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financing

  • NAFA Administrator posted an article
    Global Jet Capital Exclusive Infographic: Why Fortune 100 Companies Are Flying Private see more

    NAFA member Global Jet Capital shares their exclusive business aircraft infographic.

    Business aircraft are an invaluable tool for the top global businesses. Public records indicate that at least 95% of the Fortune 100 top businesses utilize business aviation.

    There are at least 323 aircraft registered publicly to the Fortune 100 companies, with the median company owning 3 aircraft.

    Financing plays a major role in companies’ aircraft ownership – more than one-in-five aircraft have a lease or loan attached to it.

    Read full article here.

    This article was originally published by Global Jet Capital on July 27, 2021.

     

     

  • NAFA Administrator posted an article
    NAFA member JSSI Advisory Services shares what you need to know about aircraft appraisals. see more

    NAFA member JSSI Advisory Services shares what you need to know about aircraft appraisals. 

    What is an aircraft appraisal?

    Appraisals are used across the board to determine the value of assets. You may have encountered an appraisal while securing your home mortgage, for example, and they are also used to determine the worth of your business aircraft. The American Society of Appraisers (ASA), the governing body for appraisal accreditation, defines the process as “an unbiased, third-party opinion of value.”

    When you own and operate an aircraft, you may need to keep a finger on the pulse of your asset’s current value for tax and depreciation purposes, but it’s also important to be informed if you wish to refinance or sell your jet, turboprop or helicopter. Aircraft appraisals are often a required condition from many lenders and lessors prior to entering a financial transaction.

    Read full article here.

    This article was originally published by JSSI Advisory Services on July 19, 2021.

     

  • NAFA Administrator posted an article
    Adam Meredith, AOPA Aviation Finance, answers your aviation finance questions. see more

    NAFA member Adam Meredith, President of AOPA Aviation Finance Company, answers your aviation finance questions.

    Question: I see on AOPA Finance that I can potentially finance an engine overhaul with sufficient equity in the plane. What are my options for financing a plane that will need an EO almost immediately after purchase? I am willing to put enough down on the note so that there is sufficient equity in the plane for an EO loan if I can roll that in. To be explicit, the plane is $37,500, and the EO estimate for that engine is $24,000. I am not sure what the equity requirement is, but let's say it is 40%. So, what I would hope is that I can get a loan  for $46,500 by putting down $15,000 on the plane, with the loan then completing the purchase price with $22,500, leaving $24K in the note for the EO. If the EO goes over that, I would just eat that cost myself.

    Answer: Rolling an overhaul into a purchase is a fairly simple process. As part of our internal review and the lenders’ underwriting, two values for the aircraft will be determined. One as-is for the purchase and a second with a zero-time engine. Financing can be up to 85% of the final value with the overhaul included. In your example, assuming value is roughly equal to cost, financing would look like $31,875 towards the purchase (85% of $37,500) and $20,400 towards the engine for a total loan of $52,275. The initial $31,875 would be disbursed at the time of purchase with the remaining $20,400 disbursed once the engine has been installed and signed off by the A&P. We would be happy to discuss the details further if you would like. Just give us a call at 800.627.5263.

    Read more.

    This article was originally published by AOPA Aviation Finance Company on July 7, 2021.

  • NAFA Administrator posted an article
    Adam Meredith, President of AOPA Aviation Finance Company, answers your aviation finance questions. see more

    NAFA member Adam Meredith, President of AOPA Aviation Finance Company, answers your aviation finance questions.

    Question: I'm in the process of buying my first airplane. I'm planning to pay for it without financing. Do I need title insurance?  If so, where can I get it?

    Answer: While title insurance may not be necessary, it does help with peace of mind. Especially when purchasing an older aircraft that may have gone through several ownership changes. Title insurance will protect you in the event a prior registration or bill of sale was filed incorrectly. AIC can assist in acquiring title insurance if you wish to purchase it. At the very least a thorough title search should be conducted prior to purchase through one of the aircraft title an escrow companies in Oklahoma City. AOPA members receive a discount through our strategic partner, Aero-Space Reports, for using their title and escrow services. Please feel free to reach back out to us if any other questions should arise during your purchase, we’d be happy to help.

    Question: I have an Experimental GlaStar that I built and have flown for 20 years, can I get an appraisal on that from AOPA?  Let me know what information on the plane you need if you can do it. 

    Answer: AOPA does not offer in house appraisal services. We utilize tools such as VREF and Aircraft Blue Book to determine value. Experimental aircraft, however, do not have book values. VREF offers certified desktop appraisal services but an appraisal can be obtained from any appraiser licensed with the Professional Aircraft Appraisal Organization (https://appraiseaplane.org/) or American Society of Appraisers (https://www.appraisers.org/Home).

    This article was originally published by AOPA Aviation Finance Company on July 6, 2021.

