aircraft lease

  • NAFA Administrator posted an article
    COVID-19 Opened the Door to Private Jet Ownership see more

    NAFA member, PNC Aviation Finance, discusses how business travelers and some individuals have bumped up against the limits of charter and fractional private aircraft services and are now pivoting to ownership.

    It's no secret that 2020 changed the landscape of the aviation industry. According to data from the Los Angeles Times[1], 2020 forecasts show that this will be the worst year in the history of commercial aviation with the industry poised to post a net loss of $84.3 billion. Consumer air travel revenue is expected to drop from $876 billion in 2019 to $434 billion in 2020. Initially many individuals considered charter services or fractional shares like JetLinx and NetJets but quickly ran up against usage limits and health concerns as the planes are still shared. As a result, more people are considering direct ownership. Airline brokers have noticed a significant uptick in business. "We're on pace to have one of our best years ever," says David G. Coleman, of Duncan Aviation a private aircraft sales, brokerage and consultancy.[2]

    Key Insights

    • Charter and fractional shares can lower risk compared to commercial airlines but they aren't risk free. Private ownership provides end-to-end control of cleaning, crew health and safety checks as well as limited use of the aircraft.

    • Aviation finance is a fragmented industry. It's important to engage veteran professionals who understand aircraft mechanics as well as financing options.

    • Individuals interested in owning an aircraft should have a clear understanding of the aircraft they are purchasing and be prepared to provide that information to lenders as well. Leasing is also an option, but individuals will want to make sure they've planned for any additional costs and are also well versed in the terms of their lease.

    Charter and Timeshare Services See a Short-term Boost

    While surging in popularity, many corporate travelers are realizing that chartered and shared services only offer limited flexibility in terms of schedule and personal safety standards. "What we're talking about is still a form of mass transit," says Jeff Wieand of Boston Jet Search, a private aircraft broker and consultancy.[3]"There are fewer people involved but the questions remain the same - are they cleaning the plane in between? When was the staff tested? Individuals in these kinds of arrangements don't have much control over the aircraft or the process. The lack of control was a driver toward ownership before the pandemic and more so now."

    Charter and timeshare services also require passengers to book in advance just like conventional travel, which may result in a bit of jostling if your travel schedule doesn't already line up with that of the service provider. While this may not matter much during a normal week, scheduling issues could become especially acute during high travel periods like around the holidays or ahead of virus lockdowns when many people are trying to get to more remote locations.

    Pivot to Ownership

    Historically, owning an aircraft was an all-cash process with a naturally limited audience. But as access to capital has improved, aircraft costs have come down and interest rates have remained low, aircraft ownership is possible for more people.

    "To my mind, what has happened with the pandemic really accelerated trends that were already happening in the private aircraft market. As major carriers continue to cut back on services, if you're someone who needs to be on the road a lot it's a problem," says Coleman. "What we're really in the business of is giving people their time back. And now, with growing health concerns we're helping them find an option that eliminates more of the risk."

    Navigating the Private Aircraft Marketplace

    There is a robust secondary sales market within aircraft that allows people to invest in pre-owned planes that are in working condition and on established maintenance programs that lenders are willing to underwrite. New planes are also available and financeable.

    For those that are new to ownership, both Coleman and Wieand suggest that it's important to work closely with veteran aviation professionals that can correctly assess the plane itself and the financing options.

    "This isn't like buying a car or a house where you can just compare across and get a sense for what things generally cost," explains Coleman. "You really need to understand the life of the aircraft in terms of where it is coming from, the state of the equipment, and maintenance schedules. And, you have to understand that not every bank is going to finance so you're going to want to engage with brokers and financing almost before you choose the plane so that people are on the same page early."

    Avoid Common Leasing and Owning Aircraft Pitfalls

    For those that want to invest in aircraft ownership, they can choose to lease their own planes or buy them outright. The financing considerations for both options differ.

    Leasing requires careful financing. With a lease, it's important for individuals to understand that they are going to be locked into an aircraft for a period of time even if problems with the aircraft arise. Wieand suggests that it's important to consider the potential for those additional costs when determining whether a lease makes the most sense. A close read of the lease terms is also a good way to ensure that there aren't any surprises if problems arise or if someone needs to break the lease for any reason.

