aircraft purchase

  • Tracey Cheek posted an article
    What Is The Typical Down Payment Percentage on a Jet? see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about jet down payments.

    Q: What is the typical down payment percentage on a jet? Possibly a CJ3+?

    A: How the aircraft is being used will be a primary factor in determining the required down payment. For Part 91 personal/business use lenders typically will finance up to 85% of the purchase price or aircraft value, whichever is less. Part 135 charter or other commercial usage generally requires larger down payments. 30% down is typical for this type of usage. How the loan is structured can also play a factor in the down payment. AOPA Aviation Finance can offer solutions such as interest only, asset based, or longer fixed term structures. Larger down payments are typically required for these types of loan structures. Please give us a call, we’d be happy to discuss your situation in further detail.

    This article was originally published by AOPA Aviation Finance Company on September 18, 2019.

     

  • Tracey Cheek posted an article
    The Closing: The Final Step to Completing the Aircraft Acquisition! see more

    NAFA member, Amanda Applegate, Partner with Aerlex Law Group, shares what you need to know when it's time to close on your aircraft.

    At long last, you have found the aircraft that fits your needs, the pre-purchase inspection is complete and the discrepancies have been remedied. It is now time for the closing. What does this mean and what needs to be done? For many first-time aircraft buyers, they think the closing will be a long drawn out event. However, I tell all of my clients that the closing should be a non-event and if all of the work has been done in advance, the actual closing should take less than 10 minutes. Once the purchase agreement is executed, a closing checklist should be developed to track all of the deliverables needed through closing. Here is a list of the important items that need to be accomplished shortly before closing:

    1. Aircraft Positioning –
    The purchase agreement should identify the delivery location and who is required to pay the movement costs, if any. The closing cannot occur until the aircraft arrives at the delivery location and in the required delivery condition.

    2. Closing Documents –
    There is an actual filing window at the Federal Aviation Administration (“FAA”) registry in Oklahoma City, OK. All of the closing documents should be pre-positioned with the escrow agent in Oklahoma City, as the escrow agent will be responsible for filing the applicable documents with the FAA. As the buyer, the required FAA closing documents are a registration application FAA Form 8050-1, a statement in support of registration if the purchasing entity is a limited liability company, lender documents if applicable, and a declaration of international operations if there is an upcoming international trip. As the seller, the required FAA closing documents are a bill of sale FAA Form 8050-2, as well as any lien releases if necessary. Additionally, the buyer and seller will each need an active transacting user entity account with the international registry in order to register the contract of sale at closing. Further, the purchase agreement more than likely requires other non-FAA closing documents, such as a delivery receipt and warranty bill of sale.

    3. Insurance –
    During the purchase process an insurance carrier should have been selected and a determination on the amount of coverage required. Shortly before closing, insurance should be bound and the buyer should receive and review the certificate of insurance. If the aircraft is financed or managed by a third party, these parties will have specific insurance requirements which need to be evidenced on separate insurance certificates.

    4. Maintenance Programs and subscriptions – 
    If the aircraft is enrolled in any maintenance programs or subscription services, the third party providers must be contacted to confirm the account is in good standing, paid in full and transferrable upon closing.

    5. Closing Statement –
    The escrow agent will prepare a final accounting statement based on the terms of the purchase agreement and information provided by the parties. The statement will usually include the purchase price and any other fees due under the purchase agreement or to third parties, such as brokers. Any movement costs or similar expenses should be calculated a few days prior to closing and agreed upon by the parties prior to the day of closing.

    6. Inspection Facility Invoice –
    Oddly this is an item that can often cause a delay in closing. The aircraft cannot depart the inspection facility for the delivery location until all invoices are paid. However, invoices can’t be paid until they are final. The invoices from the inspection facility are very detailed and often take a long time to get into final form. Once received they must be reviewed in detail since certain costs are buyer costs and other costs are seller costs as dictated by the purchase agreement.

    7. Tax plan – 
    The tax planning at the federal and state level for the acquisition should have been completed while the pre-purchase inspection was occurring. At closing, the tax plan should be implemented. 

    All of the items above can be accomplished in the days leading up to closing. If done properly the actual closing is a series of emails or a conference call with all parties lasting less than 10 minutes!

    This article was originally published by Aerlex.com on Nov. 19, 2019 in Articles, BusinessAir Magazine, The Latest.

  • Tracey Cheek posted an article
    How to Build a Business Aircraft Acquisition Plan see more

    NAFA member, David Wyndham, Vice President with Conklin & de Decker, discusses the importance of developing a thorough aircraft acquisition plan.

    With a sense of urgency and a large sum of cash, an aircraft acquisition can be completed rather quickly. However, without a plan or the right team in place, these types of scrambles typically result in the wrong aircraft for the job, or just simply picking the wrong aircraft. To avoid the headache from an impulse purchase, you need to build a business aircraft acquisition plan.

    To begin, there are two fundamental reasons for acquiring new or different aircraft:

    1. The current aircraft can no longer perform the mission, or
    2. The current aircraft is no longer the most cost-effective solution.

    Changes in mission need to be quantified. As an example, one client in the Eastern US started flying shorter trips with fewer people. Their eight-passenger jet, with a 1,800nm range, was more than they needed.

    Instead, they found that a five-passenger airplane that’s more efficient on short trips might be the next aircraft for them.

    But how can you quantify what it is that you need and want? Economics are critical. The cost of an aircraft is more than the acquisition price alone. It encompasses the total costs needed to operate the aircraft and allow for a future residual value.

    As an example, a single aircraft that meets 98% of usage requirements may cost far more than an aircraft that meets 85% of your needs with a supplemental jet card, charter or fractional solution in place for the remaining 15%.

    What Should Your Acquisition Plan Include?

    It is important for you to understand what it costs to own and operate the aircraft – and this will all come into your acquisition plan. So, what should your acquisition plan include?

    An aircraft acquisition plan must (at a minimum):

    • Identify, quantify and differentiate your needs and wants;
    • Identify and rank the possible aircraft types by mission capability; and
    • Analyze all the costs involved with the aircraft.

    Your plan should be void of emotional issues and stay as far from subjective criteria as possible. To help in this respect, you will need someone who can ask the tough questions and assist with an unbiased analysis of the candidate aircraft.

    Consultants may offer the unbiased review that you initially need, and their feedback will need to cover both technical and financial aspects of the aircraft acquisition.

    Who Should be on Your Acquisition Team?

    As you proceed with the acquisition you need to add expertise across several fields to your team. Tax planning should begin well before the purchase, not after the closing, meaning that you will need to hire someone familiar with taxes as they apply to aviation.

    You will also need to consult a qualified aviation attorney to ensure that the contracts are appropriate and that the various regulatory issues are addressed. A document that looks good from a basic business perspective may not be legal in the eyes of the FAA or other aviation authority.

    Don't overlook the insurance broker, who will need to be kept informed as to when and how the aircraft is to be used. (For example, if the aircraft is to be placed on a management agreement, who and how are each of the parties to that agreement going to be covered?)

    You will also need an aircraft sales professional, who will ideally have an excellent understanding of the aircraft sales market — what the availability is; lead times for various models; who to contact about pre-buy inspections and appraisals; and how long it could take to dispose of your current aircraft.

    Moreover, the aircraft sales professional you hire will need all the qualities required to be an excellent facilitator, since their job will also be to make sure the deal closes and that all parties are happy.

