Four Common Mistakes That Can Delay Your Aircraft Purchase: Ways To Keep Headaches To a Minimum see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, shares tips for making sure your aircraft purchase goes smoothly.
You found the right airplane for your mission; you have a lender and now you are days away from your final goal—landing the aircraft of your dreams. Out of nowhere, you get a phone call from the lender. A last-minute mix-up now threatens to stall or upend the deal. What happened? Here are four common trip-ups:
1. Last-minute ideas
Did you change your mind midway through the deal regarding how you wish the airplane to be owned, or how the airplane will be used? One of the biggest delays comes from buyers who suddenly decide their airplane should not be personally owned but instead owned by an LLC.
First, you’ve now altered the financial picture from which the lender is basing the parameters of the loan. Second, you’ve just added complexity to the deal. Complexity adds time. Third, an aviation LLC is different than other LLCs. The nuances are significant enough for us to suggest you contact AOPA Legal, or an aviation attorney before initiating the paperwork.
2. Title issues
Did you forget to order a title search from a reputable title company? Missing logbook signatures, an unqualified person making a logbook signoff, the presence of a heretofore unseen lien are all examples of items that can put a “cloud” on a title. Before the title can be cleared, a title company must do due diligence.
3. Pre-buy inspection
What could possibly go wrong with a pre-buy inspection? How about the aircraft is stuck overseas? How about a dispute between the seller and buyer as to where the pre-buy will occur? How about a pandemic that shuts down business operations and air travel for an unspecified amount of time? From the mundane to the previously unimaginable, myriad things can affect the pre-buy. That’s why a Pre-purchase Agreement is vital. In it, all the parameters of a pre-buy are codified and agreed to prior to, hopefully mitigating as many possible obstructive circumstances as possible.
Even with that, the pre-buy inspection will invariably uncover some addressable item. That item’s resolution will then have to be negotiated into the price if it’s not an airworthy item, or fixed and inspected prior to, if it is an airworthy item.
Illegible logbook documentation, missing paperwork, documents missing a notary’s required imprint— are a partial list of paperwork problems that could slow the closing process. AOPA Aviation Finance can help build a paperwork checklist early that will help prevent this pitfall.
This article was originally published by AOPA Aviation Finance Company on November 23, 2020.
Finding the Best Appraisals for Your Aircraft see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, talks about which appraisal is right for your situation.
Getting an appraisal is a necessary part of the aircraft acquisition process. Because there is more than one type, the question becomes, “Which appraisal is right for your situation? Knowing that may involve a conversation with your lender and should also involve a conversation with AOPA Aviation Finance. Here is an analysis of the three types.
Pricing Digest Appraisal
This is the least expensive, least comprehensive type of the three. A Vref or Bluebook analysis is good for 90 percent of aircraft transactions. That's the good news. The bad news is the analysis is only as accurate as the information put into it and therefore subject to biases (lender perspective, seller perspective, buyer perspective). Also, what isn't part of a book appraisal are the nuanced differences actual market values (based on current demand) versus costs for things like STC modifications, avionics and engine monitoring upgrades, not to mention interpretation of paint and interior quality.
A desktop appraisal is done by a certified appraiser. Certified appraisers may start with the pricing digests, but they then expand their analysis to include market data. That means looking at comparable sales, type-specific trends, as well as average "days on market" for similar aircraft. More sophisticated, more powerful aircraft garner additional appraisal criteria. For example, if the aircraft is a Malibu recently re-engineered into a JetPROP, well that means the aircraft's maintenance schedule must be evaluated differently.
This is also true for turboprops and light jets. The appraiser will have to sift through even more paperwork than normal. Does the aircraft have maintenance expenses coming up? Is it enrolled in an engine maintenance program? Is it up to date with those programs? How much life is left in those programs? A desktop appraisal typically runs $500 to $600.
This is the most extensive, most hands-on, most precise way to appraise an aircraft. Not surprisingly, it's also the most extensive at a price range of $2,000 to $4,000. In a lot of ways, it's like a pre-buy inspection.