    Focus on alignment first and financing second when taking out a loan. Taking out a loan to cover the cost of an aircraft can remove some obstacles like being locked into a lease period, but individuals will make sure that they are working with well respected financing teams that are familiar with these kinds of transactions. Coleman notes that if you're financing before you buy, lenders will typically want to be clear on the results of a pre-buy inspection so that there aren't any discrepancies with aircraft components or functionality. Appraisals and inspections can vary widely provider to provider so potential owners can avoid problems by working with appraisers and inspection teams that the lender is already familiar with and trusts. Coleman adds that some lenders will not finance specific types of planes so it is important to make sure that individuals align their desires with a finance team that is willing to support them.

    "I have seen people get into situations where they find out that they can't get the financing they were counting on because they didn't do the pre-work," Coleman says. "A seasoned aviation finance team will work closely with you on finding solutions but it's best when they are included early on in the process."

    Ready to Help

    PNC Aviation Finance offers knowledgeable financing solutions to make private aircraft ownership possible and affordable.

    We offer custom-tailored financing packages based on business needs and circumstances. Our experienced aviation finance team understands and has extensive knowledge regarding private aircraft ownership requirements, FAA, insurance, operating leases, etc.

    We can help you look at the implications of each option and help you decide on the best option for you or your business.

    Learn how PNC Aviation Finance can help you fly higher by visiting pnc.com/aviation.


    Sources
    1. Los Angeles Times (July 10, 2020) The rich are flying again -- in the comfort of their private jets - https://www.latimes.com/business/story/2020-07-10/charter-private-jet-flight-covid-19-coronavirus
    2. CEO David G. Coleman, Duncan Aviation (November 2020) Interview
    3. CEO Jeff Wieand, Boston Jet Search (November 2020) Interview


    This article was originally published by PNC Aviation Finance on December 17, 2020.

  • NAFA Administrator posted an article
    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?

    Do …

    • 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.

    Don’t …

    • 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.


     

  • NAFA Administrator posted an article
    Aircraft Lease Agreements, Explained see more

    NAFA member, H. Lee Rohde, III, President and CEO of Essex Aviation, shares what you need to know about aircraft lease agreements.

    Aircraft leasing is a popular private aviation option for corporate entities and private individuals alike. In order to lease an aircraft, a lessee and lessor must sign an aircraft lease agreement, which defines the terms of the lease, such as who is responsible for operating and maintaining the aircraft, the length of the lease and so on.

    For this article, we’ve enlisted the help of David M. Hernandez and Edward K. Gross of Vedder Price, an international business-focused law firm, to explain what aircraft lease agreements are and how they differ depending upon which leasing structure you choose.

    Table of Contents

    The Two Most Common Types of Lease Structure

    There are two primary types of aircraft lease structure:

    Traditional Ownership Structure Lease
    Also known as an operating lease, the owner (either a business or an individual) acquires an aircraft and sets that aircraft up as its own legal entity, typically a limited liability company (LLC). The LLC will often enter into a lease agreement with the actual intended operator of the aircraft — usually the original buyer — so that they can use the aircraft. This prevents the LLC from being considered a prohibited flight department company. From there, the LLC — which legally owns the aircraft — may also enter into an aircraft management agreement with a management company. The management company is responsible for managing the aircraft on behalf of the owner, as well as operating the aircraft for third-party commercial charters. Some owners decide not to hire a management company and instead elect to hire their own pilots and maintenance personnel.

    There are a number of reasons why an aircraft owner might create a traditional ownership leasing structure, including for tax purposes, for privacy or to comply with Federal Aviation Administration (FAA) regulations. Many owners choose to take advantage of what is referred to as “sale for resale” state tax exemptions; this exemption enables the owner to spread sales tax across lease payments, rather than pay in full at closing. Some owners would prefer that their company name not be listed on the FAA registry and would, therefore, rather use an LLC as the registered owner of the aircraft.

    Finally, the FAA prohibits entities from charging for the use of the aircraft and prohibits single member entities from owning and operating an aircraft; this is commonly referred to as the “flight department company trap.” As a result, some companies will set up an LLC as a leasing company and lease the aircraft to the actual operator.

