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Amanda Applegate

  • NAFA Administrator posted an article
    Aircraft Registration Numbers: Personalized “Plates” for Aircraft see more

    NAFA member, Amanda Applegate, Partner at Aerlex Law Group, discusses aircraft registration numbers.

    First-time aircraft buyers looking at a potential acquisition may not realize that the registration number painted on the fuselage or vertical stabilizer of the aircraft can be changed and personalized by the new owner. “Tail numbers” – the name often used when referring to aircraft registration numbers – can be chosen by an owner in much the same way as a “vanity” license plate for an automobile. When selecting a registration number for a U. S. registered aircraft, the following rules apply:

    An N-Number can be in any of these formats:

    • One to five numbers (N12345)
    • One to four numbers followed by one letter (N1234Z)
    • One to three numbers followed by two letters (N123AZ)

    N-Numbers do not have:

    • A zero as the first number
    • The letters “I” or “O”

    In order to check the availability of a registration number, the following website can be used: 

    http://registry.faa.gov/aircraftinquiry/nnav_inquiry.aspx

    However, it is worth noting that reserving a registration number can be done online, in person at the Federal Aviation Administration (“FAA”) registry filing window or through the mail. Therefore, sometimes a registration number may appear available online when it is not actually available.

    If the registration number is available, it can be reserved for a fee of $10.00. It is important to reserve the registration number under the name of the new owner or a relinquishment and reservation in the new name will have to take place later.

    Once the registration number has been reserved, the FAA will send a written notice of confirmation of the reservation. If this confirmation has been received but the assignment has not yet been approved by the FAA, owners oftentimes will paint the new number on the aircraft but cover it with a decal reflecting the present registration number until such time as the change has been approved by the FAA.

    Once the registration number is reserved, it must be assigned to the aircraft. If the change is being done at the time the aircraft is being purchased, it is best to submit the request for the registration number change with the documents filed for closing with the FAA civil aircraft registry. The letter requesting the registration number change should include the name of the aircraft manufacturer, model designation, serial number, and the current registration number.

    When the FAA approves the registration number change, the agency will mail an AC Form 8050-64 to the owner. This is the Assignment of Special Registration Number and authorizes the placement of the new registration number on the aircraft. Once the owner places the new registration number on the aircraft, the owner must do four things:

    1. Within five days after the number is placed on the aircraft, the owner must complete and return the 8050-64 form showing the date the registration number was placed on the aircraft.
    2. Within 10 days, the owner must take a copy of the 8050-64 form and the existing airworthiness certificate to a FAA Flight Standards District office (FSDO) to obtain a revised airworthiness certificate.
    3. The owner must carry a copy of the AC Form 8050-64 with the current Certificate of Aircraft Registration, AC Form 8050-3. These documents provide temporary authority to operate the aircraft under the new N number until the replacement Certificate of Aircraft Registration is received.
    4. The owner must notify the aircraft insurance provider of the registration change.

    A seller who wishes to keep the registration number currently assigned to an aircraft that is being sold should make retention of that N number one of the terms of sale. If the seller is going to retain the current registration number, then the parties need to determine, as part of their negotiations, which party will pay for the cost associated with the change. Additionally, some sellers may wish to establish a deadline on when the registration number will be assigned back to them. However, it is important to note that neither party controls how fast the FAA issues the 8050-64 form and, therefore, language should not obligate the parties to a timeline they cannot control. If a registration number change is being done in conjunction with a sale, it is best to file the request for the registration number change at the same time the closing transaction documents are filed with the FAA registry.

    Creating a unique and special registration number for your aircraft can add a bit of fun to the ownership experience. However, the cost of the personalization must be properly allocated to the responsible party. Additionally, the timing of the change should be considered in order to avoid causing unnecessary complications in the closing of an aircraft acquisition.

    This article was originally published in BusinessAir Magazine, November 2020, Volume 30, No. 11.

     

  • NAFA Administrator posted an article
    Aircraft Fractional Programs: A Solution During a Pandemic? see more

    NAFA member, Amanda Applegate, Partner at Aerlex Law Group, discusses aircraft fractional programs.

    Due to COVID-19 there has been a significant increase in the number of individuals who previously were comfortable flying commercially that are now exploring the idea of traveling on private aircraft. Over the past decade, the group of individuals who could afford to fly privately has increased but the number of people who fly privately has not increased at the same rate. The reasons that some individuals elected not to fly privately before are now outweighed by the health and safety concerns caused by COVID-19. Many people currently considering private aviation are looking for temporary solutions, believing that science will lead us through the pandemic eventually. Recently I have been asked if fractional ownership is a good solution.

    By way of background, there are many ways to travel privately. Ad hoc charter requires no commitment and each flight is scheduled separately through a charter broker or a charter operator. A great option for those who only want to travel privately until health concerns go away and who think they will go back to flying commercially sooner rather than later. Next in the private travel hierarchy is block charter/membership programs where a single provider is used for a certain number of hours or days, often paid in advance. This is a good option for an individual who wants consistency, wants one person to call for private flight solutions and/or who is willing to make a small commitment in return for reduces rates or other benefits not available under the ad hoc option. Next comes fractional ownership or fractional leases where a single provider is selected and a minimum commitment is required, usually at least a couple of years. Finally, the option that requires the most commitment is whole aircraft ownership, which entails owning and operating an aircraft.

    The fractional market has changed significantly over the past 20 years. The number of national fractional providers has decreased while the number regional providers have increased. Additionally, in 2020 we have seen many of the long-standing fractional providers offer new programs, products and aircraft types. As a result of the changing market, there is not a single best program for all individuals. 

