2012 Year-end Aircraft Financing

25 Days left in 2012 for customers to buy an aircraft and cash in on the great tax incentives and historically low interest rates this year!  Financing is still readily available for you December buyers out there!2012

As we gear up for a big year-end rush, we know many of you are purchasing before the clock strikes midnight on 2012.  If you are interested in financing that purchase, please see the important dates and recommended deadlines below to ensure a smooth closing before December 31st:

December 14:
Last day for complete credit application submissions for loans above $1 Million to arrange financing before year-end
December 21: Last day for complete credit application submissions for loans below $1 Million to arrange financing before year-end
*Please note: applications can still be submitted/closed after these dates, but meeting year-end goals may be in jeopardy.

December 25: Christmas Day (Closed)
December 31:  New Year’s Eve
(please note many employees at the FAA and Banks leave early both Christmas Eve and New Year’s Eve, making it more difficult to handle a high volume of late closings these days)

Plan ahead as weather can impact the best-laid plans.  Oklahoma City has been known to get weather this time of year, shutting down the FAA and Title Companies.

Since December is the busiest time of year for many of us (including dealers, banks, title companies and the FAA), response and action can become more sluggish the closer it gets to 12/31.  Getting approved asap and working out the details in advance ensures a smoother transaction.  If you are still deciding between a few different options, get pre-approved for a finance amount today, then finalize your plans with the funds in your back pocket.

Don’t hesitate to contact us and get started today at 800.390.4324 as we quickly approach our suggested application deadlines above.  We look forward to hearing from you and helping you ring in 2013 with your new bird!

International Registry and General Aviation Aircraft Purchases

With larger aircraft transactions, there is a higher level of complexity with respect to title preparation and recording a lienholder’s security interest on an additional aircraft registration called the International Registry.  The International Registry (IR) is a  global registration that the United States has adopted, and it is important that you understand if, how, and why you need to register your aircraft before closing. 

In 2006, the Cape Town Treaty went into effect, attempting to standardize transactions involving movable property (aircraft, railway and space equipment); in doing so, the Treaty created laws governing the global registration of Aircraft.  The Treaty, in effect, created a new global registry for larger aircraft (similar to the FAA registry).  In the US, we recognize the IR as an additional place for filing interests on particular airframes and engines.  Interests filed with the IR take priority over any unregistered interests and also takes precedence over any other governing registration (including the FAA).  Please note, in the United States, documents must still be filed with the FAA. 

What type of aircraft equipment must be registered? If an aircraft buyer is located in one of the contracting countries (Over 50 worldwide including the US), and the aircraft fits certain parameters designated by the Treaty, it must register on the IR under Cape Town Treaty.  Aircraft falling within the requirements of the IR are defined below: 

  1. Airplanes certified to transport 8+ people, or goods in excess of 6050 pounds
  2. Helicopters certified to transport 5+ people, or goods in excess of 990 pounds 
  3. Jet aircraft engines with at least 1750 pounds of thrust
  4. Turbine or Piston aircraft engines with at least 550 take-off horsepower.

How do I Register?  If your aircraft or engine fits one of the requirements above, you should contract with a firm that specializes in aircraft registration.  After you file your documents with the FAA, this firm will contact the registry and act on behalf of all parties involved (buyer, seller, lender, etc) to file everyone’s interests appropriately.  Once this is complete, a search will be performed to confirm accurate registration.

How does this pertain to Aircraft Financing?  If an aircraft is financed, the lender has an interest in the equipment (just like a lien with the FAA).  The lender’s interest must be registered with the IR so that in case of default or other unforeseen issue, they are protected not just in the eyes of the FAA, but also in the global governance community.

Additional information on the International Registry, including “Eligible Aircraft” and engines, as well as the countries who have “contracted” the Capetown Treaty may be found through following websites: 

http://www.aerospacereports.com/services/registry

https://www.internationalregistry.aero/irWeb/

Tax Incentives for Aircraft Buyers in 2012

May has arrived, and just when you thought you wouldn’t have to talk about taxes for another 10 months, we bring it up again!  But this time, it’s all about keeping your money! 

