“Low Price” or “Good Value”? see more
NAFA member, Barbara Spoor, co-Founder of Asset Insight, LLC, discusses the difference between a low price and a good price and how prior planning produces a premium sale price.
What do you need to know before you purchase an aircraft to ensure that you get the best possible price when it’s time to sell?
While the terms “price” and “value” often are used interchangeably to describe an aircraft’s worth, they actually have different meanings. “Price” is what the buyer pays, while its “value” is the relative worth, utility, and/or importance placed on that asset. Since emotions can run high during the aircraft acquisition process, determining whether an aircraft carrying a “low price” represents “good value” requires a detailed analysis – one that focuses on its future maintenance requirements and estimated Residual Value (RV).
Consider the length of time you plan to keep the aircraft, and how many hours you intend to fly annually. Such data can help project the aircraft’s scheduled maintenance costs during your ownership term. This calculation is neither linear nor simple; costs assumed to be minimal actually can be much higher than anticipated.
For example, scheduled maintenance costs increase over time due to more comprehensive airframe inspections, required either by the manufacturer or new regulation. While some view airframe maintenance costs as relatively minor, they are not. If you plan to own the aircraft for five years, and it will need a double-engine overhaul within ten years, the value of the airplane may be reduced by what the next owner will have to spend: approximately half the cost of the overhaul, perhaps more for an older aircraft. That could run from the high six-figures to several million dollars, depending on make and model.
Carefully consider the cost of scheduled engine maintenance if the aircraft is not enrolled on an Hourly Cost Maintenance Program (HCMP), as maintenance expenses based on “time and materials” undoubtedly will increase over time. Opting to not enroll the aircraft on an HCMP upon purchase will increase your financial risk during your ownership period. And the aircraft still may require HCMP enrollment at resale to make it marketable, due to its “Maintenance Exposure to Ask Price Ratio” (“ETP Ratio”).
The ETP Ratio is a useful indicator of an aircraft’s marketability. It is computed by dividing an aircraft’s Maintenance Exposure (the financial liability accrued for future scheduled maintenance events) by the aircraft’s Ask Price. An analysis of “Days on Market” shows that when the ETP Ratio exceeds 40%, the Days on Market increase by more than 30%. For example, aircraft with ETP Ratios exceeding 40% during Q2 2018 were listed for sale an average of 72% longer than aircraft with ratios below 40% (169 days versus 291 Days on Market, respectively).
The Residual Value Projection
A traditional RV forecast starts with an assumed Current Value that then is degraded based on the aircraft model’s average historical annual depreciation percentage. But the aircraft’s future maintenance condition, perhaps the most important value influencer, is not accounted for appropriately, if at all. Since historical values and trends play no role in an aircraft’s future financial behavior, it’s best to obtain Residual Value figures using objective methodology that assesses the aircraft’s value independently, based on current maintenance condition, future requirements, and proven forward-looking market indicators.
A “low price” is easy to determine. “Good value” is derived by optimizing your investment by:
- Acquiring an aircraft able to perform your mission requirements, at a reasonable price;
- Stabilizing maintenance costs during your ownership period with HCMP enrollment;
- Limiting scheduled maintenance expenses not covered through an HCMP, based on the aircraft’s future maintenance requirement at time of purchase;
- Securing an objective, science-based Residual Value analysis; and,
- Remarketing an HCMP-enrolled aircraft at a predetermined date to ensure that the ETP Ratio is well below 40%.
Taking these steps can help you enjoy the best possible return from your aircraft – both while you own it and when you are ready to sell.
This article was originally published in Business Aviation Advisor on November 1, 2018.
Financing: Which Aircraft are Most Likely to Qualify? see more
NAFA member, Vivek Kaushal, Chief Risk Officer with Global Jet Capital, discusses the challenges of getting funding for used aircraft in today's market.
Is the goal of getting financing for a used aircraft really so difficult in today’s Business Aviation marketplace? Global Jet Capital’s Vivek Kaushal discusses, offering tips on ways to maximize your chances when selecting your next aircraft…
If you’re thinking about financing an aircraft, you’ve probably heard that it’s relatively easy to obtain funds for a new aircraft but that financing used jets is a thornier proposition.
That’s mostly true, but even for a new aircraft, there is no guarantee of securing funding. It’s important to remember that not all new aircraft are created equal. Lenders will always wait for a new model to prove its performance and demonstrate some trading history before going ‘all-in’.
Existing models with a solid installed base and performance history are usually acceptable, with a few exceptions.
While it’s mostly true that financing for new aircraft can be more easily obtained than for used, within the used realm there’s significant variation in what lenders look for and what kinds of risk they’ll tolerate. Generally speaking, a used aircraft can indeed be trickier to finance.
Some lenders, especially those that don’t specialize in aviation financing, won’t finance aircraft over five years old, while for others, ten years is the cut-off.
These are largely arbitrary numbers, and experienced aviation lenders know that there are more important considerations than arithmetic based on model year.
Useful or not, some banks rely on these simple weeding-out measures because they’re constrained by conservative credit risk policies or by a lack of knowledge. Neither is conducive to a holistic approach to used aircraft financing.
Thus, if you’ve got your eye on a used aircraft that’s got a little more history between its wings than some lenders are comfortable with, don’t despair. Older aircraft can qualify for financing, but obtaining it would typically mean engaging a specialized aviation financing partner who can work with you and navigate some of the industry particulars.
Following are three major factors that will make a difference as to whether a specific used aircraft qualifies for financing or not…
1. A Robust Installed Base/Model Performance History
The more performance history that’s available for an aircraft model, the better. Models that have been well-accepted in the market will almost always be more likely to qualify for financing.
