AOPA Backs Emergency Airport Funding to Fight Coronavirus Impact see more
NAFA member, AOPA, urges Congress to support emergency airport funding.
AOPA and six other aviation groups are urging Congress to support needed funding for airports across the country while ensuring that small and general aviation airports also receive a portion of any funds made available to help cope with the coronavirus pandemic.
Assistance to airports should include funding “exclusively for small and general aviation airports that serve thousands of communities across the country and which have also been impacted by this situation,” the groups said in a letter delivered to the bipartisan leadership of the House and Senate appropriations committees on March 23.
“We need a strong and vibrant airport ecosystem in this nation and we want to do everything we can to ensure they get help to meet the operational challenges caused by this pandemic and ultimately continue to accommodate the millions of general aviation operations each year,” said AOPA President Mark Baker. “These airports will remain a priority for us.”
The letter noted that volunteer pilots fly from airports that are the lifeline of many small and rural communities to deliver goods and services during times of natural disasters and emergencies. The diverse general and business aviation aircraft fleet is “capable of rapidly responding to needs in every part of the country and transporting time sensitive supplies, medical and testing equipment, organs for transplants, and key personnel and patients on demand,” it said, adding that “now more than ever, the country will rely on our airport ecosystem.”
As the pandemic has continued, AOPA has been reporting on the coronavirus’s increasing impact on GA airports, events, and activities.
The organizations that joined AOPA in signing the letter include the Experimental Aircraft Association, the General Aviation Manufacturers Association, Helicopter Association International, the National Air Transportation Association, the National Business Aviation Association, and the National Association of State Aviation Officials.
This article was originally published by AOPA on March 23, 2020.
Aircraft Purchases During Stock Market Swings see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses aircraft purchases during stock market swings.
Q: Given the current volatility of the market, what advice are you giving to members contemplating an aircraft purchase?
A: In times of volatility, in particular with wild stock market swings, you want to maintain as much cash as possible. Taking a methodical approach of buying into markets that are depressed is arguably more important than having the proverbial crystal ball that helps you get out of the market before a crash. That said, there has probably been no better time to obtain financing, whether it be for your house or airplane, or any other relatively stable asset then now. With interest rates for excellent credits on loans over $2M in the 2.5 to 3.0% range, this is truly an unheard-of period of time. Knowing what options are available is what AOPA Finance does best because of the strength and depth of our membership. Don’t wait to find out what your specific situation looks like, call us and find out how we can help you take advantage of this rare time.
This article was originally published by AOPA Aviation Finance Company on March 11, 2020.
Congress Introduces Legislation for a National Aviation Center see more
NAFA member, AOPA, shares the latest on legislation for a national aviation center.
Known as the National Center for the Advancement of Aviation (NCAA), the bill has already garnered overwhelming support from AOPA and organizations representing all segments of aviation across the country.
The proposal will open the door for all stakeholders to come together in support of a long-overdue, national industry forum. It will help ensure science, technology, engineering, and math (STEM)-based aviation curriculum reaches the 25,000-plus high schools across the country, assist in apprenticeships, and help military veterans and others transition to good paying technical jobs in the aviation industry.
The NCAA would be a private entity and no general fund taxpayer dollars would be used to support it. The legislation calls for funding the initiative by using a small percentage of the interest that is accrued annually on the taxes and fees collected from users and deposited into the aviation trust fund. Today, users of our aviation system pay for nearly all the costs associated with the operations of the FAA including air traffic control modernization. Moreover, the proposed center would be prohibited from involvement in any political or legislative activity.
Spearheaded by U.S. Sens. James Inhofe (R-Okla.) and Tammy Duckworth (D-Ill.), the NCAA would focus on four key initiatives: aviation workforce development, including the facilitation of STEM-based aviation curriculum for high school students; a repository for aviation research; safety and economic data analysis; and the fostering of needed collaboration among the entire aviation industry.
“The widespread support for this center is very encouraging. This center would do more to promote needed cooperation in the aviation community including efforts to address the workforce challenges our industry is facing now and into the future. Whether it be pilots starting in general aviation, military or commercial pilots, technicians, maintenance workers, or others, we need to ensure that our industry remains competitive and can meet these challenges,” said AOPA President Mark Baker. “AOPA is proud to work alongside allies in Congress and respected aviation leaders to make this center a reality.”
Demand for air travel, a sizeable cohort of commercial pilots nearing the mandated retirement age, and the high cost of training have all led to a shortage of qualified professionals in the industry. Boeing’s 2019 Pilot and Technician Outlook predicts the need for 804,000 new civil aviation pilots, 769,000 new maintenance technicians, and 914,000 new cabin crew over the next 20 years to fly and maintain the global aircraft fleet. In North America alone, Boeing suggests 212,000 new pilots and 193,000 new technicians will be needed over the next two decades.
