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.
The Closing: The Final Step to Completing the Aircraft Acquisition! see more
NAFA member, Amanda Applegate, Partner with Aerlex Law Group, shares what you need to know when it's time to close on your aircraft.
At long last, you have found the aircraft that fits your needs, the pre-purchase inspection is complete and the discrepancies have been remedied. It is now time for the closing. What does this mean and what needs to be done? For many first-time aircraft buyers, they think the closing will be a long drawn out event. However, I tell all of my clients that the closing should be a non-event and if all of the work has been done in advance, the actual closing should take less than 10 minutes. Once the purchase agreement is executed, a closing checklist should be developed to track all of the deliverables needed through closing. Here is a list of the important items that need to be accomplished shortly before closing:
1. Aircraft Positioning –
The purchase agreement should identify the delivery location and who is required to pay the movement costs, if any. The closing cannot occur until the aircraft arrives at the delivery location and in the required delivery condition.
2. Closing Documents –
There is an actual filing window at the Federal Aviation Administration (“FAA”) registry in Oklahoma City, OK. All of the closing documents should be pre-positioned with the escrow agent in Oklahoma City, as the escrow agent will be responsible for filing the applicable documents with the FAA. As the buyer, the required FAA closing documents are a registration application FAA Form 8050-1, a statement in support of registration if the purchasing entity is a limited liability company, lender documents if applicable, and a declaration of international operations if there is an upcoming international trip. As the seller, the required FAA closing documents are a bill of sale FAA Form 8050-2, as well as any lien releases if necessary. Additionally, the buyer and seller will each need an active transacting user entity account with the international registry in order to register the contract of sale at closing. Further, the purchase agreement more than likely requires other non-FAA closing documents, such as a delivery receipt and warranty bill of sale.
3. Insurance –
During the purchase process an insurance carrier should have been selected and a determination on the amount of coverage required. Shortly before closing, insurance should be bound and the buyer should receive and review the certificate of insurance. If the aircraft is financed or managed by a third party, these parties will have specific insurance requirements which need to be evidenced on separate insurance certificates.
4. Maintenance Programs and subscriptions –
If the aircraft is enrolled in any maintenance programs or subscription services, the third party providers must be contacted to confirm the account is in good standing, paid in full and transferrable upon closing.
5. Closing Statement –
The escrow agent will prepare a final accounting statement based on the terms of the purchase agreement and information provided by the parties. The statement will usually include the purchase price and any other fees due under the purchase agreement or to third parties, such as brokers. Any movement costs or similar expenses should be calculated a few days prior to closing and agreed upon by the parties prior to the day of closing.
6. Inspection Facility Invoice –
Oddly this is an item that can often cause a delay in closing. The aircraft cannot depart the inspection facility for the delivery location until all invoices are paid. However, invoices can’t be paid until they are final. The invoices from the inspection facility are very detailed and often take a long time to get into final form. Once received they must be reviewed in detail since certain costs are buyer costs and other costs are seller costs as dictated by the purchase agreement.
7. Tax plan –
The tax planning at the federal and state level for the acquisition should have been completed while the pre-purchase inspection was occurring. At closing, the tax plan should be implemented.
All of the items above can be accomplished in the days leading up to closing. If done properly the actual closing is a series of emails or a conference call with all parties lasting less than 10 minutes!
Refurbish Your Jet With Maximum Appeal - Part 2 see more
NAFA member, Gary Crichlow, Director of Aviation Finance with Arc & Co., discusses aircraft refurbishment investments.
Any investment into private aircraft needs to be looked at from the point of view of slowing the aircraft’s inherent depreciation as much as possible and extracting maximum utility, rather than expecting a positive financial return.
The most effective way to slow value loss is to make sure the aircraft is desirable to the market so that it sells quickly when you decide that it’s time to upgrade or generate some cash. Previously we discussed the impact that a well-executed interior, in top condition, can have on a sale.
Here, we consider the value of cabin refits from the perspectives of utility, history and transferability. Note: With our use of the term ‘value’, we encompass not only the actual return by way of an increased selling price (which tends to be the exception rather than the rule), but also we mean the impact on the time it takes to sell the aircraft, thereby minimizing the detrimental effects of depreciation and time on the market.
Refurbishing With Utility in Mind
The first consideration is, of course, to have an aircraft that does what you want it to do in terms of the cabin layout, amenities, entertainment, connectivity, privacy, etc. However, it’s also important to think about the end-buyer. How likely is it that your aircraft will be able to meet their needs as well?
The most value-enhancing upgrade options tend to be the ones that result in a demonstrable enhancement to utility. They will, for example:
• Enable the aircraft to fly longer distances;
• Certify the aircraft to land at certain airports, in certain countries or on more efficient routings;
• Allow full in-flight connectivity for all users including streaming live; or
• Have different zones for privacy/rest/work for principals, entourage and crew.
According to Celia Sawyer, who runs her own interior architecture and design firm and provides private and commercial clients with bespoke, luxury interiors for private jets and helicopters, the things that clients typically look for can differ significantly.
“It is different with every client,” she notes. “I had a Middle Eastern client who wanted a lot of gold inside and also wanted the interior to be very opulent, with only the best Italian leathers, a good boudoir to sleep in and a large shower room.
“Another client wanted no frills — just a contemporary, functional interior with good technology on board, more like a flying boardroom with a living area next to it that he could work from. So, it really is dependent on the client’s needs and their priorities.”
And yet there is more than just catering for the principal’s needs at play when considering the upgrade and refurbishment options for a private jet. Just how much of a selling point are amenities appealing to the buyer’s family or entourage?
These items might include private family suites on the much larger jets, catering facilities, showers, broadband allowing for the streaming of videos/gaming and additional baggage/stowage space.
According to Sawyer, “They all want the highest level of technology. That’s something that is always requested, whatever the size of the aircraft.” Having other amenities on board are very important to some clients. “If they have a family they travel with, they need to have everything available,” Sawyer adds.
“Of course, it will depend on the size of the aircraft as to whether they can have a shower, or what sort of catering facilities and how much additional baggage space is possible.
These design requirements will in turn be driven by what sort of trips they intend to make.” So, what are the top design trends that aircraft owners are choosing to help to maximize the appeal of their aircraft’s interior? “I am pleased that my clients are thinking of the environment,” Sawyer observes. “Many are requesting more fuel-efficient aircraft with lower emissions. New and upgraded engine and aerodynamic technology is key in this respect.
