Considerations for companies buying a private jet
Is your company considering buying a private jet for Executive travel?
Identifying the steps involved with acquiring and using a business aircraft will reduce the likelihood of surprises and lead to a more successful experience with Business Aviation, notes attorney Chris Younger.
Here are his tips to planning and executing a successful purchase.
A Board of Directors evaluating the purchase of a business aircraft must consider a multitude of issues in conjunction with the aircraft acquisition process. Many of these items require long lead times to complete.
Tax planning, conducted in advance of the closing, is essential to minimizing the effective costs of aircraft ownership and operations. Similarly, aircraft financing transactions, which often have the longest lead times of all the components in aircraft transactions, need to be planned and commenced in the earliest stages of the aircraft acquisition process. Finally, operational considerations, such as whether the aircraft will be managed in-house or by an external management company, must be addressed in an orderly fashion.
Board Members must ‘run the traps’ (or insist that their advisors do their homework) early to ensure that all necessary issues are spotted and addressed prior to the company making a commitment to acquire. It makes sense to approach the process by utilizing the concept of a business aircraft acquisition ‘checklist’ that includes the following…
1. Business aviation experts.
The Board should first and foremost assemble and retain an experienced team to address the acquisition. Experts knowledgeable in brokering, taxes and technical subjects related to business aviation are essential. Be advised that business aviation has unique requirements, thus the team the company used to acquire land for a new factory is not the best choice for advising on aircraft acquisition.
In addition, the Board may need to retain other specialists, such as a customs broker, depending on the nature of the transaction and the specific aircraft to be acquired.
By hiring an experienced aviation team, the Board will receive the best advice regarding selecting the aircraft make/model that fits the company’s mission profile; identifying the pool of target private jets available; narrowing the list to those private jets that are most appealing based on technical specifications, layout, price, maintenance history and cosmetic appearance; and spotting potential legal and tax issues that may exist depending on where the private jet is currently located, where it will be based, and how it will be owned and operated.
The Board and its aviation team will need to decide if the aircraft will be managed “in-house” or by an external management company, and whether it will be available for lease to a charter operator to offset aircraft ownership and operating costs.
If the Board and its aviation team decide that the company will hire an outside third party to manage the aircraft or allow a charter operator to lease the aircraft, much focus will shift to selecting the appropriate service providers since they will have a significant impact on a successful outcome. Thus it is best for the Board to decide in advance how the aircraft will be managed and the flight department structured.
If the aircraft will be added to a charter operator’s air carrier operating certificate to be flown using an AOC or FAA FAR Part 135 commercial operations, it is also ideal to involve the management company in the aircraft inspection process for the purpose of identifying all equipment requirements, and to confirm that the aircraft meets all requirements for its operation under the AOC requirements (FAR Part 135 in the case of the FAA).
3. Structuring & Tax Planning.
The structuring of the company’s use of Business Aviation should be determined prior to the acquisition of the aircraft to ensure that all open items are addressed in connection with making an offer on a specific aircraft.
The Board must access relevant sales tax, federal excise tax and income tax issues as well as FAA regulatory considerations. Furthermore, certain tax planning opportunities, particularly relating to sales tax, should be explored. Implementing the recommended tax planning may take considerable time due to the potential need to form a new entity to acquire the aircraft and to procure applicable tax-related registrations for the purchasing entity.
4. Aircraft Financing.
If the company plans to finance the aircraft’s purchase, the Board should immediately engage in the process of soliciting loan proposals and identifying a preferred lender. The process of negotiating the loan terms is often an arduous and time-consuming exercise. While most lenders generally request specific information on the aircraft to be acquired, they are typically able to provide general financing terms in advance if certain specific private jet parameters are provided (such as model year, price range and aircraft type).
A lender will also be able to commence the lender’s due diligence process regarding the borrower and credit committee approval of the loan prior to the identification of a specific aircraft. If the Board is in a position to purchase the aircraft without financing, it may be useful to negotiate the terms of the loan during the time that the aircraft is in its pre-purchase inspection but fund the loan after the aircraft is acquired.
This will allow the Board to focus on the key elements of each stage of the aircraft acquisition process. It also provides the lender greater comfort regarding the status of the collateral securing the loan, which often allows the lending process to proceed more smoothly. However, there is a drawback to this approach since the incentive to finalize the financing may not be as strong on either side of the table once the private jet is purchased.
5. Proposal, Negotiations and Documentation.
When a suitable aircraft has been identified, the Board should engage its aviation counsel to prepare an offer letter, carefully drafted and negotiated to protect the company. Although the terms of an offer letter are usually not legally binding, it nonetheless commits the parties to the transaction and helps to avoid ambiguity regarding important business points.
Furthermore, it helps to prevent the aircraft seller from “sandbagging” the buyer by presenting issues in the purchase and sale agreement that were not considered by the Board when it made the offer to purchase a particular aircraft. Once the offer letter is executed, typically the buyer’s counsel prepares the aircraft purchase agreement setting forth the commercial terms of the purchase and sale transaction. This document:
• Expands upon the offer letter provisions,
• Clearly defines circumstances where the deposit becomes non-refundable,
• States the obligations of the seller regarding the delivery condition of the private jet,
• Describes the inspection scope and procedure,
• Provides for conditions upon which each party is obligated to perform in proceeding to closing, and
• Sets forth detailed closing procedures.
The purchase agreement also governs the resolution of disputes and the rights and remedies of the parties. The typical time frame to negotiate the purchase agreement is two weeks, although in an import or export transaction this timeline may be lengthened substantially.
6. Aircraft and Seller Due Diligence.
As soon as an aircraft purchase agreement has been negotiated and signed, the Board must engage with the company’s team of aviation experts to conduct its due diligence of the aircraft, aircraft documents and the aircraft seller. This process typically includes the completion of a pre-purchase inspection of the aircraft and the aircraft documents.
The scope of the pre-purchase inspection is typically outlined in the purchase and sale documentation, and the inspection facility is chosen as part of the process of negotiating purchase and sale documentation. The inspection timetable typically is from one to four weeks, depending on the age and condition of the aircraft, the level of inspection to be performed, and the discrepancies discovered during the course of the inspection.
Once the pre-purchase inspection begins, the Board should have its technical consultants, its flight department or management company personnel and hopefully its future flight crew involved in the process of reviewing the aircraft and its documents.
The Board must also engage its aviation counsel to conduct due diligence regarding the status of the aircraft’s seller and the status of its title to the aircraft as well as verification of the seller’s authority to sell the aircraft. These are especially important issues when an aircraft is being imported into the US.
If all of the steps in Part 1 and 2 of this article are followed properly, the Board should be able to complete the closing process relatively smoothly. For the closing, the Board will need to ensure that the aircraft is in a jurisdiction that is sales-tax friendly, that all the foregoing steps have been followed, that all required documentation is in escrow to proceed, and that the aircraft can be operated following closing in the manner and to the destinations desired.
It is imperative that all of the steps relating to an aircraft acquisition be carefully orchestrated to achieve the mission critical planning objectives in the most efficient manner possible. The preparation of a detailed checklist that includes each of the foregoing items is an indispensable aid in guiding the Board through the aircraft acquisition process.
Author: Chris Younger
Kindly reproduced with the permission of AV Buyer.