  • NAFA Administrator posted an article
    NAFA Member Adam Meredith, President of AOPA Aviation Finance Company, discusses aircraft loans. see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses loan lengths in Adam Answers May edition.

    Question: What determines the length of loan say between 15 and 20 years. I’m looking at a 1997 aircraft to finance 45k. What term might I expect to get?

    Answer: Generally speaking the amount financed,  usage and age are what limits length of term. In this case age is not the issue, however, loan amount at $45k would likely limit you to 15 years. The reason being, after 3 years on this amortization schedule you will have only paid the loan by less than $4k. This doesn’t leave much room for surprise expenses like an engine overhaul and therefore benefits neither the owner nor the lender.

    Question: Can I get a loan to finish off a project aircraft? I would need less than 20k to purchase the avionics. Everything else (engine and Airframe) are done. I could get a conditional Airworthiness inspection if needed. Thanks.

    Answer: Thanks for the question. It really would depend on the specific aircraft and how much work (time) it will take to get it airworthy. We’d be happy to discuss further, please contact us directly so we can review your specific situation.

    This article was originally published by AOPA Aviation Finance Company on April 30, 2021.

  • NAFA Administrator posted an article
    Procrastinating on gathering your financial documents can slow or undermine your plan to buy an ... see more

    NAFA member Adam Meredith, President of AOPA Aviation Finance Company, shares how procrastinating on gathering your financial documents can slow or undermine your plan to buy an airplane. 

    Our experience securing financing for our clients reveals far too frequently that they wait until they’re much further along in the process than they should be before getting their financial paperwork in order.

    So when clients have a make and model in mind and want to know their financing options, we tell them to get their financial documents together ASAP. Without a thorough understanding of a client's financial picture, AOPA Finance is limited in the number of options it can offer. Depending on that picture, and the more transparent the financials, the better the buying experience all around.

    Read full article here.

    This article was originally published by AOPA Aviation Finance Company on April 27, 2021.

  • Tracey Cheek posted an article
    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.

    Read more

    This article was originally published by Essex Aviation Group, Inc.

  • NAFA Administrator posted an article
    Aircraft Financing: How Long Does it Take? see more

    In answer to a frequently asked question in their field of expertise, National Aircraft Finance Association members offer a standard financing timeline — and outline the factors that could delay the process.

    With interest rates at historic lows, buyers are increasingly turning to finance as a way to manage expenses and preserve liquidity, when buying business aircraft. But how long should it take to arrange financing for a business jet?

    Following, NAFA members answer the most frequently asked questions about the financing timeline, including when you need to start, what you need to accomplish (and when), and the factors that could delay the process.

    How Long Does the Process Take From Start to Finish?

    “Unfortunately, there’s no short answer to this question, as it depends on several factors,” says Michael Smith, President of Scope Aircraft Finance. “I’d say the biggest factor for timing is how complex the financial picture is for the applicant.”

    However, as a safe bet, both Adam Meredith (President of AOPA Aviation Finance Company) and Keith Hayes (Senior Vice President and National Sales Manager of PNC Aviation Finance) advise 3-4 weeks from initial inquiry to funding — with select exceptions in our current environment of limited inventory.

    Dave Labrozzi and Andrew Farrant, Vice Chairman and Chief Marketing Officer of Global Jet Capital, respectively, echo that same sentiment.

    “When a client should start thinking about their financing options is typically tied to market conditions. In a slow market with plenty of inventory, getting out in front of the financing question may not be so critical.

    “On the other hand, in our current market — where we have limited inventory — successfully moving on a desirable aircraft that suddenly comes to market may be directly tied to having strong financing partners in place who are ready to act on your behalf.”

    What Does the Financing Process Look Like...
    (and When Does Each Step Need to be Completed?)

    “Essentially, it’s a two-part process,” says Meredith: Approval, and Closing (assuming you’ve already determined what person or entity will own the aircraft).

    Approval Process - 30 days out:

    • Collect and submit financial documents (tax returns, pay stub, W2, personal financial statements, etc…)
    • Choose a specific aircraft, and provide a spec sheet for valuation 
    • Provide answers or additional documentation to any follow-up lender questions

    Funding:

    • Obtain aircraft-specific items (purchase agreement, logs, photos, clean title search, signed inspection report, etc…): 1 week prior to closing
    • If registered to an LLC or corporation, send lender organizational documents: Immediately upon approval
    • Execute loan documents and send to lender/escrow: 2-3 days in advance of closing
    • Provide escrow with documents/authorizations/wiring instructions needed to close

    For an easy way to remember the process, Smith recommends mnemonic devices — “a play on the aviation acronym, CTAF”.

    Call:

    • Reach out to the lender, learn about their program, and obtain a quote.
    • Timing: As soon as you know you want to finance the purchase.

    Turn in:

    • Turn in the application and required financials.
    • Timing: As soon as you are comfortable with the lender.

    Approve:

    • Answer any follow-up questions to ensure a smooth approval process.
    • Timing: At least two weeks before closing.