According to the Aeronautical Repair Station Association the technician shortage is costing the U.S. aviation maintenance industry an estimated $118 million per month ($1.421 billion per year) in lost economic opportunity. Additionally, the Aviation Technician Education Council predicts that the mechanic population will decrease 5 percent in the next 15 years. New entrants make up just 2 percent of the technician workforce annually, while 30 percent is at or near retirement age.
The U.S. Air Force is short thousands of fighter pilots but has taken significant steps to reduce that gap and seek initiatives to retain more airmen. Using 3D virtual reality, the Air Force is looking to speed up pilot training—a technique that could also benefit the civilian pilot training sector. The NCAA would be an avenue for the Air Force to share its experience, allowing for cross-industry collaboration and potentially reducing the cost of civilian flight training.
The future of the entire aviation ecosystem depends on effective training, resources, and innovative ideas, which can be accomplished through the establishment of the NCAA.
Additionally, this center would allow the FAA to focus on safety and certification while the industry invests in the collaboration of promoting aviation through education, training, research, and awareness of the many job opportunities in the aviation industry.
This article was originally published by AOPA on February 27, 2020.
Best Time to Sell an Older Jet see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses the ideal time to sell an older aircraft.
Above and beyond the upfront cost savings, benefits to acquiring a used jet in great condition include avoiding much of the increased depreciation that besets aircraft in those early years. Of note to sellers, the inventory for well-maintained, 15-year old or younger turbine aircraft is severely limited. That translates into high demand and a market that's in your favor.
As with many things, putting an older, well-maintained jet on the market involves the right timing. It may sound counterintuitive, but the best time to sell an older jet is right after you’ve done the scheduled, heavy maintenance on it, after you've brought your jet up to date on all of its maintenance events.
A jet's optimum selling price point occurs when the aircraft has its lowest maintenance exposure to asking price ratio (ETP). That ratio is expressed as the value of an aircraft as a percentage of unaddressed maintenance due on an aircraft versus the overall market value of the aircraft. When the ETP is at its lowest is also when the aircraft is most desirable. That's why historically, planes that have the lowest ETP tend to sell the quickest.
To be clear, this does not include avionics upgrades, only scheduled maintenance. Retrofitting avionics on older jets is not just an expensive proposition, it's also a subjective one. The vast range of options available make it virtually impossible to please everybody. Plus, the money a seller sinks into new avionics probably will not be recouped in the sale. It's better therefore to let the new buyer install the avionics suite of their dreams post-acquisition.
If it's possible, coordinating the completion of heavy maintenance items with the start of the last quarter of the calendar allows the owner of an older, well-maintained jet to take advantage of the best calendar time of the year to sell it--September through December. That's because many businesses have a fiscal year and a calendar year that parallel each other. Those that do tend to more closely assess ways to manage their bottom line as they approach Q4. That heightened focus on the year-end clarifies whether selling the jet or acquiring one is an appropriate income offset option. For many, it's the perfect time.
And then there's the tax incentive. When the dollar amounts are more significant and an aircraft is used in business—the possibility of a tax deduction of 100% of the cost of the aircraft does exist, based on the current tax law in place.
To be fair, getting to 100% is really difficult and the inherent landmines are many. At AOPA Aviation Finance, we strongly advise anybody pursuing that goal to talk to their tax experts before attempting such a course of action. I should also point out that the latest regulations that came through in 2017 closed some significant aviation-related loopholes. For instance, capital gains deferment into another aircraft purchase is no longer a legal option. A discussion with your accountant on how you’re going to manage your tax liability is a must. When you do go to sell, there will be capital gains tax implications.
Bottom line: If you own a well-maintained, older jet and it's fresh out of maintenance, now's the best time to consider selling it. ETP is low and demand is high.
This article was originally published by AOPA Aviation Finance Company on November 18, 2019.
Deposits see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses when a deposit is required and why during your aircraft deal.
Typically, larger airplane transactions require deposits, specifically, deals of a million dollars or more. Why do lenders ask for a deposit? As the old saying goes, “Trust, but verify.”
Larger transactions tend to involve assessing more sophisticated, more complicated financials. Often multiple legal entities may be involved. Each of the entities need to be reviewed, requiring substantially more due diligence. The additional due diligence accrues additional costs in the form of time, resources, third-party background checks, and other checks and searches. All of those things equate to unavoidable upfront costs.
