Aircraft financiers may not fully appreciate the implications of how, where, when, and by whom an aircraft will be operated post-closing. Because many factors govern aircraft operations, it can be a lot for lenders to anticipate, but understanding and documenting the specifics is critical to protecting themselves from risk, liability, and loss.
In a recent NAFA webinar sponsored by TVPX, attorneys John Copley and Scott McCreary explained the operational requirements and implications that lenders, attorneys and even insurers—all parties in the transaction—need to consider to ensure conformity and enforceability of purchase, finance, and operational agreements.
Here are the critical issues for stakeholders before, during and after closing.
Operations Specifications
Three primary Federal Aviation Regulations (FARs) govern general aviation, namely Part 91, Part 135, and Part 121, and provide key requirements—Operations Specifications, or Ops Specs—for those use cases. The key distinction among them is compensated vs. non-compensated operations.
FAR Part 91 generally covers private, non-commercial operations without compensation. It also provides for some exceptions under Part 91.501, including compensated operations between parent and subsidiary companies, time-sharing agreements (with compensation limited to 2X the fuel cost plus incidentals), interchange and joint ownership agreements. These exceptions typically involve aircraft with a maximum takeoff weight of 12,500+ lbs., although the NBAA small aircraft exemption may apply to smaller aircraft.
FAR Part 135 covers commercial aviation for on-demand air services, such as air charter and air taxi. Part 135 permits on-demand charter operations including traditional single-entity charters, private carriage, and scheduled commuter-style operations on aircraft with 9 seats or less.
FAR Part 121 applies to scheduled airline services and charter using larger aircraft, such as those with more than 20 passengers or greater than 6,000 lbs. payload capacity. These are typically operated by common carriers and carry stricter FAA regulations for equipment, crew training and maintenance.
All aircraft must be registered in compliance with the proper Part and meet the operational requirements, not only at the time of closing and registration but also post-closing and throughout operations. Financiers must know the intended operations, including this in the lending agreement and monitor for compliance.
Ownership and Registration
Aircraft may be registered to U.S. citizens, permanent resident aliens or entities under the Based and Primarily Used (BAPU) standard. A BAPU registration is exclusively for U.S. corporations, based in the US and the aircraft will be primarily operated (60%) within the U.S. For non-U.S. citizens, registration may be made by a voting trust, non-citizen owner trust, or privacy trust.
Special purpose entities (SPEs) formed solely to own aircraft can complicate compliance depending on the intended operation. If the SPE has no business purpose beyond aircraft ownership, it cannot legally operate under Part 91 because it would, by definition, be providing charter services. While there’s nothing wrong with owning an aircraft through an SPE, how the aircraft is operated can raise issues.
Regardless of the ownership structure and registration, financing agreements must include covenants preventing illegal charter operations and ensure the debtor maintains ownership compliance after the sale. That includes validating that the BAPU requirements are met and trust structures remain in place throughout the loan. There is no grace period if qualifications change—registration becomes instantly invalid if the requirements cease to be met, rendering it illegal to operate the aircraft and risking potential FAA penalties, fines or even seizures and insurance invalidation—all of which put the lender at risk.
For aircraft that will be operated under Part 135 as an air taxi or on-demand air carrier, in addition to the FAA Ops Spec certificate, the Department of Transportation requires additional registration under Part 298. These operators must obtain a certificate of public convenience and file insurance documentation with DOT. There are also special considerations for air charter brokers, which must register under DOT Part 295. From a financing perspective, these brokers may control customer relationships and cash flow even if they don't operate the aircraft, and lenders need to ensure DOT-compliant operations.
Lease Agreements
SPE owners may offer the aircraft for lease, but these leases must meet specific compliance rules based on who maintains operational control. Under a dry lease, the SPE/lessor provides only the aircraft with no crew. The lessee assumes operational control of the aircraft, which allows for compliant Part 91 operations.
In a wet lease (like a timeshare or interchange), the lessor provides the aircraft, pilot and crew and maintains operational control. These arrangements must operate under Part 135 or 121 unless they meet specific Part 91 exceptions.
The FAA determines operational control based on multiple factors, many detailed in FAA Circular 91-37B. These include who assigns the crew, fuels the aircraft, initiates the flights, hires the pilots, and maintains and insures the aircraft. The FAA scrutinizes arrangements where one entity provides pilots and another provides the aircraft. What looks like a dry lease could be deemed a wet lease if it’s presented as a transportation service rather than aircraft rental, especially when the same pilots are used across multiple leases. These arrangements aren’t necessarily wrong, but lenders should be aware and ensure that lessors have the agreements appropriately structured to avoid noncompliance.
For aircraft over 12,500 lbs. maximum certificated takeoff weight, lease arrangements are subject to the FAA’s Truth in Leasing requirements under FAR 91.23, which requires specific contract language, FAA flight notifications and other filing compliance.
Lender Protections in Lease Operations
For lenders that rely on rentals or lease covenants in the credit analysis, or if there are third-party leases at play, a lender can perfect its collateral assignment of the lease by recording the lease and assignment with the FAA. In the case of international use of the aircraft subject to the Cape Town Treaty, lenders must also register the lease on the International Registry of Mobile Assets. Lenders may also consider a UCC-1 filing as a failsafe to cover related assets. Where the lender is not the lessor, it’s important to verify that the debtor follows through with these assignments.
Most lenders also now obtain powers of attorney from lessees in order to terminate leases if necessary, in the event of a default, repossession, or transfer, and require standstill and even if the lender isn't primarily responsible for operational compliance, they may be negatively affected by non-compliance. The consequences can be severe, including:
- Aircraft grounding by the FAA, affecting asset value
- Complications in the event of default and repossession
- Invalidated insurance coverage
- Potential negligence per se allegations in the event an illegal operation
- FAA enforcement actions that may impact the aircraft's value
Due Diligence and Compliance Safeguards
Financing agreements require thorough due diligence and specific contractual protections to ensure regulatory compliance and protect lender interests. Key due diligence steps include:
- Verifying the aircraft’s eligibility for intended operations via certificate review
- Confirming the borrower’s understanding of operational limitations
- Examining ownership structures for compliance issues
- Reviewing any existing lease arrangements for proper structure
- For Part 135 (charter) operations, validating operator certificates and operations specifications
- Investigating any past or intended international operations to ensure compliance with export/import, foreign and customs requirements
- Validating the lender’s enforcement capabilities internationally
To further protect their interests, lenders may include specific language that clearly defines permitted operational categories, compensation or hire parameters that align with FAA rules, requirements for maintaining valid registration, lease arrangement permissions and limitations, and requirements for maintaining airworthiness.
Post-closing monitoring is equally important, enabling lenders to verify continued registration, operational compliance, licensing and insurance coverage and adherence to lease parameters and requirements.
Understanding the particulars of aircraft operation before and after closing is essential for lenders to protect their interests. Through a combination of due diligence, contract clarity and post-closing monitoring, lenders can ensure a smooth transaction, ongoing compliance and a great relationship with borrowers.
This article was published by NAFA on May 13, 2025.