No one should buy a used aircraft on the fly. But that does not mean the parties cannot, or should not, move quickly and efficiently to close a purchase. Some prospective purchasers treat buying an aircraft as if it is just like acquiring real estate, a car, or a boat. However, those purchases do not trigger similar complex and intersecting regulatory, liability, tax, risk management, financing/leasing, and technical equipment issues.
Sometimes trying to pace or schedule an aircraft purchase from any point in the deal continuum to closing seems more aspirational than practical. After more than four decades of practicing law, it seems no deal is the same; no deal is “simple;” and few purchases occur without external factors complicating decisions such as the U.S. presidential election, turbulent geopolitics, and economic conditions. How, then, does a purchaser start this buying journey, and what should the purchaser expect to happen?
Transaction Teams
First and foremost, a potential purchaser should hire an aircraft broker with aircraft market knowledge, strong business aviation industry relationships, team-oriented negotiating skills, and economic analysis capability. Some technical consultants also function well as brokers. Such brokers know and, in real-time, can apply to purchase decisions such factors as increasing aircraft inventories, constraints on pilot availability and high compensation, declining interest rates, and fluctuating prices in different aircraft makes and models.
Second—or first to help assess team members—a purchaser should select an aviation lawyer with deep aviation legal knowledge and deal experience, wide industry contacts, and a sense of urgency aligned with the client’s objectives.
Third, the lawyer and broker can and should recommend other appropriate aviation resources, including aviation insurance brokers, tax accountants, technical consultants, FAA counsel, and escrow and trust companies. These people, acting concurrently with the lawyer and broker, can help pick up the pace, facilitate a smooth closing, and enhance the quality of services to the parties.
Aviation professionals understand how to work rapidly, interactively, and responsively in tight coordination with their seller and purchaser clients while avoiding mistakes like those I previously identified (see “AINsight: 7 Avoidable Mistakes in Acquiring a Bizjet”).
Unfortunately, in my experience, some purchasers seem reluctant or decline to incur the expense for these resources, even in large aircraft purchases. They believe their inside counsel or other non-aviation lawyer alone can manage the process and aviation issues. Through no fault of those lawyers, the choice may result in significant mistakes such as operating the aircraft in violation of the Federal Aviation Regulations (FARs), incurring sales tax, structuring to limit personal liability, and reducing federal income tax benefits.
Aircraft Analytics and Search
Before searching for the right aircraft, the broker should analyze the purchaser’s “mission”—the purchaser’s expected and potential aircraft use. Importantly, the purchaser must understand the projected costs of owning, operating, and maintaining each aircraft. After that, the broker can search for an aircraft that fulfills most missions. One aircraft may not serve all missions. For example, a purchaser may not need or want to incur the cost of buying or maintaining a large jet for the most likely trips to fly alone for one hour in Texas. The fastest pace is for naught if the purchaser buys the wrong aircraft, which happens.
Structuring and Documentation
Once the purchaser focuses on an aircraft type or actual target aircraft, if not sooner, the aviation lawyer should develop an ownership, operation, and management structure with and for the purchaser. Structuring a deal is like solving a puzzle into which the lawyer fits conflicting and intersecting pieces until completing an integrated picture. For example, the IRS and FAA disregard each other, necessitating tax and regulatory structuring to align their functions. Other structuring considers issues like personal liability, privacy, aircraft management, leasing, regulatory compliance, and financing.
When the broker finds, and the purchaser decides to offer to buy, a particular aircraft, it is highly preferable that the lawyer and broker, in coordination with the purchaser, negotiate and draft a non-binding letter of intent (LOI). The LOI establishes the material terms of the purchase that an aircraft purchase agreement (APA) expands and memorializes.
Although bypassing the LOI to negotiate the APA immediately may seem efficient, the parties may inadvertently engage the reverse thrusters if the parties bog down in the details without first agreeing on the big points. The LOI and APA drive the pace of the transaction by setting deadlines like aircraft technical acceptance and delivery dates. The purchaser and seller negotiate the timing and, despite possible delays, typically push to close promptly.
Pacing Priorities and Sequencing
Ideally, before a purchaser signs an LOI, the purchaser will make the binary decision whether to proceed with the deal based in part on initial evaluation of the following important points:
Tax Depreciation. Some purchasers make the buy/no buy decision based solely on whether they can claim 60% bonus depreciation (for 2024). However, purchasers should assess the aircraft’s mission value and then determine whether the assumed tax benefits will adequately support the purchase. I often ask purchasers whether they would buy an aircraft without bonus depreciation; some say “no.”
Pre-Purchase Inspection. Obtaining a PPI slot may be the most time-sensitive task in a purchase due to the limited capacity of inspection facilities and/or qualified technicians. Also, supply chain issues still plague the ability of inspection facilities to find parts to complete repairs quickly to return the aircraft to service for closing. As a result, the broker or aircraft management company should search for and, as soon as feasible, schedule an inspection facility within or outside the U.S. that conducts the required PPI.
Insurance. The lack of satisfactory coverage may be a showstopper. At a high level, purchasers will encounter multiple insurance variables: the availability, scope, limits, and cost of coverage. To evaluate these factors correctly, the purchaser can benefit by consulting an aviation insurance specialist before signing the LOI or APA to find and be ready to bind the coverage.
Management companies may replace the insurance market search by offering quality fleet insurance coverage to the purchaser. As a pacing tip, financiers typically need extra time before the closing to ensure their certificate or evidence of insurance for the aircraft is in an acceptable form.
Financing. Purchasers/borrowers should not be surprised that financing takes roughly two to six weeks to close after signing an APA. In reality, the timing is unpredictable for lenders to complete their due diligence, appraisal, credit approval, regulatory compliance, negotiation, PPI review, and documentation.
The purchaser’s financing may pace faster if an established relationship exists between the purchaser and the financier or between negotiators. However, most lenders require thorough documentation that a purchaser must provide to, and/or negotiate with, the lender as quickly as possible to maintain a rapid closing pace.
Aircraft Management. Aircraft managers span three broad categories: a third-party manager supporting a purchaser’s FAR Part 91 operations, a third-party manager under FAR Part 91 with chartering capabilities under FAR Part 135, and the purchaser’s flight department operating under FAR Part 91. Each organization can arrange flight crew, flight scheduling, maintenance, and other services.
Although some purchasers wait until late in the purchase process to interview outside management organizations, a purchaser should at least interview and perhaps sign a non-binding letter of intent, and select a management company before or shortly after signing the APA (for more, see “AINsight: Managing to Fly”). By doing so, the management company can quickly rev up its efforts to find the right crew and participate in the PPI to ensure the aircraft’s capability to conduct its missions for the purchaser.
Summarizing on Pace
Aviation buy/sell teams sometimes feel pacing to a closing is tantamount to racing to a deadline, often dictated by an APA and motivated by the parties’ lofty expectations or flight schedule. When a purchaser experiences the buy/sell teams’ concurrent and sequential efforts to sell/buy an aircraft, they often tell me the purchase transaction and issues are more complicated than expected.
Even purchasers skeptical of incurring fees for aviation experts conclude that such an effort merits their transaction cost. And the proof for the purchaser will ultimately become clear when the purchaser sees its aircraft sitting on the ramp ready for takeoff on or before the aircraft’s expected delivery date.
The material in this blog is not intended to be, nor should it be construed or relied upon as, legal advice. The comments, recommendations, and analysis expressed in this blog are those of the individual author, David G. Mayer, and they may not reflect the opinions of AIN Media Group. Your use of this blog does not create an attorney-client relationship between you and the author or his law firm. If specific legal information is needed, please retain and consult with an attorney of your selection.