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.
Is There a Minimum Purchase Price to Obtain a 10-Year Loan? see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your aviation loan questions.
Q: What's the minimum purchase price to obtain a 10-year loan? I'm looking at aircraft in the $20K-$30K range after 1960.
A: Thank you for reaching out. The minimum loan amount required for a 10-year term is $20,000. This is after the minimum 15% down payment. Therefore, the minimum purchase price should be around $24,000. Please feel free to give us a call as you get closer to purchasing. We always recommend that AOPA pilots get pre-approved as they shop.
Q: I'm thinking of buying my first plane. Would you finance an experimental one? The one I am looking at this moment is a SONEX 2016, tri-gear, with asking price of $39K. What is rate and term?
A: A number of our lenders offer financing on experimental aircraft. In some cases, a lender may require that the aircraft have an appraisal. Our account executives will discuss that requirement with you early in the application process. A SONEX is common enough that an appraisal is not likely needed. For a purchase price of $39,000 rates will fall around 7.5% for 10 years. Keep in touch as you search. Our account executives can help with providing rate quotes and valuations as you shop around.
This article was originally published by AOPA Aviation Finance Company on June 12, 2019.
Painting the Financial Picture see more
NAFA member Adam Meredith, President of AOPA Aviation Finance Company, shares what items you need when preparing to finance 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 June 12, 2019.
Will High Time Engines Complicate the Loan Process? see more
NAFA member Adam Meredith, President of AOPA Aviation Finance Company, discusses finding the "perfect airplane" and the loan process.
You’ve finally found the perfect airplane. It has no damage history, all of its logs, great avionics, and good interior. The high time engines are the only downside. You’re not worried because the plane is flown often and mechanically is in great shape. When you present it to your lender, though, the lender balks. Why?
Lenders tend to keep the worst-case scenario in mind. For them, that case is if they might have to repossess the aircraft with it needing an overhaul. To make it marketable again, the lender would have to use their own money for an overhaul. To counter that, most lenders are going to specify you have enough liquidity to cover an overhaul from Day 1.
Some lenders may require an overhaul as part of the purchase. Others may require a "hold back" amount of money as a precursor to financing. That "hold back" amount must be sufficient to cover overhaul costs upon taking delivery. Because lenders recognize that the likelihood of other expenses popping up at any time with an airplane is high, they may also require an additional cushion of liquidity as a condition of completing the deal. Some lenders will simply bow out of the transaction entirely.
For many pilots, having to fold an overhaul into the purchase price looks like a pricing discount opportunity. The reality is aviation market appraisers have already figured that into the equation. For example, if two identical aircraft are for sale and one has a fresh overhaul while the other is at TBO, the airplane with the fresh engines will have a market value of at least $30,000 more per engine over the TBO plane.
We've had clients who felt their ability to potentially liquidate an asset to cover an overhaul should have had that counted in their favor. Lenders tend to disagree with that assessment for two reasons. First, offering to liquidate an asset against an overhaul changes the global financial picture of the borrower. Keeping in mind that every aspect of one's financial picture is interconnected; it becomes easy to see why changing one part may have a negative domino effect overall.
Second, where borrowers tend to feel eternally confident about their ability to quickly liquidate any asset they own, lenders are more sanguine about the reality of asset disposal. Financers can draw from plenty of historical precedent where circumstances changed for the worse, and the asset a borrower thought would be easy to sell to cover the unforeseen event fetched far less than expected or didn't sell at all.
The flip side of that coin are two specific instances where an airplane owner whose engines are at TBO might easily obtain an overhaul loan. In the case of an aircraft that is free and clear, it’s generally possible to get virtually 100% financing. The second situation is when a loan is still outstanding. If the amount requested--plus the remaining principal--adds up to less than 80% loan-to-value (LTV), a lender will typically refinance. In that case, the owner may not have to go more than 20% out of pocket to pay for the overhaul.
Lenders who provide this type of refinancing find it attractive for another reason. Often a pilot will include an avionics or interior upgrade, thus turning a simple engine overhaul into a whole aircraft refurbishment. The one caveat is, at least on the piston side, the relatively small dollar amount of a refinance loan for an overhaul is low, so it's not necessarily attractive to a lot of lenders.
