NAFA Administrator posted an articlePodcast: Business & Legal Issues to Consider When Acquiring An Aircraft see more
David Mayer, a Partner with the law firm of Shackelford, Bowen, McKinley & Norton, LLP, discusses some of the business and legal issues one should consider when acquiring a new or pre-owned aircraft. Topics covered include:
- The kinds of business professionals a buyer should engage for an aircraft purchase.
- The terms a Letter of Intent (LOI) should include when it comes to the acquisition process.
- Why use an LOI rather than enter into an Aircraft Purchase Agreement immediately?
- Should the LOI state the purchase be contingent on securing financing?
- Drafting the Aircraft Purchase Agreement.
- Issues that are important to address in the Aircraft Purchase Agreement.
- How Federal Aviation Regulations can affect aircraft purchases and structuring.
- The benefit of establishing a Limited Liability Company (LLC) or Trust to own an aircraft.
- Tax planning and bonus depreciation.
- The “fly-away” sales tax exemption.
- How aviation insurance protects an owner or lessee.
- The importance of Uniform Commercial Code (UCC), FAA and International Registry filings.
This podcast was originally published by Asset Insight on July 21, 2020.
About David G. Mayer
David Mayer has decades of experience in guiding clients through domestic and international transactions, disputes, and other matters. Currently, most of his work relates to business aviation and aircraft finance.
He likes to describe when he can first help clients: “When they say airplane, I’m in.” In this regard, David advises his clients at all stages of their experiences in buying, selling, structuring, leasing, financing, maintaining, and upgrading private aircraft. His tasks range from simple to complex.
David helps clients evaluate and, when feasible, minimize local, state, and federal taxes, particularly bonus depreciation, associated with purchases and sales of business aircraft, turboprops, and other private aircraft, comply with federal aviation regulations, and manage liability risk that they worry an aircraft may cause.
He represents, among others, high wealth individuals, large private and public companies, private jet owners and lessees, Part 135 and Part 91 operators, flight departments, charter operators, brokers, consultants, and management companies. By representing various lessors, lessees, lenders, and borrowers, David knows both sides of the transaction, enabling him to expedite and achieve favorable results for his clients in a wide array of legal matters.
David has experience as a corporate counsel in addition to his longer experience as a partner in law firms. Adapting to the client’s interest, David provides insightful, thoughtful, and common-sense advice honed in part by calling on his extensive industry contacts in business aviation to enhance the quality and value of the client experience.
He writes blogs for Aviation International Network, in the industry’s AINsight series, which, in part, positions David at the leading edge of legal and business developments in business aviation.
Shackelford, Bowen, McKinley & Norton, LLP
Shackelford, Bowen, McKinley & Norton, LLP represents clients in matters involving business, commercial and entertainment law based on years of experience in courtroom trials and negotiations across the U.S. We assist large corporations as well as individuals in a variety of industries, including aviation, energy, entertainment, financial institutions, health care, hospitality, real estate, and retail automobile sales.
AINsight: Negotiating Business Aircraft Financing see more
NAFA member, David G. Mayer, partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses negotiating business aircraft financing.
Like large companies, an increasing number of high/ultra-high-net-worth individuals apparently like using other people’s money (OPM) instead of cash to close private aircraft transactions. These transactions include true tax leases, sale leasebacks, financing leases, secured loans, and refinancing of private aircraft by lessors and lenders. These deals also cover a broad range of aircraft by value, cost, cabin size, age, make and model.
It might just be my passing anecdotal experience that these “customers” seem to be more patient, flexible and engaged with their financiers than before the fourth quarter in resolving deal points that matter to them. Perhaps customers have discovered what I regularly see today: financiers, though controlled by bank regulations and internal credit policies, will work diligently and productively with their customers to develop structures and terms acceptable to their customers and the financier.
For lessors and lenders, this apparent surge in financing activity is good news. Yet, they widely acknowledge that “cash is king” in how high/ultra-high net worth individuals typically purchase new and preowned aircraft. According to JetNet, cash wins over secured loans to purchase jets, in an estimated 70 percent of U.S. aircraft purchases or a lower percentage of cash purchases depending on other sources of the information.
Financiers often encounter objections to financing like these: “I have cash available to buy the aircraft with minimal effect on my net worth”; “I really want to avoid the ‘brain damage’ associated with negotiating documentation, responding to onerous credit disclosure requests and abiding by restrictions that financiers will impose on me.”; and “I just prefer, like my buddies, to own the aircraft outright.”
Some financiers apparently have found the magic sauce to overcome these typical customers’ objections when combined with three particular attributes of financing today that appear to underpin the elevation in financing activity.
First and foremost, while money is cheap in the current highly competitive financing market, every client pursues the lowest loan or lease rates, though most lease pricing entails more variables and assumptions than loans.
Some clients even acknowledge what is almost universally true: they can make more money using their cash elsewhere for their businesses or investments. Other clients simply prefer using OPM and holding their cash. With the current volatility in the stock market, coronavirus fears, and concerns about the future economy, OPM may, and maybe should, attract even more interest.
Second, with the passage of the Tax Cuts and Jobs Act of 2017, clients almost always ask whether the aircraft qualifies for bonus depreciation. Correspondingly, they assume, often incorrectly, that they can use and qualify to take these substantial tax benefits. What is important here are ways in which leasing still might enable customers to enjoy some of these tax benefits.
