, for loans between $20K and $50K, that extra cost could approach 4 %. In many a lender’s mind, that additional financial burden on the borrower is more nuisance than convenience.
In more upmarket transactions, a PC-12, a TBM or a Cirrus, for example, where the loan amount is well north of half a million, lenders tend to be more willing to accommodate. That’s because the added cost as a percentage of the total loan is much smaller and therefore only minimally impacts them.
We live in a world where people are more willing to pay for convenience. It would behoove banks to offer the option of drawing up subordination agreements for lower value loans if the borrowers believe that to be in their best interest. Doing so relieves the cash partner of loan default liability and credit exposure. And the bank can rightly charge for the convenience.
This article was originally published by AOPA Finance on July 30, 2020.
AINsight: 5 Incentives To Finance Business Aircraft see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, shares five important incentives when financing your next business jet.
The business aviation industry has encountered intense downdrafts this year connected to the Covid-19 pandemic. Ironically, the same forces have increased certain charter flights, spurred newcomer acquisitions of whole and fractional shares in aircraft, and highlighted the value of business aviation.
Concurrently, the August 27 issue of JetNet iQ Pulse revealed significant untapped interest in borrowing or leasing (financing) to make aircraft acquisitions, stating: “Since the onset of the Covid-19 pandemic and amongst respondents with an opinion, about two-thirds indicate that they plan to use some sort of financing to acquire their next new aircraft.”
Understanding Today’s Aircraft Finance Markets
A few brief insights into the two dominant types of aircraft financing, “true leases” and secured loans, will help understand the interest in financing jet aircraft in a market typically dominated by cash purchases.
A true aircraft lease is a transfer by an owner/lessor of the right to possession and use of the aircraft to a lessee for a lease term in return for rent and other consideration/value. In a true lease, the lessor provides 100 percent financing by purchasing the aircraft and leasing it to the lessee.
Lessors expect the lessee to return the aircraft to the lessor at lease expiration, buy it during or at the end of the lease term, or renew the lease. Lessees enjoy the corresponding rights to drop off the aircraft to the lessor and walk away (after meeting the aircraft return conditions), purchasing the aircraft, and renewing the lease.
A typical aircraft secured loan requires a borrower to grant a “security interest”– a lien –on an aircraft to the lender/secured party to secure the borrower’s payment or performance obligations under the loan documents. A lender does not own the aircraft; it just has an interest in the aircraft as collateral.
Customers typically borrow between 50 percent and 80 percent of the price of the aircraft and make up the difference with the customers’ cash or, for refinancing, the value of the equity in the aircraft. These percentages fluctuate up or down for different lenders and loan structures, with a relatively few lenders advancing up to 100 percent loan to the value of the aircraft agreeing to a term of up to 20-years.
Five Incentives To Finance Business Jets
Most customers in the U.S. have at least five incentives to finance their next (or first) aircraft:
• Cheap money. The Federal Reserve (FR) recently announced a policy shift that the FR will average inflation rates to allow about a 2 percent inflation rate before increasing interest rates to tame the inflation. The FRprojects that interest rates will remain near zero for years to come. Financiers should, for the foreseeable future, offer customers very low rates consistent with the FR action.
• No to low cash outlay. Many potential customers should readily appreciate that, rather than stroking a check for a new or used jet, they can more prudently or profitably use their cash elsewhere in their businesses for capital expenditures, investments, or, particularly during the pandemic, working capital.
• Tax write-offs. If the lessor adheres to applicable federal tax law, including the lessor’s maintenance of residual value under the federal true lease guidelines, the lessor may be entitled to claim bonus depreciation on the new or used leased aircraft per the Tax Cuts and Jobs Act of 2017.
In a loan transaction, the borrower, as the owner, may be entitled to bonus depreciation of the aircraft and other tax write-offs allowed under the Coronavirus Aid, Relief, and Economic Security Act plus bonus depreciation despite some personal use of the aircraft.