Understandably, a lender is loath to go out of pocket on a transaction after putting forth so much effort. It’s not enough to trust that a borrower is committed to the deal. A deposit verifies that commitment. The size of the deposit depends on the selling price. It’s usually proportional, ranging from a couple thousand dollars up to one percent of what’s been negotiated.
It’s always prudent to expect to submit a deposit, even when the topic isn’t initially mentioned. Deposit discussions generally occur after a term sheet--a broad estimate of structure-- is drawn up and then agreed to by both parties. Only once the borrower agrees to the terms and conditions and decides to move forward should a deposit discussion take place. Anything sooner should fire off alarm bells.
If your transaction requires a deposit, we cannot overstate the importance of dealing with a trusted financial institution or escrow company If in doubt, give AOPA Aviation Finance a call. We work with trusted escrow agents all the time. We will help you find one with which both parties to your transaction can feel comfortable.
If you’re working through a bank, our position is that institution is an appropriate place to hold the deposit. If you’re not working with a bank, we strongly recommend an escrow agent to handle that duty. In past articles, I referenced using third-party escrow services to hold the deposit. That’s because there are occasions when it is better to have an escrow agent bear the burden. A broker or a private party seller are examples of entities which are not highly regulated, if at all. As such they don’t have as much exposure to liability and are proportionally more difficult to extract compensation from should the deal go awry, compared to highly regulated banks.
Escrow companies tend to carry errors and omissions insurance, and many of the good ones are also bonded. Neither of those assurances match the accountability found in banking regulations, though. With your deposit at a bank, regulators and regulations back you in the event the deal goes sideways.
Enlisting the services of someone trusted like AOPA Aviation Finance will ensure whomever you work with is properly vetted, and that you are working with reputable folks. Regardless of whom you add to your team to work on the deal, important questions to ask and get answered before putting down a deposit include, “Are you bonded? What errors and omissions insurance do you have? Do you have references from satisfied customers? Have you ever been sued?”
This article was originally published by AOPA Finance on December 10, 2019.
What Do I Want the Seller to Fix see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, shares what a buyer should negotiate that the seller fix before the purchase.
The pre-purchase inspection report will drive the negotiation. It will determine what must be fixed; what should be fixed; and what could be fixed later at some other point. What “must be fixed” are all airworthiness items and Airworthiness Directives. What “should be fixed” relates to operational integrity items. All else falls under “what could be fixed later.” Generally, the buyer wants the seller to cover the cost of all AD issues.
Of course, there are exceptions to consider. Let’s say the seller’s estimate to fix all the AD-related squawks is $100,000. Let’s say s/he knows of an A&P with whom they have a good relationship. The A&P says the work can be done for $80,000. In that case, it may be more attractive for that buyer to negotiate a price reduction of $100,000 instead of having the seller fix those items. The buyer could realize a 20% savings. But in this scenario, the logistics involved in obtaining a ferry permit and flying the aircraft to a mechanic’s base must also be factored in. If those additional costs approach the $20,000 the buyer hoped to save, it might be better to put the onus back on the seller.
“What should be fixed” can be considered those items that may have an operational or usage impact but don’t otherwise jeopardize the airworthiness of the aircraft. For example, a spot of corrosion the size of a baseball on the rudder should be fixed. But if the buyer’s intention is to repaint the aircraft anyway, it might be better to negotiate a price reduction than to make the seller eliminate the corrosion pre-sale.
An intermittent HSI or DGI are examples of “what could be fixed later.” If the buyer’s intention is to upgrade the panel post-acquisition, it’s better to lower the price accordingly and then take care of the failing device during the entire avionics upgrade.
Determining what the seller should fix is also influenced by the buyer’s general attitude toward an aircraft purchase. Some folks don’t want to deal with any aircraft issues. They just want the plane delivered squawk free. Others have a higher tolerance for addressing issues.
These are some of the guiding questions an AOPA Aviation Finance advisor might ask you to help assess your personal tolerance for handling pre-purchase inspection squawks: How important is it to you to have it fixed vs. receiving credit? How long can you stand to go without fixing the item? How urgent is it that you get it replaced or fixed? What kind of relationship do you have with a qualified mechanic? How much effort are you willing to expend in finding a qualified mechanic to save some money? How does this plane’s overall condition stack up against others in the marketplace? In other words, is there enough supply vs. demand in the marketplace to give you any negotiating leverage?
For example, we’ve seen a recent surge in the popularity of the Cessna 182. To buyers in that market, we would advise they come prepared with a flexible negotiation mindset. You can have a particular mindset, but if you have to compare your mindset to the realities of the market, you may have to adjust it. After all, there might be ten other potential buyers lined up behind you who are willing to deal with that leaky door seal post-purchase instead of demanding “it simply must be repaired before closing at seller’s expense.”