In keeping with this ‘green’ trend, on the aesthetic side Sawyer’s clients are insisting on lighter-weight interior furnishings and fittings than they may have done previously, “but they’re still choosing materials and designs that deliver on comfort, quality and style.”
The Role of History in an Attractive Aircraft Refurb
Ultimately, buyers prefer to purchase aircraft where the history of ownership, operation and maintenance is simple, well-documented and clear.
All the records – including the installation and certification of the interior, right down to the last detail – should be organized in such a way that a buyer can immediately see and take comfort that everything is in order.
According to Iain Houseman of Elit’Avia, “In an ideal world, all aircraft purchases would come with the correct documents, such as a comprehensive history of ownership and maintenance.” Interior installs from the factory are usually well documented, but problems can occur in service when an aircraft’s owner decides to change something and does it at their local facility for no other reason than that facility is the more convenient option.
“I’ve seen a number of aircraft that had work done where the paperwork wasn’t in order,” Houseman reflects. “This has meant the aircraft couldn’t be moved on to a different registry because you cannot show the history of modifications.
“That’s why it’s so important for the owner to have an approved operator with quality maintenance and care processes in place to ensure paperwork is properly kept.”
Elaborating further on the owner who was unable to move their airplane to a different registry, Houseman adds, “When the owner wanted to put it on an EASA registration, he couldn’t because the EASA approval for the modifications was not complete. He had to put the aircraft on the Isle of Man registry (which accepts both FAA and EASA certifications) and wait a further six months for the EASA approvals to come through.
“In another situation, a client decided to replace the carpet. It sounds easy, but the carpet was also attached to the seat bases. Burn certification paperwork is required, not only for the carpet, but also for the glue to attach it to the seat base and approval is needed from the seat manufacturer.
In total, it took eight weeks for a one-week install!” So, what are the lessons learned for interiors being installed on new aircraft? “You can usually pay the manufacturer to provide EASA certification alongside the FAA’s, because pretty much all the aircraft being built will come with FAA approval on the interior in the form of an STC,” Houseman explains.
“There is usually an upcharge for EASA, but from a seller’s perspective, it could make sense to get this for resale purposes,” he suggests. “It also depends on the model: larger aircraft with an international market would more obviously benefit from more certification to help with resale.
However, for smaller aircraft that are predominantly sold in the US, foreign certification may be a ‘nice-to-have’ rather than a ‘must-have’. “Multiple certification can be important in older aircraft, too. If an aircraft has spent its entire life in the US and has had modifications done under FAA STCs that are not EASA-approved, then all of the STCs would need EASA approval to import the aircraft onto an EASA registry.
It’s also important to make the distinction between private or commercial use, Houseman notes.
The requirements for commercial use vary between countries, so an aircraft that has EASA-only approved modifications could still go on the US registry for Part 91 private operations, but if it’s missing certain equipment mandated specifically by the FAA, it cannot do Part 135 commercial operations.
Upgrading and refurbishing an aircraft is a significant investment that can strongly enhance your experience whilst on board. But it’s vital, when planning for the investment, to have a realistic view of the value it creates and the other challenges that could arise.
A well-executed cabin refit should meet your needs in terms of space, aesthetics, utility and connectivity, and have the added benefit of appealing to the broadest possible range of potential buyers when the time comes to move the aircraft on.
As established at the start of this article, a well- executed cabin refit will not generally result in a positive financial return outside of a very narrow and oft-unpredictable set of market circumstances.
Doing your homework and enlisting competent expertise is key: an interior refit is a complex project that requires detailed planning and oversight, and strict adherence to a plethora of regulations. Delays and mistakes can be costly and time- consuming. You should keep potential future buyers for your aircraft in mind; not just in terms of aesthetics and technology, but also in terms of certification, with the aim being to ensure maximum transferability with minimum headache.
Finally, a reminder that investing in a quality operator is crucial to make sure that paperwork is properly organized and maintained.
This article was originally published by AvBuyer on September 27, 2019.
GAMA Publishes 2019 Third Quarter Aircraft Shipment and Billings Report see more
NAFA member, GAMA, releases Third Quarter Aircraft Shipment and Billings Report.
Washington, DC — The General Aviation Manufacturers Association (GAMA) today published a nine-month industry update with the release of its third quarter general aviation aircraft shipments and billings report. Aggregate business jet and piston airplane deliveries continued experiencing increases through the first nine months of 2019 compared to last year, whereas the number of turboprops and rotorcraft deliveries declined.
"The first nine months of 2019 show positive results for business jets and piston airplanes,“ said GAMA President & CEO Pete Bunce. “Turboprops and rotorcraft, however, continued to encounter headwinds. Despite these mixed results, our manufacturers continue their investments in advanced factory machinery, design software, and associated processes that keep product development cycles robust and in-turn bring advances in fuel efficiency, capability, and safety to the global fleet."
Business jet deliveries rose by 15.4% in the first nine months of 2019 from 447 in 2018 to 516 in 2019. Piston airplane deliveries also experienced double-digit growth of 12.3% from 781 units in 2018 to 877 in 2019. The number of turboprop deliveries declined from 395 to 349 airplanes.
The number of rotorcraft delivered during the first nine months of 2019 was down compared to 2018. In the first nine months of the year, 434 turbine powered rotorcraft were delivered and 136 piston engine powered rotorcraft. The value of rotorcraft shipments was $2.2 billion compared to $2.7 billion, a 17.3% reduction.
This press release was originally released by GAMA on November 15, 2019.
The Aircraft Buyer’s Guide to Private Jet Financing see more
NAFA member, H. Lee Rohde, III, founder, President and CEO of Essex Aviation Group, Inc., shares tips on private jet financing.
Even for high-net-worth individuals, whether to purchase a private aircraft might rank as one of the most expensive — and, potentially, lifestyle-changing — decisions they’ll ever make. From upfront costs to the ongoing costs of maintenance, hangarage and direct operating costs, private aircraft ownership requires a significant capital investment but, for those who frequently fly for business or personal reasons, it provides unparalleled travel experiences.
The fact of the matter is that the comfort, convenience, luxury and freedom that private aviation offers would be compelling to just about anyone and considered well worth the cost by those who can afford it — so let’s talk about the options to best structure it through private jet financing.
Let’s Talk Costs
Before a buyer kickstarts their search for a private aviation lender, they’ll first want to thoroughly consider the costs of purchasing a private jet. Conservative estimates place the cost of a brand-new private jet between $7 million and $75 million, while the most expensive private aircraft in the world — those of commercial size but modified for private use — cost well above that range.