How is that possible? Certain lessors can and do use the tax benefits in pricing leases—when setting rents and casualty values—sums lessees must pay the lessor on the occurrence of a total loss of the aircraft. These lessors can, but might not offer to, share the depreciation tax benefits with the lessee, primarily in the form of lower rents and casualty values.
Importantly, the tax benefits might be available not only when the lessor purchases the aircraft directly from the third-party seller and leases the aircraft to the lessee/customer. These tax benefits might also be available when the lessor purchases the seller’s/lessee’s owned aircraft and leases it back to the seller/lessee. The latter strategy allows the seller/lessee to monetize the value of its aircraft while keeping possession and use of the aircraft subject to the new “sale leaseback” arrangement.
In true operating or tax lease transactions, customers get a third benefit. Lessors assume the residual value risk arising out of aircraft ownership and leasing.
Under federal income tax true lease guidelines and other applicable law, an owner/lessor must, among other requirements, retain continuous residual value risk during the lease term of not than 20 percent of the original cost of the aircraft. Residual value refers to the market value of the aircraft at the end of the applicable lease term.
In reality, the residual value assumed usually far exceeds 20 percent due to the inherent value of aircraft, enabling lessors to assume far higher residual values. The customer is entirely free from residual value “downside” losses in value from, or “upside” gain over, assumed residual value in connection with any subsequent sale, lease or other disposition of the customer’s leased aircraft.
THE RIGHT TEAM
Although customers often have relationships with non-aviation professionals, aircraft transactions will almost always progress more easily, efficiently, and at a lower transaction cost with the right aviation team. It is imperative that the transaction team thoroughly understands and adopts a strategy to fully satisfy the customer’s desired participation, attitude towards the financing negotiation and distinguishing between the “must have” an “nice to have” modifications in the documentation.
As a result, every financing transaction is unique, even when a financier provides basically the same “form” of documents to different customers covering similar aircraft. The right transaction team will understand the big issues, nuances, documents, and characteristics of the financier.
Some clients want to negotiate/win every point. Others simply want the best loan or lease rates from financiers that will stay out of their businesses, minimize fast-trigger defaults, not reach for non-aircraft related collateral such as securities accounts, and impose the fewest restrictions on flight operations.
To achieve the best outcome, the transaction team, especially brokers and technical advisors, should ideally participate starting before the hunt for the right aircraft. The customer should engage the other team members before the negotiation of the letter of intent (LOI) or the financing proposal.
For buyers, the key is to allow adequate time for tax planning, aviation regulatory structuring, identification of the best financier for the particular situation and risk management planning, especially in current volatile insurance markets.
Financiers draft the financing documents in their favor even though they expect the provisions to change depending on the relative bargaining, credit, and relationship strength of the customer. True tax lease transactions usually entail more complex and opaque provisions than secured loans, including extensive aircraft maintenance requirements, aircraft return conditions and federal tax indemnification.
For reasons that differ and do not appear to show a discernable pattern, more high and ultra-high net worth customers seem to be gravitating toward financing private aircraft. Perhaps these potential customers, on closer reflection, have concluded that aircraft financing has significant value and, with the right aircraft transaction team, are easier to close than they anticipated.
The content provided above is intended for informational use only and does not constitute legal advice. Each person involved in these transactions should consult his or her aviation team advisors.
David G. Mayer is a partner in the global Aviation Practice Group at Shackelford, Bowen, McKinley & Norton, LLP in Dallas, which handles worldwide private aircraft matters, including regulatory compliance, tax planning, purchases, sales, leasing and financing, risk management, insurance, aircraft operations, hangar leasing, and aircraft renovations. Mayer frequently represents aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, and managers, as well as lessors and lenders. He can be contacted at email@example.com.
This article was originally published by AINonline on March 13, 2020.
Deposits see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses when a deposit is required and why during your aircraft deal.
Typically, larger airplane transactions require deposits, specifically, deals of a million dollars or more. Why do lenders ask for a deposit? As the old saying goes, “Trust, but verify.”
Larger transactions tend to involve assessing more sophisticated, more complicated financials. Often multiple legal entities may be involved. Each of the entities need to be reviewed, requiring substantially more due diligence. The additional due diligence accrues additional costs in the form of time, resources, third-party background checks, and other checks and searches. All of those things equate to unavoidable upfront costs.
Understandably, a lender is loath to go out of pocket on a transaction after putting forth so much effort. It’s not enough to trust that a borrower is committed to the deal. A deposit verifies that commitment. The size of the deposit depends on the selling price. It’s usually proportional, ranging from a couple thousand dollars up to one percent of what’s been negotiated.
It’s always prudent to expect to submit a deposit, even when the topic isn’t initially mentioned. Deposit discussions generally occur after a term sheet--a broad estimate of structure-- is drawn up and then agreed to by both parties. Only once the borrower agrees to the terms and conditions and decides to move forward should a deposit discussion take place. Anything sooner should fire off alarm bells.
If your transaction requires a deposit, we cannot overstate the importance of dealing with a trusted financial institution or escrow company If in doubt, give AOPA Aviation Finance a call. We work with trusted escrow agents all the time. We will help you find one with which both parties to your transaction can feel comfortable.
If you’re working through a bank, our position is that institution is an appropriate place to hold the deposit. If you’re not working with a bank, we strongly recommend an escrow agent to handle that duty. In past articles, I referenced using third-party escrow services to hold the deposit. That’s because there are occasions when it is better to have an escrow agent bear the burden. A broker or a private party seller are examples of entities which are not highly regulated, if at all. As such they don’t have as much exposure to liability and are proportionally more difficult to extract compensation from should the deal go awry, compared to highly regulated banks.