    When exploring the various fractional providers and their various offerings, it is important to understand how the fractional share will be used. If you can generally predict the number of hours needed per year and the flights which will be flown, it will help determine the best program offering. Further, it is important to understand how long of a commitment you are willing to make to the ownership (or leasing) of a fractional share. The shorter the commitment period, the less it makes sense to own a fractional interest, and instead a lease (if available) of a fractional share may be more advantageous. As with any capital investment, the longer you plan to own something the more the capital investment makes sense. For example, if you really like a particular aircraft model and know with certainty that you want to use that type of aircraft for 5-10 years, then fractional ownership would be a far better solution than if you think your mission and thus aircraft type will change in the next couple of years. Furthermore if the aircraft will be used for personal use and there is no tax advantage to owning, then a lease may be a better option.

    Things to think about when making a decision on fractional providers:

    1. Number of hours needed per year
    2. Expected flight patterns (some of the newer enhancements make longer flights more affordable)
    3. Purchase and lease option available?
    4. Guaranteed aircraft – Is the aircraft you are purchasing or leasing guaranteed (or can a lesser aircraft be provided) and what are the peak travel day restrictions
    5. Other program restrictions or enhancements

    With the right flight data, an estimate of the number of flight hours needed per year and the knowledge of commitment level, it is easy to determine the all-in cost per hour of the various programs. However, the analysis does not stop there. As with all service products, it is not solely a determination to be made purely on price. Intangible factors should also be considered such as appearance of aircraft, on-time performance, cultural fit between customer and prospective providers, and customer service.

    When considering entering into a fractional program for the first time it is extremely important to take your time to make the right determination and try not to rush through the process in order to accommodate an upcoming flight. Take your time, get to know each provider and their offerings and select the program that best suits your individual flying needs, commitment level and who will provide the service level you expect. Fractional programs may be a good solution for first time private aviation flyers looking to avoid commercial airlines, but the particular program and product should be closely considered.

    This article was originally published by Aerlex in BusinessAir Magazine, October 2020, Volume 30, No. 10.

  • NAFA Administrator posted an article
    Cross Border Transactions During a Pandemic see more

    NAFA member, Amanda Applegate, Partner at Aerlex Law Group, discusses what to consider during cross border aircraft transactions during a global pandemic.  

    During the global pandemic, many US based aircraft buyers are only considering US registered aircraft due to the logistical challenges caused by COVID-19. However, a willing buyer with an expert acquisition team may be able to find a better pedigreed foreign-registered aircraft at a lower price in today’s market. Cross border transactions in 2020 are unpredictable, challenging, time consuming and require a team who can handle unexpected issues and react to various situations which may arise. Here are some of the important elements to consider in these complicated 2020 cross border transactions.

    1. The aircraft purchase agreement (the “Agreement”) should be a detailed road map of the transaction. It should set forth the chronology of the entire purchase process, and identify who will pay for each step. The timelines in the Agreement must allow for delays which are outside of the control of the parties due to COVID-19. Also, the parties should determine if extensive delays would allow termination of the Agreement, and if so, include in the Agreement. In addition to all of the key concepts that should be in every Agreement, the Agreement for a cross border transaction in 2020 should also clearly specify: (i) which party pays for the correction of airworthy items necessary to allow the aircraft to be registered in the US; (ii) which party pays the cost of import into the US; (iii) which party has the responsibility for the export, import and customs documents; (iv) when the full purchase price has to be in escrow; and (v) when the deregistration process starts and when all of the documents can be released for filing.

    2. The Agreement should allow for a visual inspection. With the COVID-19 travel restrictions changing frequently, it is important that the team who conducts the visual inspection understands local restrictions. During the visual inspection, it is important for the buyer to have a designated airworthiness representative (“DAR”) present to determine if the aircraft will be considered airworthy in the United States. If the aircraft is not deemed airworthy, the DAR can assess what work will need to be done to meet the standards required for issuance of an US airworthiness certificate, and a repair facility can estimate the cost of these items. Understanding these expenses before incurring the inspection fees and before the deposit becomes nonrefundable is very important. It can be very useful to have the pre-purchase inspection take place in the United States so that the buyer can easily view the aircraft prior to purchase and eliminate some of the complexities with traveling during the pandemic. If this is the case, it is important to make sure the seller correctly imports the aircraft into the United States prior to the start of the inspection.

    3. The Buyer needs to build an expert transaction team that includes an onsite technical representative at the inspection facility, the DAR mentioned above, a licensed and bonded United States Customs Broker, and aviation counsel that can, among other responsibilities, coordinate and gather relevant information from local tax counsel, and local title counsel to insure that there are no tax issues with closing and that good title is being conveyed to the buyer free and clear of any local liens or encumbrances that may have attached to the aircraft in the country of registration.

    4. Following a satisfactory visual inspection and pre-purchase inspection, buyer will move towards closing the purchase of the aircraft. In order to start this process, seller deregisters the aircraft from the current country of registration. Depending on how the Agreement is drafted, the seller may also be required to provide an export certificate of airworthiness in favor of the United States.

    5. The Agreement should require that, immediately upon receipt of the notice of deregistration and without any further requirements, the escrow agent will simultaneously wire the proceeds of the sale to the seller and file the bill of sale and registration application with the FAA.

    6. The FAA treats aircraft entering the United States from a foreign registry as a priority and a Temporary Certificate of Aircraft Registration (“Fly Wire”) is typically issued within one to two days following confirmation of deregistration and filing of the appropriate registration documents with the FAA. If the aircraft has been deregistered outside of the United States, the aircraft cannot be ferried to the United States until issuance of the Fly Wire.

    7. The Temporary Certificate of Aircraft Registration should be sent to the DAR who is ready to issue the Certificate of Airworthiness (“C of A”). Prior to issuing the C of A, the DAR will need confirmation that the aircraft has the new United States registration number on it and the transponders have been re-strapped. 

