Operational Control And Aircraft Leasing: What’s The Big Deal? see more
NAFA member, Greg Reigel, Partner at Shackelford, Bowen, McKinley & Norton, LLP., discusses operational control and aircraft leasing.
From the FAA’s perspective, operational control in aircraft leasing transactions is not just a “big deal”, it is “the” deal.
What Is Operational Control?
14 C.F.R §1.1 defines operational control as “the exercise of authority over initiating, conducting or terminating a flight.” In a “wet” lease situation, since the lessor is providing both aircraft and crew, the lessor maintains operational control of all flights. And in the absence of a specific exemption (such as under 14 C.F.R. § 91.501(c) the lessor who is operating an aircraft under a wet lease will need to have an air carrier certificate to legally operate the aircraft.
In a “dry” lease situation, the lessee provides its own flight crew, and the lessee exercises operational control over its flights. The lessee’s operations may be conducted legally under 14 C.F.R. Part 91 without an air carrier certificate.
It is important to keep in mind that the FAA will look beyond the actual written agreements to determine who has operational control. Although a lease may be written as a dry lease and says “Dry Lease” at the top of the agreement, for example, that does not mean the FAA cannot take the position that the arrangement is really being conducted as a wet lease. And if the FAA takes that position when the lessor who is actually operating the aircraft for the lessee does not have an air carrier certificate, then that will be a problem for the lessor, and potentially for the lessee as well.
Why Does It Matter?
If the lessor is exercising operational control, then the flight must be conducted in compliance with regulations that are stricter than Part 91 (i.e. Parts 121 or 135). Those regulations limit the types of airports the lessor may utilize, crew qualifications, crew rest and duty times, maintenance requirements etc. Additionally, the lessor under a wet lease arrangement is required to remit federal excise tax on the amount charged to the lessee.
Alternatively, if the lessee has operational control under a dry lease the lessee is permitted to operate under the less restrictive and less costly requirements of Part 91. And federal excise tax is not due on the amounts paid by the lessee to the lessor, although sales tax is often assessed on the lease rate.
How Do You Determine Who Has Operational Control?
The FAA has issued guidance for determining which party has operational control in a leasing arrangement. Advisory Circular 91.37B Truth in Leasing provides FAA inspectors with an explanation of leasing structures and how they may or may not be compliant with the regulations. Although AC 91.37B only applies to aircraft subject to the requirements of 14 C.F.R. § 91.23, and it is not regulatory in nature, FAA inspectors also use this guidance when reviewing leasing structures that are not subject to truth-in-leasing requirements.
Here are the types of questions an FAA inspector will ask when the inspector is trying to determine which party has operational control in an aircraft leasing situation:
- Who decides crewmember and aircraft assignments?
- Who accept flight requests?
- Who actually initiates, conducts, and terminates flights?
- Are the pilots direct employees or agents for the lessor, the lessee, or someone else?
- Who is responsible for aircraft maintenance and where is that maintenance performed?
- Who decides when/where maintenance is accomplished, and who pays the maintenance provider for that service?
- Prior to departure, who ensures the flight, aircraft, and crew comply with regulations?
- Who determines weather/fuel requirements, and who pays for the fuel at the pump?
- Who directly pays for the airport fees, parking/hangar costs, food service, and/or rental cars?
If properly drafted, an aircraft dry lease agreement should answer these questions and, to the extent the answer for any item is “the lessor”, then the lease should explain that answer and how it does not negate lessee’s exercise of operational control.
For example, if the aircraft is leased to more than one lessee, it may make more sense for the lessor to retain responsibility for maintenance to ensure that the aircraft is consistently maintained in an airworthy condition. Similarly, lessor maintaining an insurance policy insuring the aircraft and the various lessees may be necessary to make certain the aircraft is insured appropriately.
However, responsibility for maintenance or insurance are just two indicia of operational control. And the lessor’s responsibility for maintenance or insurance does not negate the lessee’s responsibility for ensuring that the aircraft is in an airworthy condition and the lessee’s is properly insured prior to any operations conducted under a lease. Appropriate language in the lease can explain these issues so an FAA inspector reviewing the lease does not misunderstand and draw the wrong conclusion.
Also be aware that some FAA inspectors rely upon AC 91.37B but do not fully or properly understand its guidance. For example, in one instance AC 91.37B states “[t]he FAA has taken the position that if a person leases an aircraft to another and also provides the flightcrew, fuel, and maintenance, the lessor of the aircraft is the operator.”
This language is sometimes misunderstood by inspectors to mean that a lessee does not have operational control when the lessor is responsible for maintenance. But that is incorrect.
The key indicia in the language above is lessor’s providing the flightcrew. However, lessor’s responsibility for maintenance by itself does not indicate that lessor is improperly exercising operational control over lessee flights. Although it may indicate that lessor is exercising some operational control, without other indicia of operational control by the lessor, performance of maintenance alone is not conclusive.
Operational control in aircraft leasing arrangements is, and will continue to be, an area of special emphasis for the FAA. Although the terms of the lease and other transaction documents are important, the FAA is not bound by those terms when it is making an operational control determination. Rather, it will also look at the actual arrangements between the parties, as well as the responsibilities of each party, especially if they are inconsistent with the lease.
When the FAA determines that lessor is exercising operational control in what is supposed to be a Part 91 dry leasing transaction, you can expect that it will act. Depending upon the circumstances, pilots and operators could be faced with certificate action and civil penalty action. It is important to understand the indicia of operational control and to be able to determine which party is exercising operational control in an aircraft leasing transaction. Only then will you be able to ensure that you are operating in compliance with the regulations.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP., on Feburary 5, 2021.
Finding Growth in a Changed World see more
NAFA member, David Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, shares his perspective of business aviation amid the pandemic.
Shifting markets are creating new opportunities in a world altered by COVID-19. Here are some to consider.
WITH EVERY NEW YEAR COME HOPES FOR A BETTER WORLD, and 2021 is fairly bristling with them. Of particular relevance to equipment finance companies is the Equipment Leasing & Finance Foundation’s 2021 Equipment Leasing & Finance U.S. Economic Outlook, which forecasts 7.8% growth in equipment and software investment this year, and 4.7% growth in the U.S. Gross Domestic Product. Heartened by plans for widely distributed vaccines against COVID-19, industries and the companies within them are re-tooling to apply permanently many of the technologies and efficiencies necessitated by the pandemic. Equipment Leasing & Finance spoke to leaders in several equipment sectors experiencing changes that are leading to growth.Here’s what we learned:
There’s a Window in Trucking
Howard Shiebler is President of Crossroads Equipment & Finance LLC and Chairman of Velocity SBA, both in Rancho Cucamonga, California. Financing commercial trucks for transportation companies gives him a strategic view of one of the largest and most dynamic sectors in equipment finance. “We’re in an abnormally strong market now, both with values and the demand for tractors and trailers,” he says. “For those financing in this space, new business volume is up and repossessed inventory is selling quickly, and at good prices.”
The big question is how long current conditions will last. Increased consumer spending, much of it done online, helped freight markets recover quickly from initial pandemic shock. If economic recovery continues, Shiebler expects the strong transportation market to last well into 2021.
“Additionally, manufacturers of trucks and trailers have had their supply chains and work forces impacted by the pandemic, and the corresponding shortage of new equipment has driven demand and prices for used equipment to unusually high levels,” Shiebler notes. He adds, “I think some e-commerce-driven demand will become permanent, and manufacturers will eventually catch up with market demand, leading to a more typically cyclical transportation finance market.”
Nonetheless, Shiebler says equipment finance companies must still do a thorough job of underwriting in the space or risk getting into trouble. “When the economy slows, we’ll see freight rates drop, defaults increase and used truck prices drop fairly quickly,” he warns. “Lenders that understand this cycle underwrite to it, and they also properly staff collections and remarketing operations to deal with increased defaults.”
Healthcare Providers Want More Options
Jon Biorkman is President of Healthcare Financial Services at GE Healthcare. As the dynamics of the medical equipment market change, he sees healthcare providers revisiting budgeting, capital structure and other fundamentals of corporate finance to re-evaluate strategy and develop multiple scenarios for use in times of economic uncertainty.
“To account for variability, leadership teams are examining operating and non-operating cashflows, liquidity sources and cash on the balance sheet,” says Biorkman. “And as market dynamics continue to change, we’re bringing optionality to the table. This can be in terms of structure that allows for the deferment of a more permanent position, or increased liquidity to protect against unpredictable variability in patient volumes, payors and reimbursement trends.”
One such option is an escrow agreement that pre-funds capital for future equipment acquisitions. “The benefit is to lock in interest rates today, and secure capital for upcoming needs,” says Biorkman. Another option shortens the lease term, enabling equipment usage without full capital outlay.
“Creativity is something that matters to customers, and if we look at the market we’ve been operating in, it’s been incredibly dynamic,” Biorkman observes. “We view our role as providing customers with options for a future that may not be certain. We’re having candid conversations with them, being very grounded as it relates to financial projections—where they were before, where they are now, where they’re going. Liquidity and cash on the balance sheet have always been important, but today, customers are placing a premium on both—and alternative financial structures can really provide more tools.”
