AINsight: Why Refinancing Your Aircraft Pays Off

A subtle shift toward refinancing business aircraft appears to be underway. Although an estimated 70% of aircraft buyers pay cash, these figures do not reflect financing trends I have noticed in loan and lease activity since 2025 amid robust demand for business aircraft. Perhaps this preference for paying cash is softening as buyers conclude that it results in lost financial opportunities, a counterproductive allocation of capital, and a diminution in accumulated wealth.

Two Categories of Refinancing  

At a high level, aircraft refinancings fall into two broad categories: secured loans and sale-leasebacks. A refinancing here refers to a loan or lease (financing) completed after the aircraft purchase date. 

In a secured loan, a lender disburses funds to an owner/borrower in one or more advances, including new aircraft progress payments. The lender secures repayment by obtaining a security interest in the purchase agreement, the aircraft and related assets under a security agreement/ mortgage.

A true sale-leaseback occurs when an owner sells the aircraft to a buyer/lessor at 100 percent of the agreed-upon sale or market value and then leases it back to the selling owner. A lease of a business aircraft under the Uniform Commercial Code (UCC) generally means a transfer by a lessor to a lessee of the right to possess and use the aircraft for a term in return for consideration, such as hourly, fixed, or variable rents. Lessors also fund progress payments and convert them into a lease.

The Case for Refinancing an Aircraft

Depending on the owner’s unique situation, refinancing an aircraft generally enables the owner to monetize equity, minimize opportunity costs, and realize other economic and strategic benefits. 

When to refinance. Lenders and lessors can provide refinancing when owners plan, for various objectives, to extract cash from a debt-free aircraft—either after a cash purchase or by replacing existing financing to reduce rates or improve terms—to substitute borrower parties, including guarantors, that might occur in corporate restructuring, or to raise cash for a rainy day or other business purposes.

Opportunity cost of failing to refinance. Perhaps the notion of an opportunity cost (OC) should be called an opportunity lost. Opportunity cost is the most compelling and obvious factor buyers should consider when purchasing an aircraft with cash (equity) rather than financing or refinancing. 

It seems counterintuitive for a buyer to pay cash when the aircraft's price is a material sum and can yield a substantial return that offsets or exceeds the buyer’s financing costs. Maybe these buyers pay cash simply “because they can,” even though they know or should know that cash is not trash and has calculable value. Perhaps these buyers accept the opportunity cost as the price of accelerating the purchase, bypassing the selection of a lender or lessor (financier), avoiding refinancing negotiations, and eliminating refinancing documentation. For these and other reasons, a cash purchase may make sense for some buyers, depending on the buyer's specific circumstances.

Calculation of opportunity cost. Opportunity cost here refers to the value of an alternative use of your cash rather than deploying it to buy an aircraft. Expressed formulaically: FO-CO = OC, where FO is the forgone economic option (holding cash), and CO is the chosen option (buying an aircraft with cash). By using other people’s money (OPM), you free up cash to use when appropriate.

One of my recent transactions illustrates a few of these points. An ultra-high-net-worth client purchased a new large-cabin jet for $70 million in cash and, within about 10 days thereafter, closed a $50 million aircraft loan, leaving $20 million of equity in the aircraft. By doing so, the client gained more time to negotiate satisfactory loan terms—avoiding the rush to close and making concessions to do so—and reserved the $50 million in loan proceeds to fund a real estate project expected to yield a 14% return. 

Although calculations, costs, taxes, assumptions and refinancing structures differ, these examples roughly depict the potential financial impact, as you will note in the real deal above. Assume you borrow $50 million of the $70 million aircraft purchase price with a five-year, non-amortizing loan (interest-only/100 percent balloon payment) at 6% interest, instead of buying the aircraft in cash. You would pay $15 million in interest over five years. If you paid all cash, your $50 million of capital would be tied up in a depreciating asset, earning nothing. You might view that cash as declining in value as the aircraft depreciates. Why do that if you can productively use your cash?

Instead, suppose you refinance and invest the $50 million in a private real estate fund yielding a 14% return (an 8% spread over the 6% debt rate). Your investment should net approximately $20 million. This $20 million is a significant OC you incur to pay cash for an aircraft. A more complex analysis applies to sale-leasebacks, which involve pricing, cash flow, and yield components, along with critical residual-value assumptions. 

In contrast, a lower purchase price may change your cash-versus-financing calculus. Assume the same structure as the client deal, but pay cash at closing for a used aircraft priced at $7 million. Thereafter, you refinance with a $5 million loan, leaving $2 million in equity. In this case, your investment would net approximately $2 million ($3.5 million earned on the investment minus $1.5 million in interest). Even these lower figures underscore the importance of OC and should continue to test your appetite for paying cash.

The point is not to avoid cash purchases in all cases, but to analyze your capital allocation and cash earnings potential before you deploy all or part of your cash to buy an aircraft. Simplistically, the higher you leverage your purchase, the more capital you can invest to earn, thereby reducing or even surpassing the cost of your financing. Consider refinancing as a wealth booster rather than a deflator.

Balance sheet optimization. An all-cash aircraft purchase concentrates capital in an illiquid asset that, like cash, appears on your balance sheet along with almost all leases and loans. Available cash can provide your business with funding flexibility and play a key role in managing cash allocations. 

Tax efficiency. Generally, for a business-use-only aircraft, as a lessee under a true lease, you should be entitled to deduct rent, and as a borrower, you should be entitled to deduct interest on the debt. In a true lease, the lessor takes the depreciation, whereas in a loan, you take it. In either case, you should consult your tax advisors to structure the most tax-efficient and favorable refinancing product based on your unique facts and applicable law, especially given 100% bonus depreciation.

Debunking Refinancing Myths

Myth number 1: Financing is overly complex and not worth the effort. Some buyers tell me they prefer to avoid the “brain damage” of negotiating, documenting, and closing a refinancing, as well as responding to a financier’s credit data and due diligence requests. But let’s put the refinancing in perspective. Although you need to respond to these requests and work through a few complex aircraft refinancing documents, you have participated in different sophisticated financial and other transactions that you will likely conclude were more challenging than your aircraft refinancing.  

Myth number 2: Financiers will interfere with my flight operations, privacy, and business. Closing your refinancing is not the end but the start of a relationship with the financier. If you make your payments on time, properly maintain and insure the aircraft, and never surprise the financier with bad news, your financier is likely to leave you alone to enjoy your aircraft, checking in only occasionally. 

Don’t Go It Alone: The Deal Team 

As you can see, aircraft purchases and financing involve multiple intersecting economic, regulatory, technical, risk-management, tax, and other issues. To ensure a smooth process, you should first select a qualified aircraft broker and an aviation lawyer (with experience in a range of financing types) who will help you build a team of experts to assist with all aspects of the purchase and refinancing.  

Last Observation

Whether to pay cash for an aircraft or finance/refinance it is primarily a capital-allocation and wealth-management decision, especially when you focus on the opportunity cost of buying an aircraft with cash. Although a financing transaction takes some effort to complete, selecting the right financier and using a seasoned aviation transaction team can make the aircraft refinancing process smoother and more understandable than you may think. Perhaps the apparent cultural or emotional appeal of paying cash for your aircraft will yield to the financial realities that show boosting aircraft financing benefits all parties.