Operational Control And Aircraft Leasing: What’s The Big Deal? see more
NAFA member, Greg Reigel, Partner at Shackelford, Bowen, McKinley & Norton, LLP., discusses operational control and aircraft leasing.
From the FAA’s perspective, operational control in aircraft leasing transactions is not just a “big deal”, it is “the” deal.
What Is Operational Control?
14 C.F.R §1.1 defines operational control as “the exercise of authority over initiating, conducting or terminating a flight.” In a “wet” lease situation, since the lessor is providing both aircraft and crew, the lessor maintains operational control of all flights. And in the absence of a specific exemption (such as under 14 C.F.R. § 91.501(c) the lessor who is operating an aircraft under a wet lease will need to have an air carrier certificate to legally operate the aircraft.
In a “dry” lease situation, the lessee provides its own flight crew, and the lessee exercises operational control over its flights. The lessee’s operations may be conducted legally under 14 C.F.R. Part 91 without an air carrier certificate.
It is important to keep in mind that the FAA will look beyond the actual written agreements to determine who has operational control. Although a lease may be written as a dry lease and says “Dry Lease” at the top of the agreement, for example, that does not mean the FAA cannot take the position that the arrangement is really being conducted as a wet lease. And if the FAA takes that position when the lessor who is actually operating the aircraft for the lessee does not have an air carrier certificate, then that will be a problem for the lessor, and potentially for the lessee as well.
Why Does It Matter?
If the lessor is exercising operational control, then the flight must be conducted in compliance with regulations that are stricter than Part 91 (i.e. Parts 121 or 135). Those regulations limit the types of airports the lessor may utilize, crew qualifications, crew rest and duty times, maintenance requirements etc. Additionally, the lessor under a wet lease arrangement is required to remit federal excise tax on the amount charged to the lessee.
Alternatively, if the lessee has operational control under a dry lease the lessee is permitted to operate under the less restrictive and less costly requirements of Part 91. And federal excise tax is not due on the amounts paid by the lessee to the lessor, although sales tax is often assessed on the lease rate.
How Do You Determine Who Has Operational Control?
The FAA has issued guidance for determining which party has operational control in a leasing arrangement. Advisory Circular 91.37B Truth in Leasing provides FAA inspectors with an explanation of leasing structures and how they may or may not be compliant with the regulations. Although AC 91.37B only applies to aircraft subject to the requirements of 14 C.F.R. § 91.23, and it is not regulatory in nature, FAA inspectors also use this guidance when reviewing leasing structures that are not subject to truth-in-leasing requirements.
Here are the types of questions an FAA inspector will ask when the inspector is trying to determine which party has operational control in an aircraft leasing situation:
- Who decides crewmember and aircraft assignments?
- Who accept flight requests?
- Who actually initiates, conducts, and terminates flights?
- Are the pilots direct employees or agents for the lessor, the lessee, or someone else?
- Who is responsible for aircraft maintenance and where is that maintenance performed?
- Who decides when/where maintenance is accomplished, and who pays the maintenance provider for that service?
- Prior to departure, who ensures the flight, aircraft, and crew comply with regulations?
- Who determines weather/fuel requirements, and who pays for the fuel at the pump?
- Who directly pays for the airport fees, parking/hangar costs, food service, and/or rental cars?
If properly drafted, an aircraft dry lease agreement should answer these questions and, to the extent the answer for any item is “the lessor”, then the lease should explain that answer and how it does not negate lessee’s exercise of operational control.
For example, if the aircraft is leased to more than one lessee, it may make more sense for the lessor to retain responsibility for maintenance to ensure that the aircraft is consistently maintained in an airworthy condition. Similarly, lessor maintaining an insurance policy insuring the aircraft and the various lessees may be necessary to make certain the aircraft is insured appropriately.
However, responsibility for maintenance or insurance are just two indicia of operational control. And the lessor’s responsibility for maintenance or insurance does not negate the lessee’s responsibility for ensuring that the aircraft is in an airworthy condition and the lessee’s is properly insured prior to any operations conducted under a lease. Appropriate language in the lease can explain these issues so an FAA inspector reviewing the lease does not misunderstand and draw the wrong conclusion.
Also be aware that some FAA inspectors rely upon AC 91.37B but do not fully or properly understand its guidance. For example, in one instance AC 91.37B states “[t]he FAA has taken the position that if a person leases an aircraft to another and also provides the flightcrew, fuel, and maintenance, the lessor of the aircraft is the operator.”
This language is sometimes misunderstood by inspectors to mean that a lessee does not have operational control when the lessor is responsible for maintenance. But that is incorrect.
The key indicia in the language above is lessor’s providing the flightcrew. However, lessor’s responsibility for maintenance by itself does not indicate that lessor is improperly exercising operational control over lessee flights. Although it may indicate that lessor is exercising some operational control, without other indicia of operational control by the lessor, performance of maintenance alone is not conclusive.
Operational control in aircraft leasing arrangements is, and will continue to be, an area of special emphasis for the FAA. Although the terms of the lease and other transaction documents are important, the FAA is not bound by those terms when it is making an operational control determination. Rather, it will also look at the actual arrangements between the parties, as well as the responsibilities of each party, especially if they are inconsistent with the lease.
When the FAA determines that lessor is exercising operational control in what is supposed to be a Part 91 dry leasing transaction, you can expect that it will act. Depending upon the circumstances, pilots and operators could be faced with certificate action and civil penalty action. It is important to understand the indicia of operational control and to be able to determine which party is exercising operational control in an aircraft leasing transaction. Only then will you be able to ensure that you are operating in compliance with the regulations.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP., on Feburary 5, 2021.
Finding Growth in a Changed World see more
NAFA member, David Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, shares his perspective of business aviation amid the pandemic.
Shifting markets are creating new opportunities in a world altered by COVID-19. Here are some to consider.