Escrow companies tend to carry errors and omissions insurance, and many of the good ones are also bonded. Neither of those assurances match the accountability found in banking regulations, though. With your deposit at a bank, regulators and regulations back you in the event the deal goes sideways.
Enlisting the services of someone trusted like AOPA Aviation Finance will ensure whomever you work with is properly vetted, and that you are working with reputable folks. Regardless of whom you add to your team to work on the deal, important questions to ask and get answered before putting down a deposit include, “Are you bonded? What errors and omissions insurance do you have? Do you have references from satisfied customers? Have you ever been sued?”
This article was originally published by AOPA Finance on December 10, 2019.
Is It Beneficial To Get a Loan Against My Home? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about aircraft financing.
Q: I own my home outright, so would it be more beneficial to get a loan against my home at a much lower rate, than to go through an aircraft finance company at a considerably higher rate?
A: While HELOCs can potentially offer rates slightly lower than traditional aircraft financing, going this route ties up equity in your home. Equity that may be needed for inevitable home repairs. Financing through a traditional aircraft loan only uses the aircraft as collateral. This helps keep equity in your home and other assets. Most importantly, however, is that aircraft lenders understand the aircraft purchasing process. They have access to detailed valuation tools and will ensure that the appropriate documents are filed with the FAA. These steps would be entirely on the borrowers’ shoulders when using non-traditional financing. AOPA Aviation Finance’s staff help alleviate the stress of buying an aircraft. In the current rate market these benefits typically outweigh the minor differences one may see with a mortgage rate versus aircraft rates.
This article was originally published by AOPA Finance on October 7, 2019.
Non-Traditional vs. Traditional Aircraft Payment Methods see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses your options when it comes to aircraft payment methods.
In a seller’s market like this one, the ability to act swiftly might make all the difference. So non-traditional financing sources like a margin loan or a home equity line of credit (HELOC), used in limited scenarios, can make sense. However, there are worthwhile considerations to using them over the more traditional methods of paying for an airplane—cash or financing through an approved aircraft lender.
AOPA Aviation Finance (AAF) recently negotiated a great aircraft loan with an extremely competitive financing structure for a client. The client ultimately rejected the loan in favor of using a non-traditional, margin loan to pay for his aircraft instead. A margin loan is designed to allow a stock investor to borrow money to invest in more stocks, using one’s shares as security. Using a margin loan can help a person increase one’s returns. It can also magnify one’s losses, especially if using it to pay for an airplane.
Let’s say, a sudden market correction triggers a margin call. A margin call happens when the investor's equity, as a percentage of the total market value of securities, falls below a certain percentage requirement. Having to make good on a margin call could create a disastrous situation—like selling the airplane to satisfy the margin call or liquidating the equities. Odds are also good that if the stock market falls, so too does the used aircraft market. Losses magnified.
Another client wanted to use her HELOC to pay cash for an airplane. She was tempted because the HELOC had already been approved, just waiting to be tapped. For her, the traditional aircraft financing process was taking longer than she wanted to endure.
Over five years, the average length of airplane ownership, it’s reasonable to predict a major event like roof replacement, foundation repair, or even flood damage might occur. Exhausting the HELOC as a long-term aircraft loan could leave her with zero equity to cover such emergencies. She would then be forced into borrowing against the airplane, or even selling it.
A margin loan or a HELOC used as a stop-gap, bridge loan for a short period of time—think three to six months, might be prudent only until a post-purchase, reimbursement loan is negotiated.
For all intents and purposes, non-traditional financing options are akin to the more traditional method of paying cash for an airplane. About half of all airplane owners will pay cash. Many of them do so with the intention of getting a post-sale, reimbursement loan. While cash and non-traditional financing might increase the speed of the airplane transaction, they also might increase its complexity. That’s why we advise speaking with AAF, or at least with an aircraft financier, before considering such strategies.
Lenders will stipulate certain actions occur prior to a non-traditional aircraft sale before they will even consider financing it. Stipulations like a cash sale be conducted through a third-party escrow company like AAF partner Aero-Space Reports. Lenders are legally obligated to know where all monies related to an aircraft purchase go, who the buyer is, and whether the buyer is an upstanding individual. The third-party escrow company can help verify the identity of the buyer, as well as assist in the title search. Most lenders will stipulate an aircraft have a clean title, or they won’t consider financing it.
AAF, or the lender, can also offer good counsel on the potential pitfalls of buying an “orphan” or obsolete aircraft. That’s right. Lenders are not eager to finance every type of aircraft. To a lender, number of units manufactured, parts availability, and current service availability matter. For example, finding financing for a Beechcraft Duke will typically be harder than for a Beechcraft Baron. Fewer than 600 Dukes were manufactured over a relatively short, 12-year time frame, 1968-1980. All were powered by a variant of the relatively obscure, Lycoming TIO-541-E1 engine. Compare that to the Baron’s 6,884-plus units manufactured since 1961, most of which are powered by the ubiquitous Continental IO-470 or IO-520 engines. You pay a penalty for an orphan/obsolete aircraft, assuming anybody will finance it.
A commoditized aircraft—one produced in abundance—like a Cessna 172 or a Cirrus SR22, will garner far more options for financing over a 20-year amortization than, say, a Navion. The same typically holds true for turboprops, but this rule of thumb does not apply to jets. Rapid technological advancements and limited manufacturing runs tend to render jets obsolete quickly. While there are some options for older jet aircraft, the most options are available for jets manufactured within the last 20 years.