Aircraft Has Pockets of Promise
David Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, in Dallas, says the COVID crisis created a potential cash crunch for some owners of aircraft, and that a significant number of these are refinancing or entering into sale-leasebacks to cash out their equity in the equipment. “This is a global phenomenon, also driven in part by lower interest rates,” says Mayer. The upshot: opportunities exist in sale-leasebacks for those able to take residual risk, not just in tax leases, but in true or operating leases.
Mayer says there are also leases in which the credit advanced is fully paid out and the asset is sold for a purchase price at the end, which can be as low as $1 or another agreed price. “These deals have been active since the emergence of the pandemic and since rates have dropped,” he says. “I expect this trend to continue into 2021.”
Mayer has handled a number of such transactions and sees a particular market for the refinancing of larger jets with a value of $7 million or more. “One challenge for equipment finance companies will be to persuade customers that they won’t suffer ‘brain damage’ from engaging in a financing transaction,” says Mayer, tongue in cheek. “I say that because, compared to purchasing or borrowing, leasing is a more complex transaction.” Another deterrent among high-net-worth individuals and companies is pride of ownership and reluctance to use a financing product or allow a lessor or lender to control use of their aircraft.
“Make no mistake, the market is under stress and the pandemic is not helping,” Mayer cautions. “Companies that buy, lease or charter aircraft are leaving the business. But financiers are ready, able and willing to finance, and are doing more secured loans than true leases because they’re unable or unwilling to take the risk on the value of these assets.”
The aircraft market was on a downslope that started in 2019, and prices dropped another 10 to 15% at the start of COVID-19 before showing later indications of stabilizing. “But owners didn’t panic and sell; they were smart enough to stand by and wait—unlike what happened in 2008,” says Mayer. “Now equipment finance companies can provide these owners with smart and viable solutions in the form of true leases, tax leases, loans and sale-leasebacks.”
Small Businesses Need Your Capital
Marlin Capital Solutions provides equipment financing, working-capital loans, vendor financing and franchise financing to approximately 100,000 small businesses throughout the U.S. Thus, the company’s portfolio is a small-business index for sentiment and economic health, and CEO Jeff Hilzinger says the pandemic put the company “right at the center” of the 2020 economic storm.
“After ensuring the safety of our employees and the stability of our financial portfolio, we transferred people from our front office to our servicing team and immediately began reaching out to customers,” says Hilzinger. “We processed almost 6,000 requests for payment relief, most of them during April and May. And because we own a bank, we have an SBA license and were able to lend under the PPP program. We quickly created a platform to do that. Along with the payment relief we were providing, our goal was to preserve as much liquidity for our borrowers and in our own portfolio as possible.”
As Marlin helped its customers, the company also saw an opportunity to help itself. “The PPP platform we obtained was digital, and we’d always known we needed to become more digital,” says Hilzinger. “Once we took care of our employees, partners and customers and saw that the pandemic would last a while, we realized it could be a crisis of opportunity for us. We decided to dramatically accelerate our digitization and have been focused on it since June.”
In 2015, the New Jersey-based, small-ticket Independent had introduced a working-capital loan product to compete against fin techs. “We were always careful with it, because it hadn’t gone through a complete business cycle,” says Hilzinger. “But it turns out that the product performed much better than we expected, so now we’re redoubling our efforts
Because the small-business market resides next to the consumer market, Hilzinger says much of what consumers do with their personal credit can be projected for use in small business. “Once customers can access us digitally, we’ll be able to offer lines of credit and other micro-ticket products that were too much work to provide when our processes were manual,” he says. “Now we can offer these in ways that will be exciting to small businesses, and of economic benefit to us. Going digital definitely opens up new opportunities.”
Schools Urgently Need IT
Insight Financial Services (IFS) in Costa Mesa, California began studying the nuances of the k-12 school market about six years ago with the goal of doing business there. Through networking, they were introduced to OETC, an Oregon-based consortium that offers contracts for products supplied to K-12 schools and universities throughout the Pacific Northwest. “Needs were starting to change for schools at the time, and one of our customers suggested we talk to OETC about the consortium developing an RFP for school districts to lease IT,” says Andy Hashimoto, Vice President.
Over the next year, Hashimoto and Colleen O’Donnell, IFS Senior Vice President of State, Local and Education Business, explained to OETC the benefits municipalities and schools could leverage through leasing. A contract with IFS would allow OETC-member schools to acquire equipment without requesting proposals.
“What we found with many schools is that their previous plan had been to put equipment in the classroom with teachers and keep it until it didn’t work anymore,” says O’Donnell. “But the idea was evolving that schools need a sustainable strategy for IT and a budget to support it. They need technology that matches the curriculum, technology for both students and teachers that brings digital learning to life.”
COVID-19 greatly accelerated the need, and this past October, IFS was awarded a three-year contract as an approved IT equipment leasing services vendor in California. The contract is in addition to a nationwide agreement IFS already has with OETC, and expands the services the company can provide in California.
“This is a growing market for us, and we’ve experienced significant growth over the last couple of years,” says Hashimoto. “Today, school districts need large numbers of devices, and these can be acquired through a leasing contract that manages the entire life cycle.”
To that point, Hashimoto says much of IFS’s growth in the school market is attributable to asset management services included in the company’s contracts. “The asset management is geared to specific devices and allows school districts to be in control of what happens to the equipment,” he says. And because IFS tailors its leases to individual school-district budgets and needs, IFS is able to serve every customer. “We invest the time with each school district to customize the solution so that it works specifically for them,” says O’Donnell. “We structure from beginning to end to help them have the technology they need to support learning in the classroom and from home.”
Asked for suggestions for other equipment finance companies considering the school market, Hashimoto and O’Donnell have several thoughts. “Colleen and I have joked that we are evangelists for leasing, but it’s true that customers need to be educated about how leasing can help them,” says Hashimoto. “Our message about this has been the same since we started with the education market, but with COVID-19 driving and accelerating the need for IT equipment, what we had to say became that much more important and understandable. Communicate often with your customers, and explain clearly how leasing can be a solution for budgets, for obtaining the equipment they need, and for controlling what happens to that equipment at the end of the lease.”
Adds O’Donnell, “I’d say the willingness to be nimble, to explore the market deeply and invest time communicating with prospects and building relationships, is extremely important. Working this way is a cornerstone of our business, and by doing it, we’re in a position to respond immediately when needs change or a crisis arises. It’s how we provide solutions our customers are looking for.”
This article originally appeared in Equipment Leasing & Finance Magazine's Jan/Feb 2021 Issue.
AINsight: How Dry Leases Can Prevent Illegal Charter see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses how dry leases can prevent illegal charter.
Is it possible that a subtle shift is occurring away from the pervasive and persistent menace of illegal charter operations? Anecdotally, and perhaps for me just hopefully, I am seeing more aircraft owners, operators, lessees, and lessors asking whether they need some type of leasing or other structure to avoid FAA scrutiny or personal liability.
Leasing enables a lessee, which may be an individual or entity (person), to lawfully “operate” and thereby exercise “operational control” over an aircraft under the FARs. Only one person has operational control. Leasing offers a broad array of benefits and structures to direct cash flow from lessees to lessors and vendors, manage risk, minimize certain taxes, share aircraft use and cost among unrelated and affiliated parties, and facilitate commercial operations under FAR Part 135.
But leasing is not an incidental subject, as explained in the General Aviation Dry Leasing Guide developed by NBAA and several other aviation alphabet groups. This 17-page publication informs aircraft buyers, owners, lessors, lessees, lenders, brokers, lawyers, and other advisors about the flexibility, utility, regulatory aspects, and complexity of leasing.
Key FAA Leases: Dry and Wet
It is essential first to understand that a “lease” under the Uniform Commercial Code in part means a transfer by a “lessor” to a “lessee” of the right to possession and use of an aircraft for a term in return for consideration—usually hourly, fixed, and/or variable rent payments.
In contrast, a true lease might exist when the lessor retains residual value risk—the remaining value of the aircraft at the end of the lease term. Sellers do not take this risk. Finally, a charter is not a lease; it is a service, with no change of aircraft possession.
Under FAR 91.23, “a lease means any agreement by a person to furnish an aircraft to another person for “compensation or hire, with or without flight crewmembers, that is not a contract of conditional sale.” In this context, the FAA identifies two extremely important categories of leases in Order 8900.1: dry leases and wet leases.
Dry lease refers to an aircraft transaction in which the lessor provides the aircraft, the lessee independently supplies the crewmembers, and the lessee retains operational control of the flight. FAR 1.1 defines a core regulatory concept of operational control with respect to a flight as “the exercise of authority over initiating, conducting, or terminating a flight.”
Illegal or unsafe operations may occur when leases or other contracts do not specify who is responsible for operational control of the aircraft and in other circumstances. As such, the FAA focuses on operational control in assessing whether a flight operation is an illegal charter or valid Part 91 operation.
Operational control under Part 91 does not mean the traveler must fly the aircraft personally. An aircraft owner or lessee typically delegates that responsibility to pilots under Part 91 or charter operator under Part 135. I sometimes refer to the one person that exercises operational control as having the liability target on the person’s back.