    Fund:

    • Provide details needed for closing.
    • Timing: Plan on 1-2 weeks to allow time for all parties of the transaction to co-ordinate paperwork and communicate efficiently.

    What Common Errors or External Factors Could Delay the Financing Timeline?

    There are a few common errors and external factors to be aware of and avoid (where possible) that could delay the financing timeline. The main ones are as follows:

    • Aircraft Inspection Results & Issues
      “If the financing company finds damage history when doing its due diligence, they could request a modification to the structure,” Hayes explains. “So if you’re buying an airplane that has damage history you are aware of, but you’ve done your research and are comfortable with it, then be sure to share that with your finance partner early on.”
       
    • Not Providing Organizational Information Early Enough
      “Over the course of my career, I have always said...come early and come often,” explains Hayes.

      “In other words, the longer you wait, the more difficult the process can be. In order for your bank to be as aggressive as possible with the highest level of confidence that they’ll be able to close the deal, the buyer should be prepared to provide the financials upfront.”

      “Remember,” adds Smith, “we as a lending institution can only work as efficiently as we are provided answers and information. So it’s important to provide the details and transparency necessary to make a lending decision.”
       
    • Issues with Obtaining a Clean Title, Lien Release, or Other ‘Clouds’ Needing Resolution

      The most common aircraft title issues include unreleased liens/security agreements (many of these liens can be 20+ years old, which means locating the parties involved can be difficult, resulting in a cloud that is difficult to remove).

      Moreover, document errors (which can be as minor as a missing or incorrect signature, or inconsistent owner information on a bill of sale), and break in ownership (caused by a missing bill of sale or missing signature of one of the previous owners of the plane, or an incorrect title in the signature line of a bill of sale anywhere in the chain of title) are among the fairly common issues.
       
    • Internal Legal Issues

      “If something unique is going on within the business — whether it be a lawsuit or change of ownership — it will eventually come out,” says Hayes. “So be sure to share it upfront. Even if you don’t have concerns about it, your financing partner might.”
       
    • International Deals

      “US financing tends to be fairly straightforward and predictable,” explain Labrozzi and Farrant. “On the other hand, international deals can run into a multitude of complex issues related to aircraft import and tax regulations, regional operating requirements, and regional registration.

      “The common error in all of this tends to be not getting out in front of the client’s objectives and mission profile early enough to clear these potential roadblocks.”
       
    • Improperly Executed Loan Documents

      In order to prevent this from happening, it’s important to work with a lending institution that specializes in aviation finance. “This is not like financing real estate, which is a fairly common department in any bank,” warns Hayes. “It’s important to partner with someone who understands the documentation and filing process unique to aviation. This will also be a partner that you can grow with as you progress through your aviation life.”

    More information from www.NAFA.aero.

    As originally published in AvBuyer Volume 25 Issue 5 2021.

  • NAFA Administrator posted an article
    Five Reasons to Consider an Asset-Based Loan see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses asset-based loans.

    Here are five cases for choosing an asset-based loan over a credit-based one:

    1. Individuals with complicated financials. Aviation lenders must be able to clearly see the sources and timing of cash flow to understand a borrower’s debt service side of the equation in a typical credit-based loan. Having revenue streams from multiple assets often doesn’t provide such a clear understanding. A person possessing multiple assets, i.e. businesses generating revenue, might find asset-based loans a good choice.

    For example, individuals with real estate holdings usually hold them in multiple entities, complicating matters from a lender’s viewpoint. Car dealers are another example. Regardless of how well-established or profitable a car dealer is in real life, the nature of that business generally has them highly leveraged. On paper, to a bank they look like they’re carrying a lot of debt. Both examples tend to make a lot of banks hesitant to issue credit-based loans.

    2. Individuals who derive income from multiple businesses of which they may have minority or partial ownership. Conventional aircraft financers tend to require those businesses as a guarantor on the loan. As a partial owner, you may not be able to comply with that request.

    3. Other cases include instances where a person cannot provide business recourse. An asset-based loan typically isn’t going to require business recourse.

    4. Another example would be serial entrepreneurs, or mezzanine-type financiers, who generate revenue in an uneven fashion. In other words, year-to-year their income may look sporadic, but over a three- or five-year period it has a consistent arc. Because a project has a three-year timeline, say, the amount of debt carried in the first two years may be high, but the third year could be profitable. If lenders are looking at financials a year at a time, they would reject the financials, so an asset-based loan is your best bet.

    5. A fifth example involves people with a complicated tax and estate planning structure whose income might derive from trusts. Retired people can fall into this category too. If you don’t have traditional cash flow coming through, that’s going to be problematic. Hence it’s worth it to consider an asset-based loan.

    Last of all, asset-based loans can be done generally more quickly because lenders won’t require a full financial audit. Their concerns center around whether you’ve sued or been sued by anybody, if you have a prison record, or if you have other anomalies that might surface.