    Additional Planning When Buying New…

    Moreover, if you are buying a new aircraft, specifying all the options, picking out paint, and choosing an interior may take a minimum of six months and may well require the services of additional advisors.

    In Summary…

    Think of your business aircraft acquisition as a “time-is-money” deal. That is, if you don’t have much time, you’ll probably spend even more money! If you are looking to close a deal by the end of this year, you need to be looking seriously right now, and investing in all of the right areas to ensure your acquisition plan results in the right aircraft, at the right cost, at the right time.

    This article was originally published by AvBuyer on October 25, 2019.

  • Tracey Cheek posted an article
    How Much Cash On Hand Do I Really Need? see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses how much reserve cash you really need to qualify for an aircraft loan.

    Determining how much cash a potential borrower needs on hand to finance an airplane is not as cut and dried as it is with automobile financing. When it comes to aircraft financing, it’s best to think of aircraft loans as individually tailored transactions, based on a variety of factors that influence cash reserve requirements. 

    Among these factors are: How much money is being borrowed?  How does that figure relate to one’s overall net worth? What is the person’s financial "lifestyle”? How complex is the aircraft? What is the remaining useful life of its engine(s)? And what is the loan-to-value ratio?

    In an ideal transaction, a lender may require only enough cash on hand to satisfy the down payment. In contrast, the lender may ask the borrower to provide evidence of liquidity to cover 24 months of global cash flow. For instance, a business owner wants to purchase an aged, high performance, complex piston twin with freshly overhauled engines. He has personal and business debt for which he’s responsible that totals $10,000 monthly. Depending upon his other financial obligations, the lender might require the business owner to have as much as $240,000 on hand.

    That same business owner might wonder if the liquid assets of the business in which he has a stake can be used to satisfy the cash reserve requirements for the loan. Not without a guarantee from that business. 

    Other similar situations include:

    1. An individual whose liquid assets are held jointly with their spouse, but who is applying for a loan without the spouse. Some lenders might only consider half of those assets.
    2. Assets held in trust where the trust is legally incapable of guaranteeing on a loan will not be considered

    Sometimes determining questions are intertwined. For example, a person buying a turboprop is probably seeking a larger loan than a person looking to finance a single engine, fixed gear piston. In this instance, the size of the loan, the loan-to-value, and the complexity of a turboprop aircraft will indicate a need for greater on hand cash reserves.

    How about a person living in a $120,000 home that's fully paid for versus one living in a five million-dollar home that's fairly-well leveraged, both seeking to buy a ten-year old Cirrus SR/22? What might their individual cash reserve requirements look like? If the homeowner with 100% equity has sporadic income, the lender may require more on hand than the highly-leveraged homeowner who has a predictable, consistent monthly income stream.

    And let’s be clear: “Cash” means liquid assets such as hard currency or marketable securities in your name, or in the name of the borrowers and/or guarantors. In certain situations retirement accounts could be considered liquid as well. “Cash” does not mean Bitcoin or other cryptocurrencies, furs, Rolex's, collectible cars, baseball cards or other memorabilia.

    All of this may seem pretty daunting. But a conversation with an AOPA Aviation Finance  (AAF) adviser can help inspire confidence. Our assessment of your finances will give you a good understanding of how much in cash reserve a lender might require you to have. If you’re buying an aircraft for the first time, we know you’ve done a lot of research. We fill in the gaps and simplify the nuances. For folks transitioning from a non-pressurized, piston aircraft to a turboprop, AAF can offer clarity over the significantly greater reserve and cash flow requirements of turbine ownership.

    Regardless of the aircraft type, an aircraft with engines closer to overhaul will increase cash requirements compared to an aircraft with freshly overhauled ones.

    A discussion of your debt-to-income ratio will provide a reasonable idea of how much cash on hand a lender will expect you to have initially. If that ratio is on the low side, then the liquidity requirements will most likely be less stringent than those for a person with a higher ratio.

    This article was originally published by AOPA Aviation Finance Company on September 4, 2019.

  • Tracey Cheek posted an article
    Buying a Foreign Aircraft and Importing It see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, shares what you need to know when purchasing and importing a foreign aircraft.

    Buying an aircraft is a complex transaction. Buying one from outside the United States and importing it only adds to the complexity. Paperwork and timing are two major aspects of a domestic deal that can become complicated with foreign transactions and the importation process.

    For instance, in the United States there’s only one place to go to verify aircraft records--the Federal Aviation Administration (FAA). Assuming an aircraft has spent its entire history in the United States, most reputable title companies should be able to ferret out any claims impacting the title by performing a quick title search.

    By contrast, in Canada, for example, there is no central source for determining an aircraft’s chain of ownership. Aircraft registration in that country is done at the regional level. There are many different provincial and territorial level queries that would need to be done to ascertain whether there are any claims outstanding on Canadian-owned aircraft.

    Every country has its own, distinct registration process. Unfamiliarity with a country's aircraft registration procedures can significantly impede the timing of the transaction and increase the paperwork. It should be mentioned that the International Registry (IR) was originally intended to help address this issue. However, the IR falls significantly short in providing certainty of a clear chain of title, even on those aircraft it covers.

    Aircraft pre-purchase inspection is another potential minefield. AOPA Finance recently stepped in to help somebody who had imported a plane without setting up a thorough Purchase and Sale Agreement (P&S). The two parties agreed the seller would fly the plane to the United States. Both also agreed the buyer could have an annual inspection performed by the buyer’s A&P as part of the pre-purchase inspection. During the annual, the buyer’s mechanic discovered several issues with the aircraft.

    A dispute arose over which country’s definition of airworthiness took precedence. The seller believed the aircraft was airworthy when it departed his country. The buyer’s mechanic begged to differ. So both the plane and the deal were in pieces. To add insult to lack of planning, the lender refused to release funds until somebody signed off that the aircraft was airworthy.

    In the United States, that somebody is the FAA’s designated airworthiness representative (DAR). Not only does the DAR control that aspect of the transaction, this person also oversees the de-registration and registration process. Every country also has their equivalent, which means there are options on how to proceed. Whichever course is chosen, it involves getting on the DAR's calendar, and paperwork.

    Other details to be resolved include: In which country will the plane be de-registered? How will it be flown or ferried into the United States? Where and how will it clear U.S. Customs? And how will the aircraft be re-registered?

    Our advice is to hammer out a rock-solid purchase and sales agreement before embarking on your journey. Clearly spell out all the details to make sure expectations are realistic. Have the P&S elaborate what’s going to happen, when and who is going to take care of which parts of the process. Have it specified when the money will become non-refundable, when the entire amount of the loan is funded into escrow, and when those funds will be released to the seller.

    Disputes happen. Lay out what the dispute resolution process will be. Clarify the logistics of when and where the aircraft will be de-registered and subsequently re-registered. Specify the time period for the designated airworthiness representative to inspect and deem the aircraft airworthy by U.S. standards.

    Our other piece of advice is to get title insurance. It doesn’t cost a lot on the one hand, and on the other hand, having a U.S.-based title insurance company to defend you if something does occur is more than worth the cost. Don’t skimp on this item. Get title insurance.

    AOPA has a plethora of online resources. We also can be helpful through our Legal Services Plan. We’re not the only ones. There is a small industry of other aviation professional service providers out there who are in the business of importing aircraft. Our goal is to provide an understanding of the process and help set expectations. Buying a foreign aircraft and importing it is absolutely a case where hiring professional service providers can only benefit you.

    This article was originally published by AOPA Aviation Finance Company on May 28, 2019.