For those buyers hoping to minimize their capital investment in an aircraft, acquiring a pre-owned aircraft can offer many of the same benefits as a new model with a reduced capital cost. However, for the following new aircraft, current industry data included in the VREF Aircraft Value Reference Guide offers some perspective on pricing and just how expansive the private jet financing industry is.
Bombardier • Lear 75: $13.8m
• Challenger 650: $32.4m
• Global 5000: $50.4m
• Global 6000: $62.3m
• Global 7500: $72.8m
Cessna • Citation M2: $5m
• Citation CJ3+: $8.6m
• Citation CJ4: $9.6m
• Citation XLS+: $13.6m
• Citation Latitude: $17.3m
• Citation Sovereign 680+: $18.8m
Embraer • Phenom 100 EV: $4.5m
• Phenom 300: $9m
• Legacy 450: $16.6m
• Praetor 500: $17m
• Praetor 600: $21m
• Legacy 650E: $26m
• Lineage: $50m
Dassault • Falcon 2000S: $30m
• Falcon 2000LXS: $35.1m
• Falcon 900LX: $44.8m
• Falcon 7X: $53.8m
• Falcon 8X: $59.3m
Gulfstream • G500: $46.5m
• G600: $57.9m
• G650: $69.5m
Pilatus • PC-24: $9.5m
Choosing the Right Lender
The road to private aircraft ownership should begin with the decision to retain the services of an aviation consultant or a jet financing broker. It is the responsibility of an aviation consultant to understand the buyer’s needs and situation to direct them to an appropriate tax attorney and, ultimately viable lenders and financing structures. Once the consultant has completed these steps, the process of researching lenders, requesting and reviewing lender proposals and working with the client or the client’s team is fairly straightforward. A consultant’s primary contribution is to apply their knowledge and considerable network of industry connections to facilitate the financing solution that best serves the client’s unique needs and requirements.
High-net-worth individuals often partner with aviation consultants and finance brokers through their private wealth advisors or in-house finance team in order to identify the best options available. Clients in different segments of the market who might not have the same level of in-house financing staff to support their needs can also benefit from assembling a team of third-party experts within the private aviation industry. Whether they’re working with an in-house finance team, a third-party private aviation consultant or an aircraft finance broker to evaluate lenders, buyers have three private jet financing options from which to choose:
- Traditional Banks: For most buyers, utilizing their current bank can be the most efficient choice for jet financing due to their existing relationship. The bank already has a complete portfolio of the buyer’s finances, which can make the loan process that much more efficient.
- Banks With Aircraft Finance Groups: In the event that a buyer’s current bank cannot provide jet financing, it may still be able to use its industry connections to put the buyer in touch with a different bank that has a dedicated aircraft finance group. These institutions specifically have a vested interest in private jet financing and already manage a large aircraft portfolio and would therefore be more inclined to offer private jet financing to a buyer without an existing relationship.
- Private Lending Groups: This type of lender is able to provide private jet financing by raising capital within equity markets to support their portfolio growth. Though private aircraft lenders are less common than their traditional banking counterparts, they are a viable option for buyers who, for whatever reason, wish to avoid securing a loan with their primary bank or a traditional bank. Buyers who choose to pursue this private jet financing option are still advised to work with a private aviation consultant and tax attorney to confirm the lender’s position in the market and whether it’s a suitable option for the buyer in question.
Criteria for Private Jet Financing Evaluation
It is, understandably, in a lender’s best interest to be highly discerning about who it grants private jet financing to and how much it lends. Therefore, similar to home mortgage lenders, private aircraft lenders have strict criteria for evaluating potential borrowers, as well as additional portfolio parameters based on the age and models of aircraft they’re able to finance.
For buyers who want a better understanding of this criteria, look no further than the “5 Cs” of credit: character, capital, capacity, collateral and conditions.
- Character refers to the borrower’s reputation and the stability of their credit.
- Capital refers to the borrower’s net worth and the types of capital assets they currently own.
- Capacity refers to the borrower’s ability to pay on the loan, as well as their current debt-to-income ratio.
- Collateral refers to the assets that the borrower is able to pledge to secure the loan.
- And, finally, conditions refer to how the borrower intends to use the aircraft, as well as external factors such as pending legislation that could affect the loan and the current state of the economy.
Buyers should be aware that most lenders have specific loan covenants, and that their lender of choice might require periodic reviews of the aircraft’s market value and also organize third-party inspections to determine whether the aircraft is being kept in the proper condition.
Alternatives to Private Jet Ownership
For individuals who want to replicate the experience of owning their own aircraft without having to worry about securing private jet financing, there are multiple alternatives to outright ownership:
- Private Jet Lease: The individual leases an aircraft from the owner for a specified period of time and assumes full operational control — similar to direct ownership — without transferring the aircraft title. Private jet leasing offers similar operational benefits, which can make it a viable option for buyers who are not able to take advantage of the tax benefits that direct ownership can provide. In some cases, however, private jet leasing agreements preclude the lessee from using the aircraft for third-party charter (FAR Part 135).
- Fractional Aircraft Ownership: The individual invests in partial ownership by purchasing a share of a specific aircraft type and agrees to an annual amount of flight hours depending on their specific travel needs. Fractional ownership often comes with significant upfront acquisition and monthly operational costs, but fractional owners save on deadhead costs.
- Private Jet Membership: The individual agrees to a fixed cost per hour at the start of the contract and is billed after each flight. Members are also expected to pay monthly management or annual membership fees.
- Jet Card Program: The individual either agrees to a predetermined number of hours on a specific aircraft type or size category (dedicated service) or funds an established travel account and chooses the aircraft category on a trip-by-trip basis, after which the cost of trip is calculated and deducted from the account’s balance (debit card service).
- Private Jet Charter: The individual charters — that is, rents — an aircraft for each specific trip they wish to take. Private jet chartering can be well-suited for individuals with relatively low annual travel requirements, but who fly to areas that cannot be easily reached by scheduled airline service.
A Final Note
Buyers interested in purchasing a private jet should assemble a team of professionals to assist them at every step of the process. From sorting out aircraft-specific tax considerationsto hiring an aircraft management company to handle day-to-day operations and support once the purchase is complete, buyers will want to have qualified and capable industry experts on their side — starting with a private aviation consultant.
At Essex Aviation, we have a combined 70 years of aviation experience; in that time, we’ve had the opportunity to learn the ins and outs of the private aviation industry, as well as develop strong relationships with service providers and other vendors. We’re able to leverage this knowledge and our vast network of industry connections in order to ensure that our clients’ unique private aviation requirements are met with unbiased guidance and that they have a quality client experience, from start to finish.