• Lessor/lender competition. Most aircraft lenders and lessors compete aggressively on interest rates or lease economics to win business to the extent consistent with their respective business models, regulatory constraints, and internal credit policies. However, financiers will, except for the most creditworthy customers, expect customers to sign documentation that contains strong covenants, defaults, and other restrictive terms on aircraft and business operations.
• Customized lease and loan structures. Structuring lease and loans constitute an integral part of competition among financiers. To facilitate planning and cost management of aircraft operations, a lessor can, within tax and other limits, create flexible structures that contain fixed and variable rents, options to purchase the aircraft during the lease term or at lease expiration, terminate the lease during the lease term or renew the lease term at lease expiration.
Lenders can offer various loan structures that drive down periodic loan payments and achieve other customer goals. These loans might include a payment term of five to 12 years, asset-based financing (that primarily relies on aircraft value for re-payment), one large “balloon” or total principal payment at the end of the loan term, 10- to 20-year amortization periods, interest-only structures, and limited personal guarantees. Borrowers should negotiate early payoff rights so they can, at will, exit the relationship, refinance the aircraft loan, or use available cash to pay off the loan.
Though cash is king for many aircraft buyers, up to 70 percent of potential business aircraft owners or operators intend to finance the acquisition of their next new aircraft. The same should roughly be true for anyone interested in acquiring a used aircraft.
Such financing can afford these potential customers cheap interest/rent rates, no or low cash use, and an immediate opportunity to buy or lease aircraft. For the business aviation industry, any boost in transaction volume this year, prompted by an expansion of financing, would be most welcome and perhaps generate a little optimism for a better 2021.
This article was originally published in AINonline on September 11, 2020.
Difficulties Financing an Aircraft for Leaseback see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses the challenges of financing aircraft leased back to a flight school or flying club due to higher-than-normal aircraft usage.
The usage equates to two things: number of hours flown annually and the type of hours flown. Aircraft leased back to flying clubs will typically accrue fewer hours than those leased to a flight school. Additionally, flight training hours will be harder on an aircraft’s engine and airframe because students and inexperienced pilots are harder on equipment than experienced pilots.
The flying club may go so far as to stipulate that members can’t join without a certain level of experience. A privately-owned airplane is flying a lot at 100 hours per year. An airplane on leaseback to a flying club could fly 200-300 hours per year. A popular flight school might see double that. More hours on the engine mean more hours on the airframe, lowering the airplane’s value. When it comes to the engine, that accelerated use could force an overhaul before typically anticipated in an amortization schedule, significantly eroding an airplane’s market value. This is what makes lenders nervous.
For example, let’s take a 1980 Cessna 182 worth $100K with a mid-time engine and decent avionics and interior. The prospective buyer wants to lease back to a flying club. Let’s say the lender values the same aircraft at TBO at $85K but also expects you to reach TBO in a certain number of years under normal usage. For a leaseback to a flying club, the lender might typically expect to see 150-250 hours a year. A lender can tolerate 300 hours or maybe even 350 hours, but higher than that and depreciation accelerates. Additionally, instead of an overhaul in five to seven years, you’ll need one in two or three.
For these reasons, lenders have a minimum loan of $100K and require a 30% down payment to finance a plane destined for flight school or flying club leaseback. So $30K down and then a $30K overhaul in two-three years means an owner essentially has put $60K cash into a plane that’s worth $105K with the overhauled engine.
Some aircraft are more likely leaseback candidates than others. A $400K or $500K SR22 is a good example. This could be ideal for a flying club or for a flight school that also rents aircraft. It’s also worth noting there are some options for leaseback to flying clubs with only 25% down and a $25K minimum loan amount, but the aircraft must be owned personally, not in an LLC. Give AOPA Aviation Finance a call if this is a situation you’d like to explore. Depending upon the current residual value in your aircraft, there might be room for a deal.
This article was originally published by AOPA Finance on July 9, 2020.