Optimizing Value When Selling An Aircraft see more
NAFA member, Anthony Kioussis, President of Asset Insight, shares his viewpoint on optimizing the value of your aircraft when selling it.
Not many aircraft buyers acquire an aircraft with a specific date in mind to sell or replace an asset. While a little planning could help optimize their investment value, this thought process rarely comes into play during the exciting, and sometimes less than rational, aircraft acquisition period.
In a recent Pro Pilot Viewpoint article (November 2018, page 10) we discussed the importance of distinguishing between "low price" and "good value" in an effort to optimize an aircraft investment at point of purchase. Let's have a look at the financial dynamics that come into play when selling the asset.
I have yet to speak to an owner who believes their aircraft is anything but "the best" asset available for purchase when it is listed for sale. Fortunately, Asset Insight's tools allow for logic to prevail in the form of objective analytics and a standardized grading system allowing anyone to determine how their aircraft truly compares with like models listed for sale, as well as how it rates within the model's active fleet. There are also tools that make it possible to determine exactly how any aircraft's Residual Value is affected by the estimated expense of maintenance due, as well as the appraisal value of maintenance events completed. Simply put, you may have just completed a $1 million double-engine overhaul, but it may only add $750,000 (perhaps less) based on the aircraft's age and it's "market desirability."
Some aircraft owners, as well as inexperienced brokers, believe it is not possible to predict an aircraft's Residual Value (RV) more accurately than basing the aircraft's future value trend on the model's value degradation history. Thus, traditional RV forecasts start with an estimated Current Value, usually based on aircraft prices obtained from an industry "source." The Current Value estimate is then degraded based on the aircraft model's average historical annual depreciation percentage, and the resulting RV figures are usually presented as a line graph similar to the RV Trend line shown in Table A.
To read the full article, please click here.
This article was originally published in Pro Pilot magazine, February 2019, p. 10.
LBC Capital Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
FORT LAUDERDALE, Fla. - March 1st, 2019 - National Aircraft Finance Association (NAFA) is pleased to announce that LBC Capital, Inc., a subsidiary of Laurentian Bank of Canada, has recently joined its professional network of aviation lenders. "NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we're happy to add LBC Capital to our association," said Ford von Weise, President of NAFA.
LBC Capital's Aviation Finance team aims to facilitate business productivity by providing capital for the acquisition, sale and refinancing of corporate aircrafts including turbojets, turboprops and helicopters. The group serves corporations, high net worth individuals and aircraft operators within the general aviation market across Canada and the United States. They partner with manufacturers, brokers, aircraft owners, and various industry players by providing creative financing solutions.
"LBC Capital is delighted to join NAFA as we expand our aviation financing offering not only to Canadian business aircraft and helicopter buyers but now also to the US market," said Eric Provost, President of LBC Capital.
Much like NAFA, LBC Capital fosters a network of highly talented and dedicated professionals in the finance and aviation industries. LBC Capital and NAFA are committted to providing the highest level of service through their many partnerships, promotion of education and support of local communities.
About Laurentian Bank Financial Group
Founded in 1846, Laurentian Bank Financial Group is a diversified financial services provider whose mission is to help its customers improve their financial health. The Laurentian Bank of Canada and its entities are collectively referred to as Laurentian Bank Financial Group (the "Group" or the "Bank"). With more than 3500 employees guided by the values of proximity, simplicity and honesty, the Group provides a broad range of advice-based solutions and services to its retail, business and institutional customers. With pan-Canadian activities and a presence in the U.S., the Group is an important player in numerous market segments.
The Group has $CAD 45 billion in balance sheet assets and $CAD 29 billion in assets under administration.
The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowldge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit www.NAFA.aero.
Need for Speed see more
NAFA member, Brad Harris, Founder, President and CEO of Dallas Jet International, discusses the shrinking volumes in the pre-owned market.
AH: When we spoke back in January this year, you were pretty optimistic. Now that we are heading into the final quarter of 2018, how are things looking?
BH: 2018 is probably going to be the best year that Dallas Jet International has ever had. In speaking with my friendly competitors and colleagues in the aircraft brokering business,
they are all echoing the same sentiment. Starting in October 2016, our business took off and has not slowed down. It started before the Presidential election in the US, before Trump was even elected as a candidate. We are seeing tremendous activity in the United States and are now seeing Europe, the Middle East and China heating up. In addition, charter hours in the US and Europe continue to be strong. Deals are happening in the US, Europe proper, Russia, the Middle East and China. It is all very encouraging.
AH: How are the tax changes introduced by President Trump’s December 2017 Tax Cuts and Jobs Act, impacting aircraft sales and purchases? I am thinking specifically of the fact that the Act withdrew the Section 1031 “like-kind exchange” rules, that allowed someone to sell an aircraft and buy a new aircraft while deferring the recapture of depreciation.