Our experience and advice apply as much to the seller as it does to the buyer. A recent client wanted to sell his Piper Warrior for a price he thought fair. We advised him that an aircraft like his that fits in the flight training usage profile would likely sell for better than what he imagined he could get. We recommended a higher asking price. He took our advice and received bids even above that amount.
Our advisors have deep knowledge of both the market and demand. AOPA Aviation Finance has an extensively researched database and can provide guidance on the relative market strengths and weaknesses of most aircraft, from the common to the esoteric.
This article was originally published by AOPA Finance on November 18, 2019.
Structuring an Aircraft Sale to a Flight School see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your aviation finance questions.
Q: Hi Adam, I’m the owner of a 77 B-55 Baron. My local flight school is interested in purchasing it but is unable to finance. Any ideas on how to structure a sale?
A: If the flight school is unable to secure financing through an SBA loan or other means, seller financing might be an option. With AOPA’s Pilot Protection Services added to your membership you will have access to consultation with one of our panel attorneys. They would be able to help set up the appropriate contracts to facilitate the sale.
Q: I'm an AOPA member that recently purchased an airplane in Missouri and brought it back to North Carolina two days after purchase. I intend to eventually incorporate business use into my flight time, but for now the use is personal. I have two questions: What sales tax can I expect to pay on this purchase, and from what state would I be taxed? I intend to upgrade avionics for ADS-B requirements. If I incorporate business use into my flying before the avionics purchase, is any of this deductible or do I need to put it under an LLC before this happens?
A: For tax-related questions your CPA would be able to provide the appropriate answers. Additionally, AOPA’s Pilot Protection Services has in house attorneys that specialize in aviation tax law. Adding PPS to your membership will give you access to these attorneys.
This article was originally published by AOPA Aviation Finance Company on October 23, 2019.
Is It Beneficial To Get a Loan Against My Home? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about aircraft financing.
Q: I own my home outright, so would it be more beneficial to get a loan against my home at a much lower rate, than to go through an aircraft finance company at a considerably higher rate?
A: While HELOCs can potentially offer rates slightly lower than traditional aircraft financing, going this route ties up equity in your home. Equity that may be needed for inevitable home repairs. Financing through a traditional aircraft loan only uses the aircraft as collateral. This helps keep equity in your home and other assets. Most importantly, however, is that aircraft lenders understand the aircraft purchasing process. They have access to detailed valuation tools and will ensure that the appropriate documents are filed with the FAA. These steps would be entirely on the borrowers’ shoulders when using non-traditional financing. AOPA Aviation Finance’s staff help alleviate the stress of buying an aircraft. In the current rate market these benefits typically outweigh the minor differences one may see with a mortgage rate versus aircraft rates.
This article was originally published by AOPA Finance on October 7, 2019.
What Is The Typical Down Payment Percentage on a Jet? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about jet down payments.
Q: What is the typical down payment percentage on a jet? Possibly a CJ3+?
A: How the aircraft is being used will be a primary factor in determining the required down payment. For Part 91 personal/business use lenders typically will finance up to 85% of the purchase price or aircraft value, whichever is less. Part 135 charter or other commercial usage generally requires larger down payments. 30% down is typical for this type of usage. How the loan is structured can also play a factor in the down payment. AOPA Aviation Finance can offer solutions such as interest only, asset based, or longer fixed term structures. Larger down payments are typically required for these types of loan structures. Please give us a call, we’d be happy to discuss your situation in further detail.
This article was originally published by AOPA Aviation Finance Company on September 18, 2019.
Title Insurance Ensures a Clean Title see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about title insurance.
One aircraft owner recently shared his story that might be illustrative. When he bought his first airplane, a used C-182. The buyer entered into an agreement to purchase the aircraft from a respected aircraft dealer, however, after the transaction was supposed to have closed things quickly unraveled. The dealer had set up escrow with a small title company and the buyer trusted this firm was competent to coordinate the closing. Unfortunately, the escrow company never properly filed documents or distributed proceeds to the appropriate parties. After a lot of finger-pointing, the seller no longer had clear title to the plane, the buyer did not have possession of the plane, his lender was still expecting him to make payments and the dealer had a huge headache!
Eventually the seller got paid, the buyer got the plane and the lender began receiving loan payment but not without each of them having to expend tens of thousands of dollars on legal expenses. Had the owner obtained title insurance (along with a lender policy), they and their lender would have had all their legal expenses covered. More importantly though, the event would not likely have happened as the title insurance company would have ensured the buyer was working with a competent title and escrow company.
Title insurance "is a contract between the insurance company and the insured that protects the title of the insured on a specific aircraft from risk and challenges to the insured’s title arising from covered events.” Events like improper lien filings.
