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    • NAFA Administrator posted an article
      Dry Lease Agreements: What to Check Before Signing
      Dry Lease Agreements: What to Check Before Signing see more

      What are some important, but easily overlooked items in an aircraft dry lease agreement that lessees need to read and understand? Gerrard Cowan asks a selection of industry experts...

      Dry leases require lessees to source their own flight crew, presenting a range of unique challenges – and opportunities. But what are the key “small print” items that business jet lessees should study in any contract?

      Michele Wade, a partner at Jetstream Aviation Law, says there are many items a lessee should consider before signing a deal to lease an aircraft. For instance, they should ask questions of the lessor, obtain professional advice on anything they do not understand, and ensure the final written lease addresses the important terms.

      In a dry lease, Wade says, the lessee will write two checks – one for the lessor for the lease of the aircraft and another to the independent source providing the crew.

      “The lessee may want to inspect the aircraft and review the records before signing the lease,” she adds. “The aircraft lease will generally not contain any representation from the lessor as to the condition of the aircraft.”

      Moreover, the lease may contain a representation that the lessee will operate the aircraft in compliance with applicable laws and regulations, and so the lessee must confirm that the aircraft operations comply with such requirements (such as Federal Aviation Regulations in the US).

      Any operation that does not comply will risk the insurer denying coverage if a claim is made, while the FAA may seek penalties, Wade warns.

      “Nor should the lessee be an entity formed primarily to operate the leased aircraft,” she adds. “A sole purpose entity operating the aircraft may appear to be an escape from liability, but sole purpose entities are not eligible to operate aircraft on passenger-carrying flights under Part 91, which makes any such flight they conduct an illegal operation.”

      With larger aircraft there should be a ‘truth-in-leasing’ clause at the end of the lease, Wade adds. “The lessee has ‘operational control’, and the responsibility and liability that accompanies operational control. Because the lessee has operational control liability, it is important to confirm that the lessee’s operations are covered by the insurance.”

      And, in the US, relevant state departments of revenue may impose a sales or use tax on lease payments, Wade highlights, so lessees should determine if they must pay such a tax.

      Potential for Millions of Dollars of Liability

      David M. Hernandez, Business Aviation & Regulation Sub-practice Chair at Vedder Price, says he is astonished “that people lease aircraft and expose themselves to potentially millions of dollars of liability and regulatory enforcement without any idea whatsoever of the risks”.

      Continue to full article here

      This article was published by AvBuyer on December 20, 2023.
       December 20, 2023
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    • NAFA Administrator posted an article
      6 Myths & Truths About Aircraft Operating Leases
      6 Myths & Truths About Aircraft Operating Leases see more

      Cut through the misinformation about aircraft operating leases and discover who they benefit the most. Gerrard Cowan asks the industry about the common myths, and gains key tips on exploring if a lease is right for you...

      Operating leases are a viable option for many private jet operators, particularly when it comes to budgeting. However, industry experts point to a range of common myths that surround the concept, both positive and negative, which could have an undue impact on a lessee’s decision-making. Following, we'll explore a few...

      There are many types of leases, often with differing interpretations. However, at its most basic level, an operating lease is typically a ‘dry’ lease, meaning the lessee gains control of the aircraft for a defined period of time.

      Within such an arrangement, the lessee does not own the aircraft, which remains the property of the lessor and is handed back at the end of the lease. Unlike a ‘wet’ lease, the lessee is in control of the flight and must supply their own pilot and crew members.

      David M. Hernandez, Business Aviation and Regulation Sub-Practice Chair at Vedder Price, says it’s vital at the most basic level to understand what a lease actually is – notably whether it is a dry or a wet lease.

      “People who are in the airplane – the passengers – might not realize that they’ve actually entered a legally-binding lease agreement and have responsibility for the insurance, the maintenance, and the pilots,” he says. “In a wet lease scenario, the lessor who operates the aircraft will be responsible for that.”

      According to Ford von Weise, Head of Aircraft Finance at Citi Private Bank, and former President of the National Aircraft Finance Association (NAFA), the fundamental underlying precept of an operating lease is the transfer of risks associated with the future residual value of the aircraft.