The physical appraisal combines all aspects of the desktop and pricing guide appraisal with an actual on-site inspection of the aircraft. This is an ideal inspection for unique, "orphan" or highly-modified aircraft. In the case of those airplanes, comparing them to the more standard, more generic market may prove insufficient. Despite the cost, it's also an ideal way to create a bulletproof assessment of one's aircraft's true value.
This article was originally published by AOPA Aviation Finance Company on October 23, 2020.
You Don't Need All This Financial Information, Do You? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, lists the financial documents you need when purchasing an aircraft.
"You don't really need all of this financial information, do you?" It’s a question often asked by AOPA Finance clients. Yes, yes we do. If you want the lowest rate, the most competitive structuring, the least amount down, and the lowest payment, an exhaustive analysis of your credit worthiness must be made.
IRS Schedule Cs or Schedule Es are not enough. While they may indicate whether the ownership structure has any pass-through income on an individual's tax return, the description of that pass-through income is summarized as a line item or two. Likewise, K-1s only indicate percentages of a shareholder’s income and liabilities. Line items and percentages don’t tell the whole story. Full tax returns do.
Global Cash Flow
Your tax summaries may show cash going from one related entity to another. But are you actually taking from the “left pocket and putting it in the right pocket?” If so, that isn't real money, is it? The lender will net that out of your “global cash flow.” Global cash flow—also known as a Consolidated Statement of Cash Flows—is a listing of all the various entities in which a person has ownership and what their net cash flow from all the entities is.
And then there’s the global debt schedule.
Global Debt Schedule
What is a global debt schedule? It’s a comprehensive list of all the ownership entities. It’s a listing of the actual total debts of each entity in which the individual has ownership. It details what the total amount owed is, and to whom. What the monthly payments are. How much is interest versus how much is principal. It also includes maturity dates for all debt.
Depending upon what one’s business relationship is with his partners, the lender may require additional documents to help fill in holes in the financial picture. Those might include hypothecation, subordination, or even side agreements. A hypothecation agreement could be submitted from the controlling party acknowledging the CEO emeritus is entering into a financial relationship.
Speaking of partners, imagine a borrower has two partners and he owns one-third of the business. Some lenders may require the other two partners’ to be party to the transaction.
For some, that’s just too much. They’re only going to have the loan for three years so the “pain-in-the-neck” factor is not worth their time and effort. Other folks just don't want to disclose all their financial information for personal reasons. Still others have obligations with lenders elsewhere that restrict them from guaranteeing debt or have covenants in place from other business debt. For these individuals, a collateral-based loan might be the more appropriate option. The trade-off is simplicity for a little bit higher interest rate.
Collateral Based Loans
A collateral-based deal might proceed more quickly from initial inquiry to funding but it does come with a different paperwork burden. Even so, the process is usually far less onerous. Banks will conduct an exhaustive search on the quality of the individual as well as on the aircraft. For the individual, they want to know if this person has filed bankruptcy. Do they have tax liens against them? Are there pending lawsuits on them, for any reason? A person applying for a collateral-based loan should be crystal clear how good or bad their character looks on paper.
Every time an AOPA Finance advisor must request additional information because our client’s paperwork is incomplete adds additional stress to the process. Bottom line-- there are no shortcuts. A transparent, painless credit deal requires in-depth financial paperwork.
This article was originally published by AOPA Aviation Finance Company on September 29, 2020.
Difficulties Financing an Aircraft for Leaseback see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses the challenges of financing aircraft leased back to a flight school or flying club due to higher-than-normal aircraft usage.
The usage equates to two things: number of hours flown annually and the type of hours flown. Aircraft leased back to flying clubs will typically accrue fewer hours than those leased to a flight school. Additionally, flight training hours will be harder on an aircraft’s engine and airframe because students and inexperienced pilots are harder on equipment than experienced pilots.
The flying club may go so far as to stipulate that members can’t join without a certain level of experience. A privately-owned airplane is flying a lot at 100 hours per year. An airplane on leaseback to a flying club could fly 200-300 hours per year. A popular flight school might see double that. More hours on the engine mean more hours on the airframe, lowering the airplane’s value. When it comes to the engine, that accelerated use could force an overhaul before typically anticipated in an amortization schedule, significantly eroding an airplane’s market value. This is what makes lenders nervous.