    The key items to remember in purchasing a foreign registered aircraft are: perfecting the Agreement; hiring a DAR, a licensed and bonded United States Customs Broker and an expert transaction team; understanding the costs of obtaining the C of A (and who pays those costs); and sequencing the buying process in a way to properly deregister, register, export and import the aircraft while, at the same time, avoiding unnecessary taxes. To be sure the process is more complicated than buying a US registered aircraft, but if the transaction is managed properly, the benefits to the savvy buyer can make the purchase of a foreign-registered aircraft very rewarding.

    This article was originally published by Aerlex Law Group on September 23, 2020 in Articles, BusinessAir Magazine, The Latest.

  • NAFA Administrator posted an article
    Becoming a Prepared Buyer: Aircraft Acquisition see more

    NAFA member, Amanda Applegate, Partner at Aerlex Law Group, discusses aircraft acquisition.

    As we continue to face the “new normal” of traveling during a pandemic, I have been inundated with calls from individuals and companies who are exploring the idea of whole aircraft ownership for the first time. For anyone in the market for an aircraft today or in the near future who would like to make the purchase and closing on an aircraft as efficient and straightforward as possible, please 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. If international aircraft are going to be considered, be sure the Aircraft Broker/Consultant takes into consideration the quarantine rules where the aircraft is located and/or where the pre-purchase inspection will take place.

    Aviation Counsel – Retain aviation 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 draft of the 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. Be sure that the technical representative is willing to travel during the pandemic in order to be able to oversee the pre-purchase inspection.

    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 you may get valuable advice from the management company at little cost by selecting a management company early in the process.

    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 AND OPERATING 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 and make you a more attractive buyer.

    This article was originally published in BusinessAir Magazine, August 2020, Volume 30, No. 8.

  • NAFA Administrator posted an article
    Keeping the Title Clear on Your Aircraft see more

    NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses keeping your aircraft title clear.

    As an aircraft owner, it is important to make sure the title to your aircraft remains clear. Unlike some other countries, in the United States we have an owner based registry where liens can be filed on the aircraft by anyone.  Since a notice of a lien can be sent to the FAA Civil Aviation Registry (the “Registry”) without the knowledge of the aircraft owner, sometimes these filings create valid liens on the aircraft and other times a cloud on the title is created by these filings.  It is a good idea to have a title search of the Registry and, if applicable, the International Registry, done annually to make sure there are not any issues with the title of your aircraft. If this annual review is not done, then at the very least title searches for your Aircraft should be done when the decision is made to market the aircraft for sale.  By conducting the searches prior to finding a buyer for the aircraft, if it is discovered that there are encumbrances/liens which have attached to the aircraft or clouded the title, that have not been properly released, then such encumbrances/liens can be addressed early in the sales process.

    I recently worked on a transaction where at the time of the purchase the aircraft the owner had financed the aircraft. Subsequently the loan was paid off but the lien release was never filed with the Registry. Ten years later during the process to sell the aircraft, the lien was discovered. To further complicate matters, the lender was no longer in business. A simple title search run annually or even every other year could have caught this issue much sooner and made the time to research and resolve the lien easier and less costly. In another recent transaction the aircraft owner discovered that there were five liens on the aircraft because the management company for the aircraft failed to pay for maintenance that was performed on the aircraft prior to the management company going out of business. The owner of that aircraft did not know of the liens until the aircraft was under contract to be sold and the escrow company, as part of the sale process, performed the title searches on the Registry. Having to track down five lienholders in a short timeframe in order to avoid the sale from being delayed added unnecessary stress to the closing. 

    There are many great escrow companies, in Oklahoma City, where the Registry is located. The escrow companies will perform the searches on the Registry for a few hundred dollars. In order to perform the searches, the escrow agent simply needs to know the make, model and serial numbers of the airframe, engine(s) and propellers (if applicable).

    In addition to liens filed on the Registry, an international interest can also be registered on the airframe or engines of an aircraft of a certain size on the International Registry that exists as a result of the Cape Town Treaty, which the United States is a signatory. However, the International Registry is a two- party system and requires consent from the aircraft owner before the international interest is registered against the aircraft. As a result, it is less likely that an international interest will attach to the aircraft without the knowledge of the aircraft owner. However, when an aircraft loan is paid off, the aircraft owner should request post-closing International Registry searches evidencing the discharge of the international interest.

    In short, for a bit of annual work at a nominal cost, an aircraft owner should conduct annual searches at the Registry to ensure that the aircraft title remains clear of any unknown or unwarranted liens or encumbrances that have attached to the title or are clouding title of the aircraft. For various reasons, this will save the aircraft owner headaches in the future when the aircraft is sold.

    This article was originally published by Aerlex Law Group in Articles, BusinessAir Magazine, The Latest, on August 4, 2020.

  • NAFA Administrator posted an article
    Immediate Private Aviation Solutions During and After a Pandemic see more

    NAFA member, Amanda Applegate, Partner with Aerlex Law Group, answers your questions regarding private aviation during and after a pandemic.

    As the United States and other countries around the world start to lift their stay-at-home restrictions, many individuals and companies are electing to increase or exclusively fly privately for the foreseeable future. Prior to the global pandemic, a number of companies and individuals used either a hybrid solution of flying, which included both private and commercial flights, while others elected to fly all flights commercially, even when private aviation was financially viable. The reasons for these choices, such as cost savings or flight shaming, are now being significantly overshadowed as a result of the global pandemic. Today those companies that previously used a hybrid model have new mandates which extend private flying rights to more employees for both business and/or personal use. In addition, those who previously elected to fly commercially are now more likely to select a private aviation solution when it is financially practicable.