  • Tracey Cheek posted an article
    Adam Meredith, President of AOPA Aviation Finance Co., shares helpful steps when financing aircraft. see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, shares helpful steps when financing your aircraft.

    AOPA Aviation Finance and our experienced and trusted specialists can assist you in making your purchase by offering a wide array of financing options that are tailored to your specific needs. 

    Here are eight steps to help you start flying: 

    Gather Supporting Documents

    Gather your tax returns, financial statements, and personal net worth information for submission with your application to speed up the process. The fastest approvals are applications where W-2's are submitted with no business ownership, usually within 1-2 days. Additional approval time may be required for applicants with business entities.

    Complete an Application

    Fill out the application as completely as possible to avoid a delay in processing and remember to provide an original signature on the application before submitting it through the online portal. 

    Get Approved or Pre-Approved Quickly

    Once your application package is complete, your account executive and analyst will identify and select the best lender based on your aircraft selection, usage, loan structure, and financial history. 

    Still Shopping?

    A pre-approval ensures that:
    - You don’t lose the aircraft of your dreams due to lack of financing.
    - Your loan closes quickly. 
    - You have 90 days to decide on your aircraft with the rate locked for 30 days.

    Negotiate a Balanced Purchase and Sales Agreement

    Don’t just sign anything given to you by the seller, have someone familiar with the process review to ensure it’s balanced. The purchase and sales agreement is a binding legal document that sets the sales price and all conditions to close, including time to complete pre-buy, time to complete transaction, how and where escrow and deposit are held, and who pays to move the aircraft, etc.

    Schedule a Pre-Purchase Inspection

    We highly recommend a pre-buy inspection by an independent 3rd party to avoid any surprises and conflict of interest once you take ownership of the aircraft.

    Typically, the prospective buyer pays to re-position the aircraft for the pre-buy, and the seller pays for correcting any maintenance issues relating to airworthiness. 

    Set Up Escrow and Review Fees

    AOPA members pay no broker fees!  Members will, however, need to open escrow with a lender approved title and escrow company to ensure proper closing and will include a title search. Normally, fees are based on the aircraft’s sales price and are split by the buyer and seller.

    Lender closing costs are based on the aircraft and purchase price and are used to cover hard costs such as background checks, credit bureaus, overnight fees, loan documentation, and legal review.

    Obtain Insurance

    Hull and liability insurance coverage is required by lenders, AOPA members can get discounted rates through AOPA Insurance. Your account executive will gladly refer you to an agent for a quote.

    Prepare for Closing

    Once you have selected a closing date, be prepared to find a notary to notarize documents and leave time for overnight packages to be sent back and forth as some documents require a “wet signature”.

    This article was originally published by AOPA Aviation Finance Company on August 5, 2019.

  • Tracey Cheek posted an article
    Maintaining Objectivity in a Subjective World see more

    NAFA member Tony Kioussis, President of Asset Insight, discusses an appraiser's function in the valuation of an aircraft.

    We occasionally receive telephone calls that start with (what we call) the famous 4 words: "This can't be right." The caller then proceeds to explain why the figures displayed by eValues, our automated valuation system, do not match their view of the world, and the implied - if not stated - expectation is that we will correct the transgression. Knowing the artificial intelligence program running eValues is not infallible, we try to listen very carefully to ensure we understand the caller's issue. We then point out the objective path that led to our system's conclusion. 

    Most people understand that an automated system looks at everything with complete objectivity, yet some clients cannot help but "feel" that our conclusions are wrong. Feelings are fine. The problem is they provide a subjective viewpoint. Our goal is to minimize the subjectivity to the maximum extent possible, and we have programed eValues to think the same way. Subjectivity is a very slippery slope that an appraiser can follow to an unsupportable conclusion. We know. We have encountered some of these folks during expert witness testimony and their 'feel" did not serve them, or their clients, well. 

    Take, for example, aircraft exterior paint. The Asset Insight Maintenance Rating scale ranges from -2.500 to 10.000, and the rating for new paint objectively depreciates to 0.000 over 7 years. Why? Because in speaking with numerous paint facilities, that has ben the average life expectancy of aircraft paint and styling. The paint on any specific aircraft could (and many times does) exceed 7 years of service, but odds are that a buyer will adjust their offer price for the cost to repaint the aircraft if its paint looks marginal, or if the paint scheme is dated.

    We once had a discussion with an owner who believed his aircraft's paint should be rated at an 8, even though more than 15 years had elapsed since the aircraft was last painted, because the aircraft had been kept in a hangar. Well, the aircraft didn't do any of its flying inside of the hangar, but it certainly experienced the elements that affect paint, such as rain, sleet, hail and UV rays from the sun each time it flew a mission.

    Next is the issue of an aircraft's interior condition. Again, there are those who will rate their aircraft's interior much higher than the 0.000 it achieves when it has aged more than 8 years. The interior's condition could be good, but styles change, and interior colors and schemes become dated. The colors that were prevalent some years ago are probably out of fashion today, and even the TV monitors may need to be replaced with high-definition units. 

    Notice that we are not suggesting that the paint was peeling, the interior fabrics were torn, the leather was worn, or the wood on sidewalls and table-tops was damaged. In fact, the paint and interior may be perfectly acceptable to the current owner and the prospective buyer. However, unless transaction prices allow us to value the asset higher, the only objective basis that intelligence, human or artificial, can rely on is the facts. 

    Another client valuation angst is the market depreciation pace of cockpit and passenger cabin "technology," which is often valued lower than some people "feel" it should be. What many are not considering is the pace of technology obsolescence. Avionics manufacturers, along with cabin communication system OEMs, are introducing new equipment every few years. Considering capability and dependability - not to mention safety - improve with each iteration, values of aircraft not equipped with the latest technology can depreciate more rapidly than "feels" fair. But is that not to be expected? 

    Consider a scenario where you install a new avionics suite after its technology has been available for some time. A couple of months later a more advanced system is introduced, and many aircraft owners adopt it for the make/model aircraft you operate. While perhaps unfair, sellers of these newly-equipped aircraft are likely to expect more (and buyers are likely to pay more) for those assets, at the expense of aircraft equipped with your less capable system.

    One item with the potential to dramatically alter an aircraft’s value is Hourly Cost Maintenance Program (HCMP) enrollment, and the amount of value change can be influenced by several factors, and the specific level of coverage the program provides is certainly an important one. More than one level of coverage is often made available by the OEM, and there are independent companies offering such programs with differing levels of coverage. Another important factor is a program’s transferability. If it cannot be transferred at time of sale, the program holds no value for the purchaser.

    However, the primary HCMP value driver is the actual differential between what buyers are willing to pay, by make/model, for aircraft enrolled on HCMP compared to those not enrolled on a program. Also, if only 20% of your make/model fleet is enrolled on a program, don’t expect the value increase to be dramatic. On the other hand, if 80% of your make/model fleet is enrolled on a program and your aircraft is not, expect a value deduction on your asset. Why? Because your aircraft’s specification relative to HCMP coverage is clearly not preferred by most buyers. You may find a buyer who does not wish to acquire a HCMP-covered aircraft, just like you may find a buyer willing to acquire an aircraft sporting an outlandish paint scheme. However, rest assured, if they are an experienced buyer, their offer will more than likely reflect your asset’s HCMP coverage status.