      Read full article here

      This article was originally published by AvBuyer on October 13, 2023.
       October 13, 2023
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    • NAFA Administrator posted an article
      5 Strategic Advantages Unique to Operating Leases
      Learn top 5 benefits of this frequently misunderstood financing product for individuals and orgs. see more

      NAFA member Global Jet Capital discusses the top 5 benefits of this frequently misunderstood financing product for individuals and organizations.

      There is an unprecedented level of interest in business aviation. Thankfully, there are a range of options business aviation users can choose from to access an aircraft. Each conveys its own intrinsic benefits and drawbacks, and may be more or less attractive to the user based on their unique situation. Mindfully weighing these options – from charter, to fractional ownership, to operating leases, to traditional financing – is a crucially important process, especially since your choice can have far-reaching implications for your balance sheet.

      There are many strategic advantages to an operating lease that you should consider when making this choice. Here are the top 5 advantages that this frequently misunderstood financing product offers individuals and organizations:

      1. Built-in agility
      Yes, operating leases are contractual arrangements. The right lessor, however, can structure a lease that can adjust to changes in your mission.Depending on your needs, a lease can permit extensions, provide an early termination opportunity, or facilitate a move into a larger or smaller aircraft. In this framework, it’s easy to pivot to suit your unique situation.

      Read full article here

      This Global Jet Capital aricle was originally published by Business Jet Traveler in February 2022.
    • NAFA Administrator posted an article
      Avia Yacht Partners 360 Joins National Aircraft Finance Association
      Avia Yacht Partners 360 Joins National Aircraft Finance Association see more

      FOR IMMEDIATE RELEASE: April 13, 2022

      Contact: Tracey Cheek
      tlc@nafa.aero
      405-285-7005

      Avia Yacht Partners 360 Joins National Aircraft Finance Association

      Edgewater, MD – National Aircraft Finance Association (NAFA) is pleased to announce that Avia Yacht Partners 360 has recently joined its network of aviation professionals. Avia provides bespoke consulting and facilitation of acquisitions, sales and financing/leasing for preowned and new build business jets and superyachts worldwide.

      “NAFA members pride themselves on knowing their markets, and the luxury market is one of our most important verticals,” said Jim Blessing, president of NAFA. “As NAFA celebrates our 50th anniversary, we point to the many services our members offer to the public, including the work Avia Yacht Partners 360 does in the luxury aircraft world. Knowing the legal filings required is equally important as understanding the mechanics or routes for flight.”

      Founder and CEO Rolf Smith serves the luxury niche in both the aircraft and luxury watercraft markets. Because of his own insider insights as well as a network of trusted partners, Avia Yacht Partners 360 helps make the dream of custom aircraft ownership and charters a reality.

       

      Products & Services

      • Charter: planning and execution of for-hire air travel
      • Sales: for those acquiring or selling aircraft
      • Financing and leasing: facilitation of the purchase process
      • New builds: integration and management of new-build luxury aircraft

       

      About Avia Yacht Partners 360:

      Avia Yacht Partners 360 was founded by Rolf Smith and is based in Ft. Lauderdale, FL with locations in North America and Europe. The company provides a customized and bespoke approach to all the advisory, commercial, financial, legal, technical, and project management aspects of luxury aircraft acquisition. Avia is able to tailor services and components according to the needs of the client.

        

      About NAFA: The National Aircraft Finance Association (NAFA) is a professional association that has been promoting the general welfare of aircraft finance for 50 years. Our network of members is comprised of lenders and product service providers who work together to finance general and business aviation aircraft. NAFA sets the standard for best practices in aviation finance by educating its members with the most up-to-date industry trends and best practices. Government legislation, market influences and industry insights allow member companies to provide the highest quality services the industry has to offer. 
       April 14, 2022
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    • NAFA Administrator posted an article
      Top 5 Myths About Business Aircraft Operating Leases
      Top 5 Myths About Business Aircraft Operating Leases see more

      NAFA member, Global Jet Capital, shares the top five myths about business aircraft leases.

