aircraft purchase

  • 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.

  • Tracey Cheek posted an article
    “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.

  • Tracey Cheek posted an article
    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.
     

    In Summary…

    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.

  • Tracey Cheek posted an article
    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?

    Side-By-Side Comparison of Two Similar Business Jets 'For Sale'

    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:

    1. 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.
    2. 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.
    3. Always perform a PPI and an appraisal, once you are serious about the purchase.
    4. Never make the final decision to buy based on your emotions.
    5. 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.

  • Tracey Cheek posted an article
    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 aapplegate@aerlex.com.

    This article was originally published by Aerlex Law Group on September 25, 2018 and in BusinessAir Magazine, September 2018, Vol. 28., No. 9, p. 48. 

  • Tracey Cheek posted an article
    What you should know about using 100% bonus depreciation for private aircraft. see more

    NAFA member, David G. Mayer, partner with Shackelford, Bowen, McKinley & Norton, LLP, discusses what you should know about using 100% bonus depreciation for private aircraft.

    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.

  • Tracey Cheek posted an article
    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
    • Carpet
    • 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:

    Charter

    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.

    Fractional Ownership

    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

    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.