That’s why taking the traditional aircraft financing route is often the best choice for prospective aircraft owners. AAF or the lender will give a reasonable expectation of how much of a loan, and what terms are possible, tailor-made to your situation. We know, in the end, how you pay for an aircraft affects what the aircraft will ultimately cost you.
This article was originally published by AOPA Finance on September 4, 2019.
Painting the Financial Picture see more
NAFA member Adam Meredith, President of AOPA Aviation Finance Company, shares what items you need when preparing to finance 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 June 12, 2019.
Finding the Right Lender to Finance a Private Aircraft Purchase see more
NAFA member, Lee Rohde, President and CEO of Essex Aviation, discusses finding the right lender when financing a private jet purchase.
It is a truth universally acknowledged that private aircraft are expensive. Even those exploring part-time ownership options enter their search knowing that it will require a significant upfront investment. But for frequent fliers with the means to afford it, private aviation is the obvious choice.
Before taking the first steps toward private aircraft ownership, potential buyers should take the time to carefully evaluate all of the financing options available to them.
Something to Consider
Before deciding which financing option to pursue, buyers should consider whether they want to contact lenders directly — a process that typically involves researching lenders, requesting and reviewing lender proposals and assembling a loan due diligence package — or to work with a third-party aviation consultant or aircraft finance broker. Although most high-net-worth individuals have a finance team capable of handling these responsibilities, individuals on the mid-to-lower end of the market might find it useful to partner with an aviation consultant or aircraft finance broker because they have the necessary industry relationships to simplify the financing process and to connect with the most appropriate lender candidates depending upon the buyer’s needs and requirements.
Finding a Lender
When seeking financing for a private aircraft purchase, buyers have two main options: traditional banks and non-banking aircraft financing lenders. In most cases, high-net-worth individuals will elect to first work with their existing bank — that way, the buyer can take advantage of their existing business relationship with the bank, which already has a comprehensive understanding of their financial situation.
If a buyer’s bank is unable to finance the purchase, the next option would be to contact one of the major financial institutions that has an established aircraft finance group. These financial institutions manage a large aircraft portfolio and would be willing to work with a buyer to finance the aircraft even if the buyer does not have an existing relationship with the institution.
The benefit to this option is that the bank already has an established aircraft financing team capable of working with the buyer to obtain the necessary information to evaluate the loan.
The downside to this option is that the buyer will need to prepare and provide the bank with a full package of information on the aircraft, as well as a full set of financial documents and disclosures for the lender to provide a formal proposal.
The third option is to finance the aircraft purchase through a non-banking aviation lender. There are decidedly fewer non-banking aviation lenders in the market than there are banking lenders. Currently, there are a few major non-bank lenders in the market that actively provide aircraft financing. These lenders will usually raise their capital in equity markets to support portfolio growth. When choosing a non-banking aviation lender, be sure to contact a private aviation consultant or aircraft finance broker to confirm the lender’s position in the market and whether they’re a viable option to consider.
Bear in mind that all aircraft lenders have portfolio parameters and requirements that they must follow and, in some cases, are limited by the age and types of aircraft they can finance. First and foremost, all lenders evaluate potential borrowers based on the “5 Cs” of credit:
• Character: What is their reputation as a borrower? Is their credit history stable?
• Capital: What is the borrower’s net worth? What type of capital assets do they own?
• Capacity: Does the borrower have sufficient cash flow to repay the loan? What is their debt-to-income ratio?
• Collateral: What assets can the borrower pledge to secure the loan?
• Conditions: How does the borrower intend to use the aircraft? What is the current state of the economy? Is there pending legislation that would affect this loan?
Note that all lenders use the same criteria to evaluate individual borrowers who are looking to purchase private aircraft for personal reasons as they do corporate borrowers — at the end of the day, credit is credit and collateral is collateral. In either case, the selected lender will have specific loan covenants that the buyer must be aware of. In some cases, the lender might require periodic reviews of the aircraft market value or third-party inspections to ensure that the aircraft is being properly utilized and maintained.
Whether they work with their existing bank, an aircraft financing bank or a non-bank lender, buyers who are able to secure financing to purchase a private aircraft are opening the door to a world of luxury, comfort and convenience. And for those who are still interested in private aviation but want to avoid the extra legwork with financing, there are plenty of viable alternatives to outright ownership to explore.
This article was originally published by AvBuyer on August 23, 2019.
Financing An Aircraft Before It's Moved To The U.S. With FAA Registration see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about loans for engine replacements and aircraft financing.
Q: We are looking for financing options to purchase a pressurized Baron that is currently based and registered in Canada. I am writing to ask if you’d be willing to finance this aircraft before it is moved and transferred to the US with FAA registration?
A: For aircraft being imported from Canada our lenders will require that the deregistration from Transport Canada and new FAA registration be completed prior to releasing funds to the seller. In most cases lenders are able to position funds in escrow while the import is completed. Imports from Canada typically only take a couple days. Give us a call to discuss further. We can also help you set up escrow with our AOPA Strategic Partner, Aero-Space Reports.
Q: I own my aircraft outright. Do you provide loans for engine replacements?
A: Yes, like avionics upgrades, our lenders will finance up to 85% of the aircraft value with an overhauled engine. Having no debt on the aircraft potentially allows for the lender to finance the full cost of the overhaul. Call us today so we can get you started on the application and approval.