For each cabin class, some models demonstrate better-than-usual value retention. These will typically have been in production at a high volume and will boast a well-documented operational and financial track record.
Models with short production runs and low trading volume may be viewed more cautiously as collateral for financing.
Data on a model’s installed base and recent trading history (number of pre-owned aircraft on the market/average days to trade) is typically available on AMSTAT or JETNET.
2. Fleet Average Usage Levels
An aircraft is more likely to qualify for financing if it’s at or below fleet average usage for its make and model. Bluebook and other guides can provide this information, which is a key indicator of how much service life an aircraft has left.
If the aircraft’s usage level is significantly higher than average, lenders may get concerned about the aircraft’s remaining useful life because of heavy usage. A heavily used aircraft will tend to sell more slowly.
3. Airworthiness is Non-Negotiable - Maintenance Status Matters
To qualify for financing, an aircraft must be in very good operational condition with no history of material damage. Damage to the aircraft will be assumed to affect its reliability and value, regardless of how comprehensive the repairs. All avionics have to be up to date, with no doubt over airworthiness. All technical upgrades must be in place as well.
One major maintenance-related consideration that may affect a lender’s decision is whether the engine is cared for under a power-by-the-hour (PBH) program or not. Most lenders consider PBH programs to be a favorable approach to mitigate the risk of expensive engine repair costs.
Another consideration is when the next major inspection is going to take place. An airframe inspection can be expensive and take a significant amount of time. A thorough review of the aircraft’s logs and maintenance history will help to flag such issues.
The Real Issue With Used Aircraft Financing
In a nutshell, the main obstacle to financing used aircraft is the complexity of the deals themselves. Some lenders struggle with the complex considerations that go into evaluating the risk of financing a used aircraft, especially if they don’t have robust aviation knowledge.
Those that rely on a simple exclusionary process may rule out perfectly airworthy and viable aircraft in favor of preserving a cautious risk posture. All too often, a traditional lender will ask for other forms of collateral, such as significant amounts of assets under management which it has a right of set off, rather than rely on the value of the asset or the credit of the borrower’s business.
Someone with domain knowledge can engage with the industry’s complexity and structure a transaction that works for the aircraft, even helping clients navigate the inspection process.
As an example, Global Jet Capital was about to close on financing an operating lease for a ten-year old Bombardier Challenger 605 when a problem was identified with the aircraft’s APU requiring it to be sent to Honeywell for an estimated eight-week repair.
A lender unfamiliar with aviation might have considered this a “red flag,” and its policies may have also precluded it from holding its financing commitment for that length of time, leading to an end to the deal and possibly a lost deposit if the right contingencies weren’t in place.
Instead, our understanding of the space meant we understood the need for the repair and were able to work through the delay seamlessly. Once the overhauled APU was installed, the deal closed successfully.
So which jets are most likely to qualify for aircraft finance? A lot is possible when you find the right partner for your Business Aviation financing and understand what matters to lenders.
Used aircraft continue to represent terrific value for savvy buyers. Keeping in mind the three major considerations relating to a used aircraft’s finance-worthiness, you should be able to find a used aircraft that suits your business goals and save yourself the disappointment of a rejection.
This article was originally published by AvBuyer on May 4, 2018.
How to Choose the Best Used Jet for You see more
NAFA member, David Wyndham, President of Conklin & de Decker, details a buyer’s dilemma: Two used business jets of the same make and model are listed ‘For Sale’ and offer remarkably similar specifications. How can you tell which would provide the better purchase?
The summary within the table below depicts the approximate aircraft specifications and shows that each aircraft offers updated avionics, a recent paint and interior refurbishment, and engines fully covered by an hourly cost maintenance program (HCMP).
At first glance, these two jets look nearly identical. But are they really? What are some things a potential buyer can do to differentiate between them?
Question 1: Time on Market?
First, it’s important to establish how long each aircraft has been listed ‘For Sale’. A little research by a broker might reveal that one of these aircraft has been on the market considerably longer than average.
If the average time on the market for this model is typically 180 days, but one of these particular jets has remained unsold for a year, you’ll need to ask why.
Question 2: Aircraft’s Home Base?
Next, a buyer should look at where the two aircraft are based. In our scenario, one is based in the Southeast US and the other in the Western US; one sits in a humid climate near the ocean while the other sits in a dry, potentially dusty, desert environment.
Corrosion may be an issue, and ought to be investigated with a thorough Pre-Purchase Inspection (PPI).
Where the aircraft is based may also impact the cost and time to close the deal, however. If your prospective aircraft is thousands of miles away in another country, it becomes harder to arrange demonstration flights and PPIs.
There may be additional tax considerations with respect to the import and export of the aircraft. The reregistration of the aircraft from one country to another can also be more complicated.
Bottom line: International acquisitions take more time and likely will cost more money. You can mitigate these concerns by using a broker and lawyers who are familiar with cross-border acquisitions.
Question 3: Cabin Connectivity?
The cabin connectivity is another potential differentiator. For example, Aircraft 1, represented in our comparison table states it has Wi-Fi – but is it a land-based Air-to-Ground system? If you’re flying long distances over water and need to remain connected, a satellite-based system will be required.
Satellite-based Wi-Fi costs more to install and much more for the data usage versus a land-based system. Thus, if Aircraft 1 has a land-based system and you require global access, when Aircraft 2 as a blank canvas may be preferable to avoid the added cost of updating and installing satellite-based Wi-Fi from ground-based.
Question 4: Paint and Refurbishment?