WITH EVERY NEW YEAR COME HOPES FOR A BETTER WORLD, and 2021 is fairly bristling with them. Of particular relevance to equipment finance companies is the Equipment Leasing & Finance Foundation’s 2021 Equipment Leasing & Finance U.S. Economic Outlook, which forecasts 7.8% growth in equipment and software investment this year, and 4.7% growth in the U.S. Gross Domestic Product. Heartened by plans for widely distributed vaccines against COVID-19, industries and the companies within them are re-tooling to apply permanently many of the technologies and efficiencies necessitated by the pandemic. Equipment Leasing & Finance spoke to leaders in several equipment sectors experiencing changes that are leading to growth.Here’s what we learned:
There’s a Window in Trucking
Howard Shiebler is President of Crossroads Equipment & Finance LLC and Chairman of Velocity SBA, both in Rancho Cucamonga, California. Financing commercial trucks for transportation companies gives him a strategic view of one of the largest and most dynamic sectors in equipment finance. “We’re in an abnormally strong market now, both with values and the demand for tractors and trailers,” he says. “For those financing in this space, new business volume is up and repossessed inventory is selling quickly, and at good prices.”
The big question is how long current conditions will last. Increased consumer spending, much of it done online, helped freight markets recover quickly from initial pandemic shock. If economic recovery continues, Shiebler expects the strong transportation market to last well into 2021.
“Additionally, manufacturers of trucks and trailers have had their supply chains and work forces impacted by the pandemic, and the corresponding shortage of new equipment has driven demand and prices for used equipment to unusually high levels,” Shiebler notes. He adds, “I think some e-commerce-driven demand will become permanent, and manufacturers will eventually catch up with market demand, leading to a more typically cyclical transportation finance market.”
Nonetheless, Shiebler says equipment finance companies must still do a thorough job of underwriting in the space or risk getting into trouble. “When the economy slows, we’ll see freight rates drop, defaults increase and used truck prices drop fairly quickly,” he warns. “Lenders that understand this cycle underwrite to it, and they also properly staff collections and remarketing operations to deal with increased defaults.”
Healthcare Providers Want More Options
Jon Biorkman is President of Healthcare Financial Services at GE Healthcare. As the dynamics of the medical equipment market change, he sees healthcare providers revisiting budgeting, capital structure and other fundamentals of corporate finance to re-evaluate strategy and develop multiple scenarios for use in times of economic uncertainty.
“To account for variability, leadership teams are examining operating and non-operating cashflows, liquidity sources and cash on the balance sheet,” says Biorkman. “And as market dynamics continue to change, we’re bringing optionality to the table. This can be in terms of structure that allows for the deferment of a more permanent position, or increased liquidity to protect against unpredictable variability in patient volumes, payors and reimbursement trends.”
One such option is an escrow agreement that pre-funds capital for future equipment acquisitions. “The benefit is to lock in interest rates today, and secure capital for upcoming needs,” says Biorkman. Another option shortens the lease term, enabling equipment usage without full capital outlay.
“Creativity is something that matters to customers, and if we look at the market we’ve been operating in, it’s been incredibly dynamic,” Biorkman observes. “We view our role as providing customers with options for a future that may not be certain. We’re having candid conversations with them, being very grounded as it relates to financial projections—where they were before, where they are now, where they’re going. Liquidity and cash on the balance sheet have always been important, but today, customers are placing a premium on both—and alternative financial structures can really provide more tools.”
Aircraft Has Pockets of Promise
David Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, in Dallas, says the COVID crisis created a potential cash crunch for some owners of aircraft, and that a significant number of these are refinancing or entering into sale-leasebacks to cash out their equity in the equipment. “This is a global phenomenon, also driven in part by lower interest rates,” says Mayer. The upshot: opportunities exist in sale-leasebacks for those able to take residual risk, not just in tax leases, but in true or operating leases.
Mayer says there are also leases in which the credit advanced is fully paid out and the asset is sold for a purchase price at the end, which can be as low as $1 or another agreed price. “These deals have been active since the emergence of the pandemic and since rates have dropped,” he says. “I expect this trend to continue into 2021.”
Mayer has handled a number of such transactions and sees a particular market for the refinancing of larger jets with a value of $7 million or more. “One challenge for equipment finance companies will be to persuade customers that they won’t suffer ‘brain damage’ from engaging in a financing transaction,” says Mayer, tongue in cheek. “I say that because, compared to purchasing or borrowing, leasing is a more complex transaction.” Another deterrent among high-net-worth individuals and companies is pride of ownership and reluctance to use a financing product or allow a lessor or lender to control use of their aircraft.
“Make no mistake, the market is under stress and the pandemic is not helping,” Mayer cautions. “Companies that buy, lease or charter aircraft are leaving the business. But financiers are ready, able and willing to finance, and are doing more secured loans than true leases because they’re unable or unwilling to take the risk on the value of these assets.”
The aircraft market was on a downslope that started in 2019, and prices dropped another 10 to 15% at the start of COVID-19 before showing later indications of stabilizing. “But owners didn’t panic and sell; they were smart enough to stand by and wait—unlike what happened in 2008,” says Mayer. “Now equipment finance companies can provide these owners with smart and viable solutions in the form of true leases, tax leases, loans and sale-leasebacks.”
Small Businesses Need Your Capital
Marlin Capital Solutions provides equipment financing, working-capital loans, vendor financing and franchise financing to approximately 100,000 small businesses throughout the U.S. Thus, the company’s portfolio is a small-business index for sentiment and economic health, and CEO Jeff Hilzinger says the pandemic put the company “right at the center” of the 2020 economic storm.
“After ensuring the safety of our employees and the stability of our financial portfolio, we transferred people from our front office to our servicing team and immediately began reaching out to customers,” says Hilzinger. “We processed almost 6,000 requests for payment relief, most of them during April and May. And because we own a bank, we have an SBA license and were able to lend under the PPP program. We quickly created a platform to do that. Along with the payment relief we were providing, our goal was to preserve as much liquidity for our borrowers and in our own portfolio as possible.”