This article was originally published by AOPA Aviation Finance Company on July 10, 2019.
Financing An Aircraft Before It's Moved To The U.S. With FAA Registration see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about loans for engine replacements and aircraft financing.
Q: We are looking for financing options to purchase a pressurized Baron that is currently based and registered in Canada. I am writing to ask if you’d be willing to finance this aircraft before it is moved and transferred to the US with FAA registration?
A: For aircraft being imported from Canada our lenders will require that the deregistration from Transport Canada and new FAA registration be completed prior to releasing funds to the seller. In most cases lenders are able to position funds in escrow while the import is completed. Imports from Canada typically only take a couple days. Give us a call to discuss further. We can also help you set up escrow with our AOPA Strategic Partner, Aero-Space Reports.
Q: I own my aircraft outright. Do you provide loans for engine replacements?
A: Yes, like avionics upgrades, our lenders will finance up to 85% of the aircraft value with an overhauled engine. Having no debt on the aircraft potentially allows for the lender to finance the full cost of the overhaul. Call us today so we can get you started on the application and approval.
This article was originally published by AOPA Aviation Finance Company on July 30, 2019.
Adam Meredith, President of AOPA Aviation Finance Co., shares helpful steps when financing aircraft. see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, shares helpful steps when financing your aircraft.
AOPA Aviation Finance and our experienced and trusted specialists can assist you in making your purchase by offering a wide array of financing options that are tailored to your specific needs.
Here are eight steps to help you start flying:
Gather Supporting Documents
Gather your tax returns, financial statements, and personal net worth information for submission with your application to speed up the process. The fastest approvals are applications where W-2's are submitted with no business ownership, usually within 1-2 days. Additional approval time may be required for applicants with business entities.
Complete an Application
Fill out the application as completely as possible to avoid a delay in processing and remember to provide an original signature on the application before submitting it through the online portal.
Get Approved or Pre-Approved Quickly
Once your application package is complete, your account executive and analyst will identify and select the best lender based on your aircraft selection, usage, loan structure, and financial history.
A pre-approval ensures that:
- You don’t lose the aircraft of your dreams due to lack of financing.
- Your loan closes quickly.
- You have 90 days to decide on your aircraft with the rate locked for 30 days.
Negotiate a Balanced Purchase and Sales Agreement
Don’t just sign anything given to you by the seller, have someone familiar with the process review to ensure it’s balanced. The purchase and sales agreement is a binding legal document that sets the sales price and all conditions to close, including time to complete pre-buy, time to complete transaction, how and where escrow and deposit are held, and who pays to move the aircraft, etc.
Schedule a Pre-Purchase Inspection
We highly recommend a pre-buy inspection by an independent 3rd party to avoid any surprises and conflict of interest once you take ownership of the aircraft.
Typically, the prospective buyer pays to re-position the aircraft for the pre-buy, and the seller pays for correcting any maintenance issues relating to airworthiness.
Set Up Escrow and Review Fees
AOPA members pay no broker fees! Members will, however, need to open escrow with a lender approved title and escrow company to ensure proper closing and will include a title search. Normally, fees are based on the aircraft’s sales price and are split by the buyer and seller.
Lender closing costs are based on the aircraft and purchase price and are used to cover hard costs such as background checks, credit bureaus, overnight fees, loan documentation, and legal review.
Hull and liability insurance coverage is required by lenders, AOPA members can get discounted rates through AOPA Insurance. Your account executive will gladly refer you to an agent for a quote.
Prepare for Closing
Once you have selected a closing date, be prepared to find a notary to notarize documents and leave time for overnight packages to be sent back and forth as some documents require a “wet signature”.
This article was originally published by AOPA Aviation Finance Company on August 5, 2019.
Positioning Oneself in a Seller's Market see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, shares his strategy for positioning yourself in a buyer's market.
In a seller’s market, the best way for a buyer to position themselves is through a three-pronged strategy of pre-approval, extra liquidity and nimbleness. Buyers who finance may find themselves up against cash buyers. That’s why being nimble is so important. The buyer may have to make an offer on multiple planes before they finally get into first position on a transaction.