This article was originally published by Essex Aviation Group, Inc.
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.
How to Build a Business Aircraft Acquisition Plan see more
NAFA member, David Wyndham, Vice President with Conklin & de Decker, discusses the importance of developing a thorough aircraft acquisition plan.
With a sense of urgency and a large sum of cash, an aircraft acquisition can be completed rather quickly. However, without a plan or the right team in place, these types of scrambles typically result in the wrong aircraft for the job, or just simply picking the wrong aircraft. To avoid the headache from an impulse purchase, you need to build a business aircraft acquisition plan.
To begin, there are two fundamental reasons for acquiring new or different aircraft:
- The current aircraft can no longer perform the mission, or
- The current aircraft is no longer the most cost-effective solution.
Changes in mission need to be quantified. As an example, one client in the Eastern US started flying shorter trips with fewer people. Their eight-passenger jet, with a 1,800nm range, was more than they needed.
Instead, they found that a five-passenger airplane that’s more efficient on short trips might be the next aircraft for them.
But how can you quantify what it is that you need and want? Economics are critical. The cost of an aircraft is more than the acquisition price alone. It encompasses the total costs needed to operate the aircraft and allow for a future residual value.
As an example, a single aircraft that meets 98% of usage requirements may cost far more than an aircraft that meets 85% of your needs with a supplemental jet card, charter or fractional solution in place for the remaining 15%.
What Should Your Acquisition Plan Include?
It is important for you to understand what it costs to own and operate the aircraft – and this will all come into your acquisition plan. So, what should your acquisition plan include?
An aircraft acquisition plan must (at a minimum):
- Identify, quantify and differentiate your needs and wants;
- Identify and rank the possible aircraft types by mission capability; and
- Analyze all the costs involved with the aircraft.
Your plan should be void of emotional issues and stay as far from subjective criteria as possible. To help in this respect, you will need someone who can ask the tough questions and assist with an unbiased analysis of the candidate aircraft.
Consultants may offer the unbiased review that you initially need, and their feedback will need to cover both technical and financial aspects of the aircraft acquisition.
Who Should be on Your Acquisition Team?
As you proceed with the acquisition you need to add expertise across several fields to your team. Tax planning should begin well before the purchase, not after the closing, meaning that you will need to hire someone familiar with taxes as they apply to aviation.
You will also need to consult a qualified aviation attorney to ensure that the contracts are appropriate and that the various regulatory issues are addressed. A document that looks good from a basic business perspective may not be legal in the eyes of the FAA or other aviation authority.
Don't overlook the insurance broker, who will need to be kept informed as to when and how the aircraft is to be used. (For example, if the aircraft is to be placed on a management agreement, who and how are each of the parties to that agreement going to be covered?)
You will also need an aircraft sales professional, who will ideally have an excellent understanding of the aircraft sales market — what the availability is; lead times for various models; who to contact about pre-buy inspections and appraisals; and how long it could take to dispose of your current aircraft.
Moreover, the aircraft sales professional you hire will need all the qualities required to be an excellent facilitator, since their job will also be to make sure the deal closes and that all parties are happy.
Additional Planning When Buying New…
Moreover, if you are buying a new aircraft, specifying all the options, picking out paint, and choosing an interior may take a minimum of six months and may well require the services of additional advisors.
Think of your business aircraft acquisition as a “time-is-money” deal. That is, if you don’t have much time, you’ll probably spend even more money! If you are looking to close a deal by the end of this year, you need to be looking seriously right now, and investing in all of the right areas to ensure your acquisition plan results in the right aircraft, at the right cost, at the right time.
This article was originally published by AvBuyer on October 25, 2019.
A-OK When AOG see more
NAFA member, Anthony Kioussis, President of Asset Insight, LLC, shares tips on how to get the best aircraft help when you're on the ground.
When traveling to a special event, whether it’s the Super Bowl in Miami this February, the World Economic Forum in Davos or the Kentucky Derby next May, the 2021 U.S. Presidential Inauguration, or other sporting, political, or worldwide business conference, you’ll have company. At these events, an extraordinary number of business aircraft will be landing and then taking off within approximately the very same time as you, vying for hangar space and landing slots at the same airports proximate to the event venue.
But you’re also not alone in that your Original Equipment Manufacturer (OEM), as well as independent maintenance service providers, will be onsite to provide you with parts and technical support should your aircraft experience a maintenance event. What should you know before you travel, what services do the various maintenance providers offer at a high-traffic special event, and how can you best take advantage of their services?
Many support organizations suggest that your head of maintenance and chief pilot contact them as part of trip planning. If your OEM or maintenance support provider offers a pay-per-hour program, consider taking advantage of it, for the highest level of customer service and support.
Support is offered in several ways. For example:
Bombardier Business Aircraft’s dedicated Customer Response Team (CRT) Learjet 45 Parts Express aircraft and CRT mobile units are on location at events, manned by a team of technicians. They carry state-of-the-art diagnostics equipment supporting Learjet, Challenger, and Global aircraft, to supplement their Field Service Representatives to provide you with full service support. They can quickly bring in parts and additional technical personnel if required for unscheduled maintenance events.
Constant Aviation provides full service onsite AOG support at special events. Dedicated technicians provide maintenance, avionics, and structure services, and can be dispatched round-the-clock. With more than 2,838 years of combined experience, Constant Aviation’s AOG service technicians have supported turboprops and business jets at more than 5,700 events at more than 464 airports. Currently, Constant’s AOG mobile units span 21 cities nationwide, offering immediate response 24/7/365.
Dassault offers on-ground services to support Falcon Jet owners with its GO Teams staffed with AOG technicians, and often additional technicians onsite. More help is available at any of the 87 Falcon Authorized Service Centers, backed up by a dedicated Falcon 900 Airborne Support aircraft that can offer alternative lift to customers.
Duncan Aviation has 184 avionics and engine technicians positioned throughout the U.S., ready to travel worldwide to support operators requiring assistance and service. Its avionics satellite shops provide service to operators at 27 shops, and work away locations and Engine Rapid Response Teams offer traveling engine technicians at 14 sites, ready to launch anywhere. Owners traveling in the U.S. are within 150 nautical miles of a Duncan Aviation AOG team.
With almost 1,000 business jets in more than 60 countries, Embraer Executive Jets is prepared to assist its customers anywhere in the world, any time of the day, from any of its 58 authorized service centers. It offers an integrated comprehensive customer support plan for major global events, including broad logistic support and special procedures, and often field service representatives positioned at major events, backed by its 24/7 Contact Center.