    This article was originally published by AOPA Finance on March 19, 2021.

  • NAFA Administrator posted an article
    Why We’re In A Golden Age Of Aircraft Financing see more

    Over the course of the past year, there has been an uptick in first-time aircraft buyers, as well as entities who may have owned an aircraft 15-20 years ago and are now returning — a large percentage of whom are financing their purchases. Due to the potential cash crunch created by COVID, many are also refinancing. 

    And with 50 years of experience under our belt, we here at NAFA can say with confidence that there’s never been a better time to do just this. Here’s why financing is in a “golden age.”  

    It allows you to preserve liquidity while maintaining your cash reserves.  

    Readily available cash and marketable assets are “liquid”, whereas retirement assets (which you cannot convert to cash if under the retirement age), collections, and investments in volatile and/or niche markets are not.   

    Liquidity is “an indication of financial responsibility,” writes Adam Meredith, president of AOPA Finance Company. “Extra cash reserves are an indication—to borrow a phrase from popular culture—that the borrower understands the inevitable ‘winter is coming,’ and has planned for it. ‘Winter’ could just be a job loss, loss of an aircraft partner, or a pandemic.”  

    Use cash for assets/investments that increase in value over time and use leverage/borrowing to finance assets that decrease in value, making sure the loan amortization follows the expected future value of the asset. 

    We’re experiencing historically low interest rates.  

    Meredith, citing the latest economic projections, posits that the current economic situation is likely to last between 18 months and two years.  

    As a result, some lenders — such as First Republic Bank — favor equities over bonds and cash on a 12-month horizon, as the former is likely to continue benefiting from low interest rates (as well as an improving economic backdrop and higher corporate earnings).  

    With falling rates, some may wonder if they’re better off with a floating rate. According to Meredith, it depends.  

    “If your time horizon to hold an aircraft is less than a couple of years, then yes, absolutely, this is a great time to look at floating rates. [However,] if your hold time is greater than two or three years, you risk becoming exposed to interest rates floating higher when the economy starts picking up steam. It’s likely that the Fed may increase rates in order to stave off inflation. That’ll increase the cost of your loan.”  

    Interested in financing? 

    Keep in mind that aviation financing is specialized and should be entrusted to those with the expertise to meet your unique needs and goals. That’s where NAFA comes in. Our member organization is comprised of 140+ companies who work together to finance general and business aviation, including large and niche lenders, title/escrow firms, brokers, dealers, tax specialists, attorneys, and certified appraisers.   

    This article was originally published in Business Air, 2021, Vol. 31, No. 5.

     

     

     

  • NAFA Administrator posted an article
    Non-Recourse Financing Can Imperil Tax Deductions, read more. see more

    NAFA member, Edward H. Kammerer, with GreenbergTraurig, discusses aircraft ownership and tax deductions. 

    Taxpayers who lease or purchase aircraft face a myriad of tax issues, and aircraft can be a favorite target of both federal and state tax auditors. While the restrictions imposed by the “hobby loss” and “passive activity” limitations are more widely known, taxpayers can suffer just as much from a lesser-known scourge: the “at risk” rules imposed by Section 465 of the Internal Revenue Code (the Code).

    The ‘At Risk’ Labyrinth

    With respect to any business activity, the Code generally does not allow the total tax deductions for that activity to exceed the amount that the taxpayer has “at risk.” For financed aircraft, a taxpayer is considered to have “at risk” the amount of cash contributed as a down payment. The taxpayer also has “at risk” money borrowed to finance the aircraft, but only to the extent of (i) the amount borrowed for which the taxpayer is personally liable or (ii) the value of property (other than the aircraft) that the taxpayer has pledged to secure the borrowed amounts.[1]

    Individuals often finance an aircraft purchase using a limited liability company or other legal entity. Where the individual taxpayer is not the primary borrower, providing a personal guarantee usually will not increase the taxpayer’s at-risk amount.[2] The IRS consistently regards a guarantor as not “at risk” because, generally, a guarantor has a common-law right to seek reimbursement (“subrogation”) from the primary borrower in the event that the guarantor is called upon to honor the guarantee. However, in certain cases, a guarantor can be “at risk” for part or all of the loan he guarantees. For example, if a member of an LLC personally guarantees debt incurred by the LLC to finance aircraft, the IRS will consider that member “at risk” for the member’s pro-rata share of the obligation, to the extent that the member does not have a subrogation right against the LLC or the other members.[3]

    Moreover, although the IRS may not agree, the Tax Court has held in some cases that a guarantor can be “at risk” if the “economic reality” is that the taxpayer will ultimately be responsible for the borrowed amount in the event of default.[4] Despite these Tax Court rulings, purchasers of aircraft may nevertheless feel uncomfortable in providing a mere guarantee, since, in practice, the application of the Tax Court’s “economic reality” test can be fuzzy. The test involves an analysis of all facts and circumstances that influence the probability that the taxpayer will ultimately end up paying the debt. These factors include: the financial condition and liquidity of every party responsible for payment; the value of the aircraft and of any other collateral; whether the guarantee is contingent or in some way conditioned; and whether the guarantor has a right of stated subrogation against one or more primary borrowers. It can be difficult to predict how the IRS or the courts will view any particular combination of factors. More importantly, the IRS has not acquiesced in the Tax Court’s test.