For example, in one of the most common uses of dry leases, an owner enters into a dry lease between a limited liability company (LLC), as the single-purpose aircraft owner entity, to put operational control of flight operations into the hands of one person as the lessee in compliance with Part 91.
A major business enterprise for profit may be an appropriate dry lessee if the aircraft serves the business of the enterprise whose operations generate substantially more revenue than the operating costs of the aircraft. The LLC owner/member may also agree to an “exclusive dry lease,” with one lessee/operator or “non-exclusive leases” with multiple aircraft lessees/operators under their separate non-exclusive leases.
The finance world routinely uses exclusive dry leases of various types to enable a lessor to buy an aircraft and lease it to a lessee without crew under a long-term lease. Here, the lessee similarly supplies the crew and assumes all obligations under the lease for the care, custody, and control of the aircraft during the term, including for its maintenance, crewing, operations, cost payments, insurance, and taxes.
Despite the availability of leasing, new and current aircraft owners still frequently violate the FARs when their LLCs operate the aircraft but have no business other than to own and operate their aircraft, converting the LLCs into illegal “flight department companies.” Such a single-purpose LLC cannot lawfully conduct these operations, share the aircraft for any compensation (anything of value), or offer the aircraft for hire to others unless the LLC obtains an air carrier certificate under Part 119 and operates the aircraft under Part 135. It is quite feasible to use non-exclusive or exclusive dry leases to rectify or avoid these violations.
In contrast to a dry lease, the FAA defines a wet lease in FAR 110.2 as an aircraft lease whereby the lessor provides both an entire aircraft and at least one crewmember to a lessee. The lessor retains operational control of the flight, unlike a dry lease where the dry lessee supplies its own crew, directs many aspects of flight operations, and retains operational control.
Another significant distinction exists between Part 91 private operations and Part 135 commercial operations conducted by the air carrier that influences lease structuring. The air carrier (charterer) has the liability target on its back instead of the person that would otherwise exercise operational control under Part 91. This feature appeals to risk-averse Part 91 lessees or owners that want to mitigate the risk of liability for accidents involving their aircraft under their operational control of the aircraft.
When the Rubber Hits the Runway
When the conduct of flights blurs the line in determining whether one lessee/passenger has operational control or the lessor/aircraft provider has operational control under Part 91, illegal charter operations may be occurring. Lessees normally must understand and accept operational control and related obligations.
Although the FAA has no specific criteria to determine when Part 91 dry leases morph into illegal wet leases, lessees should be wary of lessors that offer leases to multiple unrelated parties, induce the parties to hire the lessor’s pilots, and usurp the lessee’s independence in exercising operational control.
Importantly, the lease parties of large civil aircraft (over 12,500 pounds mtow) must comply with FAR 91.23, the Truth-in-Leasing rules. These rules, which protect and inform lessees, require the filing with the FAA of a copy of the lease within 24 hours of signing and notice to the local FAA Flight Standards office at least 48 hours before the first flight under the lease.
There is no excuse for operating an aircraft as an illegal charter, especially when leasing aircraft provides a reasonable way to transfer rights to lessees to possess and use an aircraft under the lessee’s operational control. With the guidance of knowledgeable aviation counsel, individuals and entities can operate safely, lawfully, and knowledgeably under the FARs using leases and other related documentation that will survive FAA scrutiny.
This article was originally published on AINonline on January 15, 2021.
Insights From An FAA Illegal Charter Investigation see more
NAFA member, Greg Reigel, Partner at Shackelford, Bowen, McKinley & Norton, shares insights from an FAA illegal charter investigation.
Recent FAA press releases have publicized the enforcement actions the agency is taking against those involved in illegal charter. However, what is not publicized is how the FAA is investigating these cases. A recent case in the U.S. District Court for the Southern District of Indiana provides an interesting glimpse into one such investigation.
In Elwell v. Bade et al., the FAA received complaints regarding alleged illegal charter activity. In response, the FAA opened what has turned out to be a six year investigation.
During its investigation, the FAA issued three sets of subpoenas over a three year period. The last set asked for production of all documents related to agreements associated with use, ownership, and/or leasehold interest in certain aircraft under investigation for a specified period of time. The recipients of the subpoenas (the “Respondents”) objected and refused to produce any documents.
The FAA filed a petition with the U.S. District Court requesting enforcement of the subpoenas. The Respondents objected to the subpoena by filing a motion to quash the subpoenas. The Court refused to quash the FAA’s administrative subpoenas and ordered their enforcement.
The Court concluded that “(a) the matter under investigation is within the authority of the issuing agency, (b) the information sought is reasonably relevant to that inquiry, and (c) the requests are not too indefinite.” However, the Court’s analysis and rationale also provide insight into some of the things the FAA can do, and when it can do them, in an illegal charter investigation.
Here are some of the key takeaways:
The FAA Has Authority To Issue Subpoenas In Connection With An Investigation
Under 49 U.S.C. § 46101(a), the FAA may investigate violations as long as the agency has “reasonable grounds.” Neither an enforcement action nor a lawsuit is necessary. When a court reviews an agency’s subpoena requests, the court must make sure the agency does not exceed its authority. And the threshold for the relevance of the documents/information requested by the administrative subpoenas is relatively low. The court must also confirm that the requests are not for an illegitimate purpose.
In illegal charter investigations such as the Bade case, the FAA typically asks for
- aircraft flight logs
- flight summaries
- aircraft lease agreements
- operating agreements
- interchange agreements
- pilot services agreements
- pilot payrolls
- operating invoices
- receipts etc.
And, as in Bade, a court will likely hold that such requests are proper and do not exceed the FAA’s authority.
Stale Complaint Rules Do Not Bar Subpoenas During An Investigation
As you may know, stale complaint rules act to bar the FAA from acting in certain situations after a period of time. For example, in certificate actions heard before a National Transportation Safety Board Administrative Law Judge, 49 C.F.R. § 821.33 may prevent the FAA from acting if it does not initiate the case within six months of advising the respondent of the reasons for the proposed action. Similarly, in a civil penalty case, a case may be dismissed under 14 C.F.R Part 13.208(d) if the FAA does not initiate action within two years.
However, these stale complaint rules do not apply to ongoing investigations where no action has been initiated. According to the Bade court, the “FAA may conduct an investigation to assure itself that its regulations are being followed, regardless if it ultimately determines civil enforcement or formal charges are not warranted.”
Similarly, the FAA may investigate a target who is “engaged in a continuing violation of [FAA’s] safety regulations.” In Bade, the FAA argued it was not investigating stale claims. Rather, it believed the respondents were engaged in continuing violations where “the statute of limitations restarts every day.” And the Court agreed.
(Interestingly, the Court did not address whether this analysis, and its decision, would have changed if the aircraft involved had been sold and/or the flight operations had ceased. As a result, it is unclear whether the investigation would have been moot if applicable stale complaint rules prohibited enforcement action.)
The FAA Does Not Have To Tell The Target Of An Investigation About Subpoenas
Under 49 U.S.C. § 46104(c), an agency must only give notice to “the opposing party or the attorney of record of that party.” However, an investigation has no “record.” As a result, since the target of the investigation is not the one being deposed nor is counsel to those targets being deposed, the target does not have a statutory right to receive notice of third-party depositions.
The Bade court also noted that “’failing to receive notice of one or more depositions does not prove that the FAA’s investigation is a sham,’ and has ‘nothing to do with the enforceability of the Subpoenas or the motive of the FAA in conducting this investigation.’”
So, potential respondents do not get to participate at third-party depositions or receive copies of documents produced in response to subpoenas. This certainly makes defending against an illegal charter investigation a more difficult task.
The FAA’s Order 2150.3C Is Only “Guidance”
In Bade the Respondents argued that the FAA had not followed its own policies when conducting the investigation. Specifically, they argued the FAA failed to follow FAA Order 2150.3 – FAA’s Compliance and Enforcement Program. However, the Court rejected the argument. It observed that Order 2150.3 is not regulatory.
Rather, Order 2150.3 merely provides guidelines to FAA personnel for performing their duties. Thus, the Court concluded that the FAA’s failure to strictly adhere to Order 2150.3’s “guidance” did not negate its authority to investigate. Nor did it mean the FAA was pursuing the investigation for an improper purpose.
Illegal charter is a high priority for the FAA at the moment, and will be for the foreseeable future. As a result, the agency will continue to investigate complaints of illegal charter. It is important to understand how the FAA conducts these investigations and the extent of its authority.
And it is imperative for aircraft owner or operator who is the target of an illegal charter investigation to know its rights. If you believe you are the target of an illegal charter investigation, contact us now so we can help you navigate the investigation and protect your rights.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP on June 23, 2020.
7 Avoidable Mistakes in Acquiring a Bizjet see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses mistakes to avoid when acquiring a private jet aircraft.
Acquiring a private jet aircraft is fraught with the potential to make expensive mistakes. Yet, a qualified aviation team can help a purchaser achieve optimal results by avoiding these seven missteps:
GOING IT ALONE
Assembling the right aviation team admittedly entails some cost and initial effort. But most purchasers quickly realize that buying a jet is not like buying a car, real estate, or other assets. Rather, a jet purchase or lease is complex and requires the assistance of aviation experts who excel in the subject matter and interact seamlessly on a deliberate closing schedule. Tax-intensive, cross-border, and novel purchases may require additional expertise beyond the core team members described below.