    I have been inundated with questions related to immediately available solutions to cover the new normal individuals and companies are navigating. When looking for a private aviation solution the usual choices are still available: ad hoc charter, membership programs, pre-paid jet cards, leases, fractional ownership and whole aircraft ownership. What is different and hard to evaluate is the financial stability of the various service providers. When considering a service provider for private aviation, a few new questions should be asked:

    • What was the cash position of the service provider prior to the pandemic?
    • Did the service provider receive any funds from the CARES Act?
    • Has the service provider defaulted on any significant loans?
    • If funds are prepaid to the service provider, are the funds maintained in separate accounts and who is the owner of those accounts?
    • What budget cuts has the service provider implemented during the pandemic? Have any employees been laid off?

    We have already seen the closure of some private aviation companies as a result of the downturn in flying caused by the global pandemic. Some of these companies had significant prepaid deposits from customers on hand at the time of the closure, which are unlikely to be recoverable. Furthermore, we know that as companies struggle financially that budget cuts will be made, and it is important to understand how the budget cuts may impact safety and service.

    As a result of the financial uncertainty of many private aviation companies, it is more important than ever to have any unsecured prepaid funds maintained in a separate account and in the name of the customer. If that is not an option and the financial information of the service provider is questionable or not available, then negotiating that the prepayment of funds be adjusted into smaller and more frequent payments is recommended.

    When transitioning into a private aviation solution and/or increasing private aviation use, it is also important to look at the duration of time that the use and/or increase in private aviation use will occur. If the new normal for you or your company will likely become a permanent change, then whole aircraft ownership or fractional ownership should be strongly considered, particularly if the number of flight hours needed per year will exceed 100. If the change is anticipated to be temporary or the number of flight hours needed is not significant, then a less permanent solution such as a membership program, jet card or a fractional lease should be considered. If whole aircraft ownership is not the solution selected, then the cleaning process and safety procedures implemented by the service providers should also be evaluated.

    Finally, it is important to not rush the process of purchasing an aircraft or selecting a private aviation service provider. Be sure to evaluate the service provider selected and in the case of the purchase of a whole aircraft, the aircraft selected should go through a complete pre-purchase inspection. Taking such precautions and being deliberate in your evaluations will save you money and help you avoid pitfalls in the future.

    This article was originally published by Aerlex Law Group on July 14, 2020, in Articles, BusinessAir Magazine, The Latest.

  • NAFA Administrator posted an article
    An Aircraft's Final Sale see more

    NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses the process for the final sale of an aircraft.

    As more aircraft reach the end of their useful life, understanding the process for the final sale of an aircraft is becoming more important. If there are no buyers for an aircraft or if an aircraft is more valuable for its parts than as a whole unit, then the aircraft owner should endeavor to find the best possible solution for the aircraft’s final sale. Depending on the aircraft type and the parts inventory at the time, there may be multiple interested buyers for the parts of the aircraft. Once the best offer is found, a sale agreement should be drafted and include all of the necessary deal points. For the final sale of an aircraft, there are additional deal points that don’t apply to a normal sale. Here are a few to consider:

    • Is the delivery location going to be the same location as where the aircraft will be parted out? If so, then will the aircraft be deregistered at the time of sale? If so, the sale agreement should not require the purchaser to prepare and file a registration application, but instead file a deregistration notice with the FAA. However, if there is any chance that the purchaser will not part out the aircraft and may instead resell the aircraft, then the deregistration request should not be filed.
    If you file the deregistration notice with the FAA it is very difficult to then register the aircraft again at a later date and requires filing proof acceptable to the technical branch of the FAA that the aircraft is still airworthy.
    • A detailed list of the loose equipment that is being sold on the aircraft should be attached as an exhibit to the sale agreement. For example, is the aircraft being sold with the china, glassware and flatware on the aircraft or does the seller plan to reuse the china on a future aircraft? Does it include any equipment that was used in the hangar for the aircraft, like a tow bar?
    • Is the aircraft airworthy and/or are there inspections that are past due? Usually a sale agreement would require the aircraft to be airworthy. However, that may not be necessary in the case of a final sale. If there are inspections that are past due, then the inspections may not be necessary if the aircraft is already at the location where it will be sold and parted out. However, if the aircraft is not at the closing location or has to be flown after closing to the location where it will be disassembled, then one of the parties may need to obtain a ferry permit. The cost of the ferry permit should be measured against the cost of doing the necessary work on the aircraft in order to make it airworthy.
    • The aircraft records, especially burn certificates, are very important when selling an aircraft for parts. The records need to be complete for each part so that the part can be sold and used again. If the records are incomplete the part will have far less or perhaps no value.
    • Is it important that the seller retain the registration number? Unlike when an aircraft is being sold and will continue to fly, if the aircraft is being deregistered, there is no need to file a request to change the registration number at the time of closing. Instead, when the deregistration is filed, a request to reserve the registration number back to seller should also be filed. If the purchaser doesn’t plan to deregister the aircraft immediately, the parties should agree on a timeline to return the registration number back to the seller.
    • The pre-purchase inspection is far less extensive for an aircraft that will be sold for parts. It is not always as important that all systems be fully functional and therefore the timeline from execution of the sale agreement to closing is more compressed, because the inspections prior to closing may just be a review of the aircraft records and not a fully survey of the aircraft.

    Making a decision to sell an aircraft for parts, can be an emotional decision for an aircraft owner because they have often times flown in the aircraft for many years, arriving in many locations with lasting memories. The emotional impact is greater when the aircraft is being sold for parts instead of to someone else who will use it. As a result, the emotional component can sometimes prevent the best business decision from being made. As an example, I have had a client who searched for someone to buy the aircraft for reuse and sold the aircraft at a lower price than could have been achieved if they had considered selling the aircraft for parts.