    Even if the individual taxpayer is the primary borrower, the taxpayer is still not considered “at risk” if the taxpayer is protected against loss as a practical matter.[5] Certainly, a legally binding agreement between the taxpayer and another person, requiring that other person to reimburse the taxpayer for any loss, will cause the taxpayer to be not “at risk.” But the IRS may see much less obvious arrangements as limiting loss. For example, a lender might document in its file that it is largely relying on the credit of a guarantor, rather than on the credit of the primary borrower; or the primary borrower might not in fact have liquid assets, which would, as a practical matter, cause the lender (in the event of default) to seek repayment from co-borrowers or from guarantors.[6] The IRS may take the position, in such cases, that the individual taxpayer is very unlikely to end up paying the loan, and therefore is not “at risk” for the borrowed amount.

    The Impact of Non-Recourse Financing

    When a taxpayer purchases or leases an aircraft on a non-recourse basis, by definition, the taxpayer is not primarily liable for the loan. In the event of default, the non-recourse lender can look only to the collateral itself for repayment. Therefore, the non-recourse borrower will be “at risk” only to the extent that he has pledged valuable collateral (other than the aircraft itself, and other than property used in the same activity) to secure the loan. As a practical matter, it is very rare that non-recourse borrowers make such a pledge. Even where a non-recourse borrower does pledge additional collateral, the IRS may still not regard the individual taxpayer as “at risk” unless the “economic reality” is that he will bear the responsibility of repayment in the event of default.

    Pursuant to the Code, taxpayers who purchase certain goods used in business operations, including aircraft, are able to deduct up to 100% of the acquisition cost of the asset.[7] The decision to use non-recourse financing can therefore deprive the taxpayer of Bonus Depreciation and other important tax benefits, which would otherwise be available in purchasing an aircraft. Consider the following examples:

    Example A. Jordan, a high-income taxpayer, purchases an aircraft for $3 million, providing a $500,000 cash down payment, and borrowing $2.5 million on a full recourse basis. He will use the aircraft solely for business purposes, and he actively participates in this business.[8] Although the aircraft has a useful life of five years (for purposes of tax depreciation), recent legislation will allow Jordan to realize a Bonus Depreciation deduction for the full purchase price of the aircraft in the current year. Because Jordan is fully “at risk,” this deduction will not be limited, and he will be able to deduct the entire $3 million immediately.

    Example B. The facts are the same as above, except that Jordan borrows the $2.5 million on a nonrecourse basis. As a result, Jordan is “at risk” only for the $500,000 cash down payment. The deduction for the remaining $2,500,000 will be disallowed, because Jordan is not personally liable for this loan. This will likely cost Jordan $1 million or more in federal and state income tax in the current year.[9]

    Example C. Leah, a high-income taxpayer, is the sole member of Widgets LLC. Widgets LLC purchases an aircraft for $3 million, providing a $500,000 cash down payment utilizing funds contributed from Leah, and borrowing $2.5 million on a full recourse basis. Leah will personally guarantee the loan. The aircraft is used solely for the business purposes of Widgets LLC. Leah actively participates in this business. Although recent legislation will allow some purchasers to realize a Bonus Depreciation deduction for the full purchase price of the Aircraft in the current year, the IRS may take the position that Leah is “at risk” only to the extent of her $500,000 cash down payment and that Leah’s Bonus Depreciation benefits will be limited to this amount.

    Example D. Sam, a high-income taxpayer, is the sole member of HighTech LLC and materially participates in the business. Sam wishes to acquire a business jet for use by HighTech LLC. Sam borrows $2.5 million from the bank on a full recourse basis. Sam lends $3 million ($2.5 million of loan proceeds and $500,000 of personal funds) to HighTech LLC. HighTech LLC uses the $3 million loan proceeds from Sam to purchase an aircraft. The aircraft is used solely for the business purposes of HighTech LLC. HighTech LLC grants a security interest in the aircraft to Sam as collateral for the loan. Because Sam is fully “at risk,” his deductions will not be limited, and he will be able to recognize a 100% Bonus Depreciation deduction for the entire $3 million purchase price in the year of acquisition.

    In summary, except in the straightforward case where an individual directly borrows money on a full-recourse basis to finance the aircraft, the at-risk rules can threaten the tax advantages of aircraft ownership and must be navigated carefully. Despite careful planning, employing non-recourse financing may dramatically reduce the taxpayer’s “at risk” amount and may result in immediate adverse tax consequences, including the loss of Bonus Depreciation benefits. With careful structuring of a full recourse loan transaction, a taxpayer may be able to take advantage of the enhanced tax benefits available under the Tax Cuts and Jobs Act enacted in late 2017, including 100% Bonus Depreciation, to a greater extent than would be available with non- or limited-recourse financing.