As Marlin helped its customers, the company also saw an opportunity to help itself. “The PPP platform we obtained was digital, and we’d always known we needed to become more digital,” says Hilzinger. “Once we took care of our employees, partners and customers and saw that the pandemic would last a while, we realized it could be a crisis of opportunity for us. We decided to dramatically accelerate our digitization and have been focused on it since June.”
In 2015, the New Jersey-based, small-ticket Independent had introduced a working-capital loan product to compete against fin techs. “We were always careful with it, because it hadn’t gone through a complete business cycle,” says Hilzinger. “But it turns out that the product performed much better than we expected, so now we’re redoubling our efforts
Because the small-business market resides next to the consumer market, Hilzinger says much of what consumers do with their personal credit can be projected for use in small business. “Once customers can access us digitally, we’ll be able to offer lines of credit and other micro-ticket products that were too much work to provide when our processes were manual,” he says. “Now we can offer these in ways that will be exciting to small businesses, and of economic benefit to us. Going digital definitely opens up new opportunities.”
Schools Urgently Need IT
Insight Financial Services (IFS) in Costa Mesa, California began studying the nuances of the k-12 school market about six years ago with the goal of doing business there. Through networking, they were introduced to OETC, an Oregon-based consortium that offers contracts for products supplied to K-12 schools and universities throughout the Pacific Northwest. “Needs were starting to change for schools at the time, and one of our customers suggested we talk to OETC about the consortium developing an RFP for school districts to lease IT,” says Andy Hashimoto, Vice President.
Over the next year, Hashimoto and Colleen O’Donnell, IFS Senior Vice President of State, Local and Education Business, explained to OETC the benefits municipalities and schools could leverage through leasing. A contract with IFS would allow OETC-member schools to acquire equipment without requesting proposals.
“What we found with many schools is that their previous plan had been to put equipment in the classroom with teachers and keep it until it didn’t work anymore,” says O’Donnell. “But the idea was evolving that schools need a sustainable strategy for IT and a budget to support it. They need technology that matches the curriculum, technology for both students and teachers that brings digital learning to life.”
COVID-19 greatly accelerated the need, and this past October, IFS was awarded a three-year contract as an approved IT equipment leasing services vendor in California. The contract is in addition to a nationwide agreement IFS already has with OETC, and expands the services the company can provide in California.
“This is a growing market for us, and we’ve experienced significant growth over the last couple of years,” says Hashimoto. “Today, school districts need large numbers of devices, and these can be acquired through a leasing contract that manages the entire life cycle.”
To that point, Hashimoto says much of IFS’s growth in the school market is attributable to asset management services included in the company’s contracts. “The asset management is geared to specific devices and allows school districts to be in control of what happens to the equipment,” he says. And because IFS tailors its leases to individual school-district budgets and needs, IFS is able to serve every customer. “We invest the time with each school district to customize the solution so that it works specifically for them,” says O’Donnell. “We structure from beginning to end to help them have the technology they need to support learning in the classroom and from home.”
Asked for suggestions for other equipment finance companies considering the school market, Hashimoto and O’Donnell have several thoughts. “Colleen and I have joked that we are evangelists for leasing, but it’s true that customers need to be educated about how leasing can help them,” says Hashimoto. “Our message about this has been the same since we started with the education market, but with COVID-19 driving and accelerating the need for IT equipment, what we had to say became that much more important and understandable. Communicate often with your customers, and explain clearly how leasing can be a solution for budgets, for obtaining the equipment they need, and for controlling what happens to that equipment at the end of the lease.”
Adds O’Donnell, “I’d say the willingness to be nimble, to explore the market deeply and invest time communicating with prospects and building relationships, is extremely important. Working this way is a cornerstone of our business, and by doing it, we’re in a position to respond immediately when needs change or a crisis arises. It’s how we provide solutions our customers are looking for.”
This article originally appeared in Equipment Leasing & Finance Magazine's Jan/Feb 2021 Issue.
Nine Things to Know When Leasing an Aircraft see more
NAFA member, George Kleros, Sr. Vice President, Strategic Event Management & Fleet Support at JSSI, shares information on aircraft leasing.
When leasing an aircraft, what are your maintenance obligations during and at the end of the lease term to ensure that the returned aircraft maintains its value?
Focused on that residual value, the lessor will designate a qualified inspector or auditor to perform periodic records reviews and/or asset inspections, throughout the lease period. The intent is to verify the aircraft’s general condition and ensure it remains in compliance with lease requirements.
After each check, the inspector will send the lessor a report with the graded condition of the aircraft and any specific findings. If anything can or might affect the residual value, you’ll be required to take corrective action to bring the aircraft into compliance.
At term end, the lessor will conduct an “off-lease” inspection (similar to a pre-purchase inspection) at a factory-owned or authorized service center. All components and systems must be in full working order; or repaired if not. If the major components are near their life limit, you’d be responsible for covering these costs: either a pro-rated percentage based on time consumed, or 100% of the cost to overhaul if it’s close to the event.
If the aircraft requires repairs for damage or corrosion, you are responsible for the repair cost. Once any repairs required by the lease are completed, any diminution in value due to damage history will be the lessor’s responsibility.
So what can you do to preserve the value of the aircraft?
- Review the lease document fully to understand the operation, maintenance and return of the aircraft requirements. A good lease-return scenario always starts with a well-defined and documented set of return conditions. Ask questions for clarification prior to signing, to be sure you fully comprehend the broad scope of your obligations.
- Keep the aircraft clean and polished to protect from corrosion and paint deterioration. Unprotected aircraft deteriorate faster than you might expect. The aircraft interior will be inspected for wear, cleanliness, and damage. The exterior will be checked for oil leaks, paint condition, and structural damage.
- Store the records in a secure, dry, fireproof storage cabinet or safe. Damaged or missing records devalue an aircraft and will change residual value. The lessor will come out either annually or bi-annually to see the aircraft and review the records for accuracy and airworthiness.
- Keep up with routine and scheduled maintenance tasks, even if the aircraft is not flying for extended periods of time.
- Address interior and exterior wear items immediately. Waiting can compound the problem and cost more to correct.
