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Financing Questions
By: Joe Boles, Wachovia Equipment Finance
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:
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Ownership
structure |
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» 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?
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Guarantor
structure |
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» What individual or company will
provide the financial strength for this transaction?
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Aircraft
utilization |
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» Will the aircraft be operated
according to FAR Part 91, (corporate) or 135, (charter)? |
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» How many hours of annual use do you
expect? |
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» Will you utilize an internal flight
dept. or an aircraft management company? |
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» Will you lease or charter the
aircraft to related and/or unrelated parties?
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Like-Kind-Exchange (LKE) |
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» If you're a
current aircraft owner, do you qualify for and desire an
IRS Section 1031 LKE or reverse LKE?
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Financing/Lease Preferences |
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Do you have specific
preferences on the following: |
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▪ Down payment or security deposit amount? |
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Re-payment amount? |
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Re-payment schedule (i.e. monthly, quarterly, etc.)?
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Sales/Use
Tax |
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▪
Which finance
product (i.e. tax or non-tax) will best minimize your
sales/use tax liability? |
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▪
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.)
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Tax
Depreciation |
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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.]
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Timing |
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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.
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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:
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:
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Whether or
not the lease offers a specific early termination option
at that point in time,
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Fair Market
Value (FMV) of the aircraft relative to the Termination
Value (TV) of the lease at that point, and
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Whether or
not an aircraft upgrade or replacement is fostering the
early lease termination (which is often the case).
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Answers to the above factors
will more specifically define the final early termination
process. However, the following two processes are the most
typical:
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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.
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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.
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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:
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Floating
with changes in LIBOR every 30, 60, or 90 days,
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Floating
with changes in the Prime Rate or Commercial Paper,
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Fixed
annually,
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Fixed for a
pre-determined time (5 years for example) and then
re-set.
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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 you 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 agents like JMCJSI. That
builds comfort in the minds of aircraft lenders because we know
agents counsel buyers appropriately in regards to adequate
pre-purchase due diligence. Therefore, lenders typically follow
the results of the pre-buy inspections already planned amongst
the buyer and her/his agent. The results of that pre-buy will be
contemplated in the final aircraft appraisal completed prior to
final funding.
Wachovia Equipment
Finance, with a portfolio of more than $19 billion, is the 2nd
largest bank-owned equipment finance provider in the United
States. As a top provider of aircraft loans and leases to
clients seeking a turboprop or business jet, we provide aircraft
acquisition, operation and finance. By successfully leveraging
the power of our franchise and delivering the best financing
solutions for our clients, we have earned stellar industry
recognition. In the 2007 Monitor 100 report, we were ranked in
the Top 5 for dollar increases in volume and dollar increases in
assets. Our national network of experienced equipment finance
professionals provides our clients with innovative products,
responsive service and creative financing solutions. We can
provide both tax and non-tax oriented structures to meet the
unique needs of our aircraft finance clients. Please feel free
to contact the following individual at Wachovia Equipment
Finance.
Aviation
Finance:
Joe Boles (817) 252-5322
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