This article was originally published by AOPA Aviation Finance Company on July 30, 2019.
Adam Meredith, President of AOPA Aviation Finance Co., shares helpful steps when financing aircraft. see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, shares helpful steps when financing your aircraft.
AOPA Aviation Finance and our experienced and trusted specialists can assist you in making your purchase by offering a wide array of financing options that are tailored to your specific needs.
Here are eight steps to help you start flying:
Gather Supporting Documents
Gather your tax returns, financial statements, and personal net worth information for submission with your application to speed up the process. The fastest approvals are applications where W-2's are submitted with no business ownership, usually within 1-2 days. Additional approval time may be required for applicants with business entities.
Complete an Application
Fill out the application as completely as possible to avoid a delay in processing and remember to provide an original signature on the application before submitting it through the online portal.
Get Approved or Pre-Approved Quickly
Once your application package is complete, your account executive and analyst will identify and select the best lender based on your aircraft selection, usage, loan structure, and financial history.
A pre-approval ensures that:
- You don’t lose the aircraft of your dreams due to lack of financing.
- Your loan closes quickly.
- You have 90 days to decide on your aircraft with the rate locked for 30 days.
Negotiate a Balanced Purchase and Sales Agreement
Don’t just sign anything given to you by the seller, have someone familiar with the process review to ensure it’s balanced. The purchase and sales agreement is a binding legal document that sets the sales price and all conditions to close, including time to complete pre-buy, time to complete transaction, how and where escrow and deposit are held, and who pays to move the aircraft, etc.
Schedule a Pre-Purchase Inspection
We highly recommend a pre-buy inspection by an independent 3rd party to avoid any surprises and conflict of interest once you take ownership of the aircraft.
Typically, the prospective buyer pays to re-position the aircraft for the pre-buy, and the seller pays for correcting any maintenance issues relating to airworthiness.
Set Up Escrow and Review Fees
AOPA members pay no broker fees! Members will, however, need to open escrow with a lender approved title and escrow company to ensure proper closing and will include a title search. Normally, fees are based on the aircraft’s sales price and are split by the buyer and seller.
Lender closing costs are based on the aircraft and purchase price and are used to cover hard costs such as background checks, credit bureaus, overnight fees, loan documentation, and legal review.
Hull and liability insurance coverage is required by lenders, AOPA members can get discounted rates through AOPA Insurance. Your account executive will gladly refer you to an agent for a quote.
Prepare for Closing
Once you have selected a closing date, be prepared to find a notary to notarize documents and leave time for overnight packages to be sent back and forth as some documents require a “wet signature”.
This article was originally published by AOPA Aviation Finance Company on August 5, 2019.
Aircraft Age Restrictions for Financing see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers the aircraft financing question regarding aircraft age restrictions.
Question: Is there an age of airplane or number of airframe engine hours that is off-limits for financing?
Answer: For piston aircraft, our lenders do not have any age restrictions. Aircraft manufactured prior to 1960 may require a larger down payment and/or shorter term. Airframe time is restricted to less than 10,000 hours. Lenders prefer mid-time engines or less, however, financing an overhaul into the purchase is always an option for those with higher times. If you are looking at a few different airplanes and would like help, our Account Executives are available to help with valuations and can provide rate and term quotes for each airplane. Please give us a call at 800.627.5263 or contact us through our website at aopafinance.com.
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 on AOPA Aviation Finance Company on February 21, 2019.
Citi Reiterates 'Cautious Optimism' for Bizjet Market see more
NAFA member, Ford von Weise, Global Head of Aircraft Financing for Citi Private Bank, shares his thoughts on the current state of the business jet market.
Ford von Weise, global head of aircraft financing for Citi Private Bank, termed the overall atmosphere last week at EBACE as “benign” during a conference call earlier this week hosted by Citi Research addressing the current state of the business jet market. Participants on the call were also cautious about macro factors and trade war risks that could negatively affect the certainty the market thrives on.
“That said, there’s still some optimism behind that caution based on stabilized pricing/values and new products driving demand,” Citi Research aerospace analyst Jonathon Raviv said. “It’s also worth remembering that the market is in a better spot than it has been for several years, which could provide some cushion if macro weakens significantly.
“In our view, business jets are showing signs of life, with legacy orders supporting stabilized or modestly higher legacy production rates. But we do sense some jitters…which in our view means [aircraft manufacturers] are still reticent to raise rates meaningfully.”
Citi Research noted the business jet market relies on “aircraft need, liquidity, and confidence.” While it said the first two are currently in good shape, “confidence could falter, which could be coincident with aircraft need. Confidence is very important for the high-net-worth crowd, which our expert suggests comprises 50 percent of buyers. A sentiment swoon can freeze their purchase decision.”
This article was originally published by Chad Trautvetter in AINonline on May 30, 2019.
What are the Aircraft Financing Trends in 2019? see more
NAFA members Martin Ormon, President of Aircraft Finance Corporation, and Dave Labrozzi, Chief Operating Officer of Global Jet Capital, talk with freelance writer Rohit Jaggi about the condition of the aircraft financing market.
What's the condition of the aircraft financing market?
Who is seeking aircraft financing in 2019, and how are they obtaining it? Have the financing trends changed - and what's the outlook going forwards? Rohit Jaggi gets insights from financiers Dave Labrozzi and Martin Ormon.
Business jet sales tend to follow the money. And the US economy performed unexpectedly well in the early months of 2019. Yet Business Aviation growth is slowing, in the US and the rest of the world, and business jet sales are being hit by a number of factors.