In order to help stimulate economic activity, Congress passed tax law for 2012 that makes buying an aircraft very attractive this year.  If you are a business owner with a tax appetite and a need (OK, you really like to get behind the yokes for fun too!) to fly for business purpose, now is a great time to cash in on tax incentives being offered for equipment purchases.

New aircraft purchases (and in some cases, new equipment purchased for used aircraft) in 2012 are included in this category and allowed 50% bonus depreciation.  To take advantage of this allowance, the aircraft must be new, and used mostly for business purpose travel.  Contracts for the purchase of a new aircraft signed during 2012, and delivered during 2013, may also qualify under specific rules for the 50% bonus depreciation. 

Not to worry used aircraft buyers – though you cannot partake in the 50% bonus depreciation, used aircraft (along with new purchases) do qualify for the Section 179 Expensing.  This allows the buyer to write-off up to $139,000 in equipment for the year.  This Section is more specifically targeted for small businesses as it applies only to those that have an annual capital investment cost of less than $699,000. 
*Please contact an Aviation Tax Specialist for more details and to see if you qualify for these Tax Incentives.

Though this has seemed like normal practice in the last few years during the downturn, the tax environment is not always this friendly for aircraft buyers.  Take advantage of these great incentives (along with historically low prices on aircraft and even lower financing rates!) with an aircraft purchase before year-end.

Financing Aircraft Improvements

Historically, active aircraft owners tend to trade-up to a newer aircraft every three years or so.  Today, that trend has shifted and we are seeing owners keep their aircraft longer, likely a result of recent economic conditions and its impact on personal income, net worth and liquidity.  The most economical option for some in today’s market is to keep their current aircraft, and upgrade some of the components.

In conjunction with this, we are often asked the question “Can I finance upgrades on my aircraft?”.  The answer is yes.  If you have decided to keep your aircraft longer than you originally expected, but still want to have the “feel” of the latest and greatest, then an avionics upgrade may be just what the doctor ordered.   It also may be time to overhaul the engine – this is costly, and in most cases we can help with financing the overhaul as well.  Avionics upgrades, engine overhauls, or even airframe upgrades (i.e. speed modifications) – may all enhance your ownership experience without the major undertaking of a new purchase.  More importantly, when you decide to sell your aircraft a few years down the road, these upgrades could help your aircraft stand out in the marketplace.

With respect to the “finance-ability” of improvements and upgrades, there are a few rules of thumb.  In terms of improvements that we consider to add value to the bottom line of an aircraft,  the amount that can be financed will vary depending on the aircraft and upgrade.  In general, we can finance 50% to 80% of the equipment price for the upgrade or overhaul.  Labor costs for new component installation are not included in this rule of thumb, as these costs don’t add value (sometimes book values do include an element of the labor costs in the upgrade).  A lender will often need to get behind the current value of the aircraft, then understand the value-added of the upgrades you are considering.  It is important to know that value-added may be different to the lender, as a lender will often estimate the value a couple years down the road – after the initial “drop” that we typically see in avionics depreciation in the first 1-2 years for example.  To get to the bottom of “how much” of the upgrades may be financed, most lenders will complete a desktop valuation using sources such as Bluebook or VRef.

If you have a loan on your current aircraft, the refinance amount can be included with upgrades and improvements (wrapped into one new loan), but there are some things that are generally not finance-able with respect to airframe upgrades and improvements.  For example, we cannot cover much cost (if any) for paint and interior work, as paint and interior values quickly depreciate over time; and while the bright-pink neon scheme may be attractive to you, it may not be something that appeals to the masses in a re-marketed situation.  Also with paint/interior, while it will look like a new and improved aircraft and could add value in the marketplace when you eventually sell the aircraft – most likely you will not get out the same amount you put into it.  Either way, the lender’s goal is for you to be right-side-up in your loan as it matures, and it’s important to keep this in mind – a lender will look at these values more conservatively than you or the marketplace, so as to ensure they’re not out of compliance on their lending limits for your aircraft.