BH: I thought the elimination of the 1031 like-kind exchange provisions in the Act would show up as a negative impact on aircraft sales; however, in reality, the fact that the Act brought in 100 percent expensing of not only new aircraft but now, pre-owned aircraft has been very positive. We have had a number of our buyers wanting to get an aircraft deal done by year-end so that they can take advantage of Trump’s 100 percent expensing. I see this having a real impact for closing numerous deals before the end of the year. We are currently telling our clients that if they plan on selling their aircraft or purchasing an aircraft, prior to year-end, they need to engage us now so that we have enough time to complete their aircraft transaction before December 31, 2018. Since there is no longer the 1031 like-kind exchange, in order to offset any recapture on an aircraft sale, the new or used aircraft would need to purchased and expensed all in within the same year of 2018.
AH: How long does it take to close deals in this kind of environment?
BH: It really depends on the type of aircraft you’re trying to close. A typical transaction takes between five and six weeks to complete. We tend to deal with larger aircraft, which translates to longer transaction timeframes. In this scenario, and depending on the complexity of the transaction, it can take upwards of six to twelve weeks to close. As a result, by the time it gets to mid-October, the purchaser or seller runs the risk of not closing by year-end. However, as the broker, we would most likely recommend to close the transaction by year-end for tax purposes and leave holdback money in escrow to be disbursed as needed for pre-buy discrepancy costs, test flight costs or any other transaction-related expenses.
AH: Determining the amount to be left in escrow could be a difficult conversation!
BH: Absolutely. For example, we recently had a transaction where the buyer wanted to close early on a Gulfstream G450. Our seller agreed to close early and we negotiated to leave
$200,000 in escrow for post-closing expenses. However, the post-closing expenses ended up being $346,000. In this rare situation, the buyer ended up having to come out of pocket the additional $146,000 because our agreement of the holdback was final at $200,000. Since December 2018 will likely yield higher-than-normal closing numbers with Trump’s tax law, a
holdback may be necessary if the aircraft is not returned to service before December 31, 2018. As brokers, we need to be mindful of the holdback amount and make sure it is enough to cover any estimated expense plus any unknown expense. I would recommend a higher holdback amount and make sure you protect your client.
AH: How is the supply and prices of the pre-owned aircraft market?
BH: As little as a year ago, brokers and dealers were complaining that there was an overabundance of pre-owned aircraft on the marketplace. However, in the last 12 months there has been a significant change in regards to low-time, well-equipped US aircraft aged fifteen-years and newer in the pre-owned aircraft marketplace. Which results in a limited supply of good and available pre-owned aircraft. Historically, ten percent of fleet for sale dictates a buyer’s or seller’s market. For example, if there is more than 10 percent of the fleet for sale, then it’s a buyer’s market. If there is less than 10 percent of the fleet for sale, it’s a seller’s market. Today, the percentage of pre-owned Falcon 2000’s on the market is 4.1 percent of the fleet, G450’s for sale are at 6.8 percent of the fleet and shrinking. There are only ten G650 aircraft available on the market today, which is just 3.2 percent of the fleet. The Global 5000 pre-owned market is down to 5.6 percent and the Global 6000 pre-owned market is at 3.6 percent. There are currently no Embraer Legacy 450/500’s on the market for sale. As stated
above, the historic norm for all categories is around 10 percent which is a significant Seller’s market. So, the tightening of the pre-owned market is very visible. I recently spoke at Embraer’s Industry Collaborators Summit in August 2018 and one of the points I made is that our customers need to grasp just how dramatically the market has changed. If you find an aircraft that meets your needs, the client needs to be prepared to act immediately and the buyer has to be ready to pay a reasonable price. As stated above, it is no longer a buyer’s market. We as brokers and dealers need to be smart about how we communicate with our clients. It is okay to tell our clients that the market is tightening up but that there are still good
deals out there and they should be patient but also be ready to move quickly when we send them the right deal. This is an exciting time to be an aircraft broker.
The original article was written and published by Noel Barton with Business Aviation Magazine, Issue 7, Autumn 2018, p. 48.
Pre-Purchase Inspections: Don’t Take a Hit at Time of Sale see more
NAFA member, George Kleros, Senior Vice President of Strategic Fleet Management & Support with JSSI, offers advice to help you avoid taking a hit on the value of your jet when selling.
When the term ‘Pre-Purchase Inspection’ is mentioned, it can create various thoughts in the minds of aviation professionals – not all of them pleasant. Why is that?
The main reason is that this one event can lead to unexpected, costly maintenance issues that may impact the sale of the aircraft.