GE Aviation offers technical support and dedicated field service representatives for customers flying GE-powered Falcon, Challenger, and Global Jet aircraft. GE Aviation’s nineteen Authorized Service Centers offer comprehensive line maintenance, removals, and re-installations of engines and Line-Replaceable Units (LRUs) and engine spares for CF34-3 engines. GE Aviation offers service agreements through OnPoint, a long-term hourly cost maintenance program.
Gulfstream Field and Airborne Support Teams (FAST) support the full range of Gulfstream business jets, and help ensure a swift, well-coordinated response to all AOG situations. More than 20 U.S.-based pilots and technicians work in around-the-clock shifts, and are equipped with two Gulfstream G150s as their primary aircraft. The FAST1 mobile service center tractor trailer is positioned at many major events, staffed by technicians covering avionics, mechanical, and interiors.
Honeywell has both Avionics and Mechanical Technical Support Engineers (TSE) standing by to support any AOG engine or avionics service requirements. Honeywell also maintains an additional stock of the most commonly used parts in anticipation of any possible orders for such events. Honeywell’s Aerospace Technical Support (ATS) group is available via its AOG call center 24 hours/7 days a week for remote troubleshooting, and its TSE can be dispatched for onsite support.
Pratt & Whitney
Pratt & Whitney actively supports its more than 13,000 customers. At major events, they are onsite to meet customers, positioning Field Support Representatives (FSR) at strategic locations throughout the duration of the event, enabling them to provide onsite troubleshooting support services. With critical engine components on hand, Mobile Repair Teams, as well as rental engine support in-country, are on standby throughout the event.
Rolls-Royce actively supports owners of Gulfstream G350/450, G300/400, and G650, as well as Bombardier Global 5000/6000 and 5500/6500 aircraft. Its On-Wing Care (OWC) is a global in-field specialist maintenance support organization which has handled more than 6,000 field maintenance events and avoided more than 300 unplanned engine removals/shop visits since its inception in 2005. Rolls-Royce stations OWC technicians and a Regional Customer Manager onsite, supported by its 24/7 Operational Service Desk.
Textron Aviation’s 1CALL maintenance support group has a number of Textron Aviation’s 60 Mobile Service Units (MSUs) onsite at events to support Cessna Citation, Beechcraft King Air, and Hawker turbine business jet and turboprop aircraft owners. They are equipped to perform limited inspections, engine, tire and brake service, and more. Additionally, Textron’s Air Response Service has U.S.-based support aircraft available 18 hours a day, 7 days a week, to keep its owners and operators in the air.
Your OEM and maintenance support providers want to be sure that your flights to and from special events are smooth and trouble-free, even if you should experience a maintenance issue. Communicate in advance about your flight plans, so they can help ensure that they have the right number of people and parts in the region and onsite, to support any potential issues and to keep you flying and on schedule.
This article was originally published Business Aviation Advisor on November 1, 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.
Limiting Risk as Liability Insurance Tightens see more
NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, shares what you need to know about liability insurance.
If you think you can call your insurance broker and secure aircraft insurance just days before you close an aircraft purchase or renew liability coverage, think again. Insurance companies have changed the underwriting game after more than a decade of losing money.
In the last two years, many underwriters have exited aviation insurance while the remaining carriers have tightened up underwriting standards, reduced coverage limits, and increased premiums for liability coverage. These changes have impacted nearly all insureds in some fashion, including many receiving invoices with substantial premium increases. Worse still, owner-pilot and single-pilot aircraft have nearly run out of gas in finding adequate or any liability insurance coverage.
This tightening aircraft insurance market requires aircraft owners and operators to allow significant lead time to search for insurance when buying an aircraft or renewing existing policies. In addition, legal entity structuring and contractual agreements designed to mitigate the risk of personal liability have become more important as insurance underwriters clamp down.
Liability insurance typically applies to, and is often purchased by, an aircraft owner or operator as the “named insured.” The insurance indemnifies, or pays for, liability of the named insured and, when included in policies, other parties, identified as “additional insureds,” that have an interest in the aircraft or related liability risks. The obligation of the insurer to pay for potential losses is referred to generally as the “duty to indemnify” insureds. The insurance indemnifies for bodily injury, including death, incurred by someone other than the named or additional insured. Coverage should respond when claims arise out of the ownership, maintenance or use of the insured aircraft. For example, liability coverage should respond to a crash on takeoff or a collision of two aircraft on an airport ramp.
To help put market challenges in context, consider two hypothetical situations.
In the first case, a flight department operates for Big Co., a corporation with significant business operations that is owned privately by one family (Big Co.). The flight department employs professional pilots. Big Co. operates its aircraft under FAR Part 91. The fleet consists of three large cabin and three light jets. One pilot usually operates the light jets.
Big Co. carried $300 million per occurrence in liability coverage in 2018 but at renewal in 2019, Big Co. could only obtain $100 million per occurrence for the light jets. Big Co. kept the high limits on the large cabin aircraft but absorbed a 25 percent premium increase.
The carrier informed Big Co. that the light jets dragged down the original insurance limits and warned Big Co. that, in the next renewal into 2021, the underwriter may be able to insure the light jets only if Big Co. operates them with two pilots.
In the second case, a prospective aircraft owner, an ultra-high-net-worth individual (UHNWI), formed an LLC of which HW is the sole member/owner. The UHNWI client signed an aircraft purchase agreement to buy a $5 million preowned turboprop from the manufacturer but could only secure $1 million of liability coverage at a surprisingly high premium. When the client agreed with the underwriter that a professional pilot would fly the aircraft for a year while the client developed skills and knowledge on how to operate the aircraft, the insurer reluctantly increased coverage to $5 million. The client originally planned to buy 10 times that coverage.
As the aviation insurance market tightens, many, but not all, owners and operators seeking coverage will either pay higher premiums or be unable to purchase adequate or any coverage. In this new reality, potential owners or operators should engage, or continue to use, a specialized aviation insurance broker (not general lines brokers) to assist in purchasing, modifying or renewing coverage.
Waiting too long to transact with carriers is hazardous in today’s market as illustrated in the Big Co. and UHNWIsituations, as underwriters seem to be circumspect about accepting or renewing certain underwriting risks, especially for single pilot aircraft. The broker should act as a trusted advisor, exhibit deep knowledge of underwriter capacity and focus quickly on policy provisions that exist or must be modified to optimize protection of the particular aircraft owner or operator.