Aircraft broker. Purchasers buy aircraft solo, and that can work out. However, a purchaser might suffer buyer’s remorse or experience negative outcomes such as unnecessarily incurring taxes on the purchase. A skilled broker focuses on the purchaser’s needs and wants, knows the “market,” identifies the best available aircraft for the purchaser, and negotiates business and other terms with the team.
Consultants and pilots. Various consultants perform visual and record inspections, appraise aircraft, supervise pre-buy inspections, organize flight departments (Part 91-private aircraft operations), provide insights into choosing Part 135 managers (commercial/charter use), and may provide broker services. Pilots may support, perform, or lead on some tasks but must collaborate with the other team members.
Aviation lawyer. Aviation law is challenging, so non-aviation counsel should not act alone in aircraft purchases. Instead, they should hire an experienced aviation legal team that understands and regularly structures acquisitions amid conflicting tax, regulatory, liability, risk management, choice of owner entity, and other complex rules. They must also regularly draft and negotiate aviation-specific agreements and, importantly, have even broader financing expertise than just aircraft loans and leases.
Aviation insurance broker. The aviation insurance market is no place for a generalist broker. Aviation insurance brokers know how to navigate aircraft insurance markets and negotiate complex policy terms.
Escrow agent and FAA counsel. With few exceptions, purchasers and sellers should use escrow agents, comprised of escrow companies and FAA lawyers. These agents hold and disburse funds, collect and file documents at the FAA, register interests and parties on the International Registry, and may issue title insurance. FAA counsel can also offer legal advice, write title opinions, and draft multiple documents.
NOT SELECTING THE RIGHT AIRCRAFT
Despite the unquestionable benefits of owning or leasing a whole jet aircraft, notably during Covid-19, a prospective purchaser should first rule out other workable options to fly privately, such as chartering or buying a fractional share of a jet. After that, a purchaser should concentrate first on the aircraft/user’s “mission” before deciding on which new or used whole aircraft to buy or lease.
Generally, the term “mission” is aviation speak for a purchaser’s effort to identify aircraft that will serve all or at least most of the private travel the purchaser envisions. When completed, the mission profile informs the search by purchasers and their brokers in today’s active market with numerous jet makes and models for sale.
NOT PLANNING FOR TAXES BEFORE SIGNING AN LOI
Private jets attract the interest of tax authorities at the federal, state, and local levels. Before signing a letter of intent () to acquire a jet, if possible, a purchaser should use accountants and lawyers to develop tax minimization strategies and structures under federal tax law, including the use of bonus depreciation and other business deductions, state sales/use tax laws, and local property laws. Solid planning may be slower than purchasers expect but failing to do so can wreak tax and financial havoc.
NOT CREATING A LEGAL OR STRONG AIRCRAFT OWNERSHIP/OPERATING STRUCTURE
A purchaser should determine the person or entity, often an , that will own the jet, and then structure the operations of the jet in compliance with the s. An owner that violates the s invites FAA scrutiny and, sometimes, enforcement litigation by the FAA or the U.S. Department of Justice, easily causing owners to incur sky-high legal fees.
One of the most common problems stems from illegal charters, which take various forms. One rampant violation occurs when Part 91 operators lease their aircraft to many unrelated travelers, which is really a fake charter operation. Another violation often occurs when an LLC with no business enterprise operates the aircraft it owns or leases. The FAA views these flight operations as creating an illegal “flight department company.” When structured improperly, neither the leasing nor the LLC operator (allegedly) holds mandatory FAA certifications as commercial operators under the FARs.
Owners also frequently believe the same provides a liability shield for its owners (members) from third-party liability claims. However, in general, the LLC will not protect the owners from any lawsuit or liability that may ensue from illegal aircraft flight operations or violations of federal or state laws. Although insurance helps mitigate this risk, it is a false premise that insurance suffices or will respond to alleged liability. More risk mitigation structuring and financial exposure analysis can pay off.
SKIPPING AIRCRAFT INSPECTIONS
Although I have seen prospective purchasers bypass independent inspections in buying a new or used aircraft, that omission has led to surprises or disputes without an adequate legal remedy. Purchasers typically arrange a visual inspection of a jet and a review of its records.
If all goes well, an agreed maintenance facility then performs a pre-buy inspection, an in-depth aircraft checkup, and delivers an inspection report to the parties. This report identifies discrepancies that a seller usually fixes before the purchaser accepts or rejects the jet and closes the purchase. Leaving out this step is at best unwise. Beware—finding a facility and completing an inspection may push beyond a closing schedule.
NOT EXPLORING AIRCRAFT MANAGEMENT ARRANGEMENTS EARLY AND OFTEN
Aircraft management companies hold the life of jet owners and passengers in their hands. These companies differ significantly in size, experience, and services. It is critical to conduct due diligence on at least two companies covering safety, service, transparency, integrity, pricing, and FAA status. Choosing based solely on the lowest cost or a referral may needlessly raise personal, asset, and operational risks.
A purchaser that does not consult a manager during an initial jet inspection may forfeit valuable hands-on knowledge about the operations and maintenance of the subject aircraft. In contract negotiations, a purchaser, with certain team members, should secure balanced terms in such key areas as safety practices, including Covid-19 protocols, expense controls, travel scheduling, and services provided.
NOT CONSIDERING FINANCING BEFORE SIGNING A PURCHASE AGREEMENT
Even if a purchaser intends to buy a jet with cash, it is still worthwhile to inquire about leasing or borrowing to finance a jet acquisition before signing a purchase agreement. Most purchasers earn far more from their investments or businesses than the current very low rates. It is ideal to close a lease or loan at the purchase date, but either financing can occur later. Using a non-aviation lender or lessor is feasible, but may result in higher transaction fees, slower negotiations, and sub-optimal terms.
With the support of an experienced aviation team, a purchaser can complete a simple or complicated acquisition of a business jet smoothly and correctly. As aircraft deal activity rises amid Covid-19 safety concerns, it is worth understanding where mistakes can occur and how to prevent them.
This article was originally published by AINonline on November 13, 2020.
AINsight: 5 Incentives To Finance Business Aircraft see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, shares five important incentives when financing your next business jet.
The business aviation industry has encountered intense downdrafts this year connected to the Covid-19 pandemic. Ironically, the same forces have increased certain charter flights, spurred newcomer acquisitions of whole and fractional shares in aircraft, and highlighted the value of business aviation.
Concurrently, the August 27 issue of JetNet iQ Pulse revealed significant untapped interest in borrowing or leasing (financing) to make aircraft acquisitions, stating: “Since the onset of the Covid-19 pandemic and amongst respondents with an opinion, about two-thirds indicate that they plan to use some sort of financing to acquire their next new aircraft.”
Understanding Today’s Aircraft Finance Markets
A few brief insights into the two dominant types of aircraft financing, “true leases” and secured loans, will help understand the interest in financing jet aircraft in a market typically dominated by cash purchases.
A true aircraft lease is a transfer by an owner/lessor of the right to possession and use of the aircraft to a lessee for a lease term in return for rent and other consideration/value. In a true lease, the lessor provides 100 percent financing by purchasing the aircraft and leasing it to the lessee.
Lessors expect the lessee to return the aircraft to the lessor at lease expiration, buy it during or at the end of the lease term, or renew the lease. Lessees enjoy the corresponding rights to drop off the aircraft to the lessor and walk away (after meeting the aircraft return conditions), purchasing the aircraft, and renewing the lease.
A typical aircraft secured loan requires a borrower to grant a “security interest”– a lien –on an aircraft to the lender/secured party to secure the borrower’s payment or performance obligations under the loan documents. A lender does not own the aircraft; it just has an interest in the aircraft as collateral.
Customers typically borrow between 50 percent and 80 percent of the price of the aircraft and make up the difference with the customers’ cash or, for refinancing, the value of the equity in the aircraft. These percentages fluctuate up or down for different lenders and loan structures, with a relatively few lenders advancing up to 100 percent loan to the value of the aircraft agreeing to a term of up to 20-years.
Five Incentives To Finance Business Jets
Most customers in the U.S. have at least five incentives to finance their next (or first) aircraft:
• Cheap money. The Federal Reserve (FR) recently announced a policy shift that the FR will average inflation rates to allow about a 2 percent inflation rate before increasing interest rates to tame the inflation. The FRprojects that interest rates will remain near zero for years to come. Financiers should, for the foreseeable future, offer customers very low rates consistent with the FR action.
• No to low cash outlay. Many potential customers should readily appreciate that, rather than stroking a check for a new or used jet, they can more prudently or profitably use their cash elsewhere in their businesses for capital expenditures, investments, or, particularly during the pandemic, working capital.
• Tax write-offs. If the lessor adheres to applicable federal tax law, including the lessor’s maintenance of residual value under the federal true lease guidelines, the lessor may be entitled to claim bonus depreciation on the new or used leased aircraft per the Tax Cuts and Jobs Act of 2017.