Sales of new and used jets saw an uptick in 2018 as US tax cuts and changes in the rules on accounting for airplanes took effect. Increasing demand and steadier prices for used jets also signalled the return of some big banks and financiers to the sector, after having their fingers burnt following the financial crisis of 2008.
But does that mean financing private jets is becoming easier for buyers? And are specialist lenders being frozen out by competition from the big players? Two companies that play to their strengths in different parts of the business jet financing market illustrated the challenges.
Dave Labrozzi is chief operating officer of Global Jet Capital, which focuses on aircraft aged 15 years and younger. He says that the big finance corporations are focusing on their high-net-worth clients and the biggest corporate names, but their interest flags when it comes to complicated deals, or anything other than loans secured on the value of the aircraft.
Martin Ormon, whose Aircraft Finance Corporation services a US market for older aircraft with loans of $1m to $7m, is more scathing. “[The big bank lenders] believe their model is the best model – and it puts a noose around the customer’s neck.
“They still want to make it an asset-based loan. An aircraft is not an asset – it depreciates from the second you step in the door and fire the engines up. Far more so than an automobile.”
Playing to Strengths
Ormon’s niche is credit-based, 20-year loans that keep the cost of payments down and are based on the customer’s ability to pay. Offering the example of a customer for whom he refinanced a loan on a Bombardier Challenger 605, Ormon reveals the customer had been paying a bank $70k a month.
“With us that became $29k a month,” he illustrates. “Who is going to default first? A guy with a $29k monthly payment, or a guy with a $70k monthly payment?”
It’s also true that those who don’t really need to borrow can do so more easily. “The high-net-worth individuals we do business with can dig into their pockets for the $50m-$60m cost of a jet,” says Labrozzi.
“But they don’t – they prefer to put their money into their business and get double-digit returns.” The leasing deals Global Jet Capital can put together allow them to do that and have a jet.
What’s Different About Today’s Aircraft Financing Market?
Labrozzi is confident that there is not too much froth in the market. That was part of what happened after the financial crisis where lenders were spooked by falling asset prices into calling in their loans.
That helped produce a cycle of further price deterioration and an increasing number of repossessions. “I don’t see that perfect storm,” says Labrozzi. “What is different this time is that the major manufacturers are building significantly fewer airplanes.” And that should help maintain values.
But another factor helps here: A shortage of high-quality used/pre-owned jets. “Low-hour, clean airplanes are hard to find,” Ormon notes. “In the pre-owned jet market the products are not as high-quality as they were just a couple of years ago. The really great airplanes are out there, but they’re hard to find.”
Was the US Tax Cuts Impact on Aircraft Sales Limited?
A natural question is whether the effects of the US tax cuts and accounting changes, signed into law at the end of 2017, have already fed through?
“The tax law change did give the industry a shot in the arm,” says Labrozzi. But it wasn’t the benefit that many thought: “People bought a jet before the end of the tax year, but then found it was a lot more difficult to deploy the tax benefits.”
As a result Global Jet Capital has done a lot of sale and leaseback deals, because, as a leasing specialist that turns over a lot of aircraft, it can utilise the full tax benefits. “The bottom line is that it’s helped our business,” Labrozzi says.
According to Ormon the buying ability of his customers and potential customers has not been significantly dented.
“These guys are buying Hawker 850 for $16k a month. They’re putting $400k down. Sure, you could pay first class for $16k a month, probably non-stop around the world, but that’s not their mentality. Our clients have the cashflow, they’ve got the cash, and that’s what they want to do.
“So – with $200k a year in payments and another $700k a year to maintain the airplane and fly it (pilots and everything) – that’s less than $1m a year to own a Hawker.”
Looking Ahead for Aircraft Financing
Global Jet Capital’s Q1 2019 market briefing points to trade tensions and fears of market volatility, but sees demand for new business aircraft rising at the same time as a shortage of high-quality used jets impacts the number of used aircraft sales.
Labrozzi expects a steady market over the next couple of years. His customers are responding to economic and trade uncertainty by putting the tools in place they need to do business (including private aircraft).
He also believes that the sector is in a trade-up replacement cycle. “A lot of my customers are getting ready to take delivery of an airplane they ordered two years ago and it’s time to move their existing airplane,” he says.
Moreover, some highly desirable airplanes (such as the Dassault Falcon 7X) were undervalued recently when there were a lot on the market. Now the market is absorbing them quickly, Labrozzi says – they are likely to be on the market for only an average of six months.
Ormon paints a slightly different picture. “I’d say that lending is down 15%. The aircraft sales are there – there are a lot of people paying cash for $2m and $3m airplanes, because interest rates have been low for a while and companies have just received a tax cut. Companies are awash with cash that they are not necessarily putting back into the business.”
So the number of deals Ormon is doing is down. “Our biggest year, 2017, was 56 deals, with an average value of about $3.2m,” he says. “Our 2018 average was $2.9m, and today we’re probably doing around 35-40 deals a year. I don’t see anything changing unless we have a major financial crisis. I think this is the new norm.
“The outlook for my sort of financing is good,” Ormon concludes. “The Hawker 800 is becoming a thing of the past and now we’re getting [better-quality] Hawker 850s and 900s that are in that price range.”
Labrozzi is also optimistic. “There’s always plenty of business to go around,” he concludes. “I just want to get my unfair share of it…”
More information from www.aircraftbanker.com or www.globaljetcapital.com
This article was originally published by freelance writer Rohit Jaggi in AvBuyer on June 5, 2019.