If you think you’re able to pay cash for a plane with the intention of getting it financed after the fact, make sure the transaction goes through proper escrow channels all the way to closing. AOPA Aviation Finance knows from experience that being pressured by a seller into purchasing a plane quickly without all the proper due diligence leads to bad outcomes more often than not.
Many buyers are aware that incomplete logs, damage history, or a title with a cloud over it are reasons for a finance company to nix the deal. However, in this era of heightened security measures, uncertainty where (and to whom) the money from an aircraft sale went might also prevent the ability to obtain financing. Not to mention, subject a buyer to unwanted scrutiny from one or more three-letter government agencies post-closing.
Finance companies have a regulatory obligation to follow the money. They must vet not only the buyer, but also the seller as well. This is done in order to ascertain whether money from a cash deal is destined for a bad actor on a list of prohibited persons who might possibly funnel the money to an organization on one of a number of “bad guy” lists. The simplest way to protect yourself from such close scrutiny while still preserving your potential for financing is to have the transaction go through escrow.
Buying a high-quality airplane in a seller's market has a lot to do with timing. In past seller's markets like this one, AOPA Aviation Finance has seen frustrated clients try two distinct tactics to improve their chances when their timing was off: offer a buyer well above asking price; and/or settle for a lower quality airplane.
We like to advise our clients that a tight market is a particularly important time to maintain objectivity, despite understandable temptations to the contrary. AOPA Aviation Finance helps a buyer by keeping a dispassionate perspective. However, in those instances when a buyer simply cannot remain objective, we counsel them to be prepared for one of three scenarios:
- A person dead set on paying more than where a plane ”book’s out” with the pricing digest guides needs to be prepared to pay for a valuation to justify why the plane is worth more, or
- They need to be able to shell out the difference between where it books and the asking price--in addition to the regular down payment, or
- A combination of the two
Lenders will finance an aircraft only on value as determined by an independent third party so the difference between that value and the buyer's asking price will have to be made up by the borrower. If a buyer can't afford to make up that difference without changing their global financial picture, AOPA tends to advise against the deal.
Some clients feel that settling for a lesser value aircraft at least gets them a plane. For instance, pursuing a well-appointed TBM 700 because they lost out on one too many highly sought-after TBM 850s. The thing is, it's very likely other frustrated buyers have drawn the same conclusion. They too flood the market, which boosts the popularity of TBM 700s, which artificially boosts their prices. Short term win, but long-term loss. That's because the market will inevitably reverse. When it does, the 700 will likely depreciate faster and farther, thus commanding less in resale as a result.
Is it worth it to bet that you'll use and sell that lesser plane before the market turns? Is it worth it to take that risk in a market whose output is only a few thousand aircraft annually, and whose market is heavily dependent on a robust economy? A conversation with an AOPA Aviation Finance expert can help guide your decision-making and help hone your acquisition strategy.
This article was originally published by AOPA Aviation Finance Company on July 8, 2019.
What Are The Benefits Of Title Insurance For An Airplane Purchase? see more
NAFA member Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about title insurance when purchasing an airplane.
Question: I’m planning to purchase a used airplane in the next 6-months. I’ve heard some owners talk about not needing title insurance? Wouldn’t this be required by a lender? I’m familiar with title insurance for a home purchase, but what exactly are the benefits of title insurance for an airplane purchase?
Answer: Surprisingly, no, many lenders do not currently require title insurance on every transaction.
Similar to a home, your aircraft also has a title history which should be reviewed before buying. While most AOPA members know the importance of this and perform a title search prior to buying an aircraft, many may not know there are numerous scenarios where a lien or claim can end up in the FAA registry and/or otherwise “clouding” your ownership interest. By obtaining title insurance, the title insurance company will defend you legally against any bogus claims.
Question: I would like to purchase my first airplane this year. My price range is about $50k. I’ve been looking at your website and the list of financial documents you will require, especially for a business owner like myself, seems daunting. Are there any other options for someone like me? I have good credit and good cash flow.
Answer: While providing the full list of financial documents gives you the most lending options, some of our lenders do offer low doc products. The underwriting guidelines tend to be more constrained, however, for well-qualified borrowers all that is needed is an application. Because this product does not require supporting financials rates will average .25-.75% higher than our most competitive options. If you are interested in more details about this low doc option, please give us a call and we can give you a more specific rate quote.