There are at least five areas that should be addressed to adequately prepare for a Pre-Purchase Inspection, helping you avoid unexpected hurdles when it’s time to close on the sale of the aircraft.
Borescope – Know Before You Go There
For decades, performing an engine borescope prior to acceptance of the aircraft purchase has been a common occurrence. Many people believe the borescope is a standard procedure that is required, and that the transaction won’t move forward without it. However, the need for a borescope of the engine depends on how the buyer and the seller structure this process into a sales agreement.
There are areas that should be well understood before finalizing a sales contract and beginning the Pre-Purchase Inspection.
The first question the seller needs to ask is whether the aircraft hull insurance provider accepts any adverse findings, such as Foreign Object Damage (FOD), if the borescope is performed outside of an incident?
Performing a pre-purchase borescope may not be considered an ‘event’, and if the hull insurance provider does accept the finding(s) under this elective inspection, you need to understand what the underwriter is contracted to cover.
Typically, only direct damage is covered, while restoration of worn assemblies and parts will not be covered. Depending on the engine’s age, time before overhaul, or total time since last shop visit for on-condition engines, the newly discovered FOD could launch a premature overhaul event that may range from $400,000 to $4m in out-of-pocket costs for the seller.
If the aircraft is enrolled on an hourly cost maintenance program, from JSSI or an OEM, it is critical that the seller contact the program provider to understand allowances under their contract and the conditions under which the program coverage will be applied.
All the maintenance programs I have observed over 30-plus years in the industry have not covered FOD and do not recognize work performed outside of the required scheduled maintenance checks.
Maintenance programs vary greatly on how covered items are addressed when an engine enters a shop for a FOD event.
Many programs will cover airworthiness findings unrelated to FOD, but elective inspections or borescope inspections that are out of sequence may not be eligible for coverage. The key is to contact your maintenance program provider and seek permission first. Don’t expect forgiveness later.
Understand Your Sales Agreement Before the Inspection
The sales agreement is the primary tool used to control the process and define the terms of the purchase. Simple sentences or phrases within the agreement are typically not that simple. Interpretation of these words in the contract can drag out or collapse a deal. For example, a term such as ‘discrepancies discovered’ versus ‘airworthiness discrepancies discovered’ can make a significant difference.
In one scenario I witnessed, damage was discovered in an engine following a borescope inspection. The FOD was minor, and the OEM’s engineering team issued a technical variance allowing the condition to continue with no special changes to the maintenance schedule.
When the owner was ready to sell the aircraft, the sales agreement stated any ‘discrepancies’ – and this condition was a discrepancy. It was outside of normal, but acceptable to the OEM with a release letter.
The buyer felt strongly that there was a risk and challenged the seller to correct the problem, or the sale would not proceed per their agreement. The result was an unexpected ‘out-of-pocket’ expense to the seller that could have been avoided.
Know How Much ‘Your’ Aircraft is Worth
It is important to set a reasonable expectation when planning to sell an aircraft. To do this, you should understand what your aircraft is worth prior to listing it for sale. Having an appraisal performed on your aircraft by an accredited appraiser is a valuable exercise.
It can also be beneficial to keep tabs on the aircraft’s value with an appraiser as part of the life cycle plan of owning such an asset. The in-service market values of business jets today have been steady but not stellar and can change significantly from month-to-month.
Just because there is a jet like yours ‘For Sale’ online for an asking price of $8m, you should not expect your aircraft will be worth the same, especially 60 or 90 days later.
Depending on the current inventory, the length of time on the market, the interior layout and the maintenance condition of the aircraft, the value could easily swing drastically in two very different directions.
Hire an Expert
As a seller, you may feel that selling the aircraft without a Pre-Purchase Inspection is advantageous and that avoiding this process could save money. However, the risk of not conducting a Pre-Purchase Inspection usually outweighs the savings and could possibly lead to legal issues if the buyer feels you misrepresented the aircraft.
It is good practice to consult or hire a technical expert to represent you during an aircraft sale.
Before signing the sales agreement and approving the pre-purchase checklist, it is important to have a technician that is an expert on your aircraft type to work with you and the broker representative. They will be there to keep the pre-purchase fair and balanced and help select the proper facility to perform the Pre-Purchase Inspection.
All parties want to be protected, but there are reasonable limits as to how much should be reviewed and looked at, as well as any technical inspections that are essential for the pre-purchase.
Match the Logbooks with Maintenance Tracking System
A very simple yet important check to perform is comparing the aircraft and engine maintenance status report to the actual maintenance entries in the aircraft records. This review could be another task you have the maintenance expert perform for you prior to listing the aircraft.