- Assume the lease document allows for the aircraft to operate under different regulations or use than originally defined. If the aircraft flies only for you under FAR Part 91 regulations, don’t move your aircraft into a for-hire Part 135 air-taxi arrangement without consulting the lessor; it may not be allowed.
- Leave the aircraft outside. Store it in a hangar when not in use. Sun, humidity, and high temperatures deteriorate interiors and paint exterior, diminishing the residual value.
- Let the aircraft sit inactive for long periods of time. Your aircraft still needs to be flown and systems exercised to keep systems lubricated and reduce risk for damage.
- Ignore missing paint and erosion strips. This leads to corrosion and will be expensive to correct.
The lessor always requires hull insurance at a specific dollar amount, and generally seeks high liability insurance limits. If you acquire an hourly cost maintenance program (HCMP), it can help ensure that the aircraft meets return conditions. The lease should state clearly that the maintenance program was current at lease inception and that the HCMP will be transferred to the lessor. An HCMP is very desirable in a lease transaction. It helps preserve the aircraft’s residual value, and helps you avoid penalties and extra costs.
This JSSI article was originally published in Business Aviation Advisor November/December 2020.
- 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.
A Capital Option see more
It’s time to think about rebuilding your business.
And doing so as soon as it’s safe will require traveling via business aircraft, to reconnect personally, face-to-face, with your key customers, allies, and associates.
It also may require redeploying your capital to fund those rebuilding efforts. Using an operating lease to finance your aircraft can help you do just that.
Listen as Keith Hayes, PNC Aviation Finance Senior Vice President, and Lou Seno, JSSI Chairman Emeritus, detail how financing a new aircraft – or refinancing your current one – via an operating lease enables you to devote more capital to your core business.
When there’s more to be said than space and copy deadlines allow, you can rely on the Business Aviation Advisor Above and Beyond podcasts to get you the information you need, to help you make the most of your aviation investments.
Thanks for reading, listening – and flying safely!
This podcast was originally published by Business Aviation Advisor on May 18, 2020.
Five Guidelines for Successful Aircraft Financing and Leasing During the Covid-19 Crisis see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, shares guidelines for aircraft financing during the Covid-19 crisis.
With the availability of surprisingly low financing rates, aircraft owners may be able to reduce cash flow demands and/or create an extra cash resource during and after the Covid-19 crisis. Owners and others may be able to do so by aircraft refinancing, borrowing and leasing, cashing out aircraft equity or entering into sale leasebacks.
If you have purchased an aircraft for cash and you can wait out the crisis without stress or still prefer to and can purchase an aircraft with cash, read no further – except number 4 below.
Otherwise, you may find the following five guidelines useful to qualify for and close these transactions during the Covid-19 crisis:
- Be thorough; be patient. You can apply for and facilitate a credit review process by providing all lender or lessor (financier) requested information promptly and thoroughly. In this unprecedented environment, financiers still generally assess your financial capability during and beyond the crisis based on typical criteria such as aircraft attributes, cash flow, business prospects, net worth and total debt obligations. However, with current business disruption, you should expect slower credit review and documentation processes.
- Ask for payments that match your expected crisis and post-crisis cash flow. You may need or want several months of no payments, interest only or other lower payments during the crisis followed by increasing payments or other amortization changes thereafter. Financiers can customize your financing within policy and regulatory parameters.
- Realize that a durable relationship with your financier is crucial. Your transparency and high quality of integrity and character will go a long way toward building a strong and lasting relationship with a financier, especially during the current health emergency. The relationship is likely begin with some uncertainty during crisis period but, if all goes well, last for years after the corona virus ends. Stay in touch with and be responsive to your financier – by voice – not just email.
- Structure your transaction to align with the FARs. Spare yourself additional anxiety of operating illegal charters or other illegal flight department companies (often LLC holding companies). Your violations may cost you significant sums in attorney’s fees as a result of potential FAA scrutiny or action against you. Use loan or lease credit review time and/or any pause in flight operations during the crisis to structure or restructure your agreements to comply with the Federal Aviation Regulations (FARs). Aligning your aircraft ownership, leasing and operations within the FARs is a frequent task for experienced aviation lawyers.
- Search broadly for insurance coverage at credit application. In your financing proposal, specify commercially available liability insurance that you have secured or expect to buy. It is important to add this term so that financiers do not ask for more coverage than you can deliver in an insurance market that is still in turmoil due to, among other difficulties, past underwriting losses and the tragic Kobe Bryant accident.
This information was provided by David G. Mayer with Shackelford, Bowen, McKinley & Norton, LLP on April 7, 2020.
Esventures LLC Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
EDGEWATER, Md. - Jan. 22, 2019 - National Aircraft Finance Association (NAFA) is pleased to announce that Esventures LLC has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add Esventures to our association,” said Ford von Weise, President of NAFA.
Esventures LLC is a leading service-oriented company with 13 years of experience, providing a broad spectrum of services and expertise in the areas of aviation, engineering, energy, oil and gas and financing. Esventures’ expanding capabilities enable them to offer customers a full range of services, including aircraft leasing/air transportation/operational management, project financing, engineering designs, procurement, construction, installation and maintenance management.
The company establishes strategic partnerships with specialized industry leaders to constantly improve the level of services they offer, striving to provide the highest quality project deliverables on time, within budget, and at the lowest blended rate in the industry.Esventures’ leasing services supply aircraft on a timely and affordable basis and ensure that clients reach their destination in safety and comfort.Their aircraft management services are meticulous in the care of all operations and maintenance so clients can focus on their business.
Much like NAFA, Esventures LLC is proud of their reputation for excellent service and promotes strict standards in the aviation industry. Esventures and NAFA consider safety to be of the utmost concern and are dedicated to fostering highly trained and experienced pilots, crews and aviation professionals.
For more information about Esventures LLC, visit www.esventuresllc.com.
The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit www.NAFA.aero.
What to Ask When Your Aircraft Lease is Expiring see more
NAFA member, Steve Day, Head of Sales - Americas with Global Jet Capital, discusses the questions you should be asking when your aircraft lease is expiring.