      There are more options today for accessing a business aircraft than ever before: from charter, to fractional ownership, to operating leases, to traditional financing. When dealing with large, highly-regulated assets that could cost tens of millions—or more—to own, weighing the options to find what makes sense for your specific requirements can be difficult. To make navigating the sometimes-complex landscape of business aviation a little easier, we’re going to clear up five common myths around operating leases—and explain some of the advantages of this frequently misunderstood financing option.

      Read full article here

      This article was originally published by Global Jet Capital on December 16, 2021.
       March 17, 2022
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    • NAFA Administrator posted an article
      Private Jet Membership vs. Custom Jet Charter Services
      NAFA member, Clay Lacy Aviation, discusses private jet membership vs. custom jet charter services. see more

      Demand for flying by private jet increased significantly in the final quarter of 2020 as a result of the coronavirus pandemic and travelers looking for a more private way to travel. New entrants to the industry grew the customer base for both private jet membership and charter providers.

      These newcomers have three main private travel options to choose from, but which is best?

      The answer depends on these key factors:

      • Availability
      • Budget
      • Customer service

      Read full article here.

      This article was originally published by Clay Lacy Aviation on July 28, 2021.
       August 31, 2021
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    • NAFA Administrator posted an article
      Aircraft Lease Agreements, Explained
      Aircraft Lease Agreements, Explained see more

      NAFA member, H. Lee Rohde, III, President & CEO of Essex Aviation, explains Aircraft Lease Agreements.

      Aircraft leasing is a popular private aviation option for corporate entities and private individuals alike. In order to lease an aircraft, a lessee and lessor must sign an aircraft lease agreement, which defines the terms of the lease, such as who is responsible for operating and maintaining the aircraft, the length of the lease and so on.

      For this article, we’ve enlisted the help of David M. Hernandez and Edward K. Gross of Vedder Price, an international business-focused law firm, to explain what aircraft lease agreements are and how they differ depending upon which leasing structure you choose.

      Table of Contents

      The Two Most Common Types of Lease Structure

      There are two primary types of aircraft lease structure:

      Traditional Ownership Structure Lease
      Also known as an operating lease, the owner (either a business or an individual) acquires an aircraft and sets that aircraft up as its own legal entity, typically a limited liability company (LLC). The LLC will often enter into a lease agreement with the actual intended operator of the aircraft — usually the original buyer — so that they can use the aircraft. This prevents the LLC from being considered a prohibited flight department company. From there, the LLC — which legally owns the aircraft — may also enter into an aircraft management agreement with a management company. The management company is responsible for managing the aircraft on behalf of the owner, as well as operating the aircraft for third-party commercial charters. Some owners decide not to hire a management company and instead elect to hire their own pilots and maintenance personnel.

      There are a number of reasons why an aircraft owner might create a traditional ownership leasing structure, including for tax purposes, for privacy or to comply with Federal Aviation Administration (FAA) regulations. Many owners choose to take advantage of what is referred to as “sale for resale” state tax exemptions; this exemption enables the owner to spread sales tax across lease payments, rather than pay in full at closing. Some owners would prefer that their company name not be listed on the FAA registry and would, therefore, rather use an LLC as the registered owner of the aircraft.

      Finally, the FAA prohibits entities from charging for the use of the aircraft and prohibits single member entities from owning and operating an aircraft; this is commonly referred to as the “flight department company trap.” As a result, some companies will set up an LLC as a leasing company and lease the aircraft to the actual operator.

      Financing Lease
      A financing lease is essentially an acquisition financing product and is an alternative to a secured loan. For the sake of simplifying things, you can think of lease financing as being similar to loan financing.

      In this arrangement, a financial institution will take ownership of the aircraft and enter into a lease agreement with a business or individual. This is essentially an acquisition structure that doesn’t require the actual purchase by the lessee of a plane, meaning the lessee doesn’t have to carry the aircraft on its balance sheet.

      We refer to these acquisition financing transactions as “leases” for tax, accounting and commercial law/bankruptcy purposes. The lessor assumes all of the market value risks and benefits associated with ownership, especially regarding the value of the aircraft after lease expiration, and it allocates the “net” lease responsibilities (discussed below) to the lessee under the lease terms.

      In the past, banks were typically the lessors in these financings, however, the number of banks that offer true (tax) leases has significantly diminished since the 2008 recession. Those interested in pursuing a financing lease structure are more likely to find opportunities working with an equity investor.