In addition to an insurer’s “duty to indemnify” discussed above, insurers also have a “duty to defend” their insureds against liability claims for which potential coverage may arise under a liability insurance policy. The duty to defend is significant, financially and legally, for an insured. Even a small incident can run up significant legal fees regardless of the insurance coverage limits or disposition of the claim.
For this reason, even low limit liability policy coverage may have significant value to an insured when the insurer and not the insured foots the legal bill.
However, it’s critical to know when the insurance company can stop paying legal fees, which varies based on the circumstances, policy terms and state law. At that point, the insurance company may be out but the burden to pay legal bills may continue for an owner or operator such as Big Co. or the UHNWI client.
Legal Steps To Mitigate Liability Risk
For insureds facing payment demands for successful claims in excess of policy limits, claimants may, and will almost certainly attempt to, overcome legal barriers so they can tap into an owner’s or operator’s personal assets. However, certain structures or contractual strategies may mitigate risk for owners and operators.
Choice of the Right Owner/Operator Entity. Deeply rooted in state law, various types of entities, if properly structured and managed, can mitigate personal liability of aircraft owners and operators, including certain LLCs, corporations and trusts.
- LLCs. Private aircraft owners widely believe that LLCs that have no function other than to own their aircraft will shield them from personal liability. In the UHNWI client’s case, they are the sole LLC member. Claimants will almost certainly sue the UHNWI and the LLC and, with a money judgment in hand, seek to pierce the LLC veil and force the UHNWI personally to pay for damages in excess of insurance coverage. This risk is particularly acute if the UHNWI exercises operational control of the aircraft or if liability arises concurrently with a violation of the FARs (see “AINsight: Piercing the Aircraft LLC Veil”). Variations on LLC structures and proper legal management of the LLC company might reinforce its shield against a claimant.
- Corporations. In the Big Co. example, Big Co. is a corporation, which like other corporations, is designed under state law to shield its shareholders from third party claims against Big Co. However, Big Co., as the aircraft owner, might still be liable for claims in excess of insurance. And the payment by Big Co. itself could, of course, reduce the value of Big Co. to the family that owns it. Placing aircraft in an affiliated company with a lower shareholder value might provide more protection for Big Co. itself and preserve more of the net worth of the family owners.
- Trusts. Three types of trusts deserve mention, two of which might provide some protection against liability claims. A “statutory trust,” which is a creature of state statutes, protects beneficial owners from liability like shareholders of a corporation. An “irrevocable trust,” often created for estate planning and tax purposes, might protect its beneficiaries from claims because the beneficiary does not own, and claimants should not therefore be able to access, the trust assets as a result of the beneficiary’s liability. A “grantor trust,” often used for compliance with the FARs or asset management, is a pure “pass-through entity” for a beneficiary and is very unlikely to afford any protection to the beneficiary from third-party claims.
Operate under Part 135. In both examples of Big Co. and the UHNWI client, the owners operate under Part 91 where each of them maintains “operational control” under the FARs. As such, they have direct responsibility for the flights and potential liability for their actions as operators. By contrast, if Big Co. or the UHNWI hires a Part 135 on demand air carrier, the air carrier exercises operational control and thereby takes responsibility for liability arising from the flight’s initiation, conduct, and termination under its air operator certificate.
Although Big Co. might mitigate its risk of liability by hiring a Part 135 operator, the UHNWI intends to fly his or her own aircraft under Part 91 only. The UHNWI, therefore, needs to look even more closely at other structures to protect themselves against liability in excess of insurance limits, assuming insurance is even available.
By hiring a Part 135 operator, Big Co. can also access the fleet insurance policy of the operator with more comprehensive coverage including acceptable liability limits. Before signing on to the fleet coverage, Big Co. should investigate whether Big Co. can separately procure superior insurance.
Contractual Indemnification and Waivers. If an owner or operator does not hire a Part 135 operator or cannot purchase adequate liability insurance, the owner or operator can try to spread risk to other potential claimants by obtaining contractual indemnities from them that connects to that party’s insurance.
To make this work, the party that indemnifies the owner or operator, such as the UHNWI or Big Co., must modify that party’s insurance policy to obtain a blanket contractual liability coverage through and with the approval of the underwriter—not an easy task.
Even if the insurance company rejects contractual liability inclusion, an insured can still reduce exposure by asking third parties to waive their rights and claims against the insured in selected circumstances. For example, the UHNWI might try to obtain a liability waiver from their passengers or fuel suppliers (assuming the UHNWI’s compliance with the FARs).
In today’s aviation insurance market, underwriters have hit the brakes on issuing cheap and unprofitable aircraft insurance policies. No longer can owners and operators wait until the last moment before aircraft delivery or a renewal date to place, renew or modify aircraft insurance. Quite to the contrary, owners and operators should continuously monitor insurance placement, legal structuring and contractual negotiations to mitigate risk or allocate liability among appropriate parties.
Many aspects of private aviation transactions benefit from using industry experts to guide owners and operators. It is clear that insurance, regulatory, and transaction expertise in the current insurance market is not optional.
This article was originally published by AINonline on November 8, 2019.
The Value of Pre-Owned Aircraft see more
NAFA member, Chad Anderson, President of Jetcraft, discusses what you need to know about the value of pre-owned aircraft.
Gulfstream’s launch of its long-range G700 twinjet was the lead story at last week’s NBAA business aviation convention in Las Vegas and led to a buoyant mood at the show. In our more than 55-year history, we’ve discovered new aircraft announcements are always good news for the pre-owned market.
When buyers have options to upgrade to the next model, this moves young, high-quality aircraft into the pre-owned market. However, despite the surge in manufacturer announcements of late, sought-after young pre-owned jets remain in limited supply, compared to the high demand for them.
Having a minimal amount of these young aircraft for sale underpins demand for new models. If buyers miss out on the acquisition of a pre-owned Global 6000, or Gulfstream G550, they may not want to move away from that model; choosing instead to purchase a new version.
We can therefore see how the new and pre-owned markets share a valuable interrelationship, with rising activity in one spurring interest in the other.
As explained in our 2019 5-Year New & Pre-owned Market Forecast, sales of both new and pre-owned aircraft are predicted to reach $29.9bn per annum by FY2023. Although we expect to see four times more pre-owned transactions than new, we anticipate a 12.1% total growth of the business aviation fleet over the period, driven by new model sales.
Increasing attention in pre-owned aircraft is not only due to interest in younger jets. Previous buyers of new aircraft are now more willing to consider older models, due to better MRO capabilities and more accessible, rapid and cost-effective refurbishment options. As a result, we’re also seeing higher demand for out-of-production aircraft.