Your aircraft lease arrangement is coming to an end and decisions need to be made on what to do next. What are the questions you need to be asking?
1. Should I stay in my current aircraft?
If you like your aircraft and it continues to fit into your business goals, it may be very easy to extend your lease to retain the same plane.
The advantages of sticking with your current aircraft are obvious including retaining the same staff and (likely) the same hangar space, no need for additional certifications, and no new maintenance requirements—the list goes on.
Not only that, you’ll probably be looking at minimal, if any, additional capital outlay as you move into the extended agreement. You may even be able to roll in some additional upgrades and improvements.
That adds to the peace of mind you’ll have when you stay with something that’s been working well for you.
A lease extension can also be a useful stop-gap measure if you’re not ready to transition. If you don’t have a plan in place or things are in a state of flux, a lease extension can help you find time to regroup.
Let’s assume you want to move into a new aircraft, but the model you want won’t be available until a year after your lease expires. A flexible financing partner will work with you to create terms that will accommodate your timeframe and move you into the new lease seamlessly.
2. How does my transition plan fit into my business goals?
Perhaps recent tax changes have made you take a closer look at your approach to aviation. Perhaps your current aircraft is no longer meeting your needs. Perhaps you’re expanding into new jurisdictions. There’s certainly no guarantee that your aircraft needs will be identical to what they were when you first signed a lease that’s due to expire soon. But change is rarely a simple proposition.
Larger aircraft don’t just come with a higher price tag—they also come with different operator certification requirements, maintenance needs, more expensive insurance and higher costs for hangar space.
Together, those new requirements can be a larger-than-estimated drain on cash flow and time.
Smaller aircraft, while typically less expensive, can create their own logistical struggles. Even changing where you’ll be keeping your aircraft can be a minefield. A holistic and proactive approach to transition goes a long way towards preventing budgetary surprises, and experienced operating lease providers can be a big help during this process.
3. Do I have a conceptual transition plan?
If the answer isn’t yes, you may be in for some turbulence. To leverage the flexibility advantages of leasing, a proactive approach to transition is key. If you don’t start planning early, especially if the aircraft you’re considering could take more than a year to deliver, you might be setting yourself up for problems as the end of the term draws near.
In the best case scenario, a prepared lessee can move from one aircraft into another with minimal issue and little to no overlap or gaps in lease terms.
In the worst case scenario, an unprepared lessee can find him or herself without an aircraft due to production availability of new aircraft, or difficulty finding the right plane—which can create huge logistical problems.
Alternatively, the unprepared lessee might find him or herself paying for, maintaining and managing two aircraft at once while the initial contract wraps up.
That’s why it’s generally a good idea to start making your transition plan 18 months before the end of the lease if you’re planning on leasing a new aircraft. If you’re planning on leasing a used aircraft, 6-12 months should be sufficient.
4. What obligations will I be responsible for as I move out of this lease?
Most lease obligations aren’t solely financial or limited to regular lease payments. Obligations to manage, insure, maintain and store the aircraft you’re leasing are important components of lease agreements, and can be a large component of the overall expenses.
In addition, the return conditions specified in the lease will come with its own obligations – specifically written to protect the expected value of the returned asset.
If you’re unprepared, you might find yourself blindsided, or underbudgeted as the lease term ends.
You’ll find that an experienced lessor should be flexible in order to maintain an ongoing relationship, even if it’s a pre-expiration move into a different aircraft. In such cases, it’s usually possible to amend or extend the existing contract as necessary.
Early termination accommodations also exist, and they don’t necessarily have to come with a hefty penalty. Speak directly with your lessor and clearly articulate your needs and concerns as you plan your transition to find out what may be possible for you.
5. What kind of obligations am I getting into if I transition to a new lease?
Not all contracts are created equal. Depending on the experience of the lessor and how the agreement is structured, your obligations may be reasonable—or they may be draconian. Lessors that are focused on the corporate aviation market, typically take the time to fully understand their customer’s needs.
They manage their business models with a long-term view. They’re much more likely to structure transactions that are truly win/win agreements.
Both financial and non-financial obligations (maintenance, operation, etc.) affect the expenses, so it’s important to fully understand what you’re in for with a new lease and plan accordingly.
If you’re looking for a flexible operating lease that meets your requirements with minimal bureaucracy, you’ll likely want to consider a partner that has the expertise and market presence that cultivates customized solutions for its clients.
For more information, visit Global Jet Capital.
This article was originally published on AvBuyer on May 9, 2018.
Aircraft Leasing: The Types of Leases & Your Lessor Options see more
Similar to leasing an automobile, an aircraft lease involves the use of an aircraft for a specified period of time without transferring the title. The owner of the aircraft (the lessor) maintains legal ownership but the lessee holds possession of it through the duration of the lease.
Leasing can be a more attractive option than purchasing depending on the utilization of the aircraft and how it impacts the ability to take advantage of any available tax benefits. Many people choose to lease an aircraft because they are not able to take advantage of the tax benefits that ownership can provide. Aircraft used for business purposes can provide tax benefits, but personal use does not. Understanding how the aircraft will be utilized can often be one of the primary driving forces in the decision to lease or purchase an aircraft.
The Types of Aircraft Leases
Aircraft leases are regulated by the Federal Aviation Administration (FAA) under the Federal Aviation Regulations (FARs).
There are several ways to lease an aircraft, all with their own unique advantages and disadvantages. We recommend consulting with an aviation advisor to determine the lease type that is best for you.
In the event damage was to occur to the aircraft during the lease, unexpected obligations may apply to the lessee. To avoid any uncertainty, a well-drafted lease should clearly outline each party’s responsibilities in the event the aircraft does sustain physical damage during the lease term. Another important area is to understand the terms for the lease return process. Consulting with an aviation advisor can help you answer any questions you may have about a lease agreement.
Leasing vs. Chartering
Aircraft leasing and chartering are both practical and flexible alternatives to flying on commercial airlines. Both certainly offer a more comfortable flying experience on a more reliable and convenient schedule. Similar to deciding to purchase, the option to lease an aircraft becomes more attractive when your annual travel needs exceed a certain level or when availability of charter aircraft might be an issue. Leasing provides the ability to have direct control over the aircraft and its availability while also assuming the responsibilities of operational control.