Or like when a title search done as part of a normal sale and the title initially comes up clean. The deal closes, but a mechanic’s shop finds out about the transaction. The shop manages to file a lien just post-closing, however, the FAA accepts the lien after the fact. The new owner now is unaware of this cloud on their title.
Another instance is when a bank's lien release is not properly filed during a sale. The sale goes through, but the FAA subsequently rejects it due to an improperly executed lien release. Again, the owner isn’t notified so remains unaware of the cloud now on the title.
Only when it’s time to sell the aircraft, and the new buyer conducts a title search do these issues typically get discovered. It could be a simple paperwork issue. But what if it’s not? What if the bank that held that loan is no longer in aircraft lending? Or what if it's merged with another bank that does not make aircraft loans? Without title insurance, the burden and the cost of clearing the title will fall upon the aircraft owner.
What if a title search reveals a previously unknown tax or mechanic's lien on your aircraft? Big trouble. Usually, the courts will subordinate your rights to those of the lienholder regardless of how vigorously you spend to defend your position as the owner. Whichever individual or entity has the lien can legally take possession. At AAF, we've seen this happen. A bank or a shop will give notice of intent to take possession and liquidate aircraft.
Let’s say a $100,000 airplane gets seized because of a $50,000 lien. The aircraft owner must satisfy the $50,000 to the lienholder to recover their airplane. If they choose not to, the lienholder can sell it. If that entity can only get $80,000 for the airplane, then the net to the owner would be $30,000-- assuming they paid cash for it. If the aircraft had been financed, that $30K goes to the lender. The owner is left with no aircraft, no equity, yet with a loan still outstanding.
Title insurance removes uncertainty. If necessary, title insurance provides, at no cost to the insured, a legal defense team to defend or assert the insured’s title in court. If the court rules that another entity has superior title, the company will pay for loss of title. That’s a lot of peace of mind for not a lot of money.
This article was originally published by AOPA Finance on September 17, 2019.
Non-Traditional vs. Traditional Aircraft Payment Methods see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses your options when it comes to aircraft payment methods.
In a seller’s market like this one, the ability to act swiftly might make all the difference. So non-traditional financing sources like a margin loan or a home equity line of credit (HELOC), used in limited scenarios, can make sense. However, there are worthwhile considerations to using them over the more traditional methods of paying for an airplane—cash or financing through an approved aircraft lender.
AOPA Aviation Finance (AAF) recently negotiated a great aircraft loan with an extremely competitive financing structure for a client. The client ultimately rejected the loan in favor of using a non-traditional, margin loan to pay for his aircraft instead. A margin loan is designed to allow a stock investor to borrow money to invest in more stocks, using one’s shares as security. Using a margin loan can help a person increase one’s returns. It can also magnify one’s losses, especially if using it to pay for an airplane.
Let’s say, a sudden market correction triggers a margin call. A margin call happens when the investor's equity, as a percentage of the total market value of securities, falls below a certain percentage requirement. Having to make good on a margin call could create a disastrous situation—like selling the airplane to satisfy the margin call or liquidating the equities. Odds are also good that if the stock market falls, so too does the used aircraft market. Losses magnified.
Another client wanted to use her HELOC to pay cash for an airplane. She was tempted because the HELOC had already been approved, just waiting to be tapped. For her, the traditional aircraft financing process was taking longer than she wanted to endure.
Over five years, the average length of airplane ownership, it’s reasonable to predict a major event like roof replacement, foundation repair, or even flood damage might occur. Exhausting the HELOC as a long-term aircraft loan could leave her with zero equity to cover such emergencies. She would then be forced into borrowing against the airplane, or even selling it.
A margin loan or a HELOC used as a stop-gap, bridge loan for a short period of time—think three to six months, might be prudent only until a post-purchase, reimbursement loan is negotiated.
For all intents and purposes, non-traditional financing options are akin to the more traditional method of paying cash for an airplane. About half of all airplane owners will pay cash. Many of them do so with the intention of getting a post-sale, reimbursement loan. While cash and non-traditional financing might increase the speed of the airplane transaction, they also might increase its complexity. That’s why we advise speaking with AAF, or at least with an aircraft financier, before considering such strategies.
Lenders will stipulate certain actions occur prior to a non-traditional aircraft sale before they will even consider financing it. Stipulations like a cash sale be conducted through a third-party escrow company like AAF partner Aero-Space Reports. Lenders are legally obligated to know where all monies related to an aircraft purchase go, who the buyer is, and whether the buyer is an upstanding individual. The third-party escrow company can help verify the identity of the buyer, as well as assist in the title search. Most lenders will stipulate an aircraft have a clean title, or they won’t consider financing it.