    Disclaimer: These materials are not intended to be tax or legal advice but are intended only to inform the or reader of recent developments in the law and about the impact of the “at-risk” rules on non- or limited recourse aircraft financings. These materials are provided for educational and informational purposes only, for the use of clients, customers and others who are interested in the subject matter. If tax or legal advice is required concerning a particular matter, your attorney or tax advisor should be consulted.

    * The author wishes to express his sincere appreciation for and acknowledgement of the considerable contributions of former colleague, Avi Lev, in researching and preparing this GT Advisory.


    [1] Section 465(b) of the Code; Treas. Reg., §1.465-1(a). Only pledged property which is not used in the activity is considered; hence the value of the aircraft itself will not increase the at-risk amount. Pledging other property used in the same activity also will not increase the at-risk amount. Note that the taxpayer will also not be considered at risk if the lender has an interest in the activity (beyond merely being a creditor), such as an interest in net profits. See Prop. Treas. Reg., §1.465-4.

    [2] Wag-a-Bag, Inc., Tax Court Memorandum 1992-581 (1992); Brand, Hugh M. (1983) 81 T.C. 821 (1983). See Prop. Treas. Reg., §1.465-6(d). In contrast, a taxpayer who is a co-borrower with others will be “at risk” to the extent he has a direct obligation to repay; Edwin D. Abramson, 86 T.C. 360 (1986).

    [3] IRS Field Service Advice 2000-25018.

    [4] See for example, Moreno, Michael B., et al. v. United States (U.S. District Court, W.D. La.), 113 AFTR 2014-2149 (2014). Note that some courts, in particular the Sixth Circuit Court of Appeals, use a slightly different test, determining whether the taxpayer is the “payor of last resort” in a worst-case scenario. See Pledger v. United States, 949 F.2d 841 (1991).

    [5] Treas. Reg., §1.465-20.

    [6] See discussion of these issues at Moreno, above.

    [7] The Tax Cuts and Jobs Act amended the “bonus depreciation” provisions of the Code such that, for aircraft used exclusively for business purposes and acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023, the taxpayer may deduct 100% of the cost of the aircraft in the year placed in service. This benefit is commonly referred to as “Bonus Depreciation”

    [8] These facts are critical to avoid the limitations imposed on passive activity losses by Section 469 of the Code, and by the “hobby loss” limitations of Section 183 of the Code.

    [9] At the highest marginal rate of 37%, the tax on income that otherwise would be avoided is $2,500,000 x 37% = $925,000. In addition, Jordan’s federal income will almost certainly carry over to his state income tax return; even assuming a low state rate of only 4%, this results in an additional $100,000 in tax.

    ATTACHMENTS

    This article was originally published by GreenbergTraurig on May 3, 2021.

  • Tracey Cheek posted an article
    YYZlaw Joins National Aircraft Finance Association see more

    FOR IMMEDIATE RELEASE

    EDGEWATER, Md. – Feb. 5, 2019 – National Aircraft Finance Association (NAFA) is pleased to announce that YYZlaw has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add YYZlaw to our association,” said Ford von Weise, President of NAFA.

    YYZlaw (formerly Clark & Company) is a corporate and regulatory law practice with an emphasis on the aviation and travel industries. Their main clients are scheduled and charter international airlines flying into Canada, domestic air carriers, Canadian aerospace companies, aviation and travel trade associations, tour operators, aircraft lessors, financial institutions and a variety of other organizations and professionals related to the aviation and travel industries.“With our decades of experience serving the regulatory and transactional needs of business aircraft financiers and their clients, YYZlaw is excited to continue to further the growth of our industry by supporting NAFA’s mandate,” said Bill Clark, Managing Partner at YYZlaw.

    The company provides legal counsel services to foreign and domestic corporations conducting aviation and travel businesses under the laws of Canada, including: regulatory advice on all aviation matters, the travel and tour operator industries; commercial and transactional advice on aircraft leasing, acquisitions and financing; commercial advice to aviation and travel companies in regard to laws of general application relating to labor, immigration, real estate and taxation; andadvice regarding the Cape Town Convention, including assistance with forming and maintaining accounts on the International Registry. “We pride ourselves on providing cost-effective, timely and sensible legal advice because we understand the real-life demands present in the business aviation sector,” said Ehsan Monfared, Legal Counsel at YYZlaw.

    Much like NAFA, YYZlaw fosters strong client and business relationships with their expanding network of specialized professionals. YYZlaw and NAFA provide the knowledge and dedication necessary for continued development in the aviation industry.

    For more information about YYZlaw, visit www.yyzlaw.com

    About NAFA: 

    The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit www.NAFA.aero.