With private aircraft charter services, you essentially have access to an aircraft on a trip-by-trip basis but availability is not guaranteed. The decision to lease involves a long-term commitment and allows the lessee to have full utilization and operational control of the aircraft. The advantage to private charter is the ability to access a variety of aircraft models and sizes, so you can select the aircraft that best meets the requirements of each individual trip.
With more than 70 years of combined aviation experience, Essex Aviation has worked with a variety of financial institutions, banks and other companies to provide their clients with aviation financing options for both private owners and public or private corporations.
The various types of lessors available in the market today include:
- Traditional banks
- Financial institutions that provide capital through private equity markets
- Third-party service providers who facilitate the lease between an aircraft owner and a third-party lessee, but they do not actually take ownership of the aircraft
The new options available in the aircraft leasing market today can provide certain benefits that were not historically available under traditional leasing structures. Consulting with an aviation advisor will allow you to review all the options available and determine which may best meet your needs and desires for the aircraft you are considering.
Returning a Lease
Aircraft leases should have specific terms and conditions detailed in the lease agreement that will outline the requirements and processes to be followed by all parties upon the return of the aircraft at the end of the lease. It’s recommended that you consult with an aviation advisor as you’re negotiating lease terms and conditions when entering into the lease and also having them work with you when going through the lease return process.
An aviation advisor will be able to assist and advise you during negotiations concerning the lease return inspection requirements. Additionally, during the final aircraft lease return process, the expertise of an aviation advisor can often provide alternative or cost-effective ways to resolve certain issues while also satisfying the provisions and terms of the lease return process. These advisory services can greatly reduce your organization’s cost burden of unexpected return condition requirements or issues raised at that time with the aircraft.
Essex Aviation Group, Inc. specializes in advising and representing clients with various aviation services including new and pre-owned aircraft acquisitions, new aircraft completion management, aircraft leasing and more. For more information about any of our services, please contact us.
This article was originally published by Essex Aviation's blog on January 23, 2019.
Financing Your Business Aircraft: Reaping Ownership Benefits, While Avoiding Leasing Pitfalls see more
NAFA member Martin Ormon, President and Founder of Aircraft Finance Corporation, compares the benefits of buying versus leasing your business aircraft.
With the new year comes the first full-year's tax filing under the Tax Cuts and Jobs Act of 2017. If your accountant or Chief Financial Officer (CFO) works like most, you'll have already engaged in a couple of briefings on the charges - on adapting to the law's new language - and you probably have another meeting planned to lay out for you the impact of those changes on this year's numbers.
For those looking to buy or lease a business aircraft after holding-off a while to weigh up the impact of the 2017 tax changes, now would be an excellent time to answer a recurring question asked before companies make a major decision on a big-dollar equipment outlay.
Should you buy or should you lease?
Each approach brings its own benefits and limitations, just as leases themselves vary in type to meet the differing needs of the operator.
But Martin Ormon of Aircraft Finance Corporation questions why so many operators are choosing to lease older aircraft, knowing that to keep it at the end of the lease means coming up with a buyout amount for the leasing company. "Otherwise, they walk away with nothing but their receipts," Ormon notes.
While Ormon acknowledges that for later-model business aircraft lease terms may benefit an operator's cash flow picture, "for many of the older aircraft (7 years and up), buying it with today's more attractive finance terms can make more sense for cash flow - and at the end of the term leave the owner with an asset, paid off and wholly owned," he elaborates.
"A lease structure and the supply of good aircraft and low financing costs for 20 years makes more sense financially than leasing."
But then, financing aircraft sales is Martin Ormon's business. He owns and operates Aircraft Finance Corporation, a rare lending operation with regular terms as long as 20 years for older business-turbine aircraft.
Aircraft Finance Corp: The Backdrop
When we last spoke with Martin Ormon in 2016, the topic focused on understanding the benefits to clients from dealing with Aircraft Finance Corp. versus more traditional banks and finance companies, particularly when financing business aircraft aged 10 and older.
Since then Ormon's business has continued to thrive, so we sought his input on the lay of the land in light of a small renewed 'boom' of recent months. Some credit the boom to the 2017 tax-reform law signed into law 13 months ago. Others credit the resurgent economy and strong market growth - a more tentative view recently.
Still others cite both of the above and a resurgence in market demand after a lengthy period in which many buyers held back. Against the backdrop of the Great Recession and the crash in business-aircraft sales, the resurgence, for whatever cause, is welcome among companies servicing business-aircraft transactions.
What hasn't changed is the availability of good finance terms, according to Ormon. "You get the deals from the secondary (market) guys; you don't get the deals from the guys who make the business."
That means operators looking to buy an older jet still face tougher terms than operators who are able to shop for new or near-new aircraft. "Leasing terms aren't what they once were," Ormon claims. "The guys in the leasing business today are struggling more because of the nightmare hit on residual values.
"And the residual value on some of these aircraft has gone beyond hitting bottom - and they're still getting a resurgence in market value because of increased demand."
Aircraft Finance Corporation continues to do a banner business because of its combination of competitive interest rates, competitive down-payment terms and loan terms as long as 20 years.
"The one thing that i've learned , "Ormon offers, "is that interest rates do not dictate demand for aircraft purchases - while it may effect some who don't have the credit history others do."
Used Aircraft Competing Against New
Ormon cites a number of loans recently written by Aircraft Finance Corporation, loans which took advantage of depressed prices of some older aircraft with loan terms more competitive than lease terms.
"With values where they are today, why would anyone buy a new aircraft?" he asked. "With our 20-year amortization system we can make an aircraft less expensive than leasing."
One example Ormon offers is for a Bombardier Challenger 605. The owner's situation had changed and they needed some relief from the cash-flow pressures. "We refinanced that Challenger 605, which ahd payments exceeding $70,000/month on a seven-year amortization. We did it for 20 (years) and their payment came down to about $20,000/month, solving the owner's problem."