5 Tips to a Speedy Aircraft Approval see more
NAFA member Adam Meredith, President of AOPA Aviation Finance Company, shares five tips when financing your aircraft.
1. Be Organized
Aircraft financing requires documentation similar to mortgage financing. Having easy access to W2’s, tax returns, paystubs, business tax returns and K1’s will help move the process along quickly. The number one reason for delay in approval is missing documents.
2. Full disclosure
Fill out the application with as much detail as possible. You will need to provide documentation in the form of tax returns, bank statements, etc to verify income and down payment.
3. Understand your credit and financial picture
Being aware and able to explain any past issues on your credit report will help limit additional underwriting questions. Using free credit tracking services is a good way to understand what might show up on your credit report.
4. Calculate your ability to afford the loan
Make sure you have added the expected monthly payment to your current debt payments. Most lenders are not only going to want to see that you can handle the monthly payment but can also afford the operational and insurance costs on top of your current obligations.
5. Determine Ownership Structure
Having an understanding of how you want the aircraft to be registered will help the approval and closing process go smoothly. LLC or corporate ownership adds additional complexities to the closing. Establishing these entities early on in the process helps keep things moving during the final stages.
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 5, 2019.
Enhance Your Chances of Aircraft Financing see more
NAFA member, Greg Holst, President of 1st Source Bank's Aircraft Financing Group, discusses what prospective borrower's should know when it comes aircraft financing in an interview with Matt Harris, Commissioning Editor with AvBuyer.
There are some obvious points and some less obvious ones a prospective borrower should know with regard to getting aircraft financing. What are these, and what do they all have in common? We asked Greg Holst, President, 1st Source Bank’s Aircraft Financing group.
When searching for a financier to provide a loan for your next aircraft purchase, the natural thing would be to scrutinize the lender – and rightly so… Often, though, prospective borrowers fail to check their own expectations and commitments, which can lead to disappointment.
With this in mind, Greg Holst spoke with us to offer more insight into what a borrower can do to send the right signals to a finance provider.
AvBuyer: What are the basics that a borrower can expect all creditors to be looking for before approving an application for financing?
Holst: There are various items that allow the lender a basic understanding of the loan request, a background and credit check, and some indication of the financial capacity and trends of the borrower. These include the following:
- The name, address and State of organization, along with the date of birth and tax ID of the borrowing entity and any guarantors;
- Information on who the principals of the primary borrowing/operating entity are, with brief bios;
- Three years of financial statements and tax returns for each borrower/guarantor; and
- Some details on the aircraft you wish to purchase, its purpose, and any loan structure preferences.
AvBuyer: Presumably the ‘basics’ differ slightly from one lender to another. Where can borrowers get the information that will enable them to approach a preferred lender prepared?
Holst: The best place to get the specific items a lender will be seeking is to go to the lender’s website or, better yet, call them and ask by phone.
Each borrower’s situation is different. A conversation with an aircraft loan officer can help you learn specifics needed to properly evaluate your unique situation without unnecessary document production.
AvBuyer: Moving beyond the basics, what are some of the less well known items someone seeking aircraft financing could do to enhance their chances, and make a lender’s decision easier?
Holst: Most folks prefer to keep the activity of borrowing money as simple as possible. Actually, most lenders have this same goal too.
However, having a few added details on you or your business can greatly benefit the processing speed of your request and may improve the terms or rate for which you qualify. Some topics to address or share may include:
- The history/background of your business.
- A business forecast, information on recent expansions or new contracts.
- Detail on any previous whole aircraft ownership, fractional ownership or charter experience.
- Reviewed or audited financial statements.
- A synopsis of the pedigree/maintenance history of aircraft being purchased.
- A pre-buy inspection or independent appraisal.
- Detail on whether the aircraft is a beneficial business tool – and if so, how? Will it be required to generate revenue of its own?
Borrowers should also research which lenders are leading activity in the aircraft category they’re pursuing financing in. Reputable dealers and brokers should be able to offer at least a couple of names that are knowledgeable and consistent lenders, and will provide good service - not just in the good times, but year-in, year-out.
The bottom line is to seek a relationship, not just a rate.
AvBuyer: With the used aircraft market picking up at this time, presumably there are plenty of lenders looking for opportunities. How can a borrower distinguish one seeking to cherry-pick opportunities in an up-market, versus one they can build a relationship with? What are the tell-tale signs a borrower should look for?
Holst: This is difficult to determine at best. In favorable times most lenders are aggressive and put their best foot forward.
A phone call to multiple lenders may tell you little about who is who in this field. Your best resource, however, is a seasoned dealer or a reputable aircraft broker. They will know who was doing business when the markets were on their knees and which lenders consistently work with their clients through challenging business cycles.
Borrowers who expect to be long-term aircraft owners should seek a relationship with a lender that carries them through their successes and their setbacks with a minimum of pain.
Essentially, experience and transaction volume are strong positive indicators.
While rate-driven lenders may be inclined to cherry-pick opportunities, a relationship lender should be there for the long-haul, even in a down-market when you may need to renew your loan, or finance an engine or an upgrade.
It’s clear that a prospective borrower should be thinking not only about their immediate need for financing, but for the longer-term. A good business plan for buying and operating an aircraft will also include a forecast on when it may be necessary to sell the aircraft and upgrade into something more capable.
You can use that plan to assess whether a potential lender could also help with your projected need for your next purchase beyond the current one.