      The Different Types of Aircraft Lease Agreement

      The terms of an aircraft lease agreement changes depending on which leasing structure you choose to pursue.

      Traditional Ownership Structure Lease
      A typical traditional leasing structure often involves related parties. However, there are situations in which a traditional leasing structure would involve unrelated parties, in which case the lessee would be required to obtain pilot management services from an unrelated entity. It’s important to note that lessors cannot provide the aircraft and a pilot in a traditional ownership structure lease because that is considered a “wet lease” and generally requires an FAA Air Carrier certificate. The use of a time sharing agreement, under the Federal Aviation Regulations (FAR) Part 91.501, is a limited exception to this rule.

      Financing Lease
      As mentioned, a financing lease is an acquisition financing product, so it is appropriate to compare it to a purchase money loan. Similar to a secured loan, the lessor finances the lessee’s prospective acquisition, however, the lessor advances 100% of the purchase price and the lessee’s payments are reduced to reflect the lessor’s tax and residual value assumptions; the lessee typically has flexibility to purchase the aircraft upon lease expiration or, perhaps, to extend the lease term.

      Put simply, the aircraft lease agreement for a financing lease is similar to a loan agreement; so long as the lessee pays installments and materially performs any other obligations under the lease, the lessor won’t interrupt the lessee’s use and operation of the aircraft during the lease term. The key difference between a financing lease and a secured loan is that the lessor assumes on the market value risk at lease expiration.

      Components of a Standard Aircraft Lease Agreement

      Let’s take a closer look at the basic components that an aircraft lease agreement structure should include, including general terms, starting with a traditional ownership lease.

      Traditional Ownership Structure Lease
      It’s uncommon for a bank or lender to be involved in a traditional leasing structure unless the situation were to call for both a traditional ownership lease and a financing lease. In a traditional leasing structure, FAA regulations require both the lessor and the lessee to obtain pilot management services from an independent third party. A lease without the provision of pilot services is considered a “dry lease,” whereas a lease with an aircraft and pilot is considered a “wet lease” and requires FAA certification. The vast majority of traditional ownership leases that people enter into are dry leases.

      Those interested in a traditional leasing structure should be aware that the FAA takes dry lease abuses very seriously and has aggressively pursued enforcement action against entities entering into fraudulent dry leases. Any entity that requires the lessee to use a specific set of pilots when leasing the aircraft is a de facto wet lease, and therefore requires an air carrier operating certificate; this ultimately subjects the lessor to less risk of enforcement action and civil penalties.

      As far as general terms are concerned, any aircraft lease agreement for a traditional leasing structure should clearly specify which entity has operational control, performs maintenance, provides insurances and is generally responsible for the care of the aircraft while it is in the lessee’s possession. The lease agreement should also address all relevant aspects of the aircraft’s care and operation, including default provisions, choice of law, permitted use, return provisions and maximum hours of operation. Additionally, the lessor should reserve the right to inspect the aircraft if it is leased to unrelated entities.

      Financing Lease
      With a financing lease, the structure of the aircraft lease agreement will take into account whether the lessor is going to lease finance a new or pre-owned aircraft.

      If the lessor is lease financing a new aircraft, the lessee must assign its right to purchase the aircraft from the original equipment manufacturer (OEM) and, in some cases, to make progress payments due under the purchase agreement. If the lessor chooses to finance these progress payments, it will pay the balance of the purchase price to the OEM upon delivery, take ownership of the aircraft title and lease the aircraft to the lessee.

      If the lessor is lease financing a pre-owned aircraft, the purchasing process is essentially the same, except for the fact that it is generally less time and cost-efficient than purchasing from the OEM, and the lessor doesn’t finance pre-delivery payments. If the transaction is a refinancing, it will be structured as a sale and leaseback, pursuant to which the lessor purchases the aircraft from and leases it back the lessee. This would necessitate an aircraft purchase and leaseback agreement.

      In any case, once the purchase is complete, the lessee accepts the aircraft under the lease for the negotiated rent, term and certain lease expiry options. In some cases, the lessor might require additional support from the lessor in the form of a guarantee, deposit or other non-aircraft collateral.