In a loan transaction, the borrower, as the owner, may be entitled to bonus depreciation of the aircraft and other tax write-offs allowed under the Coronavirus Aid, Relief, and Economic Security Act plus bonus depreciation despite some personal use of the aircraft.
• Lessor/lender competition. Most aircraft lenders and lessors compete aggressively on interest rates or lease economics to win business to the extent consistent with their respective business models, regulatory constraints, and internal credit policies. However, financiers will, except for the most creditworthy customers, expect customers to sign documentation that contains strong covenants, defaults, and other restrictive terms on aircraft and business operations.
• Customized lease and loan structures. Structuring lease and loans constitute an integral part of competition among financiers. To facilitate planning and cost management of aircraft operations, a lessor can, within tax and other limits, create flexible structures that contain fixed and variable rents, options to purchase the aircraft during the lease term or at lease expiration, terminate the lease during the lease term or renew the lease term at lease expiration.
Lenders can offer various loan structures that drive down periodic loan payments and achieve other customer goals. These loans might include a payment term of five to 12 years, asset-based financing (that primarily relies on aircraft value for re-payment), one large “balloon” or total principal payment at the end of the loan term, 10- to 20-year amortization periods, interest-only structures, and limited personal guarantees. Borrowers should negotiate early payoff rights so they can, at will, exit the relationship, refinance the aircraft loan, or use available cash to pay off the loan.
Though cash is king for many aircraft buyers, up to 70 percent of potential business aircraft owners or operators intend to finance the acquisition of their next new aircraft. The same should roughly be true for anyone interested in acquiring a used aircraft.
Such financing can afford these potential customers cheap interest/rent rates, no or low cash use, and an immediate opportunity to buy or lease aircraft. For the business aviation industry, any boost in transaction volume this year, prompted by an expansion of financing, would be most welcome and perhaps generate a little optimism for a better 2021.
This article was originally published in AINonline on September 11, 2020.
NAFA member, David Norton, partner at Shackelford Law, shares presentation on Part 91 Dry Leasing. see more
NAFA member, David Norton, partner at Shackelford, Bowen, McKinley & Norton, gave a presentation on Part 91 Dry Leasing, which was immediately followed up with a panel discussion on illegal charters, the two topics going hand-in-hand.
According to Norton, a wet lease is defined as the "aircraft plus crewmember," and a "dry" lease as a mere equipment lease of the aircraft. Some aircraft owners, shying away from key legal, logistical and cost differences between Part 91 and Part 135 operations, enter into dry leasing agreements seeking to raise revenue with their aircraft while letting others operate the aircraft. If not done properly, Part 91 dry leasing can result in penalties from the FAA and refusal of insurance coverage when incident occurs.
The key question is whether operational control is transferred or if an air transportation service is actually being provided. Norton says that "operational control" continues to be a confusing term among owners and pilots, but essentially boils down to who gets to stay where an airplane is going on a given day.
"Pilots will say they have operational control, but unless they are the aircraft owner or the aircraft is leased to them personally, pilots are generally not in operational control of the airplane," said Norton. "The operator is generally a company or person who has the right to say where [the aircraft] is going on a given day, and for [business jets] that means you're usually hiring a professional pilot. So it's not necessarily the person whose hands are on the yoke acting as the operator."
This article was originally published by Shackelford, Bowen, McKinley & Norton in The Binder, Vol. 45 No. 2 - Summer 2020 - on August 4, 2020.
Podcast: Business & Legal Issues to Consider When Acquiring An Aircraft see more
David Mayer, a Partner with the law firm of Shackelford, Bowen, McKinley & Norton, LLP, discusses some of the business and legal issues one should consider when acquiring a new or pre-owned aircraft. Topics covered include:
- The kinds of business professionals a buyer should engage for an aircraft purchase.
- The terms a Letter of Intent (LOI) should include when it comes to the acquisition process.
- Why use an LOI rather than enter into an Aircraft Purchase Agreement immediately?
- Should the LOI state the purchase be contingent on securing financing?
- Drafting the Aircraft Purchase Agreement.
- Issues that are important to address in the Aircraft Purchase Agreement.
- How Federal Aviation Regulations can affect aircraft purchases and structuring.
- The benefit of establishing a Limited Liability Company (LLC) or Trust to own an aircraft.
- Tax planning and bonus depreciation.
- The “fly-away” sales tax exemption.
- How aviation insurance protects an owner or lessee.
- The importance of Uniform Commercial Code (UCC), FAA and International Registry filings.
This podcast was originally published by Asset Insight on July 21, 2020.
About David G. Mayer
David Mayer has decades of experience in guiding clients through domestic and international transactions, disputes, and other matters. Currently, most of his work relates to business aviation and aircraft finance.
He likes to describe when he can first help clients: “When they say airplane, I’m in.” In this regard, David advises his clients at all stages of their experiences in buying, selling, structuring, leasing, financing, maintaining, and upgrading private aircraft. His tasks range from simple to complex.
David helps clients evaluate and, when feasible, minimize local, state, and federal taxes, particularly bonus depreciation, associated with purchases and sales of business aircraft, turboprops, and other private aircraft, comply with federal aviation regulations, and manage liability risk that they worry an aircraft may cause.
He represents, among others, high wealth individuals, large private and public companies, private jet owners and lessees, Part 135 and Part 91 operators, flight departments, charter operators, brokers, consultants, and management companies. By representing various lessors, lessees, lenders, and borrowers, David knows both sides of the transaction, enabling him to expedite and achieve favorable results for his clients in a wide array of legal matters.
David has experience as a corporate counsel in addition to his longer experience as a partner in law firms. Adapting to the client’s interest, David provides insightful, thoughtful, and common-sense advice honed in part by calling on his extensive industry contacts in business aviation to enhance the quality and value of the client experience.
He writes blogs for Aviation International Network, in the industry’s AINsight series, which, in part, positions David at the leading edge of legal and business developments in business aviation.
Shackelford, Bowen, McKinley & Norton, LLP
Shackelford, Bowen, McKinley & Norton, LLP represents clients in matters involving business, commercial and entertainment law based on years of experience in courtroom trials and negotiations across the U.S. We assist large corporations as well as individuals in a variety of industries, including aviation, energy, entertainment, financial institutions, health care, hospitality, real estate, and retail automobile sales.
AINsight: Best Five Options To Fly Privately see more
NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, shares the best options to fly privately.
As commercial airlines attempt to fill seats amid the Covid-19 pandemic, some families, businesses, and individuals have made a flight to safety by traveling again or for the first time on private aircraft.
These travelers set their schedules and itineraries for on-demand business or personal flights. They can travel to about 5,300 public-use airports in the U.S., roughly 10 times the number of airports available to commercial aircraft. International airport access expands the flexibility to travel globally. Travelers greatly value saving travel time, the healthy and safe environment, productivity, and convenience of private aircraft while enjoying a comfortable, interconnected, and protected flight experience.
Although the reasons to fly privately may be obvious, especially in the age of Covid-19, deciding on the right providers and approaches to flying are more complex. Three modes of aircraft travel involve no capital investment: chartering, jet or fraction cards, and membership programs. Each of these options holds strong attributes for new and some repeat flyers. Two other options require capital outlays for frequent flyers: purchasing a whole aircraft or a fractional share of an aircraft.
Before All Else
Before making choices from the five types of private aircraft travel described below, each person should complete the following diligence and processes to select the best possible flight experience:
• Aircraft supports the mission. Identify the right aircraft for your “mission”—industry lingo that refers to identifying the details of a trip. In general, a mission profile covers logistics, operating hours, amenities, connectivity, catering, luggage/storage capacity, number of passengers, and travel distance. One size aircraft might not fit all travel needs, especially for owners or lessees that have access to only one aircraft.
• Stellar manager, operator, and pilot safety records. Insist that the commercial operator, aircraft manager, and pilots have stellar safety records. The commercial operator should supply a top-flight team, including experienced pilots approved by the operator’s insurer. Managers, operators, and pilots should be free of enforcement actions by, or violation notices from, the FAA. Ask them.
• Aircraft in good condition. Confirm whether the aircraft complies with its manufacturer’s maintenance and regulatory requirements. The aircraft should also present a well-maintained physical appearance.
• Robust Covid-19 protocols. Verify that the aircraft manager, commercial operator, and FBO have designed and implemented a robust Covid-19 safety protocol for ground personnel, passengers, and crew, including health screening, social distancing, and personal protective equipment.
• Adequate insurance coverage. Require that the aircraft manager or commercial operator provide written evidence of comprehensive liability insurance to protect you despite the tightening insurance markets.
• Aviation experts. Use business aviation experts, including various brokers, technical consultants, and aviation lawyers, to assist in evaluating, documenting, and closing the best option or options for you.
A charter is simply an ad hoc transportation service by private aircraft by the seat or whole aircraft. Charter makes the most sense for occasional and new flyers including those seeking a healthy and safe aircraft travel environment during the pandemic. Although more complicated, a charter is like taking a taxi. In legal terms, charter operators engage in air commerce by carrying persons or property for compensation or hire. You can hire a charter service in most cities with a private or public-use airport.