    By way of seeking an increase in their aircraft’s valuation, some HCMP-covered aircraft owners point to the higher Ask Prices often sought by sellers whose aircraft are enrolled on a specific level of HCMP coverage. Regrettably, higher Ask Prices do not always translate into higher Transaction Values – the only relevant figure when it comes to valuing an aircraft.

    Lastly, maintenance condition can be a serious value driver – particularly following a major airframe inspection or engine work. While some owners “feel” that an aircraft’s valuation should increase by an amount equal to the average cost of a major maintenance event, that is usually not possible. In fact, the value applied to maintenance events will decrease over time, as will the value applied to the other items mentioned in this article, including HCMP coverage.

    As an aircraft ages, there will come a time when an engine overhaul, or even a major airframe inspection, will be more expensive than the aircraft market value. The asset’s owner may elect to invest $1 million for a double-engine overhaul, and prospective buyers may become preferentially fond of this aircraft, but that does not mean a “willing buyer” will be found who will pay $1 million above the $300k to $400k transaction price range achieved by aircraft of this make/model.

    Individually, most of these items are likely to have a negligible effect on an aircraft’s value – excepting HCMP coverage. As a group, however, even if only some of them are misinterpreted or computed by “feel,” the consequences can be an illogical and erroneous conclusion.

    An appraiser’s function is to provide “an opinion of value.” Thus, valuing an aircraft higher or lower for some specific reason is well within their job description, and their purview. At Asset Insight, when computing a figure (except in the case of an eValues calculation), we try to ensure that “reason” is based on objective factors to the maximum degree possible, just in case we’re asked to support our conclusion through expert witness testimony.

    This article was originally published in Professional Pilot Magazine, May 2019, p. 14

  • Tracey Cheek posted an article
    Preparing for an Aircraft Purchase: How to Become the Most Prepared and Qualified Buyer see more

    NAFA member, Amanda Applegate, Partner at Aerlex Law Group, shares tips on how you can become the most prepared and qualified buyer when purchasing an aircraft.

    As the supply for quality pre-owned aircraft inventory has begun to shrink (especially in certain large cabin models), I see more buyers devoting time to advance preparations to ensure that they are perceived by sellers as the most qualified, attractive buyer. If you are in the market for an aircraft and want to expedite your purchase and closing, consider taking the following steps prior to making your first offer.

    BUILD YOUR ACQUISITION TEAM EARLY & PRIOR TO THE FIRST OFFER
    Aircraft Broker/Consultant – Select a consultant or broker who knows the global market for the aircraft type you are purchasing. The broker/consultant must also be respected among his peers. There are certainly instances when an offer is not taken as seriously if the broker representing the buyer lacks experience with the particular category of aircraft being sought or has had previous conflicts with the broker on the other side.

    Aviation Counsel – Retain counsel in advance so she is ready to jump into a deal once the aircraft is selected. This will save valuable time later. Including a provision in the Letter of Intent (“LOI”) that the buyer will have an initial purchase agreement to the seller within three days of signing of the LOI will be very appealing to a seller. But this can only happen if aviation counsel has already been identified, retained, and is up-to-speed on the specifics of the deal.

    Technical Representative – Hire the right technical expert so that he is ready to start immediately once the aircraft is identified. The technical representative will review aircraft maintenance records and identify any inspection items that must be rectified. The technical representative can also help determine which aircraft is the best aircraft to make an offer on, based on aircraft pedigree.

    Lender – As in all transactions, sellers prefer cash deals. But if the aircraft is going to be financed, contact lenders and select a lending partner before a specific aircraft is chosen so that lenders are able to close quickly once the aircraft is identified.

    Management Company – Is the aircraft going to be managed by a third-party provider? Will charter be allowed on the aircraft when not being used by the aircraft owner? Selection of a management company early in the process means you will have the management company acting as your advocate throughout the acquisition. Many management companies don’t start charging management fees until the aircraft is acquired, so there is valuable advice available at little cost by selecting early.

    Insurance Broker – Decide if the insurance will be procured through the management company or if you need an insurance broker to provide the comprehensive coverage to diminish liability concerns.

    Escrow Agent – Identify your escrow agent and obtain their wire instructions so you are ready to send a deposit as soon as you have an accepted LOI. This demonstrates to the seller that you are a committed buyer.

    ESTABLISH YOUR OWNERSHIP STRUCTURE

    Your aviation counsel can help you determine the following: What entity will own the aircraft? Does the proposed structure make the most sense, based on the intended use of the aircraft and the potential tax implications for those who will use the aircraft? Is the ownership structure legal under the Federal Aviation Regulations?

    Retain a qualified aviation tax attorney and CPA who can review the ownership structure to make sure it is the best tax-plan available. 

    What are the sales and use tax consequences of the ownership structure?

    Are there adequate liability protections under the ownership structure or at least adequate insurance for all parties involved in the ownership structure?

    DON’T SWEAT THE SMALL STUFF

    There are a number of miscellaneous items that often get negotiated in the LOI and purchase agreement. These items comprise a small amount of the overall transaction cost, and having flexibility on them may make your offer stand out. Understanding the cost of these items and your position on them before the LOI may allow your offer to appear more competitive than another offer. One approach is to have the seller pay all of these costs and then adjust the purchase price higher since that is the number the seller will most likely focus on. Some of the small items are Escrow Fees, Aircraft Movement Costs, Customs and Registration Change Fees (if applicable), and Registration Number Change Fees.

    Spending time and effort at the beginning of the aircraft acquisition process to prepare as much as possible, can lower the naturally-occurring stressors related to aircraft transactions.

    Please contact Amanda Applegate at 310-392-5200 or aapplegate@aerlex.com.

    This article was originally published in BusinessAir Magazine, May 2019, Volume 29, No. 5.

  • Tracey Cheek posted an article
    Tax Requirements on an Aircraft Purchase see more

    NAFA member Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about tax requirements when purchasing an aircraft.

    Question: I purchased a plane last year utilizing AOPA.  One thing I was not made aware of until later in the process is that required sales tax (I live in TX) could not be included in the loan so I had to give up almost $7k which I was going to use ADS-B compliance.  No one seems to talk about that. Is that normal?

    Answer: The tax requirements on an aircraft purchase can vary drastically from state to state. Since lenders do not roll taxes into the financing, AOPA Aviation Finance does not typically get involved with tax questions. Often times the selling broker will account for sales tax but we always recommend consulting your CPA or a tax attorney. AOPA’s Pilot Protection Services has attorneys on staff and panel attorneys throughout the country that can assist members with such questions. Members of the PPS plan receive a free 30-minute consultation annually along with a number of other benefits.

    Have questions for Adam? He is happy to answer them. Submit your questions here. Great rates. Great terms. Helpful and responsive reps. Three good reasons to turn to AOPA Aviation Finance when you are buying an airplane. If you need a dependable source of financing with people who are on your side, just call 800.62.PLANE (75263) or click here to request a quote.

    This article was originally published by AOPA Aviation Finance Company on March 28, 2019.

  • Tracey Cheek posted an article
    Airplane Acquisition Checklist Series: Part Two: Purchase and Delivery see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, follows up with part two of the Airplane Acquisition Checklist covering Purchase and Delivery.

    In Part 1 of this series on airplane acquisition, we discussed the most efficient way to approach buying an aircraft by using three checklists—Pre-purchase, Purchase and Aircraft Delivery. We also detailed the Pre-purchase Checklist.