    When an aircraft is sold for the final time, there are differences in the sale process. The delivery location is far more important, as is loose equipment list and complete aircraft records. Be sure to take the differences into account when entering into the sale agreement.

    This article was originally published by Aerlex Law Group on April 9, 2020 in Articles, BusinessAir Magazine, The Latest.

  • NAFA Administrator posted an article
    Aircraft Insurance Considerations in a Tightening Insurance Market see more

    NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses aircraft insurance claims in a tightening insurance market.

    The recent uptick in insurance claims in the commercial airline world and in general aviation have caused a tightening of the aviation insurance market. As a result, many of my clients are seeing an increase in insurance premiums, limitations on conditions previously granted, and in some cases are unable to obtain the amount of liability coverage they would like to procure.

    As a result of the price increases, some of my clients have been seeking alternative insurance for their aircraft. However, as with all insurance, not all insurance providers and policies are the same. It is important for owners to identify an aviation insurance broker who can explain the different types of coverage available and the exclusions that may limit that coverage. Recently my client was comparing two policies and focusing on the annual premium instead of what amounts and types of coverage were provided for the annual premium. It turned out that certain amounts of coverage under the liability policies were very different, thus reinforcing the need to focus not just on the annual premium when comparing policies.

    It is important to find one qualified broker and allow that broker to canvass the market. It is bad practice to have multiple brokers shopping the market for coverage for the same aircraft. In fact, it may make it impossible for any broker to obtain quotations or binding coverage.

    There is a rating system for insurers and it is important for owners to know and understand that rating system. The A.M. Best rating reflects an insurance company’s financial strength and its ability to meet contractual obligations. The rating categories range from A++ to F (in liquidation). Providers with less than an “A-” Best rating generally should not be considered, and many established brokers will not offer insurance with a lower rating. Owners should also know and understand what exclusions apply to the insurance contract.

    As is the case with all insurance policies, it is important to have the coverage you need when you need it. Coverage in aviation policies may vary if the aircraft is modified, flight crew qualifications change, normal routes of travel are changed, or travel outside the United States takes place. Before changing flight crews, modifying training programs or traveling outside the country, be sure to check the policy and check with your broker. There have been too many cases where a policy was not in effect due to a change in business practices or travel areas.

    The basic types of aviation insurance coverage are physical damage to the aircraft (hull insurance) and aircraft liability insurance. Hull insurance provides for payment to the owner of the aircraft for physical loss of or damage to the aircraft, including engines, propellers, instruments and equipment usually and ordinarily attached to the aircraft. Liability insurance covers the liability to others for bodily injury and property damage resulting from the ownership or use of the aircraft. Most liability policies offer coverage for the defense of lawsuits brought against the insured resulting from a covered peril, even if the suit is groundless. The amount of liability coverage, including any deductible, will depend on the owner’s risk tolerance and factors such as the number of passenger seats in the aircraft, average passenger load, passenger profile, number of pilots, pilot qualifications and any umbrella policy.

    When owning or operating an aircraft, the aircraft owner/operator often enters into agreements related to the aircraft, including, but not limited to, lender documents, time share agreements, dry leases, pilot services agreements, management services agreements and hangar agreements. It is important to understand the insurance requirements under all of these agreements and prior to execution, the agreements should be reviewed and approved by the insurance provider to make sure that there will not be an issue with any claim as a result of the agreement executed for the ancillary services.

    In a tightening insurance market, it is understandable that an aircraft owner/operator would focus primarily on premium costs when selecting aviation insurance. However, in the long run, an aircraft owner/operator would be better served obtaining the best available policy with appropriate liability limits, and fully understanding the terms and exclusions of the policy, rather than waiting until after an occurrence to focus on such details- by then it may be too late.

    This article was originally published in BusinessAir Magazine, March 2020, Volume 30, No. 3 on May 12, 2020.

  • Tracey Cheek posted an article
    Preparing Your Aircraft for Sale see more

    NAFA member, Amanda Applegate, Parter with Aerlex Law Group, shares what you need to know to prepare your aircraft for sale.

    Once a decision has been made to sell an aircraft, there are certain steps that should be taken in order to make sure the aircraft is ready to be sold. By taking these steps in advance, you will make the sales process easier and will avoid losing a potential sale. 

    1. Company Status. A business search should be done on the secretary of state website where the selling entity is registered. The selling entity needs to be active and in good standing. If it is not, the selling entity will need to take steps to bring the entity back to an active and good standing status with the state of registration. A sale agreement should not be signed unless the entity is in good standing, since most sales agreements contain a representation that the selling entity is in good standing.

    2. Title Searches. For a few hundred dollars, a title search (for both the Federal Aviation Administration (“FAA”) and International Registry (“IR”)) can be prepared by any of the law firms or aircraft title companies in Oklahoma City, where the FAA registry is located. More often than you might expect, there are liens on an aircraft that the seller did not know about. Clearing an aircraft title of old liens can be time consuming, especially when the lienholder no longer exists, has changed names, or has been acquired by another company.

    3. Aircraft Records Organization (paper and electronic). The keeper of the aircraft records should be tasked with making sure all entries in the log books and computerized maintenance tracking system are complete and up to date. The paper aircraft records should be organized and reviewed to make sure there are no missing entries. All aircraft records should be gathered and centralized so that when it is time to ship the aircraft records for the pre-purchase inspection, there won’t be a delay.