    Financing Lease
    A financing lease is essentially an acquisition financing product and is an alternative to a secured loan. For the sake of simplifying things, you can think of lease financing as being similar to loan financing.

    In this arrangement, a financial institution will take ownership of the aircraft and enter into a lease agreement with a business or individual. This is essentially an acquisition structure that doesn’t require the actual purchase by the lessee of a plane, meaning the lessee doesn’t have to carry the aircraft on its balance sheet.

    We refer to these acquisition financing transactions as “leases” for tax, accounting and commercial law/bankruptcy purposes. The lessor assumes all of the market value risks and benefits associated with ownership, especially regarding the value of the aircraft after lease expiration, and it allocates the “net” lease responsibilities (discussed below) to the lessee under the lease terms.

    In the past, banks were typically the lessors in these financings, however, the number of banks that offer true (tax) leases has significantly diminished since the 2008 recession. Those interested in pursuing a financing lease structure are more likely to find opportunities working with an equity investor.

    The Different Types of Aircraft Lease Agreement

    The terms of an aircraft lease agreement changes depending on which leasing structure you choose to pursue.

    Traditional Ownership Structure Lease
    A typical traditional leasing structure often involves related parties. However, there are situations in which a traditional leasing structure would involve unrelated parties, in which case the lessee would be required to obtain pilot management services from an unrelated entity. It’s important to note that lessors cannot provide the aircraft and a pilot in a traditional ownership structure lease because that is considered a “wet lease” and generally requires an FAA Air Carrier certificate. The use of a time sharing agreement, under the Federal Aviation Regulations (FAR) Part 91.501, is a limited exception to this rule.

    Financing Lease
    As mentioned, a financing lease is an acquisition financing product, so it is appropriate to compare it to a purchase money loan. Similar to a secured loan, the lessor finances the lessee’s prospective acquisition, however, the lessor advances 100% of the purchase price and the lessee’s payments are reduced to reflect the lessor’s tax and residual value assumptions; the lessee typically has flexibility to purchase the aircraft upon lease expiration or, perhaps, to extend the lease term.

    Put simply, the aircraft lease agreement for a financing lease is similar to a loan agreement; so long as the lessee pays installments and materially performs any other obligations under the lease, the lessor won’t interrupt the lessee’s use and operation of the aircraft during the lease term. The key difference between a financing lease and a secured loan is that the lessor assumes on the market value risk at lease expiration.

    Components of a Standard Aircraft Lease Agreement

    Let’s take a closer look at the basic components that an aircraft lease agreement structure should include, including general terms, starting with a traditional ownership lease.

    Traditional Ownership Structure Lease
    It’s uncommon for a bank or lender to be involved in a traditional leasing structure unless the situation were to call for both a traditional ownership lease and a financing lease. In a traditional leasing structure, FAA regulations require both the lessor and the lessee to obtain pilot management services from an independent third party. A lease without the provision of pilot services is considered a “dry lease,” whereas a lease with an aircraft and pilot is considered a “wet lease” and requires FAA certification. The vast majority of traditional ownership leases that people enter into are dry leases.

    Those interested in a traditional leasing structure should be aware that the FAA takes dry lease abuses very seriously and has aggressively pursued enforcement action against entities entering into fraudulent dry leases. Any entity that requires the lessee to use a specific set of pilots when leasing the aircraft is a de facto wet lease, and therefore requires an air carrier operating certificate; this ultimately subjects the lessor to less risk of enforcement action and civil penalties.

    As far as general terms are concerned, any aircraft lease agreement for a traditional leasing structure should clearly specify which entity has operational control, performs maintenance, provides insurances and is generally responsible for the care of the aircraft while it is in the lessee’s possession. The lease agreement should also address all relevant aspects of the aircraft’s care and operation, including default provisions, choice of law, permitted use, return provisions and maximum hours of operation. Additionally, the lessor should reserve the right to inspect the aircraft if it is leased to unrelated entities.

    Financing Lease
    With a financing lease, the structure of the aircraft lease agreement will take into account whether the lessor is going to lease finance a new or pre-owned aircraft.