This article was originally published by AOPA Aviation Finance Company on May 3, 2019.
An Overview of Aircraft Loan Structures see more
NAFA member Adam Meredith, President of AOPA Aviation Finance Company, discusses how to determine which aircraft loan package is right for you.
The best way for an AOPA Finance expert to determine the right loan package for its members is to ask them the right questions, starting with, “What’s important to you?”
Most have the same answer: “The lowest interest rate possible.” From experience, we know they really mean “lowest rate possible for their specific situation”. Three questions help us frame their specific situation:
- What have you budgeted for a monthly payment?
- How long do you want to own this plane (and keep financing in place)?
- How much are you looking to put down?
How the member answers determines whether a fixed, floating or a hybrid financing structure fits best. Their financial complexity might require us to recommend an asset-based approach.
A fully amortized, fixed rate loan with the longest possible term might be ideal for somebody intending to own the plane for a decade or more. The risk is the interest rate locked in at the beginning of the term might be higher than the going interest rate at the end. But the trade-off in peace of mind knowing the guaranteed monthly note is compatible with one’s long-term spending plan makes the extra cost worthwhile. For example, for non-commercial use, there are lenders who will execute fully amortizing, fixed-rate loans with 15 or 20-year terms for turboprops still in production.
When it comes to length of ownership, many of our clients answer, "about ten years.” Data AOPA Finance has collected shows the typical length of ownership is actually no more than five. That's why floating, balloon or adjustable rate (ARM) loan structuring might make more sense.
A floating rate loan has no fixed interest rate, while an adjustable rate (ARM) loan starts out fixed but then changes (to either a new fixed rate or a floating rate). Following the initial period, an ARM floats, based on a benchmark reference rate like the Federal Home Loan Bank (FHLB). The initial period is typically three to five years. Another term for an ARM is hybrid. In the current interest rate environment and forecasting into the foreseeable future, these financing packages can offer better savings compared to fixed rates with similar amortizations.
Balloons are another option; however, the amortization period is longer than the actual loan term. An example might be financing a turboprop on a five-year term with a "balloon" and a 15 to 20-year amortization. That package might work best for members who a.) are looking purely for the lowest rate possible, and b.) know they’re going to own the aircraft (and/or keep the loan) less time than the normal average.
Balloons allow the borrower to delay paying the principal until the very end, thus keeping the monthly outlay low. At the end of the term, the entire unpaid balance comes due. That small monthly note balloons into one large final payment.
Sometimes members come to us comfortable with the complex structures of floating or ARM financing, but the complexity of their own finances prohibits them from using those options. Take for example, a real estate entrepreneur who owns 30 different properties. Each property is a separate ownership entity. They have partners on some of these properties and are a majority owner, or half owner or some variation of percentage, across the entire real estate portfolio. Despite the positive cash flow, there are lenders who will not do a deal without them putting a guarantee on all the entities they have equity in, as well as a personal guarantee from themselves. Even if they aren’t restricted by covenants from doing so, the cost in money and time is frequently not worth it. The financial complexity surrounding their business might mandate a simpler, asset-based loan configuration.
In fact, asset-based deals can be further simplified if the client can increase their down payment. The more you put down up front, the more options lenders have available. A loan on an older airplane or one with higher-time engines becomes doable if the borrower can afford a higher down payment. Whereas a newer plane might be approved with a 15% down, 20-year amortization, the same situation for an older turboprop might go from “no deal” to “deal” with 30% or 40% down. Likewise, a relatively mainstream turboprop that has been produced in significant numbers might normally see a 15-year amortization. Without a larger down payment, older or rarer turboprops might cause lenders to shorten the amortization period, or even refuse to make the loan.
Jet financing has its own unique requirements which might also necessitate a higher down payment. That’s because the frequency of engine advancements and avionics upgrades as well as new products tend to render those aircraft obsolete faster than others. That’s why asking the right questions of our members allows AOPA Finance to give them the best picture when it comes to securing the best financing package for their unique situation.
This article was originally published by AOPA Aviation Finance Company on April 12, 2019.