    4. Specifications Sheet. When the aircraft is listed for sale a specification sheet which describes the aircraft will be developed for marketing purposes. It is imperative that this specification sheet is reviewed by technical experts to make sure the aircraft is being advertised correctly. In some instances, the specification sheet is added to the sale agreement as an exhibit and the seller agrees that the aircraft will be in the condition detailed in the specification sheet at the time of closing. If the specification sheet is not accurate, it could cause the buyer to negotiate a lower purchase price, demand the aircraft be as advertised, or terminate the sale.

    5. Loose Equipment. A list should be prepared showing all of the loose equipment being sold with the aircraft. This way there is no debate as to which loose equipment is being sold with the aircraft and which items the seller is allowed to keep.

    6. Inspections. All upcoming inspections should be performed and if there is any deferred maintenance it should be brought current. During the sale process, the buyer may request that seller handle all inspections through a certain future date. Therefore it is a good idea to understand what inspections are coming due in order to understand the economic impact of the item being requested.

    7. Registration Number. It is important to decide if the registration number currently on the aircraft is going to be retained for future use by the seller. If so, I recommend starting the process to change the registration number and retain the old number even before listing the aircraft for sale, or as you are listing the aircraft for sale. It can take 6-8 weeks for the FAA registry to process the change request and issue the 8050-64 form which allows the registration number to be changed. Therefore the change request should be made early in the process in order to complete the process prior to sale.

    8. Loaner Equipment. If there is any loaner equipment on the aircraft it should be disclosed as part of the sale process. For example, if an engine overhaul is taking place and a loaner engine is currently on the aircraft, arrangements need to be made with the service provider to transfer all agreements to the new owner as part of the sale process.

    9. Maintenance Programs. If the aircraft is on any parts programs, APU, engine programs, or the like, the program provider should be contacted to confirm that the programs are paid current and there are no deferments or deficits on any programs. Any deferments or deficiencies will need to be resolved by the seller.

    10. Building the Sales Team. When you are ready to list the aircraft for sale, you should hire an aircraft broker/consultant to handle the listing for you who has a good understanding of the market for your particular aircraft. This aircraft broker/consultant will be able to help you set a realistic sale price, market the aircraft and handle the logistics of the sale for you. Additionally, you should also have an aviation attorney on retainer who is ready to immediately review a letter of intent or draft a sale agreement when an offer arrives.

    By taking the steps above, including building the right sales team, buyers will find less fault with the aircraft and be more willing to buy your aircraft. A properly pre-planned and organized aircraft sale can help make the sales process straightforward and more efficient.

    This article was originally published in BusinessAir Magaziine, December 2019, Volume 29, No. 12 on January 6, 2020.

     

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

    NAFA member, Amanda Applegate, Partner, Aerlex Law Group, discusses steps to completing your aircraft purchase.

    At long last, you have found the aircraft that fits your needs, the pre-purchase inspection is complete and the discrepancies have been remedied. It is now time for the closing. What does this mean and what needs to be done? For many first-time aircraft buyers, they think the closing will be a long drawn out event. However, I tell all of my clients that the closing should be a non-event and if all of the work has been done in advance, the actual closing should take less than 10 minutes. Once the purchase agreement is executed, a closing checklist should be developed to track all of the deliverables needed through closing. Here is a list of the important items that need to be accomplished shortly before closing:
    1. Aircraft Positioning –
    The purchase agreement should identify the delivery location and who is required to pay the movement costs, if any. The closing cannot occur until the aircraft arrives at the delivery location and in the required delivery condition.
    2. Closing Documents –
    There is an actual filing window at the Federal Aviation Administration (“FAA”) registry in Oklahoma City, OK. All of the closing documents should be pre-positioned with the escrow agent in Oklahoma City, as the escrow agent will be responsible for filing the applicable documents with the FAA. As the buyer, the required FAA closing documents are a registration application FAA Form 8050-1, a statement in support of registration if the purchasing entity is a limited liability company, lender documents if applicable, and a declaration of international operations if there is an upcoming international trip. As the seller, the required FAA closing documents are a bill of sale FAA Form 8050-2, as well as any lien releases if necessary. Additionally, the buyer and seller will each need an active transacting user entity account with the international registry in order to register the contract of sale at closing. Further, the purchase agreement more than likely requires other non-FAA closing documents, such as a delivery receipt and warranty bill of sale.
    3. Insurance –
    During the purchase process an insurance carrier should have been selected and a determination on the amount of coverage required. Shortly before closing, insurance should be bound and the buyer should receive and review the certificate of insurance. If the aircraft is financed or managed by a third party, these parties will have specific insurance requirements which need to be evidenced on separate insurance certificates.
    4. Maintenance Programs and subscriptions – 
    If the aircraft is enrolled in any maintenance programs or subscription services, the third party providers must be contacted to confirm the account is in good standing, paid in full and transferrable upon closing.
    5. Closing Statement –
    The escrow agent will prepare a final accounting statement based on the terms of the purchase agreement and information provided by the parties. The statement will usually include the purchase price and any other fees due under the purchase agreement or to third parties, such as brokers. Any movement costs or similar expenses should be calculated a few days prior to closing and agreed upon by the parties prior to the day of closing.
    6. Inspection Facility Invoice –
    Oddly this is an item that can often cause a delay in closing. The aircraft cannot depart the inspection facility for the delivery location until all invoices are paid. However, invoices can’t be paid until they are final. The invoices from the inspection facility are very detailed and often take a long time to get into final form. Once received they must be reviewed in detail since certain costs are buyer costs and other costs are seller costs as dictated by the purchase agreement.
    7. Tax plan – 
    The tax planning at the federal and state level for the acquisition should have been completed while the pre-purchase inspection was occurring. At closing, the tax plan should be implemented. 