    If the lessor is lease financing a new aircraft, the lessee must assign its right to purchase the aircraft from the original equipment manufacturer (OEM) and, in some cases, to make progress payments due under the purchase agreement. If the lessor chooses to finance these progress payments, it will pay the balance of the purchase price to the OEM upon delivery, take ownership of the aircraft title and lease the aircraft to the lessee.

    If the lessor is lease financing a pre-owned aircraft, the purchasing process is essentially the same, except for the fact that it is generally less time and cost-efficient than purchasing from the OEM, and the lessor doesn’t finance pre-delivery payments. If the transaction is a refinancing, it will be structured as a sale and leaseback, pursuant to which the lessor purchases the aircraft from and leases it back the lessee. This would necessitate an aircraft purchase and leaseback agreement.

    In any case, once the purchase is complete, the lessee accepts the aircraft under the lease for the negotiated rent, term and certain lease expiry options. In some cases, the lessor might require additional support from the lessor in the form of a guarantee, deposit or other non-aircraft collateral.

    The essential promise the lessee makes is that, upon acceptance, the lessee cannot cancel the lease and is obligated to pay the rents and other amounts listed under the lease come “hell or high water.”

    These leases are typically “net” leases, meaning that the lessee agrees to pay all costs associated with owning, operating, maintaining, servicing, insuring and registering the aircraft, as well as all related taxes. Essentially, the lessee bears all risks associated with ownership, other than decline in the market value of the aircraft. The aircraft lease agreement will include a number of requirements and restrictions to ensure the safe operation and condition of the aircraft. By way of example, the lessee will be required to indemnify the lessor against liability claims, state taxes and loss of lessor’s anticipated tax benefits.

    Although the lease is typically non-cancellable by the lessee, should the aircraft suffer a casualty, the lessee is required to pay the lessor the agreed value of the aircraft, determined at lease inception. Aside from a casualty, some financing leases might also permit the lessee to terminate the lease and purchase the aircraft from the lessor or otherwise make the lessor whole.

    Most bank lessors are “credit” lenders, so the lease is likely to include credit covenants, cross-defaults and reporting requirements similar to what might be included in a credit facility agreement. At lease expiration, the lessee must either return the aircraft according to certain conditions set out in the lease, purchase the aircraft for (at least) fair market value or renew the term for (at least) fair market rental value.

    Drafting an Aircraft Lease Agreement

    The process of drafting an aircraft lease agreement is as follows:

    Traditional Ownership Structure Lease
    The most important aspects of drafting and negotiating a lease are understanding the goals and expectations of the parties involved and knowing which parties will be responsible for the care, maintenance and insurance of the aircraft. There should be no confusion as to:

    • Who will perform maintenance
    • Who will be responsible for payment of maintenance service plans
    • How the aircraft will be returned
    • What the termination provisions are
    • What notice is required

    Every aspect of the use, operation and return of the aircraft should be addressed. The aircraft lease agreement should also address what happens in the event of any non-compliance or default, particularly in the case of unrelated parties.

    Financing Lease
    The credit approval process for a financing lease starts with the lessor conducting due diligence regarding the lessee/guarantor and the aircraft in question. From there, the lessor and lessee will create a term sheet, with the lessor covering financing terms, requirements of the lessor’s credit committee and so on. The lessor will then provide lease documents reflecting what was proposed in the term sheet, with all important details and/or agreed adjustments to the proposed terms.

    Next, the lessor and lessee will incorporate various terms reflecting the lessee’s ownership structure and operational expectations into the lease documents. Deliverables are then collected, and closing deliverables and action items are attended to. Assuming all concerned parties are satisfied, the lessor pays the purchase price to the OEM or seller, and the lessee accepts the aircraft under the lease agreement.