General maintenance is also something that is not finance-able in most cases.  While an engine overhaul to have a zero-time engine can increase your aircraft’s value significantly, general maintenance (such as an aircraft’s annual inspection) does not add value, it just maintains it to the standard required for a safe, operational/airworthy aircraft.  A lender lends on an assumed airworthy aircraft, and book values assume a certain maintenance standard is kept to maintain airworthiness.  Any general maintenance and upkeep would assume that the aircraft has fallen below this baseline minimum, which likely will put the client in a challenging situation with the lender if standard airworthiness is not maintained (could be a default provision).

If you have decided to keep your aircraft longer than you expected, but want to upgrade from steam gauges to a new glass panel or the latest touch screen GPS, please give us a call (800.390.4324 begin_of_the_skype_highlighting            800.390.4324      end_of_the_skype_highlighting) or request a quote.  We would be happy to discuss your upgrade potential and see how you can enjoy your aircraft –  new and improved!

Aircraft Pre-purchase Inspection Basics – Part 3

Okay, you have selected an aircraft to buy and proceeded into the pre-purchase inspection phase of the transaction.  Depending on the age and condition of the aircraft, you may find yourself on the 2nd or 3rd candidate and pre-buy depending if the earlier inspections revealed any major deal breakers.  Please be advised, you will almost never have an inspection come back without a discrepancy list, so it is best to expect this up front.  Even brand new aircraft have imperfections if you look close enough.  In addition, many mechanics almost see this as a matter of pride to find something wrong, thus the earlier reference to only making “airworthiness discrepancies” the focus of the inspection.  That is not to say that other items are insignificant, but first and foremost you want the aircraft to be safe and ready to fly.  It can be helpful to have a complete list including subjective items, but understand these would not be required under the previously recommended language to be covered by the seller.  However, you might find some room for concession by the seller if the list is excessive.

Back to interpreting the results; as mentioned earlier, you want to stay away from the big deal killers.  Beyond that, some buyers worry if all the compressions are not 80/80.  Please be advised that if the compressions are 80/80, then the mechanic either forgot to open the valve to the cylinder or their gauges need to be re-calibrated.  This is because the cylinders are not designed to make a perfect seal.  What you are looking for here is simply excessive leakage past the valves or rings (or worse) and reasonable consistency between the cylinders.  Trust your mechanics advice because there are several factors exceeding the scope of this article for examining and explaining variations in compression results.

Congratulations!  By this stage you have found an aircraft worthy of buying and it is just a matter of adjusting the final sales price as previously agreed with the seller based on the final findings of the inspection.  You are ready to take ownership of your new bird!  This is the time where you can release funds and complete the sale.  One final thought; keep in mind that aircraft practically take on a life of their own, so even the most detailed inspection may not prevent a completely unexpected “widget” to fail on the aircraft, maybe even the very next day.  Does this mean your mechanic made a mistake or you bought a lemon?  Absolutely not, it is simply par for the course.  Enjoy your new ride!

Aircraft Pre-purchase Inspection Basics, Part 2

[Last month we started a series of blogs on the benefits of a pre-buy inspection, courtesy of Doug Pendleton, our Regional Sales Manager in Atlanta.  Doug is a long-time commercially-rated pilot, A&P mechanic, former FBO owner, has owned numerous aircraft, and had spent nearly a decade in aircraft sales before joining the team at AirFleet.]

You have picked out the plane you intend to buy and are ready to negotiate the pre-purchase inspection.  It’s time to “negotiate”, because this is an important step, and you should know that this step effectively serves the interests of both the buyer and seller.   For example, the buyer wants to establish the aircraft is in sound condition, and the seller wants assurance that his aircraft will not be “held hostage” for an unreasonable length of time by a perceived “nitpicking” examination.