Perhaps the simplest question about a charter and other options is what kind of aircraft does the traveler need to satisfy his or her top travel priorities? And how much will she or he spend to travel on a private aircraft? Charter rates can easily climb from approximately $1,200 to $12,000 per hour or more, depending on the aircraft selected from light jet or turboprop to an ultra-long-range jet.
Though charter rates are not inexpensive, charters are somewhat more affordable because charter rates have dropped since 2019. Also, Congress approved, among other tax benefits, an excise tax holiday in the CARES Act, which suspends the 7.5 percent flight excise tax on amounts paid to charter operators from March 28, 2020, to Dec. 31, 2020.
Cost transparency is sometimes challenging in the charter world. Travelers should ask for receipts detailing charges on their accounts, watch for overlapping charges, and tie the charges to final invoices. It is advisable to compare operator fleet sizes and business models.
One persistent legal and safety concern arises from illegal charter operations. Broadly speaking, illegal charters occur when the aircraft operator or pilot conducts charter operations without proper certification or fails to comply with strict safety requirements in applicable regulations. Illegal charters have ensnared frequent and occasional charter travelers.
Customers should look for red flags such as an operator asking customers to sign short-term leases or timesharing agreements. As a result of these regulatory violations, the FAA has, in coordination with the business aviation industry, stepped up its enforcement actions against operators and warned pilots to shun illegal charter operations.
Fee-paying members typically have access to private aircraft for a set number of hours that may range from 25 to 100 hours per year. Program terms, aircraft fleets, and quality vary widely as does pricing for membership and flights. Before joining, travelers should compare programs of operators that have developed creative ways to travel at a predictable cost.
Jet and Fraction Cards
Jet and fraction cards cost more than most other aircraft travel options and work like a pre-paid credit card that a traveler uses to pay for 25 to 100 or more flight hours. The cards enable travelers to dip a toe into private aviation. Card amounts vary, starting as low as $25,000 and perhaps lower in this changing segment. These cards and other options can provide supplemental lift to enhance travel flexibility.
Whole Aircraft Ownership or Leasing
Buying or leasing a “whole” aircraft often makes sense once a traveler anticipates using at least 200 flight hours per year and wants to control the use, customization, operational control, repair facilities, crewing, base location, and availability of the aircraft. However, many of my clients acquire aircraft knowing they will need fewer hours but also expecting to charter the aircraft to others to offset fixed costs.
At the outset of deciding whether to buy a whole aircraft, businesses should determine whether bonus depreciation and other tax benefits may be available and structured to reduce their after-tax cost of ownership and operations. Financing is widely available for whole aircraft at historically low rates. It is important to use aviation experts here as purchase, sale, financing, or leasing transactions are often complex.
Fractional Share Ownership
Simpler than owning or leasing a whole aircraft, an owner or lessee of an aircraft fractional share typically commits to a five-year program. A fraction typically corresponds to a certain number of annual flight hours, often ranging from 25 to 300 hours, though some programs instead use number of travel days instead of flight hours. Fractional programs charge monthly management and per-hour flight fees, differ in quality, and provide highly personalized service. Bonus depreciation and/or other federal tax benefits might be available like whole aircraft. A few banks will lease or finance a fractional share.
To mitigate Covid-19 infection risk, some families, businesses, and individuals have abandoned commercial aircraft travel for on-demand travel in private aircraft. The five best options for such private aircraft flights consist of charter services, membership programs, and jet or fraction cards, along with purchasing or leasing whole or fractional shares of these aircraft.
Covid-19 has boosted demand to fly by private aircraft, especially charter services. Perhaps this demand foretells a new era of sustainable growth in private aircraft travel as people realize that these flights not only save time but might also save lives.
Disclaimer: This blog is not intended to convey, and does not convey, legal or other advice. Each person should consult his or her advisors to make decisions about flying privately, as well as any legal or economic implications, risks, or terms in connection with any such decision.
This article was originally published by AINonline on July 17, 2020.
Filing Aircraft Registration Documents With The FAA Registry During The COVID-19 Pandemic: What You Need To KnowFiling Aircraft Registration Documents With The FAA Registry During The COVID-19 Pandemic: What You see more
NAFA member, Greg Reigel, Partner with Shackelford, Bowen, McKinley & Norton, LLP, discusses filing documents with the FAA Registry during the COVID-19 Pandemic.
In another instance of a “new-normal” resulting from COVID-19, the window at the FAA Registry, where real-time filing of aircraft registration documents used to occur, has closed. Although the FAA Registry is still open (for now), it has implemented new procedures for filing of aircraft registration documents. Three options are now available for recording documents:
Document Drop Bins.
The FAA has placed two bins outside the Public Documents room. One bin will be marked “Priority” and one bin will be for “Normal” processing (i.e. not priority). The FAA will retrieve documents from the Priority Bin every hour. It will retrieve documents submitted for normal processing twice a day.
Documents are filed when they are placed in one of the bins. However, will not be possible to obtain an immediate filing time for the documents as was the case in the past. Actual filing times will only be available after the documents are indexed in, scanned and available for viewing online. It is presently unclear how long that process will take.
E-Mail Filing To An Electronic Portal.
The FAA has a new e-mail filing process available subject to a number of limitations. Submitted documents must be digitally signed (i.e. Docusign, Adobe Sign, etc.) and each document must be 20 pages or less. Only one aircraft may be submitted in each e-mail and filing fees must be pre-paid at Pay.gov.
After submission, FAA will send an e-mail acknowledging receipt. However, documents will be processed during normal business hours with filing times available the same as when documents are filed via the bins.
Filing Via Mail.
As has always been the case, documents can still be filed via U.S. Mail, FedEx and UPS. And similar to the bin and e-mail filing, actual filing times will only be available once the documents are processed and in the FAA Registry’s system.
These new processes will also impact timing for receiving a “fly-wire” and for receiving Form 135 needed to accomplish International Registry filings. But it is unclear how much longer it will take to receive these back from the FAA.
The good news: The FAA Registry is still open and processing aircraft registration documents (for now). The bad news: These updated procedures will result in some delays in closing transactions, and a little less certainty regarding when documents were actually “filed” by the FAA. For example, in a transaction transferring risk of loss at the time of filing, that could present a problem.
Parties to aircraft transactions should review their documents to determine whether they are consistent with the new procedures. If they aren’t, parties should amend as needed.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP. on March 23, 2020.
How To Shield Bizjet Owners from Virus Claims see more
NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, discusses ways for bizjet owners to mitigate risk of COVID-19-related claims.
The sudden onslaught of the contagious and deadly Covid-19 pandemic delivered a severe blow to business aviation’s global flight activity and paused (but did not derail) preowned business jet retail sale and lease transactions. The pandemic has already changed so much in our lives that, for now, no one can envision what a “new normal” will look like for business aviation.
Regardless of what happens, today, as governments ease shelter at home restrictions, business aircraft owners and lessees, along with their managers and Part 135 operators (together, owners), face an imperative to protect anyone from Covid-19 who might come in physical contact with, or travel on, the operator’s business aircraft.
These people include owners and their families, other passengers, crew, independent contractors, employees, and ground support personnel (together, affected individuals). The imperative applies both to Part 91 and 135 operations. If owners do not meet this obligation head-on, it seems inevitable that affected individuals will make negligence claims against owners for exposure to, and illness or death from, Covid-19.
THREE WAYS TO MITIGATE RISK OF COVID-19-RELATED CLAIMS
Owners should use this period of slower flight and market activity to take the following three actions that might limit the chances for affected individuals to contract Covid-19 and blunt any incentive to make damage claims against owners for their alleged negligence:
First, develop comprehensive business aircraft protocols for each business aircraft to create a healthy and safe environment inside of, and close to, the aircraft.
Second, request Covid-19 waivers and indemnities from affected individuals to mitigate the risk of Covid-19-related liability claims based on negligence or other legal theories.
Finally, confirm whether the owner carries, or the owner can buy, liability insurance coverage that will respond to such liability claims.
Covid-19 Negligence Explained
As a general legal principle, business aircraft owners may be negligent and liable for money damages if the owner breaches its duty of reasonable care to maintain a safe and healthy environment for affected individuals inside of, or close to, their aircraft.
Broadly speaking, the duty occurs because an owner can reasonably foresee that Covid-19 might live in and on business aircraft, be transmitted inside or close to the aircraft by one person to another, or from personal items such as luggage to an affected individual. If negligence is proven, a judge or jury can then award significant money damages in favor of the affected individual or his/her estate.
Importantly, the affected individual who contracts Covid-19 must prove that the breach of the owner’s duty of reasonable care is the “proximate cause” of the Covid-19 illness or death. That is, the affected individual must provide evidence of an almost indisputable connection between his or her Covid-19 condition and the exposure to Covid-19 inside of, or close to, the business aircraft.
As such, causation is likely to be the most difficult element to prove, especially given the challenges in tracing from the affected individual to the aircraft environment as the only possible source of the affected individual’s infection. However, no owner should rely on the difficulty of proving causation as an excuse to ignore safeguards and fail to develop a high-quality aircraft protocol.