    An important note: Given the significant investment of private aircraft and the potential for FAA, IRS and insurance violations, it’s in your best interest to retain a team of knowledgeable professionals to help you navigate this complex process. Regardless which leasing structure you choose, your team should include:

    • An experienced business aircraft finance attorney
    • A private aviation consultant
    • A broker
    • An OEM or other seller
    • An insurance broker
    • A management company or charter operator
    • A maintenance program provider
    • An aviation experienced accountant or tax advisor
    • An FAA registration counsel and/or title company

    Key Aircraft Lease Agreement Considerations

    A few things to keep in mind before entering into an aircraft lease agreement:

    Traditional Ownership Structure Lease

    • The primary consideration is using the aircraft to its maximum operational capability consistent with the client’s wishes without violating any FAA or IRS regulations and insurance provisions. This requires full knowledge of exactly what each party wants to do with the aircraft within the limitations of those regulations and provisions.
    • In accordance with the previous consideration, it’s imperative to understand the applicable FAA, IRS and insurance requirements to ensure that owners are able to operate the aircraft as they need. It’s best practice to discuss operational considerations with the management company.
    • If the aircraft being leased under a traditional lease is being financed, all usage and other terms must be approved by, and subject to the rights of, the financing party; this is known as “consent.”

    Financing Lease

    • The terms and pricing, including rent, will be driven by the aircraft’s value, operational and maintenance expectations, the creditworthiness of the lessee and any customer relationship with the lessee.
    • Some lessors — banks, in particular — are more conservative as to whom they’ll provide lease financing. Other lessors, especially equity investors, are asset financiers and are therefore less risk-averse; that said, that risk acceptance will be reflected in their pricing.
    • Experienced and sophisticated lessors and lessees will have sorted out most of what they deem essential in the term sheet in order to avoid unnecessary investments of the time and legal costs required to put together a transaction that isn’t a good fit for either party.
    • It’s important that lessees take a thorough and thoughtful approach not only to the proposed economics of the transaction, but also to purchase, operation, management, regulatory and tax considerations.
    • Lessees must fully disclose all information that might be pertinent to the lessor’s willingness to lease the aircraft pursuant to what’s been proposed in the term sheet.
    • The financing proposed in the term sheet must be practical and likely to be approved by the lessor’s credit committee well before the scheduled closing.

    Renegotiating an Aircraft Lease Agreement

    There are some instances in which it might make sense for a lessee to renegotiate or otherwise restructure an existing aircraft lease.

    Traditional Ownership Structure Lease
    Whether the parties involved want to renegotiate the lease depends entirely on their relevant and respective needs and whether there are issues that require renegotiation. Given that related party leases are typically handled internally, there are rarely any issues. However, an unrelated party lease could involve a wide variety of issues, including payment issues, operational issues or default provisions. Therefore, it’s imperative that all leases address how to make modification amendments and define applicable resolution provisions.

    Lessees are advised to be wary of any entity attempting to offer a lease as a viable alternative to a charter arrangement. The FAA is severely cracking down on such corrupt operations and has pursued multiple enforcement actions over the past two years.

    The most important thing here is that all parties understand the terms and conditions of the lease. It’s inadvisable to sign a lease and worry whether you can comply with the terms after the fact. The lessee should always know exactly what they are responsible for under the lease and what the termination and default provisions are.

    Financing Lease
    Financing lease pricing is based on interest rates and market values. If there is a significant change in either or both, or if the lessee’s needs have changed and they intend to trade up through another lease with the same lessor, the lessee may be able to restructure the lease.

    Non-bank lessors are likely to be receptive to restructuring requests. Banks that offer leasing products are more likely to be receptive toward restructuring if the lessee is a desirable customer or if they intend to extend the lease at a time when the actual aircraft value is likely to be less than the assumed value at lease inception.

    It’s important that both parties remain aware as to when it might be mutually beneficial to renegotiate or restructure the terms of the lease.

    What to Know Before You Sign an Aircraft Lease Agreement

    In order to expediently close a deal, it’s critical that lessees fully disclose expectations and other relevant information and be responsive to the lessor. In the case of a financing lease, having an existing banking relationship with the lessor could streamline the approval process and result in friendlier economic terms.

    Lease financing for a desirable customer can be competitive; in such situations, lessees should prioritize the reliability of the financing provider over proposed financing rates and costs. To that end, lessees should place more weight on a lessor’s ability to close a transaction in a timely manner and their documentation or closing requirements than on whether they offer favorable economic terms.