  • NAFA Administrator posted an article
    What Determines the Length of a Loan see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your aircraft finance questions.

    Question: What determines the length of loan say between 15 and 20 years. I’m looking at a 1997 aircraft to finance 45k. What term might I expect to get?

    Answer: Generally speaking the amount financed,  usage and age are what limits length of term. In this case age is not the issue, however, loan amount at $45k would likely limit you to 15 years. The reason being, after 3 years on this amortization schedule you will have only paid the loan by less than $4k. This doesn’t leave much room for surprise expenses like an engine overhaul and therefore benefits neither the owner nor the lender.

    Question: Can I get a loan to finish off a project aircraft? I would need less than 20k to purchase the avionics. Everything else (engine and Airframe) are done. I could get a conditional Airworthiness inspection if needed. Thanks.

    Answer: Thanks for the question. It really would depend on the specific aircraft and how much work (time) it will take to get it airworthy. We’d be happy to discuss further, please contact us directly so we can review your specific situation.

    Have questions for Adam? He is happy to answer them. Submit your questions here. 

    This article was originally published by AOPA Aviation Finance Company on April 30, 2021.

  • Tracey Cheek posted an article
    Lien On Me - The benefits of aircraft co-ownership. see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance, writes about the benefits of aircraft co-ownership. 

    You could make good use of a light jet for your business, but you’re not likely to fly it more than 100 hours per year. And the capital cost of a brand new aircraft, plus the fixed operating costs, are a bit more than you want to spend, even considering the benefits of warranties and less downtime with a new versus a used aircraft. Instead of looking at a used and/or less capable aircraft, you decide you want a partner.

    Co-ownership of an aircraft can be beneficial for you and your partner. (See: “Giving Half a Whole Lot of Thought,” BAA Sept/Oct 2017). A carefully structured partnership can provide many benefits not otherwise available to you by using charter or owning a fractional share, including access, tax advantages, and a dedicated crew, while dividing the cost of ownership in two.

    Good news! Another like-minded business owner – either someone you know, or one who has been identified for you by an aviation professional – would like to partner with you on the purchase and operation of an aircraft.

    You’re ready for the purchase, but either you or your intended partner prefers to deploy the cash elsewhere, in your primary business or other investments. So one partner requires a loan while the other does not – your first potential conflict. How will you proceed?

    The path of least resistance is for the partners to agree to seek financing together, then to arrange some preferential treatment for the less-willing partner, such as a lower allocation of fixed overhead expenses. After all, he or she is agreeing to an unwanted loan.

    When one partner is adamant about not taking a loan, you can look for a lender who is willing to work with you, and has procedures in place to help facilitate your purchase.

    Here’s how it might work. The non-financing partner signs an acknowledgement with the lender (i.e. a subordination agreement or an extra signature on the security agreement). This gives both partners a formal relationship with the lender. Typically, the documentation will have an acknowledgment that the non-financing partner either will assume any deficiency from the borrowing partner or turn over the aircraft to the lender. The agreement also will ask the non-borrowing partner to acknowledge that the bank has first priority should a problem arise.

    For example, an airplane costs $9 million, so each partner must contribute $4.5 million. The non-borrowing partner pays cash, and the other partner makes a down payment of $900,000 and takes a loan for $3.6 million.

    Four years later, the airplane has depreciated to $6.75 million, and there remains a $3.1 million balance on the loan. The equity in the plane is $3.65 million. At that point, the borrowing partner has an unexpected life event (e.g. divorce, or major lawsuit), and cannot continue to make the loan payments.

    He/she also is in arrears with the partner on hangar rent and other maintenance-related expenses and so decides to surrender his/her equity to the partner. The non-borrowing partner then “cures” any default with back payments and inherits all the equity. At that point he/she either may find a new partner or sell the aircraft for $6.75 million, after originally having invested $4.5 million. If sold, the partner recovers all of his/her original investment, plus $2.25 million to cover any back owed expenses. This scenario also would apply with more than one partner, with each non-borrowing partner agreeing to the same terms as above.

    Shared ownership can be an excellent option when your proposed annual flight requirements aren't large enough to justify owning a dedicated aircraft. But when one of the partners prefers to finance his/her share, make certain that the lender selected can structure a deal that protects both borrower and cash buyer alike.

    This article was originally published on July 3, 2018 in Business Aviation Advisor

     September 20, 2018
  • Tracey Cheek posted an article
    Financing: Which Aircraft are Most Likely to Qualify? see more

    NAFA member, Vivek Kaushal, Chief Risk Officer with Global Jet Capital, discusses the challenges of getting funding for used aircraft in today's market.

    Is the goal of getting financing for a used aircraft really so difficult in today’s Business Aviation marketplace? Global Jet Capital’s Vivek Kaushal discusses, offering tips on ways to maximize your chances when selecting your next aircraft…

    If you’re thinking about financing an aircraft, you’ve probably heard that it’s relatively easy to obtain funds for a new aircraft but that financing used jets is a thornier proposition.