AAF, or the lender, can also offer good counsel on the potential pitfalls of buying an “orphan” or obsolete aircraft. That’s right. Lenders are not eager to finance every type of aircraft. To a lender, number of units manufactured, parts availability, and current service availability matter. For example, finding financing for a Beechcraft Duke will typically be harder than for a Beechcraft Baron. Fewer than 600 Dukes were manufactured over a relatively short, 12-year time frame, 1968-1980. All were powered by a variant of the relatively obscure, Lycoming TIO-541-E1 engine. Compare that to the Baron’s 6,884-plus units manufactured since 1961, most of which are powered by the ubiquitous Continental IO-470 or IO-520 engines. You pay a penalty for an orphan/obsolete aircraft, assuming anybody will finance it.
A commoditized aircraft—one produced in abundance—like a Cessna 172 or a Cirrus SR22, will garner far more options for financing over a 20-year amortization than, say, a Navion. The same typically holds true for turboprops, but this rule of thumb does not apply to jets. Rapid technological advancements and limited manufacturing runs tend to render jets obsolete quickly. While there are some options for older jet aircraft, the most options are available for jets manufactured within the last 20 years.
That’s why taking the traditional aircraft financing route is often the best choice for prospective aircraft owners. AAF or the lender will give a reasonable expectation of how much of a loan, and what terms are possible, tailor-made to your situation. We know, in the end, how you pay for an aircraft affects what the aircraft will ultimately cost you.
This article was originally published by AOPA Finance on September 4, 2019.
How Much Cash On Hand Do I Really Need? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses how much reserve cash you really need to qualify for an aircraft loan.
Determining how much cash a potential borrower needs on hand to finance an airplane is not as cut and dried as it is with automobile financing. When it comes to aircraft financing, it’s best to think of aircraft loans as individually tailored transactions, based on a variety of factors that influence cash reserve requirements.
Among these factors are: How much money is being borrowed? How does that figure relate to one’s overall net worth? What is the person’s financial "lifestyle”? How complex is the aircraft? What is the remaining useful life of its engine(s)? And what is the loan-to-value ratio?
In an ideal transaction, a lender may require only enough cash on hand to satisfy the down payment. In contrast, the lender may ask the borrower to provide evidence of liquidity to cover 24 months of global cash flow. For instance, a business owner wants to purchase an aged, high performance, complex piston twin with freshly overhauled engines. He has personal and business debt for which he’s responsible that totals $10,000 monthly. Depending upon his other financial obligations, the lender might require the business owner to have as much as $240,000 on hand.
That same business owner might wonder if the liquid assets of the business in which he has a stake can be used to satisfy the cash reserve requirements for the loan. Not without a guarantee from that business.
Other similar situations include:
- An individual whose liquid assets are held jointly with their spouse, but who is applying for a loan without the spouse. Some lenders might only consider half of those assets.
- Assets held in trust where the trust is legally incapable of guaranteeing on a loan will not be considered
Sometimes determining questions are intertwined. For example, a person buying a turboprop is probably seeking a larger loan than a person looking to finance a single engine, fixed gear piston. In this instance, the size of the loan, the loan-to-value, and the complexity of a turboprop aircraft will indicate a need for greater on hand cash reserves.
How about a person living in a $120,000 home that's fully paid for versus one living in a five million-dollar home that's fairly-well leveraged, both seeking to buy a ten-year old Cirrus SR/22? What might their individual cash reserve requirements look like? If the homeowner with 100% equity has sporadic income, the lender may require more on hand than the highly-leveraged homeowner who has a predictable, consistent monthly income stream.
And let’s be clear: “Cash” means liquid assets such as hard currency or marketable securities in your name, or in the name of the borrowers and/or guarantors. In certain situations retirement accounts could be considered liquid as well. “Cash” does not mean Bitcoin or other cryptocurrencies, furs, Rolex's, collectible cars, baseball cards or other memorabilia.
All of this may seem pretty daunting. But a conversation with an AOPA Aviation Finance (AAF) adviser can help inspire confidence. Our assessment of your finances will give you a good understanding of how much in cash reserve a lender might require you to have. If you’re buying an aircraft for the first time, we know you’ve done a lot of research. We fill in the gaps and simplify the nuances. For folks transitioning from a non-pressurized, piston aircraft to a turboprop, AAF can offer clarity over the significantly greater reserve and cash flow requirements of turbine ownership.
Regardless of the aircraft type, an aircraft with engines closer to overhaul will increase cash requirements compared to an aircraft with freshly overhauled ones.