The more prepared and open you are with your lender as to your present and future needs, the higher the likelihood both you and your lender will be able to develop a mutually beneficial relationship that can keep both parties happy for many years to come.
More information from www.1stsource.com/business/specialty-financing/specialty-financing/aircraft-and-helicopter
This article was originally published by AvBuyer on June 4, 2018.
Financing: Which Aircraft are Most Likely to Qualify? see more
Is the goal of getting financing for a used aircraft really so difficult in today’s Business Aviation marketplace? Global Jet Capital’s Vivek Kaushal discusses, offering tips on ways to maximize your chances when selecting your next aircraft…
If you’re thinking about financing an aircraft, you’ve probably heard that it’s relatively easy to obtain funds for a new aircraft but that financing used jets is a thornier proposition.
That’s mostly true, but even for a new aircraft, there is no guarantee of securing funding. It’s important to remember that not all new aircraft are created equal. Lenders will always wait for a new model to prove its performance and demonstrate some trading history before going ‘all-in’.
Existing models with a solid installed base and performance history are usually acceptable, with a few exceptions.
While it’s mostly true that financing for new aircraft can be more easily obtained than for used, within the used realm there’s significant variation in what lenders look for and what kinds of risk they’ll tolerate. Generally speaking, a used aircraft can indeed be trickier to finance.
Some lenders, especially those that don’t specialize in aviation financing, won’t finance aircraft over five years old, while for others, ten years is the cut-off.
These are largely arbitrary numbers, and experienced aviation lenders know that there are more important considerations than arithmetic based on model year.
Useful or not, some banks rely on these simple weeding-out measures because they’re constrained by conservative credit risk policies or by a lack of knowledge. Neither is conducive to a holistic approach to used aircraft financing.
Thus, if you’ve got your eye on a used aircraft that’s got a little more history between its wings than some lenders are comfortable with, don’t despair. Older aircraft can qualify for financing, but obtaining it would typically mean engaging a specialized aviation financing partner who can work with you and navigate some of the industry particulars.
Following are three major factors that will make a difference as to whether a specific used aircraft qualifies for financing or not…
1. A Robust Installed Base/Model Performance History
The more performance history that’s available for an aircraft model, the better. Models that have been well-accepted in the market will almost always be more likely to qualify for financing.
For each cabin class, some models demonstrate better-than-usual value retention. These will typically have been in production at a high volume and will boast a well-documented operational and financial track record.
Models with short production runs and low trading volume may be viewed more cautiously as collateral for financing.
Data on a model’s installed base and recent trading history (number of pre-owned aircraft on the market/average days to trade) is typically available on AMSTAT or JETNET.
2. Fleet Average Usage Levels
An aircraft is more likely to qualify for financing if it’s at or below fleet average usage for its make and model. Bluebook and other guides can provide this information, which is a key indicator of how much service life an aircraft has left.
If the aircraft’s usage level is significantly higher than average, lenders may get concerned about the aircraft’s remaining useful life because of heavy usage. A heavily used aircraft will tend to sell more slowly.
3. Airworthiness is Non-Negotiable - Maintenance Status Matters
To qualify for financing, an aircraft must be in very good operational condition with no history of material damage. Damage to the aircraft will be assumed to affect its reliability and value, regardless of how comprehensive the repairs. All avionics have to be up to date, with no doubt over airworthiness. All technical upgrades must be in place as well.
One major maintenance-related consideration that may affect a lender’s decision is whether the engine is cared for under a power-by-the-hour (PBH) program or not. Most lenders consider PBH programs to be a favorable approach to mitigate the risk of expensive engine repair costs.
Another consideration is when the next major inspection is going to take place. An airframe inspection can be expensive and take a significant amount of time. A thorough review of the aircraft’s logs and maintenance history will help to flag such issues.
The Real Issue With Used Aircraft Financing
In a nutshell, the main obstacle to financing used aircraft is the complexity of the deals themselves. Some lenders struggle with the complex considerations that go into evaluating the risk of financing a used aircraft, especially if they don’t have robust aviation knowledge.
Those that rely on a simple exclusionary process may rule out perfectly airworthy and viable aircraft in favor of preserving a cautious risk posture. All too often, a traditional lender will ask for other forms of collateral, such as significant amounts of assets under management which it has a right of set off, rather than rely on the value of the asset or the credit of the borrower’s business.
Someone with domain knowledge can engage with the industry’s complexity and structure a transaction that works for the aircraft, even helping clients navigate the inspection process.
As an example, Global Jet Capital was about to close on financing an operating lease for a ten-year old Bombardier Challenger 605 when a problem was identified with the aircraft’s APU requiring it to be sent to Honeywell for an estimated eight-week repair.
A lender unfamiliar with aviation might have considered this a “red flag,” and its policies may have also precluded it from holding its financing commitment for that length of time, leading to an end to the deal and possibly a lost deposit if the right contingencies weren’t in place.
Instead, our understanding of the space meant we understood the need for the repair and were able to work through the delay seamlessly. Once the overhauled APU was installed, the deal closed successfully.
So which jets are most likely to qualify for aircraft finance? A lot is possible when you find the right partner for your Business Aviation financing and understand what matters to lenders.
Used aircraft continue to represent terrific value for savvy buyers. Keeping in mind the three major considerations relating to a used aircraft’s finance-worthiness, you should be able to find a used aircraft that suits your business goals and save yourself the disappointment of a rejection.
More information from www.globaljetcapital.com
This article was originally published in AvBuyer on May 4, 2018.