NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLC, shares what first-time business jet buyers need to know.
Virtually all first-time business jet buyers are sophisticated, successful, and motivated. Often consisting of high- and ultra-high-net-worth individuals and diverse private companies, these prospective buyers might be prompted to buy a business jet by fears of Covid-19 exposure or missing the 100 percent bonus depreciation deduction.
As vaccine injections spread across the globe, some buyers have entered the market with the optimism that more personal/business travel lies ahead. Some first-time buyers, including millennials, buy jets of all sizes simply because they can.
A PURCHASE LIKE NONE OTHER
Buying a business jet is complicated but feasible and worth the effort if you can afford it. Private aircraft can inspire thoughts of positive life-changing possibilities. A jet is a time machine, a tool for productivity, and a haven of health and safety—especially during Covid-19. With the right purchase, a jet is a mode of travel that enhances convenience, security, autonomy, and comfort above and beyond any airline offering.
Many first-time buyers recognize or admit, and most others quickly learn, that buying a jet is unlike purchasing real estate, automobiles, businesses, or other assets. You encounter unique, technical, and complex issues when purchasing and owning a jet.
Some buyers insist that, having closed many other complex deals, they can buy a jet with little or no help, only later to discover the error of their ways. But first-time buyers will benefit if they educate themselves and ask for guidance. In any case, do not embark on this journey alone.
WHERE TO START
How do you buy a jet? And who can help you figure out whether a jet will provide the benefits you seek rather than become an albatross? Before you begin a search for a jet or assemble a team of experts to help you, write down why you need or want a jet, where you will go, how many seats you need, and the number of hours you expect your aircraft to fly annually. In aviation jargon, you thereby establish your “mission profile.”
As you progress into the purchasing effort, you should, as basic principles, insist on transparency from all people involved, keep an open mind, participate (there are no “dumb questions”), and be patient. The purchase will probably take longer and be more demanding on your time than you may anticipate.
ENGAGE A TEAM OF SEASONED PROS
With the benefit of referrals and research, you can find quality professionals to hire for your transaction. But first, do not sign anything, not a letter of intent (LOI), an aircraft purchase agreement (APA), or other documents before engaging and obtaining input from both an aviation lawyer for new and used aircraft and an aircraft broker primarily for used aircraft. These individuals constitute the core of your team.
A quality broker will evaluate aircraft of interest to you, parse your mission profile, advise you on appropriate jets for sale, both on and off-market, and guide you on the best make, model, price, and terms for you. Your broker will be your chief aircraft negotiator and usually will lead off the deal.
Even though you have other lawyers whom you may think can handle the purchase—stop. Instead, rely on an aviation lawyer. He or she should practice extensively in business aviation, describe how and when to structure, negotiate, and document the legal aspects in the transaction.
The subjects include, among others, FAA regulatory, tax, insurance, risk management, pilot services, international, finance, and aircraft management. Non-aviation lawyers lack the required knowledge to support you properly.
Although transaction cost is a factor, do not choose a broker or lawyer based on the lowest fees. Choose on value, integrity, responsiveness, years of relevant experience, technical knowledge, and extensive resources in business aviation. These attributes also apply to any other specialist you may engage such as aircraft analysts, aircraft inspectors and appraisers, aviation insurance brokers, management companies, and aviation tax accountants. Ask your lawyer and/or broker for ideas.
DISCOVER WHAT YOUR TEAM CAN DO FOR YOU
Your aviation lawyer should provide an overview of the steps from inception through the delivery of your aircraft. As a priority, she or he should propose structures for managing and operating your jet that complies with the Federal Aviation Regulations (FARs), including Part 91 (private operations) and Parts 119 and 135 (commercial/charter operations), as applicable; plan for tax minimization (IRS federal, international, state, and local); and develop strategies to mitigate your personal liability, including, when appropriate, forming a limited liability company (LLC).
Liability insurance coverage is a critically important risk management tool. In the tight insurance market today, the insufficiency or unavailability of insurance can disrupt or stop your purchase. Engage one aviation insurance broker to find and place coverage acceptable to you after assessing your legal risks.
If you intend to lease or finance your jet, you should ideally obtain a financing commitment before you sign an LOI to avoid negative ramifications such as lacking adequate cash to close or loss of your purchase deposit. Most financiers require strong aircraft collateral, so ask upfront if your jet passes muster.
Try to remain objective no matter how strong your relationship with the financier–at least on your “hot button” issues. Amid a long list of loan or lease issues, for example, ask your lawyer to explain how the terms in your financier’s documents, including guaranties, might adversely affect your non-aircraft business operations, reach extra non-aircraft collateral, and limit how, when, and where you can use your aircraft.
In short, your broker, lawyer, and other specialists on your deal team should enable you to achieve optimal after-tax results and protect you from making avoidable mistakes.
UNDERSTAND WHAT IT TAKES TO OWN AND OPERATE A PRIVATE JET
Although a jet offers great benefits, it is essential to understand fully what you are getting into as a new or used jet owner—financially, emotionally, and operationally. Be prepared to hit some cost turbulence, including untimely or unexpected cash demands for capital improvements, maintenance, repairs, and compliance with FAA mandates.
You can manage some of these expenses with an engine and other maintenance programs, attentive management company work, and manufacturer’s warranties. Importantly, you might be able to charter your aircraft to generate cash flow that partially offsets your costs and even pays some debt. But forget about making a profit or breaking even on chartering. In all events, you should feel comfortable that buying a jet makes sense without relying on unguaranteed charter cash flow to defray your costs.
Work hard to avoid buyer’s remorse. Beware that you might feel some rush to buy and fly. While some first-time buyers cannot wait to take off, others realize that they should find other travel solutions. In all cases, as a first-time buyer, throttle your actions with a sober analysis of the costs and benefits.
CONSIDER THE OPTIONS
Buying a jet is a long-term proposition. So think about your missions and basics of other options to fly privately like purchasing a fractional share or a jet card, chartering, joining a membership or club program, trying a shared-use model, or traveling on a commercial airline. If you buy, you might still consider using these options to supplement or substitute private aircraft to operate your jet most efficiently and economically, or when it is unavailable, possibly as a result of chartering or repairs.
CONCLUSION
Buying your first jet can be an exhilarating, emotional, and exhausting experience. It is a complicated and unique transaction, demanding plenty of patience and the use of skilled advisors. If you do obtain the help you need and travel the distance to closing, though, you will likely feel fortunate to reach your destination and satisfied when you arrive.
This blog is purely informational and reflects the author’s experience and legal practice. It does not, and should not be construed to, provide advice of any kind, express or implied, create a lawyer-client relationship, or suggest or direct you to plan a course of action without expert guidance. Each person involved directly or indirectly in any issue, transaction, or other matter covered in this blog should inquire of, and rely on, his or her aviation professionals and other trusted advisors.
This article was originally published by AINonline on March 12, 2021.