A discussion of your debt-to-income ratio will provide a reasonable idea of how much cash on hand a lender will expect you to have initially. If that ratio is on the low side, then the liquidity requirements will most likely be less stringent than those for a person with a higher ratio.
This article was originally published by AOPA Aviation Finance Company on September 4, 2019.
Why Does An Aircraft Loan Take Longer Than A Car Loan? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, explains the differences between aircraft loans and car loans.
Most of us have gone through the car buying process and may think buying an aircraft would or should be similar. So, when it takes a day or two to approve a loan we may wonder why it's not as simple as a car loan. AOPA Aviation Finance President Adam Meredith explains the differences including differences in collateral and lifespan.
Many of us have sat in car dealerships while the salesperson typed our facts and figures into a computer and within 10 to 20 minutes, there it is: We’re approved for a car loan. So why can’t a $45,000 airplane loan be that simple? Airplane loans take a day or two to approve, and sometimes longer depending on the financial complexity and number of borrowers.
That’s because the underwriting process for an airplane loan is more like that for a house than it is for a car. With both a house and an airplane, lots of documentation needs to be collected and presented. You need to supply photos, logbook entries, personal financial statements, tax returns, IDs, and more, and that’s in addition to signing a promissory note, security agreement, and other legal documents. However, one of the most time-consuming issues can be verifying a clean title to the airplane.
Consider that it would be rare to finance a 30-year-old car, but it’s an everyday occurrence to finance a 30-year-old airplane. Airplanes are designed and built to have a long life, so the average aircraft is far older than the average car. With that age, can come a very colorful history, which needs to be thoroughly examined. To make matters more complicated, it can sometimes take weeks to clear up issues arising from an improperly executed lien release.
On a positive note, because the registration process is centralized in Oklahoma City, Oklahoma, where all U.S. aircraft are registered, there’s only one place to check. Further, now that the FAA is willing to accept electronically executed documents, the process is going to become easier. Many banks and other lending institutions are slower in accepting electronic signatures, but that will change and speed up the process further. There is some hope here!
Probably the biggest reason the process of obtaining an aircraft loan is slower than that for a car is aircraft lenders are not collateral lenders; they are cash flow and collateral lenders. Most automotive lenders can rely heavily (predominantly) on the collateral of the car because they can have greater confidence in the resale value in the event they must repossess the asset. When comparing to forecasting the resale value of an aircraft, this is much more challenging. Items like the condition or total number of hours on the engine can significantly impact value. If a lender gets back that Cirrus SR22 and the engine is run out, it’s going to easily cost up to $40,000 to overhaul it on a 10-year-old airplane that’s almost 20 percent of the aircraft value. Needless to say, forecasting the resale value of cars is a far easier task than forecasting the resale value of aircraft.
This article was originally published by AOPA Aviation Finance Company on May 3, 2019.
Buying a Foreign Aircraft and Importing It see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, shares what you need to know when purchasing and importing a foreign aircraft.
Buying an aircraft is a complex transaction. Buying one from outside the United States and importing it only adds to the complexity. Paperwork and timing are two major aspects of a domestic deal that can become complicated with foreign transactions and the importation process.
For instance, in the United States there’s only one place to go to verify aircraft records--the Federal Aviation Administration (FAA). Assuming an aircraft has spent its entire history in the United States, most reputable title companies should be able to ferret out any claims impacting the title by performing a quick title search.
By contrast, in Canada, for example, there is no central source for determining an aircraft’s chain of ownership. Aircraft registration in that country is done at the regional level. There are many different provincial and territorial level queries that would need to be done to ascertain whether there are any claims outstanding on Canadian-owned aircraft.
Every country has its own, distinct registration process. Unfamiliarity with a country's aircraft registration procedures can significantly impede the timing of the transaction and increase the paperwork. It should be mentioned that the International Registry (IR) was originally intended to help address this issue. However, the IR falls significantly short in providing certainty of a clear chain of title, even on those aircraft it covers.
Aircraft pre-purchase inspection is another potential minefield. AOPA Finance recently stepped in to help somebody who had imported a plane without setting up a thorough Purchase and Sale Agreement (P&S). The two parties agreed the seller would fly the plane to the United States. Both also agreed the buyer could have an annual inspection performed by the buyer’s A&P as part of the pre-purchase inspection. During the annual, the buyer’s mechanic discovered several issues with the aircraft.
A dispute arose over which country’s definition of airworthiness took precedence. The seller believed the aircraft was airworthy when it departed his country. The buyer’s mechanic begged to differ. So both the plane and the deal were in pieces. To add insult to lack of planning, the lender refused to release funds until somebody signed off that the aircraft was airworthy.