There will always be a few errors, but most will be very minor. However, during the audit you don’t want to find a major documentation issue that will prolong the Pre-Purchase Inspection when the timing is critical.
A major finding may create other concerns, ultimately driving the buyer or seller away from the deal. This could also ground the aircraft until the issue is corrected at considerable costs.
There are numerous tasks to consider when preparing to sell an aircraft in today’s market. But if you have these five areas covered, you will minimize your risk of ending up on the short-end of the transaction.
This article was originally published in AvBuyer on March 7, 2018.
Scaling the Heights see more
NAFA member, Brian Proctor, President and CEO of Mente Group, reflects on a record 2018.
Q: It seems that 2018 is turning out to be a year when a lot of aircraft get bought and sold, how has it been for you and Mente Group?
BP: We are having a record year, both as far as buying and selling aircraft are concerned. We are already up on the whole year 2017, and we still have the fourth quarter in front of us. At this rate, and with the transactions already in the pipeline for the fourth quarter, I would expect 2018 to be around 40 percent better than last year, for us.
At the same time, our appraisals business is up around 200 percent on last year. We started this business two years ago and it is growing rapidly. That is a good sign because it means that the banks and finance companies are seeing a lot of demand from people who want to finance aircraft transactions.
Q: Is it mostly the banks and insurance companies that you are doing appraisal work for? And is that mostly for pre-owned?
BP: It is the banks and leasing houses that are keeping us busy. We do a lot of new aircraft appraisals as well. You have to remember that every negotiation with an OEM over a new aircraft purchase is different, and every aircraft is optioned differently. So, lenders want to make sure that what they are financing has the value that they have been led to believe it has.
Much of what we do is document driven rather than going out on site and actually examining the aircraft. The banks use our appraisal to work out the loan-to-value structure for the deal that they feel comfortable with.
We started the appraisal business around two years ago and we have made significant investments in the business since then. We have added another experienced aircraft appraiser to the team, plus a data scientist who manages our online database. We have put a lot of money into this and it allows people to go online and manage their portfolio of aircraft. Last year our database quoted 700 aircraft transaction datapoints and it is up almost as much again so far this year.
Q: What are you using to drive data in this database?
BP: We have a number of sources for the data, but most of it is driven organically by our own researchers and sales folk, plus the business development people. We qualify the database by the quality of the data source and we prioritize our own data, and that of our contacts, since we know this data is going to be good.
Q: How important to you is the appraisal business?
BP: It has been very good for us and we are working at extending the reputation and reach of our appraisal service in the market. What is really good for us is that it touches a different clientele and is also more stable in terms of cash flow, so it is a very useful additional revenue stream for us.
Q: How much do you think Trump’s 100 percent expensing of new and pre-owned aircraft is driving the current deal flow?
BP: It has been very significant. Remembering back, the Bill was signed off on the 18th of December 2017 and by the end of the year, or inside of two weeks, we had two clients come forward and buy aircraft. Moreover, those transactions were not even on our radar on December 18th. So that shows the kind of catalyst the Bill was for deals.
Right now, we have a number of clients working to get closure on deals before the end of calendar year 2018 so that they can claim the 100 percent depreciation against the current year’s profits. It is a huge incentive.
However, we have two headwinds in the market right now. The first is that it has become increasingly more difficult to find good quality aircraft. The second is that when you do get them it is getting very hard to get them into an MRO to get pre-appraisal delivery work done on the aircraft. The MROs are all struggling with maximum capacity. Where it used to be possible to phone them up and get a plane booked within a week, now you are lucky if they can fit the job in next month or the month after.
Q: Playing Devil’s advocate for a moment, do you worry that sales are perhaps bunching up and you could be looking at a long at spell a bit further down the track as far as transactions are concerned?
BP: What I say is bring on the sales. I never worry about sales bunching up. But there is certainly price pressure out there now. I have seen several clients who were looking for pre-owned aircraft, shift to considering new aircraft because the price differential between the two is no longer as attractive as it was.
Clearly, it is becoming a very good time to be a seller, though finding a good replacement aircraft when their existing aircraft goes away, is likely to be a problem. We are not back yet to the crazy days of 2007, but I would liken the current period to what we saw in, say, 2004 or 2005.
Q: What are you seeing with respect to the slimming down of pre-owned inventory?
BP: We have done six G550 transactions in the last two months. When we started the search for suitable G550s for a particular client back in February this year, there were about 30 of them on the market. We began to whittle the choices down and the numbers kept shrinking as we were evaluating them. We ended up with just three aircraft that we could show the
client. The point is that you cannot even say that there is, say, 3.2% of the fleet of a particular model available in the pre-owned market. If you have a discerning client with reasonable constraints on what they are looking for, you could end up with just two or three aircraft to pick from, even if there was 10 percent of the fleet available.
