Looking at purchasing an aircraft or helicopter? Asking the correct financing questions is vital to getting this acquisition element done right the first time.
1. As a first time buyer begins to build his or her strategy for funding an aircraft acquisition, what key questions should they be asking with respect to financing?
Your ultimate financing method is a well-planned, strategic approach to the aviation finance markets having considered factors such as the following:
Ownership structure
- Do you desire to structure aircraft ownership in the name of an operating corporation, a corporate subsidiary, an individual’s name, or a special purpose LLC?
Guarantor structure
- What individual or company will provide the financial strength for this transaction?
Aircraft utilization
- Will the aircraft be operated according to FAR Part 91, (corporate) or 135, (charter)?
- How many hours of annual use do you expect?
- Will you utilize an internal flight dept. or an aircraft management company?
- Will you lease or charter the aircraft to related and/or unrelated parties?
Like-Kind-Exchange (LKE)
- If you’re a current aircraft owner, do you qualify for and desire an IRS Section 1031 LKE or reverse LKE?
Financing/Lease Preferences
Do you have specific preferences on the following:
- Down payment or security deposit amount?
- Re-payment amount?
- Re-payment schedule (i.e. monthly, quarterly, etc.)?
Sales/Use Tax
- Which finance product (i.e. tax or non-tax) will best minimize your sales/use tax liability?
- Have you adequately researched and planned for the sales/use taxes that apply to this acquisition? (Note: The aircraft’s registration address is not necessarily the only tax venue that needs to be considered.)
Tax Depreciation
- Can the owner/operator effectively utilize tax depreciation on this asset now and in the future? [Note: Be sure to determine whether or not the taxpayer taking tax depreciation on this asset will be subject to Alternative Minimum Tax (AMT) now or in the future.]
Timing
- Do you and your lender have adequate time to prepare for the closing considering factors such as pre-purchase due diligence, title searches, background searches, legal documentation including Cape town registration.
All of the above factors should be analyzed to best define your most beneficial financing method. Therefore, your best solution will involve insight from your whole acquisition team including your lawyer, accountant, tax advisor, aircraft acquisition consultant, and flight department (as applicable).
2. Are there any suggestions that can be given to a perspective buyer with respect to choice of lender?
Selecting a relationship lender who is knowledgeable about corporate aircraft will always benefit an aircraft buyer. Lenders with strong aviation experience and market presence are more likely to tender attractive terms and provide a smooth proposal, underwriting, closing, and post-closing process.
Aircraft operate throughout the world in the third dimension (i.e. airspace), and the FAA (or its foreign counterpart) governs their operations. The IRS also often has say on many important economic matters surrounding your aircraft operations. If your lender is not comfortable or experienced in the ubiquities these variables produce, you are likely to be frustrated by their product, expertise, timing, and services.
Within the aviation community, there are reputable bank and non-bank aviation finance institutions that each serves a particular client and/or aircraft niche. Your aviation specialist is well informed on the various strengths of each financier, and will be able to direct you to reputable aircraft finance organizations.
3. What are the benefits to a lease structure rather than a straight purchase instrument? Highlights of true operating lease benefits can be summarized as follows:
A Lessor takes tax depreciation, and this benefit is passed along to a Lessee via low payments and lower implicit interest rates,
- In most states, sales tax is paid over the stream of the low monthly payments in lieu of the up-front acquisition cost yielding a much lower sales tax liability,
- Custom leasing will provide flexibility for upgrade and/or early buyout options,
- True operating leases qualify for off balance sheet accounting treatment providing shareholder sensitivity benefits,
- Leases provide 100% financing in most cases,
- Experienced corporate aircraft Lessors take aggressive residuals that yield residual value protection to a Lessee. This specific benefit has proven to be of significant value to Lessees over past years with diminishing aircraft values.
There are other types of leases such as a synthetic or capital lease. These products have very different features from the true operating lease described above, so please confer with your accounting or finance advisor to fully understand each lease product.
4. As a lender, are there areas or categories of planes that are more attractive and thereby have more favorable rates and terms?
New and pre-owned fixed wing and rotor wing turbine powered aircraft produced by major aircraft manufacturers will typically garner the most attractive rates, terms, residuals, and/or amortizations. These are also the same aircraft that will typically provide owners the best safety features, strong value retention, and low operating costs.
Today’s pre-owned turbine aircraft marketplace offers many unique acquisition price opportunities on very respectable aircraft. Knowledgeable, experienced lenders recognize this, and your finance or lease product should be especially favorable on younger, high caliber, RVSM compliant turbine aircraft that are being acquired at a value price.