      The essential promise the lessee makes is that, upon acceptance, the lessee cannot cancel the lease and is obligated to pay the rents and other amounts listed under the lease come “hell or high water.”

      These leases are typically “net” leases, meaning that the lessee agrees to pay all costs associated with owning, operating, maintaining, servicing, insuring and registering the aircraft, as well as all related taxes. Essentially, the lessee bears all risks associated with ownership, other than decline in the market value of the aircraft. The aircraft lease agreement will include a number of requirements and restrictions to ensure the safe operation and condition of the aircraft. By way of example, the lessee will be required to indemnify the lessor against liability claims, state taxes and loss of lessor’s anticipated tax benefits.

      Although the lease is typically non-cancellable by the lessee, should the aircraft suffer a casualty, the lessee is required to pay the lessor the agreed value of the aircraft, determined at lease inception. Aside from a casualty, some financing leases might also permit the lessee to terminate the lease and purchase the aircraft from the lessor or otherwise make the lessor whole.

      Most bank lessors are “credit” lenders, so the lease is likely to include credit covenants, cross-defaults and reporting requirements similar to what might be included in a credit facility agreement. At lease expiration, the lessee must either return the aircraft according to certain conditions set out in the lease, purchase the aircraft for (at least) fair market value or renew the term for (at least) fair market rental value.

      Drafting an Aircraft Lease Agreement

      The process of drafting an aircraft lease agreement is as follows:

      Traditional Ownership Structure Lease
      The most important aspects of drafting and negotiating a lease are understanding the goals and expectations of the parties involved and knowing which parties will be responsible for the care, maintenance and insurance of the aircraft. There should be no confusion as to:

      • Who will perform maintenance
      • Who will be responsible for payment of maintenance service plans
      • How the aircraft will be returned
      • What the termination provisions are
      • What notice is required

      Every aspect of the use, operation and return of the aircraft should be addressed. The aircraft lease agreement should also address what happens in the event of any non-compliance or default, particularly in the case of unrelated parties.

      Financing Lease
      The credit approval process for a financing lease starts with the lessor conducting due diligence regarding the lessee/guarantor and the aircraft in question. From there, the lessor and lessee will create a term sheet, with the lessor covering financing terms, requirements of the lessor’s credit committee and so on. The lessor will then provide lease documents reflecting what was proposed in the term sheet, with all important details and/or agreed adjustments to the proposed terms.

      Next, the lessor and lessee will incorporate various terms reflecting the lessee’s ownership structure and operational expectations into the lease documents. Deliverables are then collected, and closing deliverables and action items are attended to. Assuming all concerned parties are satisfied, the lessor pays the purchase price to the OEM or seller, and the lessee accepts the aircraft under the lease agreement.

      —

      An important note: Given the significant investment of private aircraft and the potential for FAA, IRS and insurance violations, it’s in your best interest to retain a team of knowledgeable professionals to help you navigate this complex process. Regardless which leasing structure you choose, your team should include:

      • An experienced business aircraft finance attorney
      • A private aviation consultant
      • A broker
      • An OEM or other seller
      • An insurance broker
      • A management company or charter operator
      • A maintenance program provider
      • An aviation experienced accountant or tax advisor
      • An FAA registration counsel and/or title company

      Key Aircraft Lease Agreement Considerations

      A few things to keep in mind before entering into an aircraft lease agreement:

      Traditional Ownership Structure Lease

      • The primary consideration is using the aircraft to its maximum operational capability consistent with the client’s wishes without violating any FAA or IRS regulations and insurance provisions. This requires full knowledge of exactly what each party wants to do with the aircraft within the limitations of those regulations and provisions.
      • In accordance with the previous consideration, it’s imperative to understand the applicable FAA, IRS and insurance requirements to ensure that owners are able to operate the aircraft as they need. It’s best practice to discuss operational considerations with the management company.
      • If the aircraft being leased under a traditional lease is being financed, all usage and other terms must be approved by, and subject to the rights of, the financing party; this is known as “consent.”