    Finally, in order to achieve all of their goals related to acquiring, financing and operating a new or pre-owned aircraft, lessees should retain the services of industry professionals with relevant experience and favorably recognized market reputations. This includes retaining legal counsel from a firm such as Vedder Price and advisory services from a private aviation consulting firm such as Essex Aviation.

    This article was originally published by Essex Aviation.

  • NAFA Administrator posted an article
    Lease Agreements! But Wait, There's More! see more

    NAFA member, Air Law Office, P.A., shares two more steps you should consider regarding your aircraft lease agreement.

    You’ve set up your operational structure for your “large civil aircraft” and you have your Part 91 lease in place, what now?  Whether you have purchased a new-to-you aircraft, or you are changing up your operational structure, you’ve found a new lessee to use your aircraft on a Part 91 basis, there are 2 more steps that you have to take.  Many owners and lessees think that the work is finished once the lease agreement is signed, but they are wrong.  The FAA requires that 2 separate copies of the lease agreement must be sent to 2 separate offices of the FAA before the aircraft flies under the new lease agreement.

    First, under FAR §91.23 within 24 hours of execution, a signed copy of the lease agreement shall be mailed to the FAA Aircraft Registration Branch (AFS-750), Attn: Technical Section, P.O. Box 25724, Oklahoma City, OK 73125.  Note: filing the lease agreement with Registry to satisfy this truth-in-leasing requirement does not constitute filing under 14 CFR part 47 or 49 to register the aircraft, or to record for public notice.

    Second, again under FAR §91.23, the lessee must notify the FSDO closest to the aircraft’s departure airport at least 48 hours prior to the first flight under the lease agreement.  This notice can be in-person, via telephone, via fax or via email, depending on the requirements of that FSDO.  The notice must include the identity of the departure airport and the proposed time of the departure of said first flight.

    The Bottom Line:  Be sure to send a copy of the executed lease to Oklahoma City, send a copy to the appropriate FSDO and be sure to carry a copy on-board the aircraft during all applicable operations!  Check in with your legal team ASAP to be sure you are in compliance!  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 14, 2020.

  • NAFA Administrator posted an article
    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.

  • Tracey Cheek posted an article
    Is a Business Jet Lease Right for You? see more

    NAFA member, Keith Hayes with PNC Aviation Finance discusses business jet leases.

    Has the aircraft lease market changed since the Great Recession? What are the popular lease types available to business jet owners? AvBuyer spoke with PNC’s Keith Hayes to discuss how leases can benefit certain companies and individuals.

    Keith Hayes began a lengthy career in the finance sector with GE Capital in 1985, having joined straight out of college. Starting as an internal auditor, he held several roles within the company transitioning into a credit role and then into a sales/finance role covering a multitude of asset types.

    In 2004 he joined the GE Corporate Aircraft group as the National Sales Manager and has been in the aviation finance sector ever since. Today as the National Sales Manager for PNC Aviation Finance, he is well placed to offer insights into the Business Aviation finance market. He is based at the company’s Boise, Idaho offices.

    AvBuyer spoke with Keith to discuss the types of leases commonly available to prospective business jet owners; trends in the aircraft lease market; and advice to buyers considering lease as an option for their next business jet purchase.

    AvBuyer: How has the aircraft lease market developed/changed over the past few years? Do you foresee further change in the short- to medium-term?

    Hayes: The biggest changes have taken place post-recession. Prior to the recession, a lot of aircraft were leased under 10- to 12-year leases with flexibility for the lessee to terminate early within years 4-6 of the lease.

    Following the recession, when aircraft values began to plummet, lessees generally found they were ‘under water’ in their leases. Many had no choice but to continue to lease the airplanes until the end of the lease term before returning them to the lessor (the bank).

    This was not a positive experience for the lessee or the lessor. Due to the challenges associated with selling the returned aircraft, many lessors stopped offering lease products altogether. Others, PNC Aviation Finance included, continued to offer the product and, now that aircraft values are stabilizing (along with the recent changes in the tax laws), lessors are seeing an uptick in lease activity.

    Looking ahead, there are changes taking place in certain accounting rules coming into effect in 2019 and 2020 that will cause leasing to not be as advantageous for financial reporting purposes.