A customary middle ground goes something like this:  “The buyer agrees to cover the cost of the inspection with the seller willing to cover the corrective expense for any airworthiness discrepancies.”   It is also customary for both buyer and seller to have some sort of escape clause if either come to believe the inspection has disclosed problems beyond what either is willing to correct.  This type of agreement can be very simple, or it can become very complex.  The complexity is generally in proportion to the value of the aircraft being inspected, thus the reference to “negotiation” on the terms of the inspection.   The “airworthiness discrepancies” language is suggested because it establishes an objective standard for the inspection.  This helps to eliminate any subjective “nitpicking” which can often lead to disagreement between buyer and seller.

Furthermore, it is generally advisable to have the aircraft inspected by an independent 3rd party and preferably not someone who has been previously maintaining that specific aircraft (and not someone with a vested interest in the sale).  Depending on the location of the aircraft and availability of A&P’s, this may require repositioning the aircraft, which is an expense customarily covered by the buyer.

In addition, it is usually advisable to structure a ”triage”  form of inspection where you look for major deal breakers first then progress deeper into the inspection as the larger concerns are eliminated.  This especially helps to control costs and time invested.   For example, signs of unreported major damage history, excessive corrosion, or lack of A.D. compliance may be something that can be detected quickly with minimum time and expense.

One last tip – it is also helpful if the A&P can be furnished with electronic or PDF copies of the logbooks in advance.   This gives your pre-buy inspector due time to evaluate damage, AD compliance, and routine service before you spend the money transporting people to the site of the physical inspection.  Several potential deal-killers can be discovered just by an educated review of the logs.

In our next segment, we will address how to evaluate the inspection results.

Aircraft Pre-purchase Inspection Basics, Part 1

[This is the first in a series of blogs on the benefits of a pre-buy inspection, courtesy of Doug Pendleton, our Regional Sales Manager in Atlanta.  Doug is a long-time commercially-rated pilot, A&P mechanic, former FBO owner, has owned numerous aircraft, and had spent nearly a decade in aircraft sales before joining the team at AirFleet.]

So what is this thing called a pre-buy and is this something I need to do before committing to buy my airplane?  We are often asked this question and this is the first installment in a series designed to provide an answer.   First of all, we are generally referring to buying used aircraft when discussing a pre-buy, as most new aircraft come with a warranty, but it is not entirely unheard of for a highly discriminating buyer to request a pre-buy even on a new aircraft as well.

First of all, there is no such thing as an official FAA defined “Pre-purchase Inspection”.  Pre-buys are typically subjective to the buyers comfort level in the aircraft so they can have confidence in what they are buying, and a reasonable expectation that their new “pride & joy” is not going to transform into a monster eating them out of house and home.  While some lenders will require a pre-purchase inspection on any used aircraft as a stipulation for the loan approval, the forms they provide for compliance are generally very basic and place little burden on the buyer to accomplish.  However, this level of inspection does not go very far in providing an adequate comfort level for the buyer.   On the other end of the spectrum is the opinion often expressed by IA mechanics that the only meaningful pre-purchase inspection is a full blown annual.  What is a buyer to do?  Who pays for this??

Now that we have established that a pre-buy is highly subjective and mostly for the buyers comfort level in their purchase, our next segment will begin to look at customary buyer and seller responsibilities in negotiating and accomplishing the inspection.

3rd Quarter Buying Advantages

With friends, family, water, BBQs (and hopefully a little bit of flying), we have celebrated the joys of being an American and the official end to summer the past few weekends.  After a rollercoaster 2 years, we are gearing up to see what this fall and the last quarter of 2010 have in store.  But before we get ahead of ourselves, we’d be remiss if we didn’t mention the awesome advantage for buyers with a tax appetite to purchase their aircraft in the 3rd quarter!

1.  Depreciation Incentives for 3rd Quarter Purchases

2.  Continuation of Expanded Section 179 “Expensing”

3.  New Lower Interest Rates

There is a large tax incentive for buyers to purchase and put an aircraft into service on or before September 30th.  Under the MACRS accounting guidelines, purchases before the start of the 4th quarter can maximize asset depreciation 20% in the first year.  For purchases after September 30th, the allowable amount drops to 5% in year 1.  Depending on the price of an aircraft, the difference between purchasing September 30th or October 1st can be very significant.