For example, let’s take a 1980 Cessna 182 worth $100K with a mid-time engine and decent avionics and interior. The prospective buyer wants to lease back to a flying club. Let’s say the lender values the same aircraft at TBO at $85K but also expects you to reach TBO in a certain number of years under normal usage. For a leaseback to a flying club, the lender might typically expect to see 150-250 hours a year. A lender can tolerate 300 hours or maybe even 350 hours, but higher than that and depreciation accelerates. Additionally, instead of an overhaul in five to seven years, you’ll need one in two or three.
For these reasons, lenders have a minimum loan of $100K and require a 30% down payment to finance a plane destined for flight school or flying club leaseback. So $30K down and then a $30K overhaul in two-three years means an owner essentially has put $60K cash into a plane that’s worth $105K with the overhauled engine.
Some aircraft are more likely leaseback candidates than others. A $400K or $500K SR22 is a good example. This could be ideal for a flying club or for a flight school that also rents aircraft. It’s also worth noting there are some options for leaseback to flying clubs with only 25% down and a $25K minimum loan amount, but the aircraft must be owned personally, not in an LLC. Give AOPA Aviation Finance a call if this is a situation you’d like to explore. Depending upon the current residual value in your aircraft, there might be room for a deal.
This article was originally published by AOPA Finance on July 9, 2020.
Do Most Lenders Offer 100% Financing? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers aircraft financing questions.
Question: I’m working with a broker who indicates he has lenders who will do 100% financing as long as the purchase price leaves at least 15% equity in the purchase. From looking at some of his planes he is selling with 0 down, it looks like he isn’t fibbing. Rates are fixed and vary from 4.2-4.9% (presumably based on credit score) and they are 20-year term loans with no penalties.
Is this something that can be done by most lenders or is this specific to whatever lenders he may be working with?
Answer: The short answer is no, most lenders won’t finance more than 85% of the purchase price.
Here’s the logic behind that decision. If you were to negotiate the purchase price down from $100k to $85k it really wasn’t worth $100k. That’s not to say you couldn’t turn around and potentially find a buyer for $100k, you might, especially if you were willing to spend money for marketing and were willing to wait it out for the right buyer to come along. The banks, however, know that if they had to sell the asset, they’re going to look to get out of it as expeditiously as possible and turn it into cash so they can then turn around and lend it back out. That’s why they typically require 15% down on the lesser of the purchase amount or the aircraft value amount.
More than likely in the scenario you’re discussing (where you have only slightly higher than market rates and 0% down), the broker has an agreement with their lender(s) whereby they will cover any shortfall resulting from a buyer default. This is typically done by an agreement to buy the airplane back at an agreed upon amount.
The potential bigger problem though with regard to 0% down financing is if there’s a macro event that causes the market to drop 10-20%, when you go to sell the airplane you’re likely going to be upside down in value. Which means you’ll either have to come out of pocket to sell or else keep the airplane until the situation gets better.
My advice would be to put at least 15% down to give yourself a hedge regardless of what you negotiate in purchase amount.
Is it possible to prepay my aircraft loan? Adam answers. see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers questions about prepaying your aircraft loan.
Question: I have been looking at several Bonanzas, but every time I start negotiations with the seller, they opt for cash buyers. Is there something I can do to get the financing in place before I negotiate the sale?
Answer: If you have an age range and purchase price in mind, it would be recommended to get pre-approved. The pre-approval will take care of the credit underwriting so that when you find an aircraft you can confidently make an offer. Closing can be completed within a few days upon signing a purchase agreement if a pre-approval is already in place. Approvals are typically valid for 90 days with the rates locked for the first 30 days.
If you are ready to get pre-approved, please call us at 800.627.5263 and we can send you an online application to get started.
Question: Is it possible to prepay my loan?
Answer: Some lenders do have pre-payment penalties but still allow additional principal payments to be made. Typically, the pre-payment penalty is only for the first 24 months of the loan and runs about 1-1.25% of the original loan balance. Additional principal payments can be made during the time that the pre-payment penalty is in place as long as the payments are within the specific lenders’ guidelines.