DEVELOPING A COVID-19 AIRCRAFT PROTOCOL
As noted above, owners can, and immediately should, develop and enforce a comprehensive protocol designed to protect any affected individual who is inside of, or might come in physical contact with, a business aircraft, its cargo, and any other affected individual. A protocol, in this context, refers to written standards, practices, and behaviors established by owners to ensure that the environment inside of, and close to, their business aircraft is free of the Covid-19 infection.
Although important, cleaning and disinfecting an aircraft by itself does not constitute an aircraft protocol. Owners should include many other elements in a protocol such as screening each affected individual, safely bag or wrap potentially infected luggage, test passengers for Covid-19 before the flight, and provide each passenger with personal hygiene supplies and masks that must be used inside the aircraft.
To help them meticulously design and write, as well as implement and update, a Covid-19 health and safety protocol, owners should hire appropriate medical, cleaning, and safety experts to contribute relevant parts of, and comment on, the entire protocol. Some managers and Part 135 operators have already taken steps to create all or part of a protocol or a rough equivalent, which is positive.
Further, owners should conduct periodic audits to confirm strict compliance with the protocols. They should also retain records on, and immediately rectify any shortfalls from, the protocol implementation such as recording dates and times of disinfecting in and around an aircraft. These steps might entail some additional effort, but they should help mount a good defense to negligence claims.
In all situations, owners and affected individuals should limit travel with operators that have not developed and comply with a protocol on every flight. After all, only one mistake or negligent act or omission can lead to tragic consequences involving Covid-19.
COVID-19 RESOURCES TO CREATE A PROTOCOL
In writing and updating the protocols, owners, experts, and their lawyers should study pertinent information from, among others, the World Health Organization, Centers for Disease Control, FAA, EBAA, and NATA. Notably, NBAA recently published a comprehensive resource that owners can use as the foundation of a quality aircraft protocol.
Aircraft manufacturers should be able and willing to provide consulting services and aircraft products, including fresh air intake and filtering systems, to mitigate safety risks and negligence claims.
LIABILITY INSURANCE COVERAGE TO MINIMIZE PAYOUTS FROMCOVID-19 CLAIMS
Liability insurance might cover Covid-19 negligence claims relating to business aircraft. Owners and their aviation insurance experts or lawyers should examine the wording in their liability insurance policies to determine whether any coverage exists against these claims. Some, but not all policies, contain explicit exclusions for viruses, which means Covid-19 claims might not be covered.
Prospects to buy such insurance now are dismal, but large accounts might have a shot. If there is potential coverage, the insurer might have a “duty to defend” the insured, at the insurer’s expense, and therefore engage counsel to defend the insured against the Covid-19 claims.
WAIVERS AND INDEMNITIES TO LIMIT IMPACT OF COVID-19 CLAIMS
Each owner should ask any affected individual, before a flight, for a written, signed waiver of claims for Covid-19 illness or death. Separately, managers and Part 135 operators might consider asking for waivers and indemnities from owners for damages to furniture and hard surfaces in the aircraft allegedly caused by disinfecting chemicals used in or on the aircraft to rid the areas of Covid-19. Courts generally enforce properly drafted waivers and indemnities, but applicable laws might alter this outcome.
Covid-19 affects all of us in different ways. In business aviation, it seems urgent that, as governments lift stay-at-home restrictions, owners develop and implement comprehensive Covid-19 health and safety protocols for their business aircraft, secure waivers, and indemnities and maintain appropriate liability insurance.
Properly structured, a protocol can protect the lives of business aircraft owners and their families, crews, independent contractors, employees, and ground support personnel from illness and death caused by Covid-19. Protocols can boost confidence in traveling by business aircraft and mitigate the risk of complex, expensive, and lengthy liability lawsuits against the business aircraft owners, managers, and Part 135 operators.
The right choice seems obvious, but the end of this healthcare crisis and recovery of business aviation remains far from certain.
Author note: “This blog is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader.”
This article was originally published by AINonline on May 15, 2020.
Five Guidelines for Successful Aircraft Financing and Leasing During the Covid-19 Crisis see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, shares guidelines for aircraft financing during the Covid-19 crisis.
With the availability of surprisingly low financing rates, aircraft owners may be able to reduce cash flow demands and/or create an extra cash resource during and after the Covid-19 crisis. Owners and others may be able to do so by aircraft refinancing, borrowing and leasing, cashing out aircraft equity or entering into sale leasebacks.
If you have purchased an aircraft for cash and you can wait out the crisis without stress or still prefer to and can purchase an aircraft with cash, read no further – except number 4 below.
Otherwise, you may find the following five guidelines useful to qualify for and close these transactions during the Covid-19 crisis:
- Be thorough; be patient. You can apply for and facilitate a credit review process by providing all lender or lessor (financier) requested information promptly and thoroughly. In this unprecedented environment, financiers still generally assess your financial capability during and beyond the crisis based on typical criteria such as aircraft attributes, cash flow, business prospects, net worth and total debt obligations. However, with current business disruption, you should expect slower credit review and documentation processes.
- Ask for payments that match your expected crisis and post-crisis cash flow. You may need or want several months of no payments, interest only or other lower payments during the crisis followed by increasing payments or other amortization changes thereafter. Financiers can customize your financing within policy and regulatory parameters.
- Realize that a durable relationship with your financier is crucial. Your transparency and high quality of integrity and character will go a long way toward building a strong and lasting relationship with a financier, especially during the current health emergency. The relationship is likely begin with some uncertainty during crisis period but, if all goes well, last for years after the corona virus ends. Stay in touch with and be responsive to your financier – by voice – not just email.
- Structure your transaction to align with the FARs. Spare yourself additional anxiety of operating illegal charters or other illegal flight department companies (often LLC holding companies). Your violations may cost you significant sums in attorney’s fees as a result of potential FAA scrutiny or action against you. Use loan or lease credit review time and/or any pause in flight operations during the crisis to structure or restructure your agreements to comply with the Federal Aviation Regulations (FARs). Aligning your aircraft ownership, leasing and operations within the FARs is a frequent task for experienced aviation lawyers.
- Search broadly for insurance coverage at credit application. In your financing proposal, specify commercially available liability insurance that you have secured or expect to buy. It is important to add this term so that financiers do not ask for more coverage than you can deliver in an insurance market that is still in turmoil due to, among other difficulties, past underwriting losses and the tragic Kobe Bryant accident.
This information was provided by David G. Mayer with Shackelford, Bowen, McKinley & Norton, LLP on April 7, 2020.
AINsight: Negotiating Business Aircraft Financing see more
NAFA member, David G. Mayer, partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses negotiating business aircraft financing.
Like large companies, an increasing number of high/ultra-high-net-worth individuals apparently like using other people’s money (OPM) instead of cash to close private aircraft transactions. These transactions include true tax leases, sale leasebacks, financing leases, secured loans, and refinancing of private aircraft by lessors and lenders. These deals also cover a broad range of aircraft by value, cost, cabin size, age, make and model.
It might just be my passing anecdotal experience that these “customers” seem to be more patient, flexible and engaged with their financiers than before the fourth quarter in resolving deal points that matter to them. Perhaps customers have discovered what I regularly see today: financiers, though controlled by bank regulations and internal credit policies, will work diligently and productively with their customers to develop structures and terms acceptable to their customers and the financier.
For lessors and lenders, this apparent surge in financing activity is good news. Yet, they widely acknowledge that “cash is king” in how high/ultra-high net worth individuals typically purchase new and preowned aircraft. According to JetNet, cash wins over secured loans to purchase jets, in an estimated 70 percent of U.S. aircraft purchases or a lower percentage of cash purchases depending on other sources of the information.
Financiers often encounter objections to financing like these: “I have cash available to buy the aircraft with minimal effect on my net worth”; “I really want to avoid the ‘brain damage’ associated with negotiating documentation, responding to onerous credit disclosure requests and abiding by restrictions that financiers will impose on me.”; and “I just prefer, like my buddies, to own the aircraft outright.”
Some financiers apparently have found the magic sauce to overcome these typical customers’ objections when combined with three particular attributes of financing today that appear to underpin the elevation in financing activity.
First and foremost, while money is cheap in the current highly competitive financing market, every client pursues the lowest loan or lease rates, though most lease pricing entails more variables and assumptions than loans.
Some clients even acknowledge what is almost universally true: they can make more money using their cash elsewhere for their businesses or investments. Other clients simply prefer using OPM and holding their cash. With the current volatility in the stock market, coronavirus fears, and concerns about the future economy, OPM may, and maybe should, attract even more interest.
Second, with the passage of the Tax Cuts and Jobs Act of 2017, clients almost always ask whether the aircraft qualifies for bonus depreciation. Correspondingly, they assume, often incorrectly, that they can use and qualify to take these substantial tax benefits. What is important here are ways in which leasing still might enable customers to enjoy some of these tax benefits.
How is that possible? Certain lessors can and do use the tax benefits in pricing leases—when setting rents and casualty values—sums lessees must pay the lessor on the occurrence of a total loss of the aircraft. These lessors can, but might not offer to, share the depreciation tax benefits with the lessee, primarily in the form of lower rents and casualty values.