Both aircraft in this example claim to have recent paint and interior refurbishments. The sales photographs will reveal to you the colors and patterns used, but they may not reveal the quality of the materials used, and any possible wear-and-tear.
Moreover, the galley may be configured in different ways. Do you need a convection oven, or is the microwave sufficient? These details will help differentiate which model works best for you.
Question 5: Maintenance Status?
The biggest differentiator is not ultimately total time, paint color, or the latest avionics suite being installed. (All these things can add value, or cost money to change.) The biggest differentiator lies in the maintenance status and quality of the records.
If you’re seriously evaluating an aircraft, ask for a maintenance status report. Most business jets are on a computerized maintenance tracking system now, and a report can be easily generated showing the status of major scheduled maintenance items, completion dates, and what is coming due soon. At a minimum, the seller should provide the status of the major maintenance items.
As an example, if Aircraft 1 requires a major maintenance inspection in 2019 costing $300,000, while Aircraft 2 just completed the same inspection, then Aircraft 2 may be a better purchase at the asking price.
Another request to make, if it’s not already stated in the listed specification, is for the compliance status with various regulatory items (Reduced Vertical Separation Minimum (RVSM), Required Navigation Performance (RNP) and Future Air Navigation System (FANS 1/A)).
If the maintenance records do not provide a complete and accurate description of the aircraft and its airworthiness status, then the aircraft is not legal for flight. An inspection of the records is typically done during an on-site appraisal or a PPI. Both are for serious buyers and are preceded by a letter of intent to purchase, or other documentation with a legitimate offer.
Question 6: Charter Approved?
Is the aircraft Part 91 or Part 135 approved by the FAA? In Europe, there are similar specifications to follow. If you plan to charter your aircraft, purchasing one that is already in compliance with the local regulatory requirements for commercial operations is a plus.
PPIs and Appraisals are Vital
An old friend once told me, “Buying a used aircraft without doing a thorough Pre-Purchase Inspection is like playing Russian roulette with a fully-loaded pistol.”
There is no substitute for a PPI performed by a qualified facility. Preferably this will not be the same facility that conducts routine maintenance on the candidate aircraft. PPIs can be expensive, but significantly reduce the risk of unexpected out-of-pocket costs in those first couple of years of jet ownership.
An appraisal by a qualified appraiser is another recommended part of the pre-purchase process and will shed light on the current market for the model being considered, identify trends in sales prices, and ensure you are being quoted a fair price. If you are leasing or financing the aircraft, these are commonly mandated by the financial institution.
What to Conclude?
In summary, we leave you with the following important takeaways:
- Work with a broker who knows the type of aircraft you are looking to buy. They can steer you clear of the less-desirable aircraft and ask the initial questions to have you arrive at a suitable candidate.
- Find a broker familiar with international transactions if you are looking outside your home country for an aircraft. The added work can pay-off with a great aircraft.
- Always perform a PPI and an appraisal, once you are serious about the purchase.
- Never make the final decision to buy based on your emotions.
- If you have two options that appear equal, do a little research or get a professional opinion. Subtle differences can have a serious impact!
Buying the right aircraft takes a skilled and knowledgeable team to guide and advise you. It’s smart money and a wise investment.
This article was originally published in AvBuyer on October 10, 2018.
2018 Aircraft Transactions - Final Quarter Countdown! see more
NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses the top 10 items to consider if your aircraft transaction closes in 2018.
As we approach the last quarter of 2018, analytical data and industry experts are predicting a quarter that will be extremely busy with both aircraft purchases and sales. Personally, I have a number of clients who are ready to proceed immediately with a purchase or sale once either the right inventory can be sourced or once a buyer is found for the aircraft that is listed for sale. Assuming the right aircraft can be found for buyers or the right buyer can be found by sellers, as transaction volumes increase those providing support services such as aircraft consultants, insurance agents, escrow companies and pre-buy inspection facilities may start to see the stress of the demand. As always, having a well-established acquisition or sales team and a process plan can help insure that nothing gets missed, that the closings go as planned and are completed in the 2018 calendar year. Ten items to consider to help closing occur in 2018:
1. If you are considering selling in 2018, list the aircraft for sale as soon as possible to allow enough time for the sales process to conclude before the end of the year.
2. If you are considering buying in 2018, you should already be looking for the right aircraft. Inventory is lower in many aircraft categories than it has been for years. Therefore sourcing the right aircraft is taking longer than it has in the past and may require expanding the search to outside of the United States.
3. Many inspection facilities have long wait times to schedule a pre-buy inspection. As soon as an aircraft is sourced or a buyer is found (or perhaps even before), look for a pre-buy slot and try to hold it if possible. As a seller, if certain inspections are coming due, perhaps scheduling these in conjunction with a potential pre-buy inspection may help with reserving a slot.
4. If you have an existing aircraft and plan to replace it, consult your tax team early in the process. Your tax team may recommend that both transactions occur in the same year since 1031 like-kind exchanges are no longer available.
5. If you are seeking depreciation in 2018 (bonus or straight-line), then the aircraft being purchased needs to be placed into service and used for business (preferably exclusively for business if closing is near the end of the year) before the end of the year.
6. When support service providers are busy, checklists and a team leader become imperative. There must be one person leading the team who is checking to make sure all aspects of the transaction are completed prior closing (i.e. assignment of mx. programs, insurance, funds, lender agreements, management agreements, international registry account set up, etc.).
7. The last day of the year in 2018 is on a Monday. In the past, the FAA registry has closed early on holidays and also for weather. It is recommended that 2018 closings be completed no later than December 28, 2018 in order to allow time for the aircraft to be placed into service before year end and avoid any unexpected closings delays that could occur.