    That’s mostly true, but even for a new aircraft, there is no guarantee of securing funding. It’s important to remember that not all new aircraft are created equal. Lenders will always wait for a new model to prove its performance and demonstrate some trading history before going ‘all-in’.

    Existing models with a solid installed base and performance history are usually acceptable, with a few exceptions.

    While it’s mostly true that financing for new aircraft can be more easily obtained than for used, within the used realm there’s significant variation in what lenders look for and what kinds of risk they’ll tolerate. Generally speaking, a used aircraft can indeed be trickier to finance.

    Some lenders, especially those that don’t specialize in aviation financing, won’t finance aircraft over five years old, while for others, ten years is the cut-off.

    These are largely arbitrary numbers, and experienced aviation lenders know that there are more important considerations than arithmetic based on model year.

    Useful or not, some banks rely on these simple weeding-out measures because they’re constrained by conservative credit risk policies or by a lack of knowledge. Neither is conducive to a holistic approach to used aircraft financing.

    Thus, if you’ve got your eye on a used aircraft that’s got a little more history between its wings than some lenders are comfortable with, don’t despair. Older aircraft can qualify for financing, but obtaining it would typically mean engaging a specialized aviation financing partner who can work with you and navigate some of the industry particulars.

    Following are three major factors that will make a difference as to whether a specific used aircraft qualifies for financing or not…
     

    1. A Robust Installed Base/Model Performance History

    The more performance history that’s available for an aircraft model, the better. Models that have been well-accepted in the market will almost always be more likely to qualify for financing.

    For each cabin class, some models demonstrate better-than-usual value retention. These will typically have been in production at a high volume and will boast a well-documented operational and financial track record.

    Models with short production runs and low trading volume may be viewed more cautiously as collateral for financing.

    Data on a model’s installed base and recent trading history (number of pre-owned aircraft on the market/average days to trade) is typically available on AMSTAT or JETNET.
     

    2. Fleet Average Usage Levels

    An aircraft is more likely to qualify for financing if it’s at or below fleet average usage for its make and model. Bluebook and other guides can provide this information, which is a key indicator of how much service life an aircraft has left.

    If the aircraft’s usage level is significantly higher than average, lenders may get concerned about the aircraft’s remaining useful life because of heavy usage. A heavily used aircraft will tend to sell more slowly.

     

    3. Airworthiness is Non-Negotiable - Maintenance Status Matters

    To qualify for financing, an aircraft must be in very good operational condition with no history of material damage. Damage to the aircraft will be assumed to affect its reliability and value, regardless of how comprehensive the repairs. All avionics have to be up to date, with no doubt over airworthiness. All technical upgrades must be in place as well.

    One major maintenance-related consideration that may affect a lender’s decision is whether the engine is cared for under a power-by-the-hour (PBH) program or not. Most lenders consider PBH programs to be a favorable approach to mitigate the risk of expensive engine repair costs.

    Another consideration is when the next major inspection is going to take place. An airframe inspection can be expensive and take a significant amount of time. A thorough review of the aircraft’s logs and maintenance history will help to flag such issues.
     

    The Real Issue With Used Aircraft Financing

    In a nutshell, the main obstacle to financing used aircraft is the complexity of the deals themselves. Some lenders struggle with the complex considerations that go into evaluating the risk of financing a used aircraft, especially if they don’t have robust aviation knowledge.

    Those that rely on a simple exclusionary process may rule out perfectly airworthy and viable aircraft in favor of preserving a cautious risk posture. All too often, a traditional lender will ask for other forms of collateral, such as significant amounts of assets under management which it has a right of set off, rather than rely on the value of the asset or the credit of the borrower’s business.

    Someone with domain knowledge can engage with the industry’s complexity and structure a transaction that works for the aircraft, even helping clients navigate the inspection process.

    As an example, Global Jet Capital was about to close on financing an operating lease for a ten-year old Bombardier Challenger 605 when a problem was identified with the aircraft’s APU requiring it to be sent to Honeywell for an estimated eight-week repair.

    A lender unfamiliar with aviation might have considered this a “red flag,” and its policies may have also precluded it from holding its financing commitment for that length of time, leading to an end to the deal and possibly a lost deposit if the right contingencies weren’t in place.

    Instead, our understanding of the space meant we understood the need for the repair and were able to work through the delay seamlessly. Once the overhauled APU was installed, the deal closed successfully.
     

    In Summary…

    So which jets are most likely to qualify for aircraft finance? A lot is possible when you find the right partner for your Business Aviation financing and understand what matters to lenders.

    Used aircraft continue to represent terrific value for savvy buyers. Keeping in mind the three major considerations relating to a used aircraft’s finance-worthiness, you should be able to find a used aircraft that suits your business goals and save yourself the disappointment of a rejection.

    This article was originally published by AvBuyer on May 4, 2018.