Q: An impossible question, admittedly, but how long do you think the present upturn can last for?
BP: North America is booming, and we are starting to see a lot more interest in aircraft acquisitions out of Western and Eastern Europe and Africa. The Middle East is still quiet and has yet to turn up. So, I would say there is at least a year of strong demand out there that has yet to make its way to the market.
Another point is that if you see the US dollar turning down, that will really stimulate demand for aircraft from Europe and Asia, since it will be tantamount to a big price discount on US manufactured aircraft.
This article was originally published in Business Aviation Magazine, August 2018, p. 26.
Shift to Sellers Market Expected as Business Aircraft Demand and Ask Prices Increasing see more
NAFA member, Asset Insight, releases third quarter 2018 market report.
October 31, 2018 – According to Asset Insight’s quarterly Market Report (AI2 Market Report), the third quarter of 2018 saw strong demand for younger models of for-sale aircraft, contribute to the increased value for that group of inventory. Conversely, older models spend considerably more time on the market and is impacting the average pricing data.
The 3Q 2018 AI2 Market Report analyzes values for every production year of every modern make and model Business Class aircraft, while the Report’s maintenance analytics cover 93 fixed-wing models and 1,553 aircraft listed for sale.
Other trends detailed in the 3Q 2018 Market Report include:
Younger jet aircraft demand, and low availability, is raising their values; older models continue to linger and negatively impact average pricing figures;
Ask versus final Transaction Value gap narrowed substantively during 3Q;
Demand strong for younger models; overall down slightly due to Small Jets;
For sale fleet attains "Excellent" Asset Quality Rating posts a 12-month best;
Excellent Asset Quality improves inventory fleet's Maintenance Exposure;
Maintenance Exposure to Ask Price Ratio ("ETP Ratio") continues to hinder sales of older aircraft.
“With a low number of young aircraft for sale on the market, and a very high demand for those limited aircraft, the value for those excellent quality aircraft increased in Q3” said Tony Kioussis, president of Asset Insight, LLC. “The seller's market in the recent model aircraft category does not translate to older for-sale inventory, however. In fact, we saw older, aircraft with higher Maintenance Exposure to Ask Price ratios spend 58% longer on the market than their younger counterparts. We forecast that average prices for lower-time aircraft will continue to increase over the next 90-days, and the price of higher-time units will continue to decline, albeit more slowly, through the end of 2018.”
Note to editors, managers and owners: Please see the bottom right corner of each category page for a concise summary of the results and conditions in that specific market segment.
Exclusively available from Asset Insight, the AI2 Market Report includes eTrendTM, a 90-day forecast for aircraft value by make and model. This tool is especially helpful to sellers who are evaluating offers on their aircraft while concurrently considering if their prospects are likely to improve.
Statistically, Asset Insight's eTrendTM forecasts are based on some of the most robust data analytics in the industry and have been thoroughly back-tested to confirm a significant degree of accuracy.
This press release was originally published Asset Insight on October 31, 2018.
What You Should Know Before Purchasing a New Aircraft see more
NAFA member, Essex Aviation Group shares what you should know before purchasing a new aircraft.
Whether it’s for business or personal use, there are many benefits to private aviation. However, there are several factors to take into consideration as you evaluate your options.
New vs. pre-owned
There are benefits to purchasing both a new or pre-owned aircraft. A pre-owned aircraft can be more affordable while offering you the option of refurbishing, upgrading or customizing certain parts to fit your needs. If you’re acquiring a new aircraft, it can also be fully customized but the delivery could take anywhere from 12 to 18 months longer than if you purchased a pre-owned aircraft.
Start the financing process early
If you choose to finance your aircraft, beginning the process early will leave yourself enough time to compare rates and request proposals from potential lenders. It’s important to understand that getting a loan or lease for an aircraft is a complex process, so researching your financing options sooner rather than later is advised.
How will you be using the aircraft?
Are you going to be using the aircraft for business or pleasure? If it’s for business, you may be able to receive certain tax benefits. An aviation advisor will be able to recommend a legal or tax advisor who can work with you to maximize any possible benefits.
Determine which features are important to you
It’s easy to say, “I want it all” but this isn’t always feasible. Most aircraft can meet many needs and desires of the purchaser but some may not be able to meet all of your necessities. An aviation advisor can help you evaluate your aircraft model options and assist you in finding one that meets your requirements. They will also be available to help you navigate all of the available information so that you can fully understand the pros and cons of each option.