8. Lenders are starting to require all ancillary documents be in place prior to funding. If the aircraft is going to be managed, chartered or on maintenance programs, the lender may require all of these documents be in place along with its own consent agreements, prior to closing. It is likely that these documents will not be allowed to be done as post-closing items, so plan enough time to get all relevant documents in order prior to year-end. Alternatively, consider paying cash and arrange financing after closing.
9. If the transaction is a cross-border transaction, make sure all parties are realistic on the amount of time the import/export process will take.
10. Having upgrades done at the same time as the pre-buy inspection often saves downtime on the aircraft for the buyer. However, it may also push the closing into 2019. Therefore, if a 2018 closing is important a close review of the calendar should be made to make sure the upgrades can be completed and the aircraft returned to service prior to the end of the year.
Please contact Amanda Applegate at 310-392-5200 or firstname.lastname@example.org.
Top 5 Factors That Affect Your Aircraft Financing Loan Terms see more
NAFA member Adam Meredith, President of AOPA Aviation Finance Company, explains the top 5 factors that affect your aircraft financing loan terms.
When it’s time to secure financing for your aircraft purchase, the lender looks at more than just your income and credit history. When financing an aircraft, the aircraft itself determines some of the conditions of the financing. Here are the top factors that an aircraft financing company examines.
Usage: A financing company wants to know you are buying the right airplane for your needs—not more than you need or can handle. The lender also wants to know how you will use your airplane (personal, business, or commercial). Buying a single-engine airplane for occasional short flights will net different terms than buying a workhorse airplane that will be flown 50 hours a month in all conditions for commercial purposes. An aircraft for personal use will get different terms than an aircraft to be used by a flight school or charter outfit (commercial). That’s because the more an airplane is used, the more it depreciates—there’s also more wear and tear on the airplane, especially with student pilots. The financial institution is your airplane’s co-owner, so it’s important to them that their asset retains its value.
Age, make, and model: Generally, the older an airplane, the fewer the financing options. Age is much more limiting when buying a turbine airplane or piston twin and will affect your loan terms. Because turbine airplanes and piston twins depreciate more quickly than piston singles, the length of these loans is typically shorter, and more money down is typically required. When you have selected an airplane for purchase, the lender will examine the specs of the airplane and compare it to the value stated in one of two pricing digests, Vref or Aircraft Bluebook (similar to Kelley Blue Book for cars). In most cases, lenders will lend on the airplane’s purchase price or the pricing digest value, whichever is lower.
The aircraft’s panel is an added factor. Avionics equipment drives value of existing airplanes more than ever before. A good airframe with vintage avionics is hard to sell and thus hard to finance. Preparing for the Automatic Dependent Surveillance-Broadcast Out mandate can be expensive. If the airplane being considered has not had updated avionics installed, its value is lower, and the lender must account for that. Engine time and condition has always been a key value, and still is, but the expense of avionics renewal is of equal importance now in establishing lending value. And avionics depreciate quickly in value so the updates must be recent. Values usually depreciate on new avionics to zero after three years.
History: The more comprehensive information you can supply the lender about your airplane, the better your chances of securing good terms for your loan. For example, you need to know all the specs of your airplane, be able to supply photos, and show its maintenance history and damage history, if any. Being able to supply a well-documented, timely maintenance history will help you. If the seller is unable or unwilling to provide you with this history, that should be a red flag—reconsider your purchase. Also, many lenders will not lend on aircraft with certain types of damage history or incomplete logs, thus limiting your financing options.
Down payment: When financing an aircraft, a down payment is required. Most common is a down payment ranging from 15 percent to 20 percent. If you have exceptional credit, you may be able to provide a 10-percent down payment. There are no zero-down payments in aviation. The higher the down payment, the longer term of the loan (if you so choose).
Loan amount: Lenders are interested in loaning a minimum of $50,000 for an aircraft purchase. While there are options for borrowing less, the loan will usually require more down and shorter terms as well as a higher interest rate. Conversely, the higher the loan amount, the more options available and thus the lower your interest rate should be.
AOPA Aviation Finance works with a group of lenders who are all a bit different to fit the various financing needs of members. Rather than working with a commercial bank with no knowledge or appreciation of airplanes, the team at AOPA Aviation Finance can help.
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 in AOPA Finance news on September 6, 2018.
What you should know about using 100% bonus depreciation for private aircraft. see more
Deducting the price tag of a private aircraft under the new 100 percent bonus depreciation rules is an intriguing idea, but it takes some effort. Planned correctly, a prospective aircraft owner can pocket a meaningful amount of cash related to purchasing almost any size and model of aircraft, whether new or pre-owned, including a fractional share of an aircraft.
Knowing About the Source of the Depreciation Benefit
The 100 percent bonus depreciation benefit arises under the Tax Cuts and Jobs Act of 2017, H.R. 1, enacted on Dec. 22, 2017, (the Act), and is now integrated into the Internal Revenue Code (IRC). The Act temporarily allows 100 percent bonus depreciation starting Sept. 27, 2017, and ending Dec. 31, 2022. Bonus depreciation will then phase down 20 percent per year for five years to a zero bonus. The IRS issued proposed regulations for 100 percent bonus depreciation on Aug. 8, 2018. When final, the regulations should help provide some clarity around certain ambiguous provisions in the Act.
Understanding Depreciation for Business Aircraft
Depreciation is an allowance Congress enacted to encourage businesses to purchase tangible personal property, including private aircraft. Depreciation allowances provide that business taxpayers may claim an annual tax deduction to recover the cost or other tax “basis” (adjusted cost) of the property for its wear and tear, deterioration or obsolescence.