    You're now staring at your ideal airplane on your screen. Time to run the Purchase Checklist:

    • Escrow, Letter of Intent and Purchase Agreement
    • Notify Lender
    • Pre-purchase Inspection
    • International Registry (if applicable)
    • Insurance
    • Title Search and Background Checks

    Escrow, Letter of Intent and Purchase Agreement. Escrow appears in all three checklists. Before it was a reminder to get your down payment together. Now it triggers you to move money into an escrow account that you set up through your escrow agent. If you're unfamiliar, AOPA has a strategic partnership with Aerospace Reports and as a member you’ll get discounted pricing and we can help get things set up. Likewise, if you’re working with another escrow company AOPA Finance can help coordinate that too. Plan on a deposit of 5%-10% of the aircraft's asking price.

    The letter of intent puts a clock on the deal, enables you to withdraw from it without penalty under certain conditions you and the seller negotiate, and establishes the parameters for the final price.

    This is also time to have your aviation attorney to draw up a detailed purchase agreement. If you don't have one, AOPA has a sample purchase agreement you can view here. You may want to consider signing up for Pilot Protection Services which includes consultation with an attorney regarding your purchase of an aircraft specific to your state and the legal requirements there. What it covers includes, but is not limited to, purchase amount, refund terms, deadlines for the process, representations and warranties, even the location of aircraft delivery.

    Notify Lender. The sooner you notify the lender, the sooner the lender can convert the pre-approval into an approval. Your lender will conduct background checks, damage history queries, etc. If the aircraft is missing logbooks, that may affect the stipulations of the pre-approval with the lender. Each has a set of tolerances for missing logbooks. Ask before you commit to a particular lender. AOPA Finance may be able to help.

    Pre-purchase Inspection. Even before you go to the airplane, have the logbooks sent to you. Nowadays, most sellers have their airframe and engine logbooks scanned into PDF format for ease of emailing. Get your mechanic started perusing those logs. You and your lender will want to know whether the logbooks are complete as soon as possible. An incomplete set can frequently impact the final price, and it may also affect the plane's insurability.

    In most instances, it's best that a mechanic other than the regular mechanic for that airplane perform the pre-purchase inspection. That may mean flying your assigned A&P to the airplane's location, with a hotel stay.

    International Registry. If your plane is subject to the Cape Town Treaty (see here for more info), you should begin the International Registry process simultaneously with contacting your escrow agent. It's complex and time-consuming and may affect the timing of your closing date. Subject to some exceptions, an aircraft must be registered with an appropriate aviation authority before it can be legally operated in any country. Suffice it to say, better to have your team of experts handle this checklist item.

    Insurance. As far as your lender is concerned, typically, they’ll require you to maintain full ground and flight insurance, as well as "Breach of Warranty Coverage" for the amount of the loan with a carrier acceptable to the lender.

    The lender must be named as "loss payee" and be protected by a "lien holder's endorsement." Once you have been placed with the appropriate lender, we will send you the specific insurance requirements for that lender.

    Title Search and Background Checks. Usually, this will be a straightforward process. If a plane has been in an incident, involved in an estate dispute or part of a bankruptcy, though, then things could get complicated. Your prospective insurer, your lender and your escrow agent may all play a part in these searches and checks. We've heard too many stories of airplane deals falling through at the last minute because of lack of due diligence by the buyer, so be thorough.

    All that complete, what's left is to take delivery. There's one last checklist to run—the Aircraft Delivery Checklist:

    • Punch List
    • Technical Acceptance
    • Escrow
    • Closing and Delivery

    Punch List. Here's where the due diligence of your title, escrow or insurance representatives pays off. They'll work with you to clear up any liens or estate claims. Similarly, the list of deficiencies and discrepancies your mechanic delivered will have been either rectified or negotiated into a lower price.

    Technical Acceptance. Once the Punch List is complete, the buyer then executes and delivers a Technical Acceptance Certificate to the seller. This says the buyer accepts the condition of the aircraft, subject to "no material damage and/or total loss affecting the aircraft upon or prior to arrival of the aircraft at the delivery location." The deposit usually becomes non-refundable at this stage.

    Escrow. The remaining purchase price is deposited into the escrow account, and the seller is paid.

    Closing and Delivery. The title is transferred and the aircraft is registered to the new owner, once the new owner insures it. Finally, the aircraft is turned over or delivered to you. Congratulations.

    Considering aircraft ownership? AOPA Aviation Finance will make your purchase experience as smooth as possible. For information about aircraft financing, please visit the website (www.aopafinance.com) or call 1-800-62-PLANE (75263).

    Click here for The Acquisition Checklist: Part One

    This article was originally published by AOPA Aviation Finance Company on March 5, 2019.

  • Tracey Cheek posted an article
    Tip to Tail—Buying New vs. Used Bizjets see more

    NAFA member David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, shares what you need to know when buying a new versus used business jet. 

    Purchasing a new business jet from the manufacturer (OEM) is a far different transaction than buying a used aircraft from a private third party. And planning for aircraft ownership is also part of this story.

    The contrast in new versus used aircraft is especially pronounced when the used aircraft does not comply with the FAA’s January 1, 2020 Automatic Dependent Surveillance-Broadcast (ADS-B Out) mandate. The lack of ADS-B Out compliance almost certainly will alter the negotiation for such used aircraft and, if the aircraft is not compliant by 2020, it could morph into a fancy paperweight. New OEM aircraft already comply with ADS-B Out requirements.

    This blog covers a few significant strategic, legal, and negotiating differences relating to new and preowned aircraft sale deals and briefly touches on ownership tax planning, risk management, regulatory compliance, and financing/leasing. This blog also briefly touches on OEMs’ perspectives on negotiation and dispute resolution.

    WHAT'S FOR SALE?

    The big-money aspects of a new aircraft deal start by selecting the right aircraft from the OEM and negotiating the aircraft purchase price. Unlike used aircraft deals, OEM agreements include terms on such items as upgrades, installment payment amounts, and pilot and technician training.

    The used aircraft market enjoyed a record year of sales in 2018 that depleted much of the desirable inventory. However, some experts suggest that the cost of ADS-B equipage and a slowing global economy may cause more used aircraft to come to market in the near term; and the lack of ADS-B Out technology may prolong or complicate buy/sell negotiations even if more aircraft become available.

    When purchasing a new or used aircraft, the parties should engage a team of knowledgeable business aviation experts, consisting primarily of an experienced aircraft broker, a technical inspector/analyst, accounting tax advisor, aviation counsel, aircraft management company, insurance broker, and capable title company or special FAA counsel. A non-aviation participant on the buy or sell side can make transactions more difficult or inefficient for experienced buy/sell teams and their principals.

    Every used aircraft should (but surprisingly does not always) undergo a “pre-buy” inspection before a purchase occurs. The inspection should involve technical experts that delve into the records of the aircraft, ADS-B Out compliance, and the physical/mechanical condition of and required repairs to the aircraft. Counsel should conduct or order title, lien, and other searches at the FAA and on the International Registry with a focus on understanding the domestic and any international ownership since birth of the aircraft.

    For new OEM aircraft, the pre-buy inspection process is dissimilar to preowned aircraft, so much so that OEMs often say that an independent inspection of a factory-new aircraft is unnecessary and the OEM can handle everything from contract to delivery.

    Although some purchasers accept exclusive OEM oversight, all purchasers should still consider engaging a technical expert to interact with the OEM’s teams and inspect the aircraft during construction, knowing that OEMs usually will facilitate such inspections but with appropriate limits. Fundamentally, the expert can assure the purchaser that the aircraft conforms to the agreed specifications and the OEM delivers the aircraft in pristine condition. Also, the parties should always conduct legal diligence similar to a used aircraft sale.