The 80/20 rule
Overbuying can be tempting when shopping for an aircraft. It’s important to consider exactly how you will be using the aircraft to avoid purchasing one that includes more than you need. Will you only be traveling for meetings a few states away? Or will you need the aircraft for international, monthly trips? Your aircraft should meet your requirements 80 percent of the time. If you will only be traveling overseas occasionally but will have monthly business trips, an aircraft for business trips will be most ideal.
Bring your aviation advisor on demo flights
There are often many opportunities for demo flights on different types of aircraft to help you make a purchase decision. Bringing your aviation advisor along for the flight can help you make a decision, as long as they are professional and unbiased.
The process of acquiring a new aircraft
When purchasing a new aircraft, the process typically involves:
The initial evaluation
When purchasing a new aircraft, you’ll have many decisions to make. These can include selecting the floorplan and any specifications or materials that are also needed. You can also choose a “white-tale” aircraft, which is one that has already been produced but gives you very limited opportunities to change things.
When you’ve selected an aircraft for purchase, you will enter the layout and design phase. An aviation advisor can help you through the series of specification meetings.
Aircraft production begins once there is a final and approved design in place. Production can take up to a year or longer, depending on several variables.
Once the aircraft is ready for final delivery, your aviation advisor and the existing flight crew will work through a formal delivery and acceptance process.
Acquiring an aircraft can become complicated since there are several parties involved. Working with an unbiased aviation advisor will offer value and comfort throughout the process, and will help you find the aircraft that’s right for you.
Essex Aviation Group, Inc. was founded in 2013 with the primary goal of providing clients with the most current industry knowledge and experience, a vital component in evaluating business and private aviation transportation needs.
Representing clients in a wide range of services, Essex builds client relationships through dedication to trust, integrity and a level of responsiveness not found anywhere else. Services include new or pre-owned aircraft acquisitions, new aircraft completion management, pre-owned aircraft refurbishment and upgrade management, block and ad hoc charter services, and much more.
This article was originally published by Essex Aviation Group.
Who pays for what? Splitting aircraft sales costs is about fairness. see more
NAFA board member and President of AOPA Aviation Finance Company, Adam Meredith writes about how to fairly split the costs of buying an aircraft.
You finally found it—that first turboprop. The aircraft looks good, but there are inspections, demonstration flights, and paperwork prior to any sale. Who pays for what as the purchase proceeds? The answer is all about fairness.
Know in advance
Have a consensus gathering meeting with the seller before the pre-buy inspection about how you are going to handle any problems found with the aircraft. What will happen if there are so many squawks that you no longer want to continue with the purchase? When you agree, put that information in the purchase-and-sale agreement. It’s much better than getting halfway through the purchase and discovering problems without a plan for addressing them.
If the pre-purchase inspection is also an annual inspection, include that in the purchase-and-sale agreement, adding who is responsible for the costs in the event the sale falls through.
Who pays what?
Obviously, the buyer pays for a pre-purchase inspection. Any airworthiness directives that need to be complied with are almost always the responsibility of the seller. Nice-to-have items that don’t affect the aircraft’s airworthiness—especially those that are expensive—usually end up getting negotiated. However, if there’s a service bulletin item, those too are generally the seller’s responsibility. In general, if something needs to be done, the seller pays. If it would be nice to repair or replace something, the buyer pays.
Here’s an example. Maybe the emergency quick-donning oxygen masks for the pilot and copilot could use an upgrade, the old ones work but are looking a bit tattered. The buyer may pay for that. But if the aircraft is approaching a limit for a landing gear overhaul, the seller will likely reduce the price to reflect the future cost. Alternatively, the buyer could just request the landing gear be overhauled as part of the inspection. In the end, negotiations tend to ebb and flow based on not only the personalities of the buyer and seller but also the supply and demand of the particular make and model aircraft.
Title and escrow costs
Not everyone recognizes the benefits to both the seller and buyer of closing a transaction with a title and escrow company. Both parties have a vested interest in making sure the documents are properly filed and thus should split that cost. Here’s a scenario that should give pause to the value from a seller’s perspective: Your buyer flies off on a “pink slip,” nothing is filed with the FAA and there’s an incident with the aircraft. Who do you think the attorneys are going to come after? Whoever has the deepest pockets! Even if it’s meritless, you may have to defend yourself and it’s going to come out of your pocket.
If the buyer is going to the seller’s location for a demonstration flight, generally the seller won’t charge the buyer for the fuel, but may limit the flight time. However, if the buyer is requesting to meet the seller away from the aircraft’s home airport, the buyer should expect to pay fuel costs. If the buyer wants to use his or her own shop for the pre-purchase inspection, same thing, the buyer should expect to pay for the fuel to get it there, and to get it home if the buyer declines the purchase. These are a few of the issues facing buyer and seller expenses, but the answer in all cases comes from asking, “Does it seem fair?”