Don’t feel shy about having aircraft financing questions. It is a complicated process, and asking questions is the first step towards understanding it better. Call us if you ever have questions about the financing process, 800.627.5263.
Have questions for Adam? He is happy to answer them. Submit your questions here. Great rates. Great terms. Helpful and responsive reps. Three good reasons to turn to AOPA Aviation Finance when you are buying an airplane. If you need a dependable source of financing with people who are on your side, just call 800.62.PLANE (75263) or click here to request a quote.
This article was originally published in AOPA Finance's August edition of "Adam Answers" on August 22, 2018.
It's common for people to misunderstand the differences between co-ownership vs fractional ownership see more
NAFA member, Adam Meredith with AOPA Aviation Finance shares the differences between co-ownership and fractional ownership.
Co-ownership is frequently what people mean when asking about fractional ownership. If you are looking to purchase an aircraft with multiple partners, this is more commonly regarded as a partnership loan. The good news here is that there’s a lot more financing options. Lenders are comfortable financing partnerships with up to four members using standard loan structures amortized up to 20 years. Beyond four members, lenders will typically only find comfort if the partnership is operating as a flying club. We have plenty of flying club options as well, however, those typically require a larger down payment and a shorter amortization.
Fractional ownership, where there’s a fractional management provider like NetJets or Planesense and the company flies and maintains your “share” of the aircraft, have very limited financing options. The reason for this is that lenders are rarely able to fully secure their collateral interest in these loans. Also, making things challenging is they must assess both your personal financial situation as well as the financial health of the fractional operator.
For the strongest fractional providers there are some options, however, financing is limited and you can expect terms of no more than five years. As an aside, if you anticipate flying more than 25 hours annually, fractional ownership can be a very cost-effective way to gain access to larger aircraft…just don’t expect to be able to fly the plane!
This article was originally published by AOPA Aviation Finance Company on September 6, 2018.
Have specific aviation finance questions, ask Adam! see more
NAFA member, Adam Meredith, president of AOPA Aviation Finance Company, is an aircraft finance professional with more than 15 years lending, small business management and customer service experience. Adam is a commercial pilot with multi-engine and instrument ratings. Ask Adam!
KARL: I have a loan with Bank of America at over 6%. This originated in 2008. Is the interest rate better now & what are my chances of getting a lower rate & would it be feasible (worthwhile)? It is a 20 year loan.
ADAM: Rates are going to be dependent on the loan amount and term of the refinance you are considering. We have a number of options that could potentially lower your rate below 6% and keeping it financed over 15-20 years. For example, a loan balance between $50,000 and $75,000, typical structures are 5.5% amortized over 15 years. If your current balance is over $75,000 then we can fix the rate over a 20 year amortization. Currently we are seeing fixed rates as low as 4.65%. The specific age and type of aircraft may also factor in to the final loan structure. Our regional account executives would be happy to discuss the best course of action to refinance your aircraft.
Example: Assuming you financed $125k in 2008 (20 yr term and 6%), your current payment should be $895/mth and you should still owe approximately $91k. If you were to refinance that loan today, your interest rate would be 1.2% less and your payment would drop to $595/mth!
KAREN: When I am ready to take the plunge, what documentation would I need to provide in order to apply for an aircraft loan from AOPA? I assume the usual stuff like bank docs?
ADAM: Aircraft lending is a bit different than most other loan products you are likely used to. The process and documentation is similar to that of a mortgage. Along with our signed credit application, our lenders require two years of personal tax returns and W2s. A current paystub would also be required. If you are self-employed or a business owner, additional business financials will be needed. A comprehensive list of required documentation based on your income situation can be found on our website.
Have questions for Adam? He is happy to answer them. Submit your questions here.
Great rates. Great terms. Helpful and responsive reps. Three good reasons to turn to AOPA Aviation Finance when you are buying an airplane. If you need a dependable source of financing with people who are on your side, just call 800.62.PLANE (75263) or click here to request a quote.
Have a specific aviation finance question you would like to see in future articles? Submit it here, and it may be highlighted in an upcoming content piece.