    CONTRACT NEGOTIATIONS AND DISPUTE RESOLUTION

    Contractual provisions for used and OEM purchases have some common terms as well as major differences. OEMs believe the form of purchase and sale agreement they provide to their customers works well with few changes. Consequently, the extent of document revisions negotiated and accepted by an OEM may, but not always, pale in comparison to extensive changes drafted into used aircraft purchase agreements.

    OEM contracts personnel, most of whom are not lawyers, have flexibility to make reasonable contract revisions, but their authority has well-honed limits. For example, their authority probably does not extend to accepting unusual revisions, settling a dispute, or altering fundamental OEM liability protections. Accordingly, purchasers should expect these contracts people to seek authority from senior managers or general counsel for revisions to obtain policy or legal guidance on an acceptable contract revision or dispute management.

    For OEMs, each customer and its sale agreement is unique. As such, OEMs uniformly frown on aviation counsel using as precedent sale agreement provisions negotiated in other unrelated transactions with the selling OEM or other OEMs. However, aviation counsel can add value in serving their clients by using their prior experiences to negotiate appropriate terms in the current deal.

    If a customer alleges material breaches by or makes serious litigious claims against the OEM, most OEM general counsel or his/her inside litigation counsel step in and try to reach an accommodation or, if necessary, circle the wagons to protect the OEM’s interests.

    OWNERSHIP PLANNING

    Under the Tax Cuts and Jobs Act of 2017, buyers of new aircraft, like used aircraft buyers, may use 100 percent bonus depreciation if the aircraft buyer qualifies for the tax benefit. Planning for ownership is critical to successful tax structuring. For more, read AINsight: 100% Depreciation and Aircraft Personal Use and AINsight: Maximize Aircraft Bonus Depreciation in 2019.

    A purchaser of a new aircraft can potentially obtain a financing benefit that does not apply to used aircraft. Lenders and lessors often agree to fund installment payments to the OEM as the OEM invoices the customer during construction and upon delivery of the aircraft. In addition, these lenders or lessors are often willing to convert the installment payment arrangement into a long-term loan or lease. Either financing or leasing provides substantial benefits to the parties but requires some additional effort to negotiate the agreements. For more, read  AINsight: Should You Finance or Lease a Bizjet?.

    Business aviation insurance brokers not only place appropriate insurance coverage but also can negotiate effectively with aviation underwriters. Purchasers of used and new aircraft generally understand that insurance is a crucial piece of protecting themselves from liability and property damage. However, they may not fully appreciate that a limited liability company (LLC) that buys the aircraft may not provide the LLC owner with the anticipated liability protection. For more, read AINsight: Piercing the Aircraft LLC Veil.

    Operations of private aircraft under Part 91 (private use) or Part 135 (charter use) in the U.S. demand compliance with the applicable regulations by owners and operators of all aircraft. For example, owners of all aircraft must keep their aircraft in the condition required by the applicable regulations for flight operations, not conduct illegal charter operations, and meet technology requirements, including ADS-B Out. Importantly, the FAAis looking for violators of the regulations, in part as described in AINsight: FAA Actively Pursues Illegal Flight Ops.

    Although purchase transactions of new and used aircraft share certain similar elements, they differ in significant respects. Assisted by knowledgeable professionals, a purchaser can and should address business, tax, financing/leasing, risk management, and regulatory issues as part of each deal. A reasonable and pragmatic approach to these transactions should foster amicable negotiations and ultimately produce the right travel solution for the purchaser.

    This article was originally published by AINonline on May 9, 2019.

  • Tracey Cheek posted an article
    Aircraft Transactions see more

    NAFA member YYZlaw discusses the three main categories of aircraft transaction agreements.

    Aircraft transactions are complicated processes that require detailed knowledge of aviation regulations, business practices, taxation of aircraft assets, and international law – knowledge that YYZlaw has been steadily building over many decades. These processes can be boiled down to three main categories of agreements: i) contracts of purchase and sale, ii) lease or finance agreements, and iii) aircraft management agreements.

    Contract of Sale Negotiations – Aircraft Purchase Agreement

    The acquisition of an aircraft, whether for business or personal use, requires consideration of multiple financial, regulatory and transactional components. Depending on the types of parties involved, different risk considerations will need to be assessed.

    When dealing with Original Equipment Manufacturers (OEM) such as Bombardier, Dassault, Embraer, Gulfstream, Textron, etc., it is important to ensure that the deal negotiated between the OEM and the purchaser is adequately reflected in the ultimate aircraft purchase agreement. The negotiation and inclusion of allowances relating to maintenance and parts programs, initial and recurrent training offerings for pilots and aircraft maintenance engineers, and future trade-in options and upgrade eligibility need to be accounted for as well. Liquidated damages provisions in aircraft purchase agreements need to also be carefully assessed to ensure that such clauses are reasonable in the circumstances.

    When an aviation transaction doesn’t directly involve an aircraft or engine manufacturer and is concerning a pre-owned aircraft, the purchase negotiation will need to account for the validity of title and any registered or hidden defect in title. This process can be complicated where an aircraft is owned by a seller in one jurisdiction, with the aircraft registered in another jurisdiction, and the buyer being located in yet a third jurisdiction. At all stages it is important to be mindful of the taxation and importation challenges which need to be managed.

    In most aircraft purchase negotiations, the condition of the aircraft is assessed and verified through a pre-purchase inspection. Typically, this process doesn’t commence until the aircraft purchase agreement has been entered into, however, there are transactions that occur differently and which require customized legal structures to protect the interests of the parties. Despite any such pre-purchase inspection verification, the vast majority of transactions involving pre-owned aircraft make no representations or warranties other than those relating to the aircraft’s state of title.  These transactions are considered “as-is, where-is” transactions as the seller makes no warranties as to merchantability, functionality or fitness for purpose, and it remains entirely the obligation of the purchaser to satisfy itself as to the condition and functionality of the aircraft being purchased. To protect the purchaser, title and lien searches against the aircraft are recommended before the conclusion of the sale. Depending on the national state of registration of the aircraft, such searches may include domestic title/security registries (Personal Property Security Registry (PPSA) or the Quebec Register of Personal and Movable Real Rights (RPMRR)), and the International Registry. Finally, registration of the aircraft with the appropriate national civil aircraft authority is necessary before it may be operated, and it is our advice that the purchase of such assets is also registered on the International Registry. It is important to note that the ownership and lien status of a Canadian registered aircraft cannot be reliably determined by the information contained on the Canadian Civil Aircraft Registry (CCAR).

    All purchase negotiations, irrespective of the parties involved, must deal with various documents: A letter of intent, an aircraft purchase agreement and a warranty bill of sale are all typical documents, in addition to the establishment or maintenance of the corporate vehicle of the purchasing entity, if one hasn’t already been formed.

    Lease and Finance Negotiations

    The purchase of aircraft assets involves a high upfront capital investment; companies may either require financing or select to finance a purchase for various tax considerations. Depending on the risk profile and the lending institution, this aircraft financing usually takes the form of either an aircraft lease or a securitized loan. Certain financial institutions offer asset-based financing, while others assess an aircraft purchaser’s creditworthiness to make lending decisions. Regardless of the type of financing obtained for an aircraft acquisition, such financing will inevitably require consideration of the choice of law, and the repossession and enforcement rights available to an aircraft financier. While insolvency and delinquency are not ordinary occurrences, these are perhaps some of the most important provisions in a lending/lease agreement that must be ascertained, in addition to the economics of the deal. When purchasing an aircraft with financing, whether a lease or loan, restrictions may be placed on the aircraft in question and additional time is necessary to complete the transaction.