NAFA member David Mayer gives tips on buying a jet outside the US. see more
NAFA member David Mayer gives tips on buying a jet outside the US.
The recent buyer’s market for preowned business aircraft has become a seller’s market. U.S. buyers recognize this phenomenal change and, consequently, search the globe to buy the right preowned aircraft among an estimated 900 saleable units left for purchase.
New aircraft sales aside, there are several points to consider when buying an aircraft outside the U.S. primarily for return and registration of the aircraft in the U.S.:
- Select the right aircraft with the support of experienced broker-advisors.
Not long ago, a client traded aircraft twice in a year; and, while the third time was the charm in that case, today’s global market might not offer such choices. To improve the chances initially to make the right purchase, a buyer should hire a quality aircraft broker or independent consultant with global market experience. This professional can support a buyer in all aspects of the purchase process and guide negotiations with sellers, including sellers emboldened by a strong market in their favor.
- Inspect the aircraft thoroughly using well-qualified, technical experts.
These experts should develop a list of delivery conditions and oversee repairs needed to fulfill them. U.S.registrants should focus on obtaining a U.S. Standard Airworthiness Certificate (SAC). A private aircraft inspector authorized by the FAA—called a Designated Airworthiness Representative (DAR)—determines whether to issue the SAC. This approval is an indispensable precondition to U.S. registration.
Sellers typically pay for airworthiness repairs found in pre-buy inspections as determined by the inspection facility. The DAR and the inspection facility should confer and reach the same conclusion as to repairs needed to issue the SAC. In the seller’s market, sellers might insist on a narrow definition of “airworthiness” repairs as those specified by the DAR or inspection facility.
If delivery conditions in the aircraft purchase agreement specify more repairs than the DAR’s items, it seems plausible that sellers might make extra repairs to meet the aircraft delivery conditions, but only if the buyer pays for them. In other words, sellers might try to reallocate inspection costs to buyers more often than in the recent past.
- Negotiate the timing of deregistration from the seller’s country’s registry and registration in the U.S.
The timing of the DAR inspection deserves close attention as a pacing item in the transaction. It plays into tricky timing of deregistering the aircraft as a condition of registering it in the U.S. The Chicago Convention allows only one registration at a time per aircraft.
The technical expert and the broker-advisor together can assist the buyer in finding and arranging an aircraft inspection by the DAR in a timely manner. They can coordinate with the DAR to deregister the aircraft at the seller’s national aviation authority (NAA) and register in the U.S. Buyers should be alert to sellers who try to shift deregistration timing risk to the buyers, though joint solutions exist that should minimize this negotiation.
- Conduct extensive diligence to avoid disputes.
Absent credit support, the limited liability companies-sellers (LLCs) or the equivalent entities worldwide, generally have zero financial ability to defend the titles they transfer to buyers against anyone who has filed a lien or makes other claims against the aircraft being sold. Seeking such title defense outside the U.S. against an LLC or a creditworthy seller might be even more problematic in a dispute, depending on, among other factors, which laws govern the deal.
To help evaluate and mitigate these risks, the seller and the buyer should each engage lawyers in the NAAcountry. Diligence starts with typical searches of the NAA registry. For signatory countries to the Cape Town Convention, called “Contracting States,” the buyer should also search the “International Registry” for outstanding “international interests” of financiers such as security interests or leases, any “non-consensual right or interest,” where permitted, such as repair liens, and a clean title history that shows no gaps in the chain of title.
In addition, the lawyers should search filing offices and other NAA registries in countries frequented by the seller for filings by tax authorities, operators, and repair facilities. Ideally, at or before closing, the seller will pay all bills, discharge any adverse claim or interest and deliver documents that the buyer’s and seller’s lawyers concur will protect their respective clients from future disputes.
- Export with assistance.
Aircraft operations, sales, and re-registration attract customs, tax, NAA, and other governmental authorities. Neither the seller nor buyer should tangle with any of these authorities as they have broad authority that can disrupt an aircraft purchase. Timing is important. A buyer can and should seek export guidance from an export specialist before signing the purchase agreement and making errors that result in paying avoidable taxes, duties, and penalties.
Plan ahead for state and federal taxes in the U.S. U.S. buyers (and others) might think that, when the buyer flies away from the delivery location exempt from value added tax (VAT) or other sales-type taxes, the buyer will likewise be exempt from sales tax in the state of the permanent U.S. base of the aircraft. This assumption may be wrong and, in certain states, expose a buyer to substantial use taxes such as in Texas where use taxes may amount to 8.25 percent of the purchase price.