Ormon says that many of the finance outfits don't want people to know that 20-year loan terms are available.
Lease Versus Buy
"At the end of the day, that 20-year term gives a lot of people more financial freedom and flexibility," Ormon highlights.
Todday's terms available from financing firms like Martin Ormon's make financing more attractive than leasing. "You'd still have to buy out the residual value to own that aircraft at the end of the lease. That or accept never owning the airplane."
Weighed against a lease structure with today's supply of good aircraft, the low financing costs for a 20-year term makes borrowing to buy more financially sensible than leasing, Ormon stresses, adding that Aircraft Finance Corporation underwrites its own financing, which makes dealing with the company more streamlined.
This different approach works for the buyers Ormon finances, for the sellers he helps sell their old aircraft, and for Aircraft Finance Corporation of a business.
Ormon's small aircraft finance bank began operations in August 2000, and he let it make money for him while he continued in his own business. "I didn't think much more about the small amount of business we were doing ... until the downturn," he recalls.
"Now, it's going great, because we help people and they come back again for their next deal."
It's good for Business Aviation - and what's good for Business Aviation is good for the aviation economy.
This article was originally published in the February issue of AvBuyer Magazine.
AINsight: Should You Finance or Lease a Bizjet? see more
NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, discusses whether a customer should consider leasing or financing a business jet.
Lenders and lessors often lament that cash is the main and most frustrating competitor for financing or leasing business jets. Lessees or borrowers often retort that these transactions cause too much “brain damage” to undertake, especially when they have cash available to buy the jet. What then should customers consider in deciding whether to lease or finance business jets—before, or even after, they close their cash purchase?
It is true that, compared with cash purchases, financing and leasing private jets require extra time, effort, professional cost, and negotiations, not to mention patience while financiers conduct diligence and obtain credit approvals. Despite the additional hassle, potential customers should not be too quick to dismiss financing or leasing, including monetizing currently owned jets in sale-leaseback and post-closing financing transactions, as these financing structures might prove to have substantial value.
Many customers have overcome any such misgivings about leasing or borrowing—and for good reason. Today’s customers range from large multinational companies to ultra-high-net-worth individuals usually represented by talented family office teams, accountants, or counsel.
Correspondingly, financiers exist that can meet the needs of virtually every qualified customer with acceptable aircraft. Importantly, lenders and lessors realize the reduction in market inventory of quality preowned jets requires them to consider somewhat older (10 to 15 years old), higher-time jets as worthy collateral or leased assets if the customers can satisfy credit and other required regulatory criteria. Some lenders are able to finance even older jets and small ticket or light aircraft, including propeller or certain turboprops.
While some clients are concerned about the costs associated with entering into an aircraft loan or lease, the transaction costs should, with exceptions, be immaterial compared to the value or cost of the jet. Further, in acquiring jets that could be eligible for 100 percent bonus depreciation, the all-in value for a customer, on an after-tax basis, might compete well against or even be superior to a cash purchase.
With leases, customers eliminate the risk of ownership because the lessor actually buys the aircraft. The lessor’s funding of the cost then preserves customer cash for working capital, reinvestment in the customer’s business, and/or funding other capital equipment. Customers can arrange a lease where a lessor purchases the aircraft from the seller and leases it to the customer.
A lessor can also monetize a jet when the customer sells the jet to the lessor and leases back. Such a sale-leaseback can occur immediately after the purchase or at such later time as meets the customer needs.
Leases also enable lessees to customize when the lessee can, during the lease term, buy the jet from the lessor or terminate the lease. A lessee may be able to obtain some benefit of 100 percent bonus depreciation from the lessor under the Tax Cuts and Jobs Act of 2017 that they might not otherwise be able to claim. The lessor can take the write-off in any direct purchase of the new aircraft from the manufacturer or, for the first time under the act, a preowned aircraft from the customer or third party seller. In addition, the customer can deduct the rent without the same limitation as interest deductions under the tax law.
To illustrate the investment aspect, suppose a company enters into a five-year lease with an aircraft cost of $10 million. The customer typically earns 18 percent on its investments and can obtain a fixed rent payment that implies a 7 percent “run” rate. By deploying the $10 million into its investments, the customer earns the 18 percent return while paying the 7 percent rent over a five-year period instead of paying $10 million up front. In its simplest form, the customer would achieve a pre-tax, net return of approximately 11 percent under this example.
Loans offer similar and other features. For the same $10 million jet, the customer would pay, depending on various factors, between 10 percent ($1 million) and 50 percent ($5 million) of the value or purchase price of the aircraft, with the lender financing the balance. The customer can take 100 percent bonus depreciation under the tax law if the aircraft is eligible for it and deduct the interest subject to limitations.
Like the lease, the customer can use the remaining cash for other investments, working capital, and/or purchases of capital equipment. Lenders can make the loan concurrent with the purchase or, like a lease, fund the loan in a “back leverage” transaction after closing the purchase.
In both loans and leases, customers with available cash to purchase an aircraft can, by executing an appropriate post-closing financing or leasing strategy, alleviate the tension of closing a loan or lease concurrently with completing a purchase.
Although one may think that, when a lender or lessor delivers its “cookie cutter” loan and lease “forms” to its customer, the negotiated deals across all customers would fit within a narrow band of final terms. Such a conclusion is far from reality.
Every negotiation differs as much as the unique personalities of the customers. Most customers ask about, if not conform to, “market” terms as a reference point in making judgments in negotiations. Lenders and lessors expect their customers to negotiate the documents, but, of course, prefer to close deals faster and easier whenever possible.