    Among the changes is a requirement from the Financial Accounting Standards Board for organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases, and to provide disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.

    However, we believe aircraft leasing will continue to be a value-added structure for certain owners.

    AvBuyer: We’re hearing various forecasts of continued growth in the new and used aircraft sales marketplace during 2019. Would you expect to see aircraft leasing influence the aircraft sales trends over the coming year? If so, how?

    Hayes: I have always said that financing does not drive the behaviour of aircraft owner. The average aircraft owner changes their airplane every four-to-five years regardless of whether they paid cash, financed or leased their airplane.

    Some would argue that when banking ‘became tight’ during the last recession, aircraft sales were impacted, but I question if this was truly a factor. Cash has been, and continues to be, the number one method of paying for an airplane.

    But as the global economy continues to thrive, I anticipate our industry will continue to grow; as companies and wealthy individuals continue to have opportunities to deploy cash into high-return assets, they will elect to finance or lease as opposed to paying cash for a ‘non-earning’ asset. Meanwhile, the lease versus finance question typically is driven by the owner’s tax appetite or financial reporting needs, not simply the drive to buy or not buy.

    AvBuyer: For those weighing-up whether a lease is right for them, what are the common lease options, and what type of aircraft owner is each tailored to?

    Hayes: In short, there are two types of leases: A tax-oriented operating lease (in which the lessor owns the airplane for Federal Income Tax purposes); and a synthetic lease (in which the lessee owns the plane for Federal Income Tax purposes).

    Typically, an owner may enter a synthetic lease for a variety of reasons, including deferral of state sales tax and/or financial reporting and off-balance sheet treatment. Under a synthetic lease, the lessee would have full availability of all tax benefits for Federal Income Tax purposes.

    Meanwhile, an owner may enter a tax-oriented operating lease for the same benefits realized in a synthetic lease but, most likely, they would do so because they cannot fully utilize the tax benefits.

    There are a number of reasons why this would be the case including their level of personal use, passive versus active income, carrying forward of net operating losses, and more. Under a tax-oriented operating lease, the tax benefits are ‘passed’ to the lessor, and the lessor in return offers a lower cost of funds to the lessee.

    Commonly, these tax-oriented leases are structured with eight- to ten-year terms with early buy-out options at a point determined by the lessee.

    AvBuyer: For those considering whether an aircraft lease is the route they want to take into aircraft ownership, what are the most important things for them to understand?

    Hayes: There are a number of variables an owner would want to keep in the front of their minds when leasing an aircraft.

    While the documentation process for a lease (versus that for a loan) is not overly complicated, there are certain conditions you want to make sure are ‘market’ ones, including the return provisions, usage provisions and reporting requirements.

    Additionally, the inclusion of an early buyout in the lease is an option the lessor may or may not offer. It is up to the individual lessee and their specific requirements to decide if this option is important.

    Also worth considering, some lessors have a tax appetite while others do not. The lessee should recognize a lower cost of funds which can be analysed through the early buy-out in exchange for passing the tax benefits to the lessor. If it appears the rate of return is equivalent to debt financing, it could mean the lessor has no tax appetite.

    Lastly, in many states, sales tax is paid on the rentals via use tax (as opposed to upfront payment). This can result in a significant deferral and, in some cases, avoidance of sales tax altogether (i.e. if the lease is terminated at an early buyout point and the airplane is then sold, the use tax on the remaining rental is potentially avoided).

    More information from https://www.pnc.com/en/corporate-and-institutional/financing/lending-options/pnc-equipment-finance/aviation.htm

    This article was originally published on AvBuyer on January 7, 2019.

  • Tracey Cheek posted an article
    What to Ask When Your Aircraft Lease is Expiring see more

    NAFA member, Steve Day, with Global Jet Capital, offers insights on what questions you should ask when your aircraft lease arrangement is coming to an end.  

    1. Should I stay in my current aircraft?

    If you like your aircraft and it continues to fit into your business goals, it may be very easy to extend your lease to retain the same plane.

    The advantages of sticking with your current aircraft are obvious including retaining the same staff and (likely) the same hangar space, no need for additional certifications, and no new maintenance requirements—the list goes on.