Purchasing a pre-owned aircraft can increase mission capabilities for a buyer. For example, our forecast demonstrates how a pre-owned midsize aircraft could be acquired for the same price or less than a new light jet; combined with ownership costs, the overall investment compares equally across a five-year period.
Despite our present period of global uncertainty, it is clear from last week’s NBAA show that the value of business aviation endures. We look forward to seeing what the next year brings ahead of the 2020 convention in Orlando.
This article was originally published by Jetcraft on October 31, 2019.
Aircraft Insurance Considerations In A Tightening Insurance Market see more
NAFA member Amanda Applegate, Partner with Aerlex Law Group, discusses what to consider when deciding on aviation insurance coverage.
The recent uptick in insurance claims in the commercial airline world and in general aviation have caused a tightening of the aviation insurance market. As a result, many of my clients are seeing an increase in insurance premiums, limitations on conditions previously granted, and in some cases are unable to obtain the amount of liability coverage they would like to procure.
As a result of the price increases, some of my clients have been seeking alternative insurance for their aircraft. However, as with all insurance, not all insurance providers and policies are the same. It is important for owners to identify an aviation insurance broker who can explain the different types of coverage available and the exclusions that may limit that coverage. Recently my client was comparing two policies and focusing on the annual premium instead of what amounts and types of coverage were provided for the annual premium. It turned out that certain amounts of coverage under the liability policies were very different, thus reinforcing the need to focus not just on the annual premium when comparing policies.
It is important to find one qualified broker and allow that broker to canvass the market. It is bad practice to have multiple brokers shopping the market for coverage for the same aircraft. In fact, it may make it impossible for any broker to obtain quotations or binding coverage.
There is a rating system for insurers and it is important for owners to know and understand that rating system. The A.M. Best rating reflects an insurance company’s financial strength and its ability to meet contractual obligations. The rating categories range from A++ to F (in liquidation). Providers with less than an “A-” Best rating generally should not be considered, and many established brokers will not offer insurance with a lower rating. Owners should also know and understand what exclusions apply to the insurance contract.
As is the case with all insurance policies, it is important to have the coverage you need when you need it. Coverage in aviation policies may vary if the aircraft is modified, flight crew qualifications change, normal routes of travel are changed, or travel outside the United States takes place. Before changing flight crews, modifying training programs or traveling outside the country, be sure to check the policy and check with your broker. There have been too many cases where a policy was not in effect due to a change in business practices or travel areas.
The basic types of aviation insurance coverage are physical damage to the aircraft (hull insurance) and aircraft liability insurance. Hull insurance provides for payment to the owner of the aircraft for physical loss of or damage to the aircraft, including engines, propellers, instruments and equipment usually and ordinarily attached to the aircraft. Liability insurance covers the liability to others for bodily injury and property damage resulting from the ownership or use of the aircraft. Most liability policies offer coverage for the defense of lawsuits brought against the insured resulting from a covered peril, even if the suit is groundless. The amount of liability coverage, including any deductible, will depend on the owner’s risk tolerance and factors such as the number of passenger seats in the aircraft, average passenger load, passenger profile, number of pilots, pilot qualifications and any umbrella policy.
When owning or operating an aircraft, the aircraft owner/operator often enters into agreements related to the aircraft, including, but not limited to, lender documents, time share agreements, dry leases, pilot services agreements, management services agreements and hangar agreements. It is important to understand the insurance requirements under all of these agreements and prior to execution, the agreements should be reviewed and approved by the insurance provider to make sure that there will not be an issue with any claim as a result of the agreement executed for the ancillary services.
In a tightening insurance market, it is understandable that an aircraft owner/operator would focus primarily on premium costs when selecting aviation insurance. However, in the long run, an aircraft owner/operator would be better served obtaining the best available policy with appropriate liability limits, and fully understanding the terms and exclusions of the policy, rather than waiting until after an occurrence to focus on such details- by then it may be too late.
Aviation Trustee Resignation: Practical Advice for Hiring a Successor Trustee see more
NAFA member, David Wall, Senior Trust Counsel with TVPX Aircraft Registration Services, LLC., offers advice when hiring an aviation trustee.
Trusts are commonly used and universally accepted in aviation. Thousands of aircraft have been placed into trusts over the past several decades and the use of trusts has become integral to many aviation ownership, financing and leasing structures.
However, recently a new issue has arisen that forces some owner participants, lessees and lenders to carefully consider their options and take decisive action. How do you proceed when your trustee resigns from its role?
Receipt of a Resignation Notice
A trustee’s decision to resign may result from conflicts with another party, lack of payment, perception of increased risk, corporate restructuring or a general move away from the line of business. The trustee will commence the process by sending an official notice to the required parties of its intention to resign as trustee, along with a request that the owner participants appoint a successor trustee. In some cases, the trustee may provide an informal notice prior to the official resignation notice to provide the parties more time to plan for the transition to a successor trustee.
Most trust agreements require the trustee to give 30-days advance written notice of resignation. In that time the owner participants are required to find and appoint a new owner trustee. Often the process of appointing a successor trustee, especially with complex transactions and structures, may take far longer than 30 days. Fortunately, resigning trustees have been reasonably flexible about granting additional time.
A trust cannot be left without a trustee, so the trustee must remain in the role until a successor is either voluntarily appointed by the owner participants or appointed by judicial action. The process of getting a court appointed trustee is somewhat cumbersome and may result in aircraft registration and loan issues, so should be avoided if possible.
Choosing a Successor Trustee
When selecting a successor trustee, owner participants should consider the party’s qualifications, experience and continued commitment to the aviation industry.
A potential successor trustee must meet all the qualifications of trustee under the trust agreement. In aviation transactions, especially those with U.S. FAA registered aircraft, this will typically include that the successor trustee qualifies as a U.S. citizen pursuant to 49 U.S. Code § 40102(a)(15). There also may be other qualifications to consider such as capitalization or rating agency requirements. Some qualifications can be waived by the owner participants and other parties, but regulatory requirements, such as U.S. citizenship, must always be satisfied.
The parties should also vet any successor trustee based on its experience in similar transactions and capability to perform all the functions set forth in the trust agreement. Consideration should also be given to the successor trustee’s long-term commitment to serving as a trustee in the aviation industry. The successor process can be lengthy and expensive, so choosing your successor trustee wisely may avoid the need to repeat the process in the future.
Documenting the Resignation and Succession
The process of documenting the introduction of a successor trustee can be approached in several ways but must involve all interested parties.