    Aircraft Management Negotiations – Aircraft Management Agreement

    While some private buyers are pilots or companies with existing in-house flight departments, most corporations require an aircraft management company to provide crew and maintenance services. YYZlaw can act as a liaison between the purchaser and the management company, ensuring that the company acquiring the aircraft asset fully understands its rights, fees and obligations under such aircraft management agreement. This document may also be referred to as an aircraft services agreement.

    While some companies have and wish to use an established in-house legal team, advice from a third-party expert, such as YYZlaw, can increase the efficiency of a transaction and provide assurance to both the seller and the purchaser from the letter of intent through to the delivery of the aircraft.

    This article was originally published by YYZlaw on June 22, 2018.

  • Tracey Cheek posted an article
    AINsight: Tip to Tail—Buying New vs. Used Bizjets, ADS-B Out, ADS-B, TCJA, aircraft transactions, see more

    NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, discusses unique perspectives of OEMs on negotiating sales and dispute resolution as well as planning for ownership.

    Purchasing a new business jet from the manufacturer (OEM) is a far different transaction than buying a used aircraft from a private third party. And planning for aircraft ownership is also part of this story.

    The contrast in new versus used aircraft is especially pronounced when the used aircraft does not comply with the FAA’s January 1, 2020 Automatic Dependent Surveillance-Broadcast (ADS-B Out) mandate. The lack of ADS-B Out compliance almost certainly will alter the negotiation for such used aircraft and, if the aircraft is not compliant by 2020, it could morph into a fancy paperweight. New OEM aircraft already comply with ADS-B Out requirements.

    This blog covers a few significant strategic, legal, and negotiating differences relating to new and preowned aircraft sale deals and briefly touches on ownership tax planning, risk management, regulatory compliance, and financing/leasing. This blog also briefly touches on OEMs’ perspectives on negotiation and dispute resolution.

    WHAT'S FOR SALE?

    The big-money aspects of a new aircraft deal start by selecting the right aircraft from the OEM and negotiating the aircraft purchase price. Unlike used aircraft deals, OEM agreements include terms on such items as upgrades, installment payment amounts, and pilot and technician training.

    The used aircraft market enjoyed a record year of sales in 2018 that depleted much of the desirable inventory. However, some experts suggest that the cost of ADS-B equipage and a slowing global economy may cause more used aircraft to come to market in the near term; and the lack of ADS-B Out technology may prolong or complicate buy/sell negotiations even if more aircraft become available.

    When purchasing a new or used aircraft, the parties should engage a team of knowledgeable business aviation experts, consisting primarily of an experienced aircraft broker, a technical inspector/analyst, accounting tax advisor, aviation counsel, aircraft management company, insurance broker, and capable title company or special FAA counsel. A non-aviation participant on the buy or sell side can make transactions more difficult or inefficient for experienced buy/sell teams and their principals.

    Every used aircraft should (but surprisingly does not always) undergo a “pre-buy” inspection before a purchase occurs. The inspection should involve technical experts that delve into the records of the aircraft, ADS-B Out compliance, and the physical/mechanical condition of and required repairs to the aircraft. Counsel should conduct or order title, lien, and other searches at the FAA and on the International Registry with a focus on understanding the domestic and any international ownership since birth of the aircraft.

    For new OEM aircraft, the pre-buy inspection process is dissimilar to preowned aircraft, so much so that OEMs often say that an independent inspection of a factory-new aircraft is unnecessary and the OEM can handle everything from contract to delivery.

    Although some purchasers accept exclusive OEM oversight, all purchasers should still consider engaging a technical expert to interact with the OEM’s teams and inspect the aircraft during construction, knowing that OEMs usually will facilitate such inspections but with appropriate limits. Fundamentally, the expert can assure the purchaser that the aircraft conforms to the agreed specifications and the OEM delivers the aircraft in pristine condition. Also, the parties should always conduct legal diligence similar to a used aircraft sale.

    CONTRACT NEGOTIATIONS AND DISPUTE RESOLUTION

    Contractual provisions for used and OEM purchases have some common terms as well as major differences. OEMs believe the form of purchase and sale agreement they provide to their customers works well with few changes. Consequently, the extent of document revisions negotiated and accepted by an OEM may, but not always, pale in comparison to extensive changes drafted into used aircraft purchase agreements.

    OEM contracts personnel, most of whom are not lawyers, have flexibility to make reasonable contract revisions, but their authority has well-honed limits. For example, their authority probably does not extend to accepting unusual revisions, settling a dispute, or altering fundamental OEM liability protections. Accordingly, purchasers should expect these contracts people to seek authority from senior managers or general counsel for revisions to obtain policy or legal guidance on an acceptable contract revision or dispute management.

    For OEMs, each customer and its sale agreement is unique. As such, OEMs uniformly frown on aviation counsel using as precedent sale agreement provisions negotiated in other unrelated transactions with the selling OEM or other OEMs. However, aviation counsel can add value in serving their clients by using their prior experiences to negotiate appropriate terms in the current deal.

    If a customer alleges material breaches by or makes serious litigious claims against the OEM, most OEM general counsel or his/her inside litigation counsel step in and try to reach an accommodation or, if necessary, circle the wagons to protect the OEM’s interests.

    OWNERSHIP PLANNING

    Under the Tax Cuts and Jobs Act of 2017, buyers of new aircraft, like used aircraft buyers, may use 100 percent bonus depreciation if the aircraft buyer qualifies for the tax benefit. Planning for ownership is critical to successful tax structuring. For more, read AINsight: 100% Depreciation and Aircraft Personal Use and AINsight: Maximize Aircraft Bonus Depreciation in 2019.

    A purchaser of a new aircraft can potentially obtain a financing benefit that does not apply to used aircraft. Lenders and lessors often agree to fund installment payments to the OEM as the OEM invoices the customer during construction and upon delivery of the aircraft. In addition, these lenders or lessors are often willing to convert the installment payment arrangement into a long-term loan or lease. Either financing or leasing provides substantial benefits to the parties but requires some additional effort to negotiate the agreements. For more, read  AINsight: Should You Finance or Lease a Bizjet?.

    Business aviation insurance brokers not only place appropriate insurance coverage but also can negotiate effectively with aviation underwriters. Purchasers of used and new aircraft generally understand that insurance is a crucial piece of protecting themselves from liability and property damage. However, they may not fully appreciate that a limited liability company (LLC) that buys the aircraft may not provide the LLC owner with the anticipated liability protection. For more, read AINsight: Piercing the Aircraft LLC Veil.

    Operations of private aircraft under Part 91 (private use) or Part 135 (charter use) in the U.S. demand compliance with the applicable regulations by owners and operators of all aircraft. For example, owners of all aircraft must keep their aircraft in the condition required by the applicable regulations for flight operations, not conduct illegal charter operations, and meet technology requirements, including ADS-B Out. Importantly, the FAAis looking for violators of the regulations, in part as described in AINsight: FAA Actively Pursues Illegal Flight Ops.

    Although purchase transactions of new and used aircraft share certain similar elements, they differ in significant respects. Assisted by knowledgeable professionals, a purchaser can and should address business, tax, financing/leasing, risk management, and regulatory issues as part of each deal. A reasonable and pragmatic approach to these transactions should foster amicable negotiations and ultimately produce the right travel solution for the purchaser.