Aircraft owners can depreciate an aircraft’s cost or other basis by using the straight-line depreciation method under the Alternative Depreciation System (ADS) or by using the Modified Accelerated Cost Recovery System (MACRS). MACRS is used to recover the cost or other basis of most business and investment property and recovers the cost of eligible property faster than under the straight-line method.
Straight-line depreciation divides up the aircraft cost or other basis in equal parts each year during the prescribed write-off period (called the “recovery period”) of the aircraft until the aircraft has been fully depreciated. The primary use of the aircraft determines the applicable recovery period.
For an aircraft used only by the owner privately, the recovery period is six years under the ADS compared to five years for aircraft and certain helicopters under MACRS. For commercial use aircraft, including aircraft used to fly charters, the recovery period is 12 years under the ADS compared to seven years under MACRS.
An aircraft that qualifies for MACRS should be eligible for 100 percent bonus depreciation in the year in which the taxpayer places the aircraft in service. Even if the aircraft is eligible for 100 percent bonus depreciation, the aircraft owner can still elect straight-line depreciation under the ADS, regular accelerated MACRS according to a schedule prescribed by the IRC (excluding the “bonus”), and 50 percent bonus depreciation – but only for aircraft acquired before Sept. 28, 2017, and placed in service before Jan. 1, 2018. The increase to 100 percent bonus depreciation applies to property placed in service after Sept. 27, 2017.
Qualifying for Bonus Depreciation
The IRC imposes certain requirements on private aircraft use to qualify for MACRS and, by extension, 100 percent bonus depreciation. The IRC includes private aircraft in a special category called “listed property” along with certain other property, like vehicles and computers, that an owner can use personally and for business. To qualify for 100 percent bonus depreciation, the owner must “predominantly” operate the aircraft in “qualified business use.”
Predominant use is a critical element that refers to using the aircraft 50 percent or more of flight time. Qualified business use, in general, refers to the aircraft owner (an entity or individual) flying its aircraft in a “trade or business.” Also a critical aspect of tax planning, “trade or business” generally refers to a business enterprise conducted regularly and continuously for income or profit – such as operating a manufacturing plant. The IRC establishes a complicated calculation to achieve the status of qualified business use, which merits careful analysis.
Among other requirements, the aircraft owner must not use the aircraft predominately outside the U.S. – an important restriction for large cabin aircraft that travel globally. Also, the owner must not have used the aircraft before acquiring it or acquire the aircraft from a related party, such as a family member.
Illustrating the Use and Loss of Eligibility for Bonus Depreciation
To illustrate one type of situation, consider that, in 2018 “Fast Food Co.” makes $5 million of ordinary income, which is reported on Form 1120S, an S-Corporation tax return. Fast Food Co. buys a $2 million aircraft in December 2018 to travel between multiple cities. Assuming the aircraft is eligible for 100 percent bonus depreciation, Fast Food Co. issues a federal tax Form K-1 to the sole owner/stockholder, who may then deduct $2 million on his tax return in 2019 for the 2018 tax year.
At a 37 percent tax rate (the highest individual tax rate under the Act), the owner can effectively reduce such taxable income by up to $2 million to a net taxable income of $3 million (not considering other tax deductions or taxes). The tax savings is approximately $740,000 cash in the owner’s pocket, thanks to 100 percent bonus depreciation ($2 million x 37 percent tax rate).
If the aircraft loses its eligibility for MACRS depreciation anytime during the aircraft ownership period, the IRS can apply “recapture” rules to add back to owner’s ordinary income an amount equal to the “excess depreciation” over straight-line depreciation. The add-back would occur in the year in which the aircraft use fails to qualify for MACRS.
At a 37 percent tax rate, the payback to the IRS on the $2 million write-off could be significant for the owner. The tax on the excess depreciation amounts to the difference between 100 percent depreciation of the cost or other basis taken in the first year and the much smaller write-off of approximately equal amounts over the aircraft recovery period between six years for private use and 12 years for commercial use (e.g., $2 million/six years = $333,333/year instead of $2 million in year one).
Using Aircraft for Entertainment and Other Personal Use
Despite planning for qualified business use, most aircraft fly for personal use reasons (e.g., entertainment, amusement or recreation). Owners cannot take depreciation deductions for the flight hours or miles devoted to such personal use, but some depreciation write-offs should remain available if the aircraft is still used predominantly for qualified business use. Aircraft owners must calculate the percentage of personal use relative to business use by noting the names of each person on board, the reason for the travel, the hours and miles of travel and other information.
These calculations determine the entertainment “disallowance” – a part of the cost or other basis of the aircraft that the owner cannot depreciate. Importantly, aircraft owners should be aware of a special rule in the IRC that minimizes the negative effect of the entertainment disallowance for owners who claim 100 percent bonus depreciation.
Planning for Use of 100 Percent Bonus Depreciation
Because each aircraft owner is likely to have a complex tax situation, each owner should engage knowledgeable tax advisors, typically an aviation tax accountant and lawyer, to propose the optimal tax plan. The advisors should analyze such factors as the taxpayer’s organizational structures (individual, S Corp, LLC or C Corp), types of qualified business use, tax rates and any net operating losses (NOLs), timing and types of income, potential for excess business losses affecting single and married taxpayers (new under the Act) and anticipated personal use of the aircraft. Ultimately, an owner’s best path may be to bypass MACRS or 100 percent bonus depreciation if the straight-line depreciation method produces a better tax result.