In most situations, the resignation and succession has been handled by way of an instrument between the original trustee, successor trustee and owner participants. Often the resignation of the trustee, the appointment of the successor trustee by the owner participants and the acceptance by the successor trustee of the appointment is handled in one document. In other cases, the old trust and lease are terminated, and the owner participants enter into new agreements with the successor trustee. In either case the parties may need to agree on certain matters related to the registration of the aircraft and will want assurances that the other parties will execute related documents and take such other actions as are necessary to facilitate the appointment of the successor trustee.
Transaction related documents will usually also need to be amended and/or assigned. Lenders should be notified early in the process as they will want to ensure continuation of their security interest. Additionally, lessees should be involved in the process so that leases can be properly assigned, or new leases put into place.
Consideration should be given to documents that need to be filed with aviation authorities with jurisdiction over the aircraft. For any aircraft registered to the trustee with the U.S. FAA, the resignation and succession documents must first be reviewed and approved by FAA Aeronautical Center Counsel and then they can be filed with the FAA along with the documents necessary to register the aircraft to the successor trustee.
Avoiding Common Issues
The best approach to avoiding problems when appointing a successor trustee is to assemble experienced aviation advisers just as you would at the commencement of a transaction.
If there is financing on the aircraft in the trust, the trustee and owner participants are likely required by the loan documents to notify the lender of any change of ownership. Lenders may have different preferences about how to document the appointment, either by amendment or assignment, or may have other requirements, so a failure to involve the lender early in the process may cause delays or create liability under the loan documents.
Lessees and operators should also be notified early of the introduction of the successor trustee. If the trustee is the registered owner of the aircraft, the appointment will require a new registration with the U.S. FAA and potentially with other aviation authorities. The lessee may help identify timing for the successor trustee to enter the structure based on the schedule of the aircraft to avoid liability for certain taxes. Lessees may also need to provide new certificates of insurance.
Involving experienced aviation counsel is essential to avoiding many issues. If the successor trustee will be the new registered owner, potential tax exposure must be considered. In the U.S. and many other jurisdictions, changing the trustee of an existing trust would typically not be considered a taxable event, however, the fact that the registration will change may invoke queries from taxing authorities and some states may view the tax issues differently. Having legal counsel review the applicable tax rules is critical to avoid tax risks.
While receipt of a letter of resignation from a trustee is an unenviable situation, with proper planning and attention to the following steps:
Prompt reaction to a letter of resignation and establishment of communication with the trustee;
Thoughtful selection of a qualified successor trustee;
Consideration of necessary required documentation; and
Engagement of experienced advisers
the introduction of a successor trustee can be safely and efficiently accomplished.
For additional information about the trustee resignation and succession process, contact the TVPX trust professionals, David Wall, Brett King, Mike Hoggan or Scott Nielsen at +1 801.877.0478 or visit our website at www.TVPX.com.
This article was originally published by TVPX Aircraft Registration Services, LLC. on August 15, 2019.
Choosing an aircraft from a financier's perspective see more
NAFA member, Gary Crichlow, with Arc & Co. Aviation Finance, discusses points to consider when choosing an aircraft from a financier's perspective.
In previous articles as part of our Aviation Insight series, we’ve explored the major benefits of availing yourself of aircraft finance: it preserves your cash flow, allowing you to redeploy capital away from a depreciating asset back into your business, or into investments that earn a return.
We’ve also looked at the financier’s motivations to extend finance: they need to demonstrate that they can generate an acceptable risk/return balance on the funds they commit against aircraft, in order to protect and enhance their license to operate.
With this in mind, we’ll now look at points to consider when choosing an aircraft from a finance-ability point of view. The more strongly these points inform your choice, the more likely it is that you’ll be in a position to secure the benefits of aviation finance without too many of the hurdles.
1. Aircraft suitability – financiers like to work with clients that can demonstrate experience and familiarity with the cost of owning or operating an aircraft. Ideal clients will evidence that they either have, or have solicited, the expertise to select an aircraft with a capability that fits their usage needs. The client will have budgeted realistic fixed and variable costs covering insurance, crew, scheduled and unscheduled maintenance, fuel, handling, etc; and can demonstrate the financial wherewithal to comfortably cover those costs.
2. Aircraft age– the overwhelming rule of thumb is that the younger the aircraft, the more readily financeable. There’s absolutely nothing wrong with well-maintained older aircraft, and there is a pool of financiers willing to lend against them for the right client; but generally speaking, younger aircraft in the 0-7 year old range are the easiest to finance competitively.
3. Aircraft value – larger deals are generally more attractive. As with older aircraft, there is always finance available for smaller lends (below $5 million) for the right client, but there is a smaller pool to choose from, especially if other aspects of the deal are not straightforward.
4. Aircraft market position – it’s easier to find finance for “liquid” aircraft: types that have a large customer base, are in well-established production and conform to “standard” in terms of capability, configuration and appearance. Financiers are generally more willing to lend money against an asset that they believe would be relatively easy to remarket if they had to.
5. Aircraft maintenance programmes– practically every financier will require that at the very least, the engines be fully enrolled on an hourly maintenance support programme, offered by the manufacturer or by a reputable third-party such as JSSI.
6. Aircraft operator– the financier will generally want to be satisfied that the operator is competent, properly certified, reputable and fully independent of the client. You can generally expect a tripartite agreement will be required between the financier, the operator and the client. The purpose of this agreement is to enable the financier, in the event of a default, to have the operator secure the aircraft.
7. Aircraft due diligence– the financier will want to satisfy themselves that the aircraft condition is fully explored. For pre-owned aircraft this generally means an in-depth inspection that looks for things like records entries that are missing or not in English, damage history, corrosion, accidents & incidents, etc – the exact same issues that your technical expert should be alerting to you as a prospective buyer.
8. Aircraft regulatory compliance– your technical expert should advise on what is required for your usage in terms of, for example, avionics capability e.g. ADS-B, FANS-1/1A compliance (if you don’t understand that jargon, make sure you have a technical expert who does!). Bear in mind that a financier will generally want to see that it is compliant on a global (or at least a US or European) basis, and this includes looking ahead for scheduled upgrades or expected developments over the term of the financing.
What it boils down to is this: when evaluating an aircraft finance opportunity, lenders need to do their homework when it comes to the aircraft, and a key part of that is ensuring that you’ve done your homework too. Your interests, and the financier’s, are aligned: you both want comfort that the aircraft you’ve chosen is as it should be.
This article was originally published by Arc & Co. Aviation Finance on July 15, 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.