Amanda Applegate

NAFA member, Amanda Applegate, Partner at Aerlex Law Group, discusses the details when it comes to purchasing an aircraft with maintenance programs and subscriptions.

Aircraft that are enrolled in maintenance and subscription programs, such as those covering airframes, engines, and maintenance tracking, are often more marketable, and sometimes more valuable, than comparable aircraft that are not covered by such programs and subscriptions. There is real value to an aircraft buyer in having the programs and subscriptions on the aircraft when purchased. As a result, it is important that the programs and subscriptions are transferrable as part of the acquisition process. Each third-party provider is different in how they handle the transfer or assignment of programs and subscriptions. Some providers simply allow the seller to assign the current contract to the buyer but many require the buyer enter into a new agreement. It is important that the buyer understand the cost of the programs and subscriptions when putting together the budget for the ownership and operation of the aircraft. It is also important that all of the necessary paperwork be handled in a timely manner. Some providers will not send out the transfer paperwork until the purchase of the aircraft has been completed. When progressing through the aircraft purchase process, the buyer should consider the following:

1. Purchase Agreement Requirements

1. Prior to the execution of the purchase agreement, request copies of the current maintenance program agreements. Confirm that the advertised programs are in place at the rates previously provided.
2. If the program provider(s) will not complete the transfers until after closing, make sure the purchase agreement requires the transfer obligations of Seller extend beyond the closing.
3. For annual maintenance or subscription payments, make sure the contract is clear that the payment will be prorated based on the closing date or as otherwise agreed upon between the parties.
4. If the buyer elects not to continue with a program or subscription, make sure the purchase agreement allows the buyer to terminate the program or subscription upon closing and stipulates which party must pay any fees associated with the termination.

2. If the aircraft is being financed, make sure the lender documents allow sufficient time to get the transfers in place. Since the process is controlled by a third-party provider, it is difficult for the buyer to dictate to the provider a timeline put in place by the aircraft lender.

3. If there is a minimum flight hour requirements under the program, make sure the minimums can be met by the buyer and if not, see if the program requirements can be revised.

4. During the inspection process, contact each maintenance provider and subscription service and inform them of the pending purchase and request a balance on each of the accounts and what date they have been paid through. Often the maintenance provider or subscription service requires seller’s approval to disclose account information.

5. Confirm with the maintenance or subscription service providers how the agreements will be transferred and when. Since each provider may have their own process, it is a good idea to create a document that tracks the process for each program and subscription.

6. Closing should only take place after third party confirmation that all programs and subscriptions are paid through closing or otherwise in accordance with the purchase agreement.

7. Once the closing has occurred, promptly send notification of the closing to the program and subscription service providers. Some providers will want a copy of the delivery receipt showing the number of hours on the aircraft/engine(s) at the time of closing. They may also want a copy of the bill of sale and perhaps additional documentation regarding the buying entity. Be sure to provide all required documents without delay.

8. Continue to follow up with the providers until the transfer of all applicable programs and subscriptions are complete.

Since there is real value to the aircraft programs and subscriptions associated with the aircraft, it is important that all of the paperwork is completed in a timely manner, so the aircraft remains enrolled on the programs and subscriptions bargained for as part of the aircraft purchase.

The original article was published in Business Air Magazine.

NAFA member Amanda Applegate has written a great article for Business Aviation Advisor about how the Tax Cuts and Jobs Act of 2017 will affect business aviation lending.  Amanda is a Partner at Aerlex Law Group, a long-standing and well-respected member of NAFA. 

How will the Tax Cuts and Jobs Act of 2017 (“TCJA”) affect business aviation lending? And what does this mean for you?

• A surplus of capital/available funds will be created for many corporations by the decreased corporate tax rate. In 2017, C corporations were subject to graduated tax rates of 15% for taxable income up to $50,000, 25% (more than $50,000 to $75,000), 34% (more than $75,000 to $10,000,000), and 35% (more than $10,000,000). Beginning with the 2018 tax year, the corporate tax rate is a flat 21%, and the corporate alternative minimum tax is eliminated.
• Bonus depreciation has increased from 50% to 100% on equipment, including aircraft. Depending on ownership structure, if you use your aircraft for business purposes, you may be able to immediately write off the entire cost of an aircraft acquired and placed into service (e.g., flying at least one qualifying business trip) after September 27, 2017, and before January 1, 2023. For tax years after 2022, there is a gradual phase out of bonus depreciation by 20% each year for five years. In addition, bonus depreciation under the TCJA applies to both new and pre-owned aircraft, as long as the aircraft is used for business purposes. Note that, for the next five years, aircraft used for business purposes qualify for 100% deductions in the cost of ownership for both new and pre-owned aircraft.
• Under the TCJA, you will no longer be allowed to defer taxable gain on the sale of aircraft through the use of a like-kind exchange. Starting in 2018, the taxable gain on the sale will be subject to immediate recapture for tax purposes. However, if an aircraft, new or pre-owned, is purchased in the same year as the sale, and you are able to take advantage of bonus depreciation, then you may be able to reduce or eliminate the overall tax impact of the aircraft sale. The elimination of like-kind exchanges became effective on January 1, 2018 and is a permanent repeal.
  The National Aircraft Finance Association (NAFA) lender members are already noticing some definite trends after the passage of the TCJA.
• Lenders offering tax leases expect their lease portfolio to grow. Although many clients will not be able to take advantage of the 100% depreciation under a tax lease, the lender can benefit in this circumstance. Lenders are investing more resources, including more robust modeling systems to predict aircraft depreciation, in order to develop better lease offerings. Furthermore, some lenders who had stopped doing leases altogether are now advertising a lease option for the first time in years.
• A number of corporate clients have evaluated the impact of the TCJA on their individual situations and are now considering replacement aircraft, whereas such a consideration had been on hold in years past.
• There is an increase in activity from current aircraft owners who own personally and are now seeking to upgrade to a newer aircraft – perhaps a result of both the strong economy and the decrease in taxes under the TCJA.

If the TCJA does stimulate economic activity, rising interest rates may follow, a significant change for lenders and borrowers since we’ve had historically low rates for the last six years. Some NAFA lenders indicate that higher rates may lead to more aircraft financing opportunities. They reason that businesses and individuals who have used the liquidity on their balance sheets to self-finance investments may now look to leveraging an asset like an aircraft and deploying that liquidity into new investments.

While it is too early to speak with any certainty, it appears that there is a strong likelihood of more aircraft financing in 2018, including tax leases, as a result of the TCJA. BAA

This article has been publish as it appeared in the May/June issue of Business Aviation Advisor.