Certain parallel legal terms arise in most financing and leasing deals, which deserve attention by customers. Broadly speaking, customers should consider negotiating provisions that include unreasonably broad representations, unrealistic time limits in which to perform obligations, and no or inadequate cure rights; allow lenders or lessors to transfer the customer’s lease or loan transaction to anyone they choose without notice to, or the consent of, the customer; call for burdensome or unnecessary financial reports or establish reporting based on Generally Accepted Accounting Principles (GAAP) when the financier did not need GAAP financials for its credit approval; demand that lender or lessor consents to, or approves, business or corporate changes unrelated to the aircraft financing (taking a seat at the table for the larger business of the customer than merited by an aircraft financing); limit when, how much, and where the customers can operate their aircraft; trigger defaults for any customer acquisition, merger or corporate reorganization; grab for extra collateral unrelated to the aircraft, such as security in cash accounts or other tangible assets of the customer or guarantor; and require, solely with respect to leases, often complex and one-sided, though indispensable, federal income tax indemnification provisions in tax leases pertaining to a loss of depreciation by the lessor, including 100 percent bonus depreciation.
Negotiating these provisions, among others, might look like a daunting task for customers, but the right integrated team of business people, lawyers, risk management, tax, and other professionals can negotiate through and close a mutually beneficial transaction with minimal involvement of the true customer. The best results normally occur when the team possesses market knowledge, negotiates the customer’s material issues, and understands where financiers have little wiggle room to negotiate provisions forced into documents by internal policies and regulatory mandates.
BASIC RULES FOR A SUCCESSFUL FINANCING EXPERIENCE
Most customers enjoy good relationships with their financiers. As a customer, you can too, if you follow three basic rules:
First, your relationship with the financier does not end at closing; it begins at closing. Financiers usually like to develop relationships that lead to other business with you and build mutual trust. Your transparency, fairness, and reasonable document compliance will go a long way toward building a strong and lasting relationship.
Second, never surprise your financiers. Financiers tend to keep open minds about giving consents, which inevitably arise, work out problems, or amend documents, if you keep them informed early and often about your business or personal situations that might adversely affect the aircraft or your compliance with the transaction documents.
Third, pay your debt or rent when due, without making excuses that worry the lenders or lessors. When financiers become nervous about a non-performing transaction, their cooperation and flexibility may dissipate quickly. They tend to focus on impediments to getting paid and reporting internally about a troubled lease or loan, which may bring unwanted scrutiny on the deal team.
As easy as a cash purchase of a jet might be, the value proposition for financing or leasing it could ultimately make more sense than a cash deal. Many customers, large and small, have elected to finance or lease jets for good reasons based on their individual needs. Customers should at least consider financing or leasing a jet before they stroke a check to buy one.
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 high-wealth individuals and other aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, and managers, as well as lessors and lenders. He can be contacted at firstname.lastname@example.org, via LinkedIn, or by telephone at (214) 780-1306.
This article was originally published on AINonline on November 8, 2018.
3 Ways to Finance your own Corporate or Personal Aircraft see more
NAFA member Keith Hayes, with PNC Aviation Finance, shares ways to finance your own corporate or personal aircraft.
Corporate and personal aviation has returned, after being grounded, or at least stalled, in the wake of the Great Recession. Rising financial markets, growing corporate earnings, a strong U.S. dollar, and increasing consumer and business confidence are driving demand for private aircraft. Faced with crowded airports, jammed-packed commercial aircraft, and ever-present delays, high-net worth individuals and corporate executives alike are increasingly turning to private aviation to relieve the time constraints and delays of commercial flying and to take advantage of the myriad of smaller airfields located closer to their final destinations. Before ringing the airplane broker and kicking the tires, consider these financing options:
No different than your smaller purchases – like houses, cars and boats – your traditional aircraft loan can be fixed rate or floating rate. Some financial institutions offer a hybrid which features a floating rate loan with the option to buy a “swap.” In other words, you can lock in your rate and benefit from early payoff and interest rate increases. Not a bad idea in a rising rate environment. Traditional loans can be structured for as short as 30 months or as long as 120 months with amortizations as long as 240 months. Just keep in mind, the longer the terms, the higher the interest rate.
Asset Based Loans
Over the last fifteen years, this type of financing has become an increasingly popular option for individuals and businesses seeking aircraft ownership without making financial disclosures or guarantees. Only a select number of organizations offer this product, but it has a number of benefits, including:
- No financial disclosure or covenants – Truly hassle-free asset based financing. No need to forward years of tax returns and K-1’s or to disclose financials of a privately owned company.
- No or limited personal guaranties – This may be very important for companies that have bonding requirements or covenants limiting the amount of debt or guaranties than a company may incur. There may be partners involved in the ownership and the owners may be unwilling to sign on the other partner’s debt.
- Non-recourse – If the borrower defaults, the lender can seize the plane, but cannot seek out the borrower for any further compensation.
As with other types of large equipment, businesses as well as individuals may elect to lease an aircraft as an alternative to purchasing. An individual or business may have multiple reasons to lease instead of purchase, including cash flow considerations, federal income tax considerations, sales tax considerations and accounting treatment. There are several types of leases with the choice often determined by how the aircraft will be used:
- Non Tax Lease – The lessee (the bank or other entity granting the lease) owns the asset for tax purposes. Typically, this option is put in place for off-balance sheet treatment. The lessor will use the aircraft only for business and has an “appetite” for tax depreciation, therefore, can take advantage of the tax benefits.
- Tax Lease – The lessor owns the asset for tax purposes, realizing the tax benefits such as the depreciation of the aircraft. Because the lessor takes the tax benefit, the lessee is typically offered a more favorable interest rate.
Where do you start the journey to find a lender? Often, borrowers start their financing search where they have an existing banking relationship. However, that may not always be your best financial option.
General aviation industry knowledge should be a critical criteria for your lender. For example, does your lender have expertise with the FAA requirements? Are they aware of new regulations on the horizon that could impact your purchase? Does your lender have an established specialty in aircraft financing or only do an aircraft loan every once in a while at the request of a marquee customer? Is the lender credentialed with key trade associations like the National Business Aviation Association (NBAA), National Aircraft Resale Association (NARA), or and National Aircraft Finance Association (NAFA)? If you don’t know, aircraft brokers and dealers, aviation attorneys and aircraft managers are a good source for referrals and recommendations.
This article was published by PNC Aviation Finance.