Further, each aircraft owner should (1) keep detailed flight and passenger records, (2) develop flight planning that conforms to the tax strategy involving the aircraft, and (3) plan for IRS challenges to flying fewer qualified business use hours than necessary to demonstrate predominant business use.
Claiming 100 Percent Bonus Depreciation in 2018
There is still enough time in 2018 to buy and place in service an aircraft or fractional share and take advantage of the 100 percent bonus depreciation. Bonus depreciation is especially valuable toward the end of the year because it’s not long thereafter until a taxpayer can file a federal income tax return and reduce its income by an amount up to the aircraft cost or other basis. However, with 100 percent bonus depreciation available until 2023, it is strongly advisable to choose an aircraft wisely rather than rush to buy the wrong aircraft just so a taxpayer can take the tax deduction in 2018.
Bonus depreciation has generated wide interest in purchasing new or pre-owned private aircraft and fractional shares. Although these purchases take time and planning to close, prospective aircraft owners understand that there is no time like the present to help boost the economy and take flight in a fully depreciated aircraft.
This article was originally posted in Money, Inc. Magazine on October 29, 2018.
Time for a New Aircraft - or Not? see more
NAFA member, Lee Rohde, Founder, President and CEO of Essex Aviation, writes about what to consider when your aircraft needs change.
Perhaps your travel mission recently has changed, and you’ll be flying to new destinations. Or you’re interested in having more cabin space, amenities, and upgrades. Maybe the lease on your current aircraft is coming up for renewal and you want to be sure you’re using the most appropriate aircraft. Or your aircraft is fully depreciated and there are tax considerations to your continued ownership.
Is buying a new aircraft your only – or the best – option for you? Today’s business aviation market offers current aircraft owners a broad range of options to meet those evolving needs. Here are three different avenues to consider:
ONE: Upgrade or Refurbish Your Existing Aircraft
The first option is to refurbish the interior and exterior of your current aircraft while also considering upgrades to meet your new mission or regulatory requirements (see “Time Flies …Will Your Aircraft? BAA January/February 2018). This option offers the obvious benefits of not having to go through the search, inspection, and purchase process inherent in buying a new aircraft. It also reduces the unknowns, since you are familiar with and know the history of the aircraft you currently own. The downside is that you will have to take your aircraft out of service while the refurbishment and/or upgrades are completed. You’ll have to weigh the costs of the refurbishment and/or upgrades coupled with the costs to use alternative lift while the work is being completed.
Depending on your mission requirements, typical upgrades to consider would include but are not limited to:
- Avionics upgrades
- FANS/ADS-B Compliance
- Enhanced Vision Systems
- Cabin Management Systems
- In-Flight Connectivity and Entertainment Systems
- Galley Layout and Equipment
Interior and exterior aircraft refurbishment can involve all or some of the following:
- Exterior Paint
- Floor plan Modifications
- Seating Design and Upholstery
- Cabinetry Veneer
- Headliner and Sidewall Covering
- Improved Lighting
Upgrading and/or refurbishing your existing aircraft is usually recommended if you plan to keep your aircraft for at least four or five more years. If you’re thinking of selling sooner than that, work with your aviation advisor to consider which upgrades will help with the aircraft’s resale value and marketability, and which probably would not provide a substantial return.
TWO: Supplement Your Existing Aircraft
Another option is to keep your current aircraft and supplement it with an additional asset — such as charter, fractional ownership, or a membership or card program. This option can be an ideal combination if you enjoy your current aircraft but have encountered additional travel requirements that it is not best suited to support.
For example, perhaps you currently own a large cabin aircraft and need to make regular short trips throughout the Northeast, to Long Island, or to one of the several island destinations during the summer months. That may be much more aircraft than is needed and not cost effective given the short distances to be flown. In many cases, using a fractional share, charter, or membership/card program for these trips can be more efficient, and frees up your aircraft for other travel. Some options for supplemental, alternative lift are:
When you charter an aircraft, you are essentially renting the aircraft for a certain mission and period of time. Charter is best for quick trips since you’ll keep the plane with you for the duration of the trip, and the aircraft is exclusively available to you. If you are traveling for a two-week vacation and plan only to use the plane to get you there and back, retaining the chartered aircraft can be expensive compared to other options. One of the benefits of chartering is schedule flexibility, which normally allows you to change your travel plans as needed.
With fractional ownership, you are either purchasing or leasing a share and percentage of allotted flight time in a specific aircraft type. Typically, fractional programs require a minimum of 50 hours per year to participate. Fractional ownership does not offer as much flexibility in terms of scheduling change as does charter. Fractional shares can be beneficial if you plan to stay at your destination for a longer period of time, since you pay only for the occupied flight time you use, albeit at a higher per hour cost than for occupied round trip charter.
Membership/Card Programs are ideal if you don’t need to fly frequently during the year, and if you appreciate flexibility in the aircraft available for each trip. On these programs, you typically will be required to use a minimum of 25 hours per year. When evaluating these programs, it is critical to understand how each provider sources its aircraft and the safety ratings of the operators they use, as well as the terms and conditions of the funds being put on the account.
THREE: Replace Your Existing Aircraft
You also may choose to replace your existing aircraft altogether. For example, if your destinations have changed and you need an aircraft capable of landing on shorter runways, you need a larger aircraft to travel internationally, you want to stop less frequently to refuel on longer flights, or you just need more room for more passengers.
As you think about replacement, you will need to consider several questions, including but not limited to:
- How will you be using the aircraft? For business or personal use, or a combination of both?
- How many trips do you take annually? What is the average duration?
- Do you travel to airports with runway restrictions or that are limited to certain size/performance aircraft?