In the United States, that somebody is the FAA’s designated airworthiness representative (DAR). Not only does the DAR control that aspect of the transaction, this person also oversees the de-registration and registration process. Every country also has their equivalent, which means there are options on how to proceed. Whichever course is chosen, it involves getting on the DAR's calendar, and paperwork.
Other details to be resolved include: In which country will the plane be de-registered? How will it be flown or ferried into the United States? Where and how will it clear U.S. Customs? And how will the aircraft be re-registered?
Our advice is to hammer out a rock-solid purchase and sales agreement before embarking on your journey. Clearly spell out all the details to make sure expectations are realistic. Have the P&S elaborate what’s going to happen, when and who is going to take care of which parts of the process. Have it specified when the money will become non-refundable, when the entire amount of the loan is funded into escrow, and when those funds will be released to the seller.
Disputes happen. Lay out what the dispute resolution process will be. Clarify the logistics of when and where the aircraft will be de-registered and subsequently re-registered. Specify the time period for the designated airworthiness representative to inspect and deem the aircraft airworthy by U.S. standards.
Our other piece of advice is to get title insurance. It doesn’t cost a lot on the one hand, and on the other hand, having a U.S.-based title insurance company to defend you if something does occur is more than worth the cost. Don’t skimp on this item. Get title insurance.
AOPA has a plethora of online resources. We also can be helpful through our Legal Services Plan. We’re not the only ones. There is a small industry of other aviation professional service providers out there who are in the business of importing aircraft. Our goal is to provide an understanding of the process and help set expectations. Buying a foreign aircraft and importing it is absolutely a case where hiring professional service providers can only benefit you.
This article was originally published by AOPA Aviation Finance Company on May 28, 2019.
How Can Borrowing More Cost Less? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, explains the credit matrix when looking for an aircraft loan.
An AOPA Finance client recently requested a quote for financing a single-engine aircraft. He was looking to finance $70,000, and was quoted what the interest rate would be based on that figure. However, had the client borrowed $75,000 instead of $70,000, the rate would have been a whole percentage point lower, saving him money. Why is that?
Many borrowers believe the way to get the best interest rate is through a large down payment and a great credit score. But actually the No. 1 factor in determining the interest rate offered on a loan is the amount of money being lent. Lenders structure each loan around a credit matrix. The matrix is comprised--among other things--of ranges of loan amounts, the loan-to-value (LTV) ratio, an individual's total financial picture, and least of all, that person's credit score.
Lenders group loans into "buckets," or ranges of loan amounts. For example, in the case of our client, one range included loan amounts from $50,000 to $74,999. Additionally, each range of loans has a default initial interest rate associated with it.
In this case, the lender's next higher range had an interest rate one full percentage point lower associated with it. This client had said a top priority of his was to get the lowest possible interest rate. Therefore, we knew if our client had the flexibility to increase his loan by $5,000, it would put him in the higher range, where the default lending rate was better.
Initially, he saw increasing the loan by $5,000 as beneficial only for the lender. We pointed out that this lender also had a loan structure that allowed for additional prepayments without penalty. If our client was willing to hold back $5,000 of his down payment and increase the loan to $75,000, he could, on Day 2 of the loan, take that held back $5,000 and apply it immediately to the principal. That would get him back to $70,000 on the loan while maintaining the lower interest rate of the $75,000 loan, thus saving him money. That’s one example of how borrowing more can cost less.
Loan-to-value (LTV) is the second-most important element in constructing the credit matrix. LTV is a financial term used by lenders to express the ratio of a loan to the value of the asset purchased. Generally, an LTV of 80%-85% is deemed an acceptable risk. LTV requirements are most frequently influenced by the aircraft and how quickly it is likely to depreciate. In other words, LTV requirements may be applied on a sliding scale. Generally, the more quickly a plane is likely to depreciate, the more money down or lower an acceptable LTV and vice versa. Additionally, by putting even more money down and thus lowering the LTV you can frequently gain better interest rates and terms.
The last, and least important, component of the credit matrix is one's credit score. Despite what retail financial institutions and credit reporting agencies pushing credit protection products advertise in the media, credit scores for aircraft loans have only a small influence on how lenders determine a loan's interest rate. The difference between a good credit score and a great credit score might be a mere quarter of a percent. It’s a lousy credit score that will hurt the most. A poor credit score may cost the borrower a full percentage point, or the loan itself.
Ultimately, obtaining the best loan for you is about providing you the best perspective on all aspects of it. AOPA Finance brokers stand ready to share the kind of knowledge, nuance and expertise that can navigate you to the best loan for your situation.
This article was originally published by AOPA Aviation Finance Company on May 28, 2019.