    Not only that, you’ll probably be looking at minimal, if any, additional capital outlay as you move into the extended agreement. You may even be able to roll in some additional upgrades and improvements.

    That adds to the peace of mind you’ll have when you stay with something that’s been working well for you.

    A lease extension can also be a useful stop-gap measure if you’re not ready to transition. If you don’t have a plan in place or things are in a state of flux, a lease extension can help you find time to regroup.

    Let’s assume you want to move into a new aircraft, but the model you want won’t be available until a year after your lease expires. A flexible financing partner will work with you to create terms that will accommodate your timeframe and move you into the new lease seamlessly.


    2. How does my transition plan fit into my business goals?

    Perhaps recent tax changes have made you take a closer look at your approach to aviation. Perhaps your current aircraft is no longer meeting your needs. Perhaps you’re expanding into new jurisdictions. There’s certainly no guarantee that your aircraft needs will be identical to what they were when you first signed a lease that’s due to expire soon. But change is rarely a simple proposition.

    Larger aircraft don’t just come with a higher price tag—they also come with different operator certification requirements, maintenance needs, more expensive insurance and higher costs for hangar space.

    Together, those new requirements can be a larger-than-estimated drain on cash flow and time.

    Smaller aircraft, while typically less expensive, can create their own logistical struggles. Even changing where you’ll be keeping your aircraft can be a minefield. A holistic and proactive approach to transition goes a long way towards preventing budgetary surprises, and experienced operating lease providers can be a big help during this process.


    3. Do I have a conceptual transition plan?

    If the answer isn’t yes, you may be in for some turbulence. To leverage the flexibility advantages of leasing, a proactive approach to transition is key. If you don’t start planning early, especially if the aircraft you’re considering could take more than a year to deliver, you might be setting yourself up for problems as the end of the term draws near.

    In the best case scenario, a prepared lessee can move from one aircraft into another with minimal issue and little to no overlap or gaps in lease terms.

    In the worst case scenario, an unprepared lessee can find him or herself without an aircraft due to production availability of new aircraft, or difficulty finding the right plane—which can create huge logistical problems.

    Alternatively, the unprepared lessee might find him or herself paying for, maintaining and managing two aircraft at once while the initial contract wraps up.

    That’s why it’s generally a good idea to start making your transition plan 18 months before the end of the lease if you’re planning on leasing a new aircraft. If you’re planning on leasing a used aircraft, 6-12 months should be sufficient.

     

    4. What obligations will I be responsible for as I move out of this lease?

    Most lease obligations aren’t solely financial or limited to regular lease payments. Obligations to manage, insure, maintain and store the aircraft you’re leasing are important components of lease agreements, and can be a large component of the overall expenses.

    In addition, the return conditions specified in the lease will come with its own obligations – specifically written to protect the expected value of the returned asset.

    If you’re unprepared, you might find yourself blindsided, or underbudgeted as the lease term ends.

    You’ll find that an experienced lessor should be flexible in order to maintain an ongoing relationship, even if it’s a pre-expiration move into a different aircraft. In such cases, it’s usually possible to amend or extend the existing contract as necessary.

    Early termination accommodations also exist, and they don’t necessarily have to come with a hefty penalty. Speak directly with your lessor and clearly articulate your needs and concerns as you plan your transition to find out what may be possible for you.
     

    5. What kind of obligations am I getting into if I transition to a new lease?

    Not all contracts are created equal. Depending on the experience of the lessor and how the agreement is structured, your obligations may be reasonable—or they may be draconian. Lessors that are focused on the corporate aviation market, typically take the time to fully understand their customer’s needs.

    They manage their business models with a long-term view. They’re much more likely to structure transactions that are truly win/win agreements.

    Both financial and non-financial obligations (maintenance, operation, etc.) affect the expenses, so it’s important to fully understand what you’re in for with a new lease and plan accordingly.

    If you’re looking for a flexible operating lease that meets your requirements with minimal bureaucracy, you’ll likely want to consider a partner that has the expertise and market presence that cultivates customized solutions for its clients.

    For more information, visit Global Jet Capital.

    This article was originally published by AvBuyer on May 9, 2018.