- For how many passengers do you need seating?
- Is international travel anticipated? If so, where and how often?
- Do you want a cabin with stand-up headroom?
- How many and what type of sleeping locations do you desire?
- Do you carry a lot of baggage or other equipment when you travel?
You also will have to decide whether you want to buy a new or pre-owned aircraft. Purchasing a new aircraft will allow you to fully customize it, but will require a longer time for final delivery. Or you could acquire a “white tail,” which is an aircraft that has already been built and completed, but whose original purchaser failed to take delivery. While you don’t have the same ability to customize, you’ll benefit from a much quicker final delivery and entry into service. A pre-owned aircraft also offers you the option, if desired, to refurbish or upgrade the aircraft to meet your needs.
If your mission requirements have changed or you anticipate a near term change, consider all the options. An unbiased aviation consultant or advisor, not affiliated with a specific operator or third-party provider, can help you evaluate your options and offer recommendations based on your current and future travel needs.
The original article was published in Business Aviation Advisor on March 1, 2018.
Aircraft Documents: an Important Factor when Purchasing an Aircraft see more
NAFA member Amanda Applegate, Partner with AERLEX Law Group, shares the importance of aircraft documents when purchasing an aircraft.
One important component of most aircraft transactions is the gathering and assessment of all pertinent maintenance records for the aircraft (“Aircraft Documents”). Aircraft owners are required to maintain Aircraft Documents in accordance with 14 C.F.R. § 91.417. The regulations strictly dictate how long Aircraft Documents must be kept, but do not mandate the format or forms that must be used. Among many other items, the Aircraft Documents contain any damage history on the aircraft, an important factor in determining the appropriate purchase price for an aircraft.
An aircraft buyer should conduct a comprehensive review of the Aircraft Documents prior to the purchase to ensure that all of the records are accounted for, complete and in good order. The aircraft purchase agreement should not only require that the seller produce all of the Aircraft Documents in its possession, but should also compel the seller to restore any deficient documents so, at the time of closing, all the records are accurate, continuous and current through the closing date.
Additionally, the review of Aircraft Records is especially important during the pre-buy of an aircraft:
- from a seller that has multiple aircraft;
- from bankruptcy; or
- from a seller currently operating only under Federal Aviation Regulations (“FAR”) Part 91, when the buyer’s intent is to operate the aircraft under FAR Part 135 after the purchase.
When an aircraft is purchased from an owner who has multiple aircraft, the Aircraft Documents may have been maintained in a manner that is suited for the specific needs of that aircraft owner and in compliance with the operations of that particular fleet. However, upon the sale, the Aircraft Documents need to be organized in a manner that is appropriate for a single aircraft operation. This conversion process is often labor intensive so it is imperative that the Aircraft Document review start as early as possible during the pre-purchase inspection phase. It is possible that the Aircraft Document review in this scenario will take longer than the physical inspection of the aircraft. Furthermore, when looking for traceability of time-tracked parts or burn certificates that may be missing from the Aircraft Documents, multiple vendors may need to be contacted in order to restore the Aircraft Documents to acceptable standards.
If the aircraft is being purchased out of bankruptcy, the records review is crucial. Once the purchase is completed, the bankruptcy estate has no obligation (and likely no resources) to help locate items that are absent from the Aircraft Documents transferred at closing. Furthermore, if the Aircraft Documents were not secured while the company was going through the chaos of bankruptcy and closure, then it could be the case that the Aircraft Documents are in disarray at the time of inspection.
Finally, if an aircraft that only operates under FAR Part 91 is being sold and the buyer intends for the aircraft to be operated under FAR Part 135, there are certain records that must be included in the Aircraft Documents in order to place the aircraft on a FAR Part 135 operating certificate. For example, if the interior of the aircraft was refurbished and there are no burn certificates for the seats, then the aircraft cannot be placed on a FAR Part 135 certificate. If the aircraft was only operating under FAR Part 91 at the time of refurbishment, the burn certificates may not have been tracked as closely as they should have been at the time of the work. This deficiency must be remedied in order to complete the Part 135 conformity check.
If, during the inspection, it is discovered that certain Aircraft Documents have been lost, stolen and/or destroyed, then it should be a condition of the purchase agreement that the buyer has the right to terminate the purchase agreement. If the parties want to move forward with the sale, the seller should be required to recreate and restore the missing records. There are companies that specialize in the replacement of Aircraft Documents. The seller should also review its aircraft insurance policy, because the missing records may be covered under that policy.
Ultimately, an aircraft buyer should not purchase an aircraft unless an Aircraft Document review is performed as a condition of the purchase agreement and, if any discrepancies in the Aircraft Documents are found during the course of the inspection, it is the obligation of the seller to fix the discrepancies. If the Aircraft Documents cannot be restored, the buyer should retain the right to terminate the purchase agreement.
What You Should Know Before Purchasing a New Aircraft see more
NAFA member, Essex Aviation Group shares what you should know before purchasing a new aircraft.
Whether it’s for business or personal use, there are many benefits to private aviation. However, there are several factors to take into consideration as you evaluate your options.
New vs. pre-owned
There are benefits to purchasing both a new or pre-owned aircraft. A pre-owned aircraft can be more affordable while offering you the option of refurbishing, upgrading or customizing certain parts to fit your needs. If you’re acquiring a new aircraft, it can also be fully customized but the delivery could take anywhere from 12 to 18 months longer than if you purchased a pre-owned aircraft.