    This article was originally published in AINonline on May 9, 2019.

  • Tracey Cheek posted an article
    Preparing For An Aircraft Purchase see more

    NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses how to become the most prepared and qualified buyer when purchasing an aircraft.

    As the supply for quality pre-owned aircraft inventory has begun to shrink (especially in certain large cabin models), I see more buyers devoting time to advance preparations to ensure that they are perceived by sellers as the most qualified, attractive buyer. If you are in the market for an aircraft and want to expedite your purchase and closing, consider taking the following steps prior to making your first offer.

    BUILD YOUR ACQUISITION TEAM EARLY & PRIOR TO THE FIRST OFFER

    Aircraft Broker/Consultant – Select a consultant or broker who knows the global market for the aircraft type you are purchasing. The broker/consultant must also be respected among his peers. There are certainly instances when an offer is not taken as seriously if the broker representing the buyer lacks experience with the particular category of aircraft being sought or has had previous conflicts with the broker on the other side.

    Aviation Counsel – Retain counsel in advance so she is ready to jump into a deal once the aircraft is selected. This will save valuable time later. Including a provision in the Letter of Intent (“LOI”) that the buyer will have an initial purchase agreement to the seller within three days of signing of the LOI will be very appealing to a seller. But this can only happen if aviation counsel has already been identified, retained, and is up-to-speed on the specifics of the deal.

    Technical Representative – Hire the right technical expert so that he is ready to start immediately once the aircraft is identified. The technical representative will review aircraft maintenance records and identify any inspection items that must be rectified. The technical representative can also help determine which aircraft is the best aircraft to make an offer on, based on aircraft pedigree.

    Lender – As in all transactions, sellers prefer cash deals. But if the aircraft is going to be financed, contact lenders and select a lending partner before a specific aircraft is chosen so that lenders are able to close quickly once the aircraft is identified.

    Management Company – Is the aircraft going to be managed by a third-party provider? Will charter be allowed on the aircraft when not being used by the aircraft owner? Selection of a management company early in the process means you will have the management company acting as your advocate throughout the acquisition. Many management companies don’t start charging management fees until the aircraft is acquired, so there is valuable advice available at little cost by selecting early.

    Insurance Broker – Decide if the insurance will be procured through the management company or if you need an insurance broker to provide the comprehensive coverage to diminish liability concerns.

    Escrow Agent – Identify your escrow agent and obtain their wire instructions so you are ready to send a deposit as soon as you have an accepted LOI. This demonstrates to the seller that you are a committed buyer.

    ESTABLISH YOUR OWNERSHIP STRUCTURE

    Your aviation counsel can help you determine the following: What entity will own the aircraft? Does the proposed structure make the most sense, based on the intended use of the aircraft and the potential tax implications for those who will use the aircraft? Is the ownership structure legal under the Federal Aviation Regulations? 

    Retain a qualified aviation tax attorney and CPA who can review the ownership structure to make sure it is the best tax plan available. What are the sales and use tax consequences of the ownership structure?

    Are there adequate liability protections under the ownership structure or at least adequate insurance for all parties involved in the ownership structure?

    DON’T SWEAT THE SMALL STUFF

    There are a number of miscellaneous items that often get negotiated in the LOI and purchase agreement. These items comprise a small amount of the overall transaction cost, and having flexibility on them may make your offer stand out. Understanding the cost of these items and your position on them before the LOI may allow your offer to appear more competitive than another offer. One approach is to have the seller pay all of these costs and then adjust the purchase price higher since that is the number the seller will most likely focus on. Some of the small items are Escrow Fees, Aircraft Movement Costs, Customs and Registration Change Fees (if applicable), and registration number change fees.

    Spending time and effort at the beginning of the aircraft acquisition process to prepare as much as possible, can lower the naturally-occurring stressors related to aircraft transactions.

    Please contact Amanda Applegate at 310-392-5200 or aapplegate@aerlex.com.

    This article was originally published by Aerlex on January 30, 2019.

  • Tracey Cheek posted an article
    IRS Record Keeping Requirements - Best Practices for Business Aircraft Owners see more

    NAFA member, Chris Younger, with GKG Law, shares timely tax tips for business aviation owners.

    As the April 15 individual income tax return filing deadline approaches, it is important to think of ongoing requirements regarding recordkeeping to support any business related deductions claimed on your tax return including those relating to aircraft ownership and operations.  As is the case with the governance of any operating business, owners of business aircraft must maintain adequate records to support the deductions claimed with respect to such aircraft. Furthermore, the records must be retained for a sufficient amount of time in the event they are needed in connection with an income tax audit.

    As a general rule, business aircraft owners should retain tax records for a minimum of six years following the date that the owner files the income tax return to which those records relate. Normally, the typical limitations period prohibits the IRS from challenging the contents of a tax return more than three years after it is filed.  However, in certain instances, such as where income is understated by a substantial amount, this time period can be expanded to six years.  There are exceptions to these general rules, such as where a taxpayer engages in fraud or fails to file a tax return. In those situations, there is no applicable statute of limitations. Assuming that those exceptions do not apply, following the general six-year rule should be adequate.

    Additional Rules of Thumb

    In addition to these “rule of thumb” recommendations, business aircraft owners should keep all records relating to an aircraft, including those pertaining to the purchase and sale of the aircraft, until six years after the owner sells or otherwise disposes of the property. The purpose for such retention is to ensure that the owner can support the amount of any gain or loss reported as a result of the sale of its aircraft and any concomitant tax basis adjustments to the aircraft that affect the amount of such gain or loss.

    Business aircraft owners also face certain unique tax record keeping requirements. For example, they must create and retain records relating to SIFL (Standard Industry Fare Level) income inclusion amounts and personal loss deduction limitations. (SIFL is an amount specified by the federal government to determine the value of personal travel on the company aircraft.)

    These records include items that must be created contemporaneously with the flights to which they relate. If a business aircraft owner fails to create such records contemporaneously with the relevant flight, the IRS may have a basis to question or challenge the veracity of the information contained in those records during an audit by, for example, arguing that a business aircraft owner created records merely to support its tax position in an audit.

    Records and Management Companies

    A business aircraft owner should be able to access flight, financial and tax records relating to ownership and operation of its aircraft. If a business aircraft owner hires a management company to maintain certain records (e.g., flight logs, passenger manifests, flight-related activity and maintenance costs), the owner should ensure that its agreement with the management company gives it the right to access these records as necessary even after the termination of the agreement between the owner and management company. Among the recommended provisions to guarantee access to such records would be a covenant by the management company that it will retain those records for an adequate period of time after their creation.

    A business aircraft owner should also ensure that certain records are created in a manner that will enable the owner to effectively utilize them in the event of a tax audit. This is especially true for records that are used as back-up to support SIFL income inclusion amounts and deduction limitations resulting from use of the aircraft for personal purposes and/or entertainment purposes.

    Since the process can be complex, a business aircraft owner should consider retaining a qualified aviation tax consultant who has expertise in collecting and organizing the information needed to correctly calculate these items. Seeking legal counsel regarding record keeping will ensure that an owner of business aircraft is well prepared in the event of an IRS audit of the owner’s tax return.  

    For more information on this topic or other business aviation related tax needs, please contact Chris Younger at cyounger@gkglaw.com.

    This article was originally published by Christopher B. Younger with GKG Law on April 9, 2019.