In addition, the tax incentive package first passed by the Bush Administration that expanded “Expensing” of business assets allows a larger than normal write-off of aircraft under a certain purchase price (also known as Section 179 Expensing).

Don’t just take our word for it.  For more details and to find out if you qualify for these 3rd quarter benefits, please contact an Aviation Tax Advisor.

And lastly – rates are even lower now! Aside from the annual tax advantage of making a purchase before September 30th, our rates also just decreased.  This is a function of the market as well as lenders increased appetite to boost their portfolio before year-end.  It’s a great time to buy!

If customers will be financing their purchase, they need to plan ahead in order to make sure they allow enough time for a smooth transfer of ownership and closing on or before September 30th.  We are requesting complete loan application packages by Monday, September 20th (no later than this week!).

The New Rules of Aircraft Financing – Podcast

With all of the changes in today’s lending environment, it’s time to set the record straight on what’s really happening with aircraft lending.  From changes in down payment, to bank appetite, to financial information required from you, there are plenty of questions that buyers have regarding the financing process today.

Listen to the recorded interview between Lezonne Hertz of AirFleet Capital and Pat Redmond of Suburban Aviation Aircraft Sales to get all of these aircraft loan answers and more: Podcast: New Rules of Aircraft Financing

Aircraft Loan: Calculating Debt-to-Income Ratio

One of the criteria that aircraft lenders use to analyze an applicant’s creditworthiness is their debt to income ratio; “DTI” for short.  We calculate DTI on a monthly basis to line it up with an applicant’s potential monthly aircraft payment.

The equation is pretty simple:

DTI = Total Monthly Credit Expenditures/Gross Monthly Income

The total monthly credit expenditures may include:

–          Mortgages
–          Car payments
–          Student loans
–          Credit card debt
–          Other credit payments – ranging from furniture to boats and any other financed assets.

Things like your utilities, credit cards that are paid off monthly, and other similar living expenses are not included in the debt calculation.

Gross Monthly Income is your gross income per year (income before taxes or anything else is removed) divided by 12.  Today’s aircraft lenders typically use Tax Returns to verify annual income.  In the analysis, interest and depreciation expenses (and other “non-cash expenses”) are added back to get a more accurate picture of true income versus reported income.  However; if you shelter income in ways that we cannot see or add-back from your Tax Returns, it may be difficult to arrive at an accurate cash-flow income picture.  You will also see that lenders are looking to gauge historical income levels, which is generally an average of the past 2-3 years’ income, so they can see if an Applicant’s income is stable, decreasing, or increasing.  Stable income is self-explanatory, but rapid growth in income or significant deterioration in income may warrant more work on the applicants’ part to explain what’s going on and offer insight into future income projections.

Below is an example of how DTI is calculated:

Annual Gross Income = 120,000 = $10,000/month

Mortgage Payment         = $2,000/mo
Car payment                      = $   500/mo
Aircraft payment             = $1,000/mo

Total Monthly Debt = $3,500/month

DTI w/aircraft payment =  $3,500/ $10,000 =  35% DTI

Aircraft lenders generally cap a DTI ratio of around 40 – 45% or less after the aircraft’s monthly payment is included.  Why 40-45%?   Let’s first start with 100% – your total income averaged to a monthly figure.  Out of this, you have a monthly tax obligation.  If you’re buying an airplane, you’re probably in the 25% – 30% tax bracket including both state and federal taxes.   If you remove the total maximum debt-load of 40-45% outlined above, you have 25% to 30% of your income remaining to live off of for regular living expenses like groceries, golfing, entertaining, gas for your car, child care, maintenance of your assets (cars, house), etc.   Additional criteria (ie, credit score, liquidity, etc.) is used when issuing an approval, but in this example, the DTI is acceptable at less than 40%.