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

    This article was originally published by BusinessAir Magazine, The Latest, on November 19, 2019.

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

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

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

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

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

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

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

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

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

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

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

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

  • Tracey Cheek posted an article
    Aircraft Insurance Considerations In A Tightening Insurance Market see more

    NAFA member Amanda Applegate, Partner with Aerlex Law Group, discusses what to consider when deciding on aviation insurance coverage.

    The recent uptick in insurance claims in the commercial airline world and in general aviation have caused a tightening of the aviation insurance market. As a result, many of my clients are seeing an increase in insurance premiums, limitations on conditions previously granted, and in some cases are unable to obtain the amount of liability coverage they would like to procure.

    As a result of the price increases, some of my clients have been seeking alternative insurance for their aircraft. However, as with all insurance, not all insurance providers and policies are the same. It is important for owners to identify an aviation insurance broker who can explain the different types of coverage available and the exclusions that may limit that coverage. Recently my client was comparing two policies and focusing on the annual premium instead of what amounts and types of coverage were provided for the annual premium. It turned out that certain amounts of coverage under the liability policies were very different, thus reinforcing the need to focus not just on the annual premium when comparing policies.

    It is important to find one qualified broker and allow that broker to canvass the market. It is bad practice to have multiple brokers shopping the market for coverage for the same aircraft. In fact, it may make it impossible for any broker to obtain quotations or binding coverage.

    There is a rating system for insurers and it is important for owners to know and understand that rating system. The A.M. Best rating reflects an insurance company’s financial strength and its ability to meet contractual obligations. The rating categories range from A++ to F (in liquidation). Providers with less than an “A-” Best rating generally should not be considered, and many established brokers will not offer insurance with a lower rating. Owners should also know and understand what exclusions apply to the insurance contract.

    As is the case with all insurance policies, it is important to have the coverage you need when you need it. Coverage in aviation policies may vary if the aircraft is modified, flight crew qualifications change, normal routes of travel are changed, or travel outside the United States takes place. Before changing flight crews, modifying training programs or traveling outside the country, be sure to check the policy and check with your broker. There have been too many cases where a policy was not in effect due to a change in business practices or travel areas.

    The basic types of aviation insurance coverage are physical damage to the aircraft (hull insurance) and aircraft liability insurance. Hull insurance provides for payment to the owner of the aircraft for physical loss of or damage to the aircraft, including engines, propellers, instruments and equipment usually and ordinarily attached to the aircraft. Liability insurance covers the liability to others for bodily injury and property damage resulting from the ownership or use of the aircraft. Most liability policies offer coverage for the defense of lawsuits brought against the insured resulting from a covered peril, even if the suit is groundless. The amount of liability coverage, including any deductible, will depend on the owner’s risk tolerance and factors such as the number of passenger seats in the aircraft, average passenger load, passenger profile, number of pilots, pilot qualifications and any umbrella policy.

    When owning or operating an aircraft, the aircraft owner/operator often enters into agreements related to the aircraft, including, but not limited to, lender documents, time share agreements, dry leases, pilot services agreements, management services agreements and hangar agreements. It is important to understand the insurance requirements under all of these agreements and prior to execution, the agreements should be reviewed and approved by the insurance provider to make sure that there will not be an issue with any claim as a result of the agreement executed for the ancillary services.

    In a tightening insurance market, it is understandable that an aircraft owner/operator would focus primarily on premium costs when selecting aviation insurance. However, in the long run, an aircraft owner/operator would be better served obtaining the best available policy with appropriate liability limits, and fully understanding the terms and exclusions of the policy, rather than waiting until after an occurrence to focus on such details- by then it may be too late.

    This article was originally published by Aerlex Law Group in BusinessAir Magazine, the Latest, on October 16, 2019.

  • Tracey Cheek posted an article
    2019 Aircraft Transactions - It Is Not Too Early To Plan For A Successful 2019 Closing see more

    NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses how to plan for a successful aircraft closing in 2019.

    As we move into the last several months of 2019, whole aircraft transaction volume will increase, particularly in December. 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 2019 calendar year. Ten items to consider to help closing occur in 2019:

    1. If you are considering selling in 2019, 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 2019, 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 likekind exchanges are no longer available.

    5. If you are seeking depreciation in 2019 (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 to 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 2019 is on a Tuesday. In the past, the FAA registry has closed early on holidays and also for weather. It is recommended that 2019 closings be completed no later than December 27, 2019 in order to allow time for the aircraft to be placed into service before year end and avoid any unexpected closing 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 crossborder transaction, make sure all parties are realistic on the amount of time the import/export process will take and that there will not be any delays in getting the Aircraft on the new country registry.

    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 2020. Therefore, if a 2019 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.

    This article was originally published in BusinessAir Magazine, August 2019, Volume 29, No. 8 and on Aerlex.com on September 12, 2019.

  • Tracey Cheek posted an article
    Ongoing Privacy Concerns with Implementation of ADS-B see more

    NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses ADS-B and privacy concerns.

    ADS-B stands for Automatic Dependent Surveillance – Broadcast. By January 1, 2020, the majority of aircraft operating within the United States will be required to have ADS-B Out capabilities – and for aircraft registered internationally, some compliance deadlines are even sooner. Aircraft lacking ADS-B Out capabilities after that date will be effectively grounded or severely limited in where and how they can fly – perhaps for months! 

    The ADS-B Out requirements are just one element of the Federal Aviation Administration’s (FAA) Next Generation Air Transportation System (NextGen), which is being implemented in phases between 2012 and 2025. The purpose of NextGen is to transform America’s antiquated air traffic control (ATC) system from a radar-based system to a satellite based system. 