Importantly, the tax benefits might be available not only when the lessor purchases the aircraft directly from the third-party seller and leases the aircraft to the lessee/customer. These tax benefits might also be available when the lessor purchases the seller’s/lessee’s owned aircraft and leases it back to the seller/lessee. The latter strategy allows the seller/lessee to monetize the value of its aircraft while keeping possession and use of the aircraft subject to the new “sale leaseback” arrangement.
In true operating or tax lease transactions, customers get a third benefit. Lessors assume the residual value risk arising out of aircraft ownership and leasing.
Under federal income tax true lease guidelines and other applicable law, an owner/lessor must, among other requirements, retain continuous residual value risk during the lease term of not than 20 percent of the original cost of the aircraft. Residual value refers to the market value of the aircraft at the end of the applicable lease term.
In reality, the residual value assumed usually far exceeds 20 percent due to the inherent value of aircraft, enabling lessors to assume far higher residual values. The customer is entirely free from residual value “downside” losses in value from, or “upside” gain over, assumed residual value in connection with any subsequent sale, lease or other disposition of the customer’s leased aircraft.
THE RIGHT TEAM
Although customers often have relationships with non-aviation professionals, aircraft transactions will almost always progress more easily, efficiently, and at a lower transaction cost with the right aviation team. It is imperative that the transaction team thoroughly understands and adopts a strategy to fully satisfy the customer’s desired participation, attitude towards the financing negotiation and distinguishing between the “must have” an “nice to have” modifications in the documentation.
As a result, every financing transaction is unique, even when a financier provides basically the same “form” of documents to different customers covering similar aircraft. The right transaction team will understand the big issues, nuances, documents, and characteristics of the financier.
Some clients want to negotiate/win every point. Others simply want the best loan or lease rates from financiers that will stay out of their businesses, minimize fast-trigger defaults, not reach for non-aircraft related collateral such as securities accounts, and impose the fewest restrictions on flight operations.
To achieve the best outcome, the transaction team, especially brokers and technical advisors, should ideally participate starting before the hunt for the right aircraft. The customer should engage the other team members before the negotiation of the letter of intent (LOI) or the financing proposal.
For buyers, the key is to allow adequate time for tax planning, aviation regulatory structuring, identification of the best financier for the particular situation and risk management planning, especially in current volatile insurance markets.
Financiers draft the financing documents in their favor even though they expect the provisions to change depending on the relative bargaining, credit, and relationship strength of the customer. True tax lease transactions usually entail more complex and opaque provisions than secured loans, including extensive aircraft maintenance requirements, aircraft return conditions and federal tax indemnification.
For reasons that differ and do not appear to show a discernable pattern, more high and ultra-high net worth customers seem to be gravitating toward financing private aircraft. Perhaps these potential customers, on closer reflection, have concluded that aircraft financing has significant value and, with the right aircraft transaction team, are easier to close than they anticipated.
The content provided above is intended for informational use only and does not constitute legal advice. Each person involved in these transactions should consult his or her aviation team advisors.
David G. Mayer is a partner in the global Aviation Practice Group at Shackelford, Bowen, McKinley & Norton, LLP in Dallas, which handles worldwide private aircraft matters, including regulatory compliance, tax planning, purchases, sales, leasing and financing, risk management, insurance, aircraft operations, hangar leasing, and aircraft renovations. Mayer frequently represents aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, and managers, as well as lessors and lenders. He can be contacted at firstname.lastname@example.org.
This article was originally published by AINonline on March 13, 2020.
ADS-B Compliance: The Potential Consequences Of Violating Rule Airspace see more
NAFA member, Greg Reigel, Partner with Shackelford, Bowen, McKinley & Norton, LLP., discusses ADS-B Compliance and Rule Airspace.
As most aircraft operators know, or should know, aircraft must now be equipped with ADS-B Out in order to fly in most airspace within the U.S. Although it is possible to take advantage of limited waivers or exceptions, generally speaking ADS-B Out is required for operations in “Rule Airspace.”
In connection with this requirement, the FAA recently updated Order 2150.3C – FAA’s Compliance and Enforcement Program to explain potential sanctions for aircraft operations that do not comply with the ADS-B Out mandate. Specifically, Chapter 9 of the Order now identifies the FAA’s sanction policy/guidance for ADS-B related violations.
It is important to understand that the FAA will be taking these violations seriously. For example, if the FAA believes an airman is transmitting inaccurate ADS-B Out or transponder information with the intent to deceive, or is operating an aircraft without an activated transponder or ADS-B Out transmission (except as provided in 14 C.F.R. §91.225(f)) for purposes of evading detection, it will revoke that airman’s certificates.
The sanction for other violations are not as severe, but are nonetheless significant. The FAA characterizes the severity of the violation based upon levels of 1, 2 or 3, with Severity Level 3 being the most serious. And depending upon whether the FAA views the violation as careless or reckless/intentional, the sanction range could vary from low to maximum.
The FAA evaluates violations based upon impact on safety. “Technical Noncompliance” involves violations where serious injury, death, or severe damage could not realistically occur as a result of the violation conduct, even if theoretically possible. A violation with a “Potential Effect on Safety” occurs in a situation where serious injury, death, or severe damage could realistically result, but under the facts and circumstances would not often occur. Finally, a violation falls into the “Likely Effect on Safety” category where serious injury, death, or severe damage may occur more often as a result of the violation conduct.
When the operator fails to comply with ADS-B Out performance or broadcast requirements due to technical noncompliance, the violation is considered Severity Level 1. If the failure to comply with ADS-B Out performance or broadcast requirements has a possible effect on safety then the violation is Severity Level 2. And, not surprisingly, when the failure to comply with ADS-B Out performance or broadcast requirements has a likely effect on safety then it is a Severity Level 3 violation.
The specific sanction will also depend upon the type of violator. If the violation is by an individual certificate holder, the airman will likely be facing suspension of his or her certificates. An individual acting as an airman or a business entity will face a monetary civil penalty. In the case of a business, the amount will vary depending upon the size and revenue of the entity.
So, depending upon the circumstances, an individual certificate holder could face a suspension of his or her certificates for 20 -60 days, 60 -120 days, 90 -150 days, or 150 -270 days, depending upon whether the violation is in the low, medium, high, or maximum range, respectively. Other individuals and businesses could face civil penalties ranging from $100 to $34,174 per violation, depending upon the nature of the violator and how the FAA categorizes the violation.
In the event of multiple violations arising from the same act or omission, the FAA may give special consideration if the violation was careless, as opposed to reckless/intentional violations which receive no special consideration. For an individual certificate holder the suspension could be anywhere from 30 -90 days, 90 -150 days, or 120 -180 days, depending upon whether the violation is Severity Level 1, 2 or 3, respectively. And an individual acting as an airman could be assessed a civil penalty in the amount of $5,000 -$10,000, $7,500 -$15,000, or $10,000 -$20,000, again depending upon whether the violation is Severity Level 1, 2, or 3, respectively.
For other individuals, the civil penalty could range anywhere from $50,000 to $200,000. And business violators could be assessed civil penalties ranging from $50,000 to $600,000 depending upon the nature and size of the business, as well as the Severity Level of the violation.
Order 2150.3C provides the FAA inspectors and attorneys with a checklist for determining sanction in any given case involving an ADS-B violation. Unfortunately, when a case gets to the point where the FAA is determining sanction, the actual calculations and method for arriving at the final assessed civil penalty is usually withheld.
However, it is important to understand that the facts and circumstances involved in any given case have an impact on both how the sanction is calculated as well as the amount of the civil penalty assessed. If you find yourself defending against an alleged violation of Rule Airspace, knowing this information can help you defend yourself and, hopefully, successfully resolve the matter.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP. on February 3, 2020.
The Flight Department Company Trap see more
NAFA member, Greg Reigel, Partner with Shackelford, Bowen, McKinley & Norton, LLP., discusses regulatory issues with owning or operating aircraft.
Businesses and individuals face many regulatory issues in connection with owning or operating an aircraft. Aircraft owners or operators who are unfamiliar with the limitations imposed by the applicable regulations may unnecessarily expose themselves to liability for non-compliance.
For example, aircraft owners or operators commonly attempt to shield their liability by creating some form of business entity that is a subsidiary of the “real” operating company to own the aircraft. Or, rather than forming a subsidiary, they create a business entity to own the aircraft that is solely owned by the individual who really wants to use the aircraft.
In either scenario, the aircraft is the sole substantive asset of the company, and the business entity is used to maintain and fly the aircraft for the benefit of the parent company or individual owner of the business entity. By structuring the ownership and operation of the aircraft in this manner, the aircraft owner and/or operator has just fallen into the “flight department company trap.”
I recently presented a continuing legal education program on this very topic for Lawline. In my presentation, I discussed the various rules and regulations promulgated by the Federal Aviation Administration that have a significant impact on how businesses or individuals are permitted to utilize private aircraft, as well as how to identify the flight department company trap, understand the consequences of creating a flight department company, and available alternatives to avoid falling into the trap and legally conduct private aircraft operations.
If you would like to learn more, you can view a short clip from the CLE here. Otherwise, you can find other posts discussing this topic here on The Pre-Flight Brief or on our Aviation Law Articles page. And, of course, if you have specific questions or would like to discuss this topic further, please feel free to contact me.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP. on October 18, 2019.