5. How does the age of the aircraft impact financing considerations of the lender?
Because there are more and more operational and re-sale concerns related to aging turbine aircraft, lenders tend to favor younger aircraft. “Young” is most definitely a relative term that will vary from lender to lender. The NBAA states that the average age of the corporate aircraft fleet is 16 years old, so typically lenders will provide more reasonable rates, advance amounts, terms, residuals, and payments on aircraft younger than 18 years old.
The other issue facing some older aircraft is whether or not they comply with Stage III engine noise level requirements. Older Stage II aircraft (Gulfstream II/III, Lear 20-series, older Hawkers, for example) will continually be viewed more conservatively by any lender due to the operational limitations that select destinations continue to enforce against flight operations with Stage I and II aircraft.
6. What is the appetite of the lending community to finance modifications or regulatory compliance items after the initial funding?
Any aircraft knowledgeable lender will have an appetite for financing after-purchase modifications such as new paint, new interior, engine overhauls, and material avionics or cabin amenity upgrades. The advance amount and payment amortization will vary with the scope of the modifications, so discuss your specific project with an aircraft lender who will recognize adequate value on the enhancements you desire to finance.
7. If the buyer decides on a lease strategy, how does the early termination process typically work?
The early lease termination process must involve the cooperation of your Lessor to determine the following:
- Whether or not the lease offers a specific early termination option at that point in time,
- Fair Market Value (FMV) of the aircraft relative to the Termination Value (TV) of the lease at that point, and
- Whether or not an aircraft upgrade or replacement is fostering the early lease termination (which is often the case).
Answers to the above factors will more specifically define the final early termination process. However, the following two processes are the most typical:
- Lessee returns the aircraft to Lessor with fresh inspections, and Lessor takes responsibility for disposition of the aircraft via re-lease or re-sale. This process is typically used when the aircraft’s FMV is close to, or in excess of the lease TV. Should the FMV be less than the lease TV, Lessee will likely have to make Lessor whole with a lump sum cash payment when the aircraft is returned.
- Lessee gets permission from the Lessor to market the aircraft for sale, and Lessor agrees to facilitate the sale documentation and closing process. This process is typically used when the Lessee is upgrading aircraft with the same Lessor.
The most important point to remember on this matter is to select an aircraft lessor who can demonstrate a successful history of assisting clients with creative early lease termination solutions. Those lessors who have successfully managed corporate aviation assets over the last 5-10 years and are not burdened with multiple non-performing corporate aircraft assets will be your most creative, aggressive, and helpful lessor.
8. What is the typical financing term for aircraft?
A typical loan term is 5-7 years, but the payments will usually amortize over a much longer schedule such as 10-20 years. This loan structure is done on a mortgage style note with an end of term balloon payment that will yield a comfortable payment amortization.
A typical lease term is 7-10 years, and a sophisticated corporate aircraft lessor will be able to customize early upgrade and/or buyout provisions consistent with your thoughts, preferences, and/or aircraft upgrade plans.
9. Does the term of the financing depend on the size of the aircraft?
A lender’s resources and costs required to finance a small aircraft and a large aircraft are virtually the same. Therefore, large aircraft should garner more favorable rates as a lender has the opportunity to recoup its costs over a larger dollar volume borrowed. Generally, however, the other provisions of the financing (i.e. advance amount, note term, amortization, etc.) will be somewhat consistent amongst small and large aircraft.
10. Are both fixed and floating rates available for aircraft purchases?
Both floating and fixed rates are available, and often times there are hybrid rate structures also offered. Examples of alternative rate structures are as follows:
- Floating with changes in LIBOR every 30, 60, or 90 days,
- Floating with changes in the Prime Rate or Commercial Paper,
- Fixed annually,
- Fixed for a pre-determined time (5 years for example) and then re-set.
The best interest rate structure for you should be determined on the interest rate climate at your time of closing, and how long you plan to own/lease the aircraft. Your aviation lender should be able to offer insight on the interest rate structure best suited to your specific transaction.
11. How involved is the lender in the initial pre-buy inspection of the aircraft?
Most aircraft buyers today are represented by reputable acquisition teams like Premier Jet Aviation. That builds comfort in the minds of aircraft lenders because we know these professionals have counseled buyers appropriately in regards to adequate pre-purchase due diligence and structured a good aircraft purchase agreement. Therefore, lenders typically follow the results of the pre-buy inspections already planned amongst the buyer and her/his team. The results of that pre-buy will be contemplated in the final aircraft appraisal completed prior to final funding.