    What is ADS-B Out? ADS-B is technology that uses an airplane’s onboard global positioning system (GPS) to transmit the current position, speed, flight number and, most importantly, whether the airplane is climbing, descending or turning. The current radar-based system is not able to recognize and process information regarding climb, descent or turns. The transmitted information is sent to ATC and other aircraft. The current radar system sends updates once every two to twelve seconds. However, aircraft equipped with ADS-B Out capabilities transmit data every second. So, not only do the transmitted updates contain more information, including data on climb, descent and turns, but the updates also take place far more frequently. 

    Upgrading the system on an aircraft to incorporate ADS-B Out capabilities allows both ATC and pilots of other aircraft with ADS-B In to see the aircraft nearest to them with a graphical representation. While Traffic Alert and Collison Avoidance Systems (TCAS) currently provide some of this information, the additional data generated by ADS-B Out will make the information far more accurate. 

    With ADS-B Out equipped aircraft broadcasting not just their flight plans but their current position, speed, and flight number, aircraft can be tracked much easier. While there are many advantages to ADS-B Out, using this newly available information means it is easier for the world to know who is flying where. 

    There are two important steps that can be taken in order to minimize the public disclosure of aircraft locations:

    1. Ownership structure. Using options such as a finance lease, owner trust or sole purpose entity to hold title could help preserve anonymity if structured properly. 

    2. Registration Number Blocking. In 2013 the FAA issued a notice that allows owners and operators to limit the display of aircraft situation display to industry (ASDI) data. Owners and operators can request the blocking of the flight tracking information. While this does not include data now available because of ADS-B, it can help. The process for opting out of this flight data feed can be found here: 

    https://www.aerlex.com/protecting-your-privacy 

    While many associations, including National Business Aviation Association (NBAA) and the Aircraft Owners and Pilots Association (AOPA) have been vocal about the privacy concerns linked to ADS-B data, a solution is not known or planned for the immediate future. As a result, planning and implementing a favorable ownership structure at the time an aircraft is purchased has become more important, as well as taking advantage of registration number blocking made available by the FAA.

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

    This article was originally published in BusinessAir Magazine, July 2019, Volume 29, No. 7., August 13, 2019. 

  • Tracey Cheek posted an article
    Closing Before the Aircraft is in the Delivery Condition - Exploring the Risks see more

    NAFA member Amanda Applegate, Partner with Aerlex Law Group, explores the risks associated with closing before the aircraft is ready. 

    More often than I would have thought possible, buyers and sellers are motivated by a variety of reasons to close on the purchase and sale of a pre-owned aircraft before the pre-purchase inspection is complete or before the inspection discrepancies are rectified. Sometimes it is because the buyer wants to close in order to start a major refurbishment to the aircraft and there is a long lead time on the correction of certain discrepancies and/or it would be more efficient to fix the discrepancies simultaneously with the refurbishment. Other times the seller wants the aircraft sold by a specific date for financial reasons, to make room for their newly acquired aircraft, or so the seller’s crew can leave for training on a replacement aircraft. Regardless of the reason, as a buyer there are certain risks that should be considered. 

    If the inspection isn’t complete at the time of closing, the risk to the buyer may be substantial because there could be unknown issues with the aircraft which haven’t yet been discovered. Additionally, if closing takes place while the discrepancies are in the process of being repaired then additional, significant discrepancies could be found, but the buyer no longer has the option to walk away from the purchase. 

    If the parties understand the risks and elect to move forward and close before the aircraft is in the contractually agreed-upon delivery condition, then there are two options. The parties can agree on a purchase price reduction based in part on the estimated cost to repair the discrepancies or the parties can agree on a holdback amount to be held by the escrow agent after closing, with those funds used to pay for the repair the outstanding discrepancies. 

    A reduction in purchase price allows the parties to complete the transaction and have no further dealings with one another. The price reduction should not only be for the amount of the outstanding discrepancies but should also include an amount that represents the risk that the buyer is assuming by accepting an aircraft which is not in the required delivery condition at closing. A short amendment should be drafted and signed by the parties which indicates the buyer is accepting the aircraft even though it does not meet the delivery conditions in exchange for the price reduction. The amount of risk being assumed under this option depends on the status of the inspection and/or the extent of the unrepaired discrepancies. One understated benefit of the price reduction over a holdback is that the transaction is completed, thus the seller has no further responsibilities and the buyer is free to do whatever they want with the aircraft going forward. 

    A holdback allows the seller to remain responsible after closing for paying the cost of the repairs necessary in order for the aircraft to meet the delivery conditions. If the holdback amendment is drafted properly, there is far less risk for the buyer under these circumstances. The buyer should make sure the seller remains responsible for not only the known discrepancies but any new discrepancies found during the completion of the repairs. Furthermore, the holdback amount should be enough so that collecting for the repairs from seller does not become an issue. I recommend the holdback amount be 150% of the estimated cost of the repairs. Additionally, the funds should be released automatically when the invoices are submitted to the escrow agent without further approval by the seller and if the holdback is not enough to cover the cost of the outstanding repairs, seller should remain liable. The escrow agent should be a party to the holdback amendment and they should confirm they understand the terms prior to execution. This will help avoid a dispute over when or how an invoice is paid. The parties will continue to work together until the repairs are complete and the remaining holdback amount, if any, is released to the seller. 

    There can be legitimate business reasons to close on a pre-owned aircraft prior to the aircraft meeting the delivery conditions as originally agreed upon between the parties. When the parties desire an early closing, it is important that the risk allocation is considered in the financial terms and that the agreement of the parties is clearly documented, including, if necessary, the post-closing obligations of the parties and the responsibilities of the escrow agent.

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

    This article was originally published by Aerlex Law Group in BusinessAir Magazine on July 15, 2019.