One of the most frequently asked questions by clients since the inception of the new tax law in September 2017 has been: Can I use 100 percent “bonus depreciation” despite my anticipated personal use of the aircraft? That question requires in-depth analysis. The results have directly affected the choice of aircraft. Accordingly, federal income tax, as well as state tax planning should begin before, not after, an aircraft purchase generally without delay to complete international transactions.
- Structure your flight operations documents before your flight to the U.S.
Purchasing an aircraft outside the U.S. does not change the buyer’s obligations to comply with the FARs in the U.S. For example, an owner should designate qualified “operators” to exercise “operational control” of the aircraft typically under FARs Part 91 or Part 135. Also, the buyer should avoid falling into the “flight department company” trap by letting an LLC or other owner with no other business activity illegally act as the “operator.” Buyers should, therefore, carefully structure and execute appropriate agreements that comply with the FARs before their first flight to the U.S.
Cross-border purchases of preowned aircraft produce complex issues for buyers and sellers. Although buyers might accept some increase in their risks or costs compared to long-standing norms, taking prudent risks differs from making avoidable mistakes. Still, buyers can purchase quality preowned aircraft outside the U.S. with confidence and success by hiring experienced, competent, and objective brokers or independent consultants, technical experts, export specialists, and lawyers to help them navigate through the international seller’s market.
This article was originally published in AIN on July 13, 2018.
AMSTAT releases latest Business Aircraft Resale Market Update Report showing slightly slower
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AMSTAT releases latest Business Aircraft Resale Market Update Report showing slightly slower Business Jet resale transaction activity so far in 2016.
Tinton Falls, NJ – October 24, 2016: According to AMSTAT, the first three quarters of 2016 saw a slightly
lower percentage of the Business Jets and about the same percentage of Business Turbo‐Props turning
over as resale transactions versus the same period in 2015.
In the first three quarters of 2016, 7.1% of the global Business Jet fleet turned over. This percentage
was down versus 7.4% in the same period in 2015. By comparison, 5.8% of the Business Turbo‐Prop
fleet turned over versus 5.7% for the same period in 2015.
Resale Retail Transaction activity year to date was up for Heavy Jets with 5.9% of the fleet turning over
in the first 3 quarters of the year, compared to 5.5% for the same period in 2015. In contrast,
transaction activity for the Medium Jets resulted in 7.1% of the fleet turning over versus 8.2% for the
same period in 2015. For Light Jets and Turbo‐Props, Resale Retail Transaction activity was largely flat
for the first 3 quarters of the year compared to the same three quarter period in 2015 (7.8% versus 7.9%
and 5.8% versus 5.7% respectively).
The report also shows that business aircraft inventory levels continue to climb but with some evidence
of a recent plateauing in certain market segments. 10.8% of the Heavy Jet fleet is now for sale. This
percentage is up from 10.4% at the start of 2016. Over the last 24 months more of this inventory has
come from Newer Heavy Jets, with 10% of that fleet for sale today versus 8% in 2015. Today 11.6% of
the Medium Jets fleet is available for sale versus 11.2% at the start of the year. As with Heavy Jets, it is
the Newer Medium Jet models that are seeing their inventory increase the most. The Light Jet inventory
is currently 11.8% of the active fleet. This up since the start of the year but flat compared to the same
time last year. 8.5% of the Turbo‐Prop fleet is for sale, up since the start of 2016 but down from 8.7% a
Average Asking Price trends have been a mixed bag so far in 2016. The Average Asking Price for a Heavy
Jets is $13.9M down 6.6% year over year. The increase in Heavy Jet Resale Retail Transactions so far in
2016 has not been enough to raise Average Asking Prices. The Average Asking Price for a Medium Jet is
$3.4M, down 7.8% from a year ago which is consistent with falling Resale Retail Transaction activity and
increasing inventory in this market segment. The Average Asking Price for Light Jets is $1.7M up 6.7%
versus a year ago and $1.4M for Turbo‐Props up 5.5% versus a year ago. These are curious trends given
that transaction activity and inventory levels are essentially flat in these markets.
For a full copy of the report go to: http://www.amstatcorp.com/docs/APR‐MUR‐1024‐2016.pdf
About AMSTAT, Inc.
AMSTAT is the leading provider of market research information and services to the corporate aviation industry. Founded in 1982, and based in Tinton Falls, NJ, AMSTAT introduced the concept of providing researched information to corporate aviation professionals.
AMSTAT’s mission is to provide timely, accurate, and objective market information to its customers. AMSTAT products and services provide aviation market and statistical information that generates revenue and delivers competitive advantage to brokers/dealers, finance companies, fractional providers, and suppliers of aircraft parts and services.
New Jersey: (732) 530-6400 x147 / email@example.com / www.amstatcorp.com