Start the financing process early
If you choose to finance your aircraft, beginning the process early will leave yourself enough time to compare rates and request proposals from potential lenders. It’s important to understand that getting a loan or lease for an aircraft is a complex process, so researching your financing options sooner rather than later is advised.
How will you be using the aircraft?
Are you going to be using the aircraft for business or pleasure? If it’s for business, you may be able to receive certain tax benefits. An aviation advisor will be able to recommend a legal or tax advisor who can work with you to maximize any possible benefits.
Determine which features are important to you
It’s easy to say, “I want it all” but this isn’t always feasible. Most aircraft can meet many needs and desires of the purchaser but some may not be able to meet all of your necessities. An aviation advisor can help you evaluate your aircraft model options and assist you in finding one that meets your requirements. They will also be available to help you navigate all of the available information so that you can fully understand the pros and cons of each option.
The 80/20 rule
Overbuying can be tempting when shopping for an aircraft. It’s important to consider exactly how you will be using the aircraft to avoid purchasing one that includes more than you need. Will you only be traveling for meetings a few states away? Or will you need the aircraft for international, monthly trips? Your aircraft should meet your requirements 80 percent of the time. If you will only be traveling overseas occasionally but will have monthly business trips, an aircraft for business trips will be most ideal.
Bring your aviation advisor on demo flights
There are often many opportunities for demo flights on different types of aircraft to help you make a purchase decision. Bringing your aviation advisor along for the flight can help you make a decision, as long as they are professional and unbiased.
The process of acquiring a new aircraft
When purchasing a new aircraft, the process typically involves:
The initial evaluation
When purchasing a new aircraft, you’ll have many decisions to make. These can include selecting the floorplan and any specifications or materials that are also needed. You can also choose a “white-tale” aircraft, which is one that has already been produced but gives you very limited opportunities to change things.
When you’ve selected an aircraft for purchase, you will enter the layout and design phase. An aviation advisor can help you through the series of specification meetings.
Aircraft production begins once there is a final and approved design in place. Production can take up to a year or longer, depending on several variables.
Once the aircraft is ready for final delivery, your aviation advisor and the existing flight crew will work through a formal delivery and acceptance process.
Acquiring an aircraft can become complicated since there are several parties involved. Working with an unbiased aviation advisor will offer value and comfort throughout the process, and will help you find the aircraft that’s right for you.
Essex Aviation Group, Inc. was founded in 2013 with the primary goal of providing clients with the most current industry knowledge and experience, a vital component in evaluating business and private aviation transportation needs.
Representing clients in a wide range of services, Essex builds client relationships through dedication to trust, integrity and a level of responsiveness not found anywhere else. Services include new or pre-owned aircraft acquisitions, new aircraft completion management, pre-owned aircraft refurbishment and upgrade management, block and ad hoc charter services, and much more.
This article was originally published by Essex Aviation Group.
Who pays for what? Splitting aircraft sales costs is about fairness. see more
NAFA board member and President of AOPA Aviation Finance Company, Adam Meredith writes about how to fairly split the costs of buying an aircraft.
You finally found it—that first turboprop. The aircraft looks good, but there are inspections, demonstration flights, and paperwork prior to any sale. Who pays for what as the purchase proceeds? The answer is all about fairness.
Know in advance
Have a consensus gathering meeting with the seller before the pre-buy inspection about how you are going to handle any problems found with the aircraft. What will happen if there are so many squawks that you no longer want to continue with the purchase? When you agree, put that information in the purchase-and-sale agreement. It’s much better than getting halfway through the purchase and discovering problems without a plan for addressing them.
If the pre-purchase inspection is also an annual inspection, include that in the purchase-and-sale agreement, adding who is responsible for the costs in the event the sale falls through.
Who pays what?
Obviously, the buyer pays for a pre-purchase inspection. Any airworthiness directives that need to be complied with are almost always the responsibility of the seller. Nice-to-have items that don’t affect the aircraft’s airworthiness—especially those that are expensive—usually end up getting negotiated. However, if there’s a service bulletin item, those too are generally the seller’s responsibility. In general, if something needs to be done, the seller pays. If it would be nice to repair or replace something, the buyer pays.
Here’s an example. Maybe the emergency quick-donning oxygen masks for the pilot and copilot could use an upgrade, the old ones work but are looking a bit tattered. The buyer may pay for that. But if the aircraft is approaching a limit for a landing gear overhaul, the seller will likely reduce the price to reflect the future cost. Alternatively, the buyer could just request the landing gear be overhauled as part of the inspection. In the end, negotiations tend to ebb and flow based on not only the personalities of the buyer and seller but also the supply and demand of the particular make and model aircraft.
Title and escrow costs
Not everyone recognizes the benefits to both the seller and buyer of closing a transaction with a title and escrow company. Both parties have a vested interest in making sure the documents are properly filed and thus should split that cost. Here’s a scenario that should give pause to the value from a seller’s perspective: Your buyer flies off on a “pink slip,” nothing is filed with the FAA and there’s an incident with the aircraft. Who do you think the attorneys are going to come after? Whoever has the deepest pockets! Even if it’s meritless, you may have to defend yourself and it’s going to come out of your pocket.
If the buyer is going to the seller’s location for a demonstration flight, generally the seller won’t charge the buyer for the fuel, but may limit the flight time. However, if the buyer is requesting to meet the seller away from the aircraft’s home airport, the buyer should expect to pay fuel costs. If the buyer wants to use his or her own shop for the pre-purchase inspection, same thing, the buyer should expect to pay for the fuel to get it there, and to get it home if the buyer declines the purchase. These are a few of the issues facing buyer and seller expenses, but the answer in all cases comes from asking, “Does it seem fair?”