      Financing Lease

      • The terms and pricing, including rent, will be driven by the aircraft’s value, operational and maintenance expectations, the creditworthiness of the lessee and any customer relationship with the lessee.
      • Some lessors — banks, in particular — are more conservative as to whom they’ll provide lease financing. Other lessors, especially equity investors, are asset financiers and are therefore less risk-averse; that said, that risk acceptance will be reflected in their pricing.
      • Experienced and sophisticated lessors and lessees will have sorted out most of what they deem essential in the term sheet in order to avoid unnecessary investments of the time and legal costs required to put together a transaction that isn’t a good fit for either party.
      • It’s important that lessees take a thorough and thoughtful approach not only to the proposed economics of the transaction, but also to purchase, operation, management, regulatory and tax considerations.
      • Lessees must fully disclose all information that might be pertinent to the lessor’s willingness to lease the aircraft pursuant to what’s been proposed in the term sheet.
      • The financing proposed in the term sheet must be practical and likely to be approved by the lessor’s credit committee well before the scheduled closing.

      Renegotiating an Aircraft Lease Agreement

      There are some instances in which it might make sense for a lessee to renegotiate or otherwise restructure an existing aircraft lease.

      Traditional Ownership Structure Lease
      Whether the parties involved want to renegotiate the lease depends entirely on their relevant and respective needs and whether there are issues that require renegotiation. Given that related party leases are typically handled internally, there are rarely any issues. However, an unrelated party lease could involve a wide variety of issues, including payment issues, operational issues or default provisions. Therefore, it’s imperative that all leases address how to make modification amendments and define applicable resolution provisions.

      Lessees are advised to be wary of any entity attempting to offer a lease as a viable alternative to a charter arrangement. The FAA is severely cracking down on such corrupt operations and has pursued multiple enforcement actions over the past two years.

      The most important thing here is that all parties understand the terms and conditions of the lease. It’s inadvisable to sign a lease and worry whether you can comply with the terms after the fact. The lessee should always know exactly what they are responsible for under the lease and what the termination and default provisions are.

      Financing Lease
      Financing lease pricing is based on interest rates and market values. If there is a significant change in either or both, or if the lessee’s needs have changed and they intend to trade up through another lease with the same lessor, the lessee may be able to restructure the lease.

      Non-bank lessors are likely to be receptive to restructuring requests. Banks that offer leasing products are more likely to be receptive toward restructuring if the lessee is a desirable customer or if they intend to extend the lease at a time when the actual aircraft value is likely to be less than the assumed value at lease inception.

      It’s important that both parties remain aware as to when it might be mutually beneficial to renegotiate or restructure the terms of the lease.

      What to Know Before You Sign an Aircraft Lease Agreement

      In order to expediently close a deal, it’s critical that lessees fully disclose expectations and other relevant information and be responsive to the lessor. In the case of a financing lease, having an existing banking relationship with the lessor could streamline the approval process and result in friendlier economic terms.

      Lease financing for a desirable customer can be competitive; in such situations, lessees should prioritize the reliability of the financing provider over proposed financing rates and costs. To that end, lessees should place more weight on a lessor’s ability to close a transaction in a timely manner and their documentation or closing requirements than on whether they offer favorable economic terms.

      Finally, in order to achieve all of their goals related to acquiring, financing and operating a new or pre-owned aircraft, lessees should retain the services of industry professionals with relevant experience and favorably recognized market reputations. This includes retaining legal counsel from a firm such as Vedder Price and advisory services from a private aviation consulting firm such as Essex Aviation.

      This article was originally published by Essex Aviation.
       March 24, 2021
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    • NAFA Administrator posted an article
      Trident Funding Joins National Aircraft Finance Association
      Trident Funding Joins National Aircraft Finance Association see more

      FOR IMMEDIATE RELEASE: ​March 5, 2021 

      Contact: ​Tracey Cheek

      tlc@tlcmarketingok.com

      405.850.1292

       

      Trident Funding Joins National Aircraft Finance Association

       

      Edgewater, MD: ​National Aircraft Finance Association (NAFA) is pleased to announce that Trident Funding has recently joined its professional network of aviation lenders under the leadership of Michael Bryant (Senior Vice President, Credit Analyst) and Craig Bowers (Director, Aircraft Lending).

      Trident Funding is a nationwide broker specializing in both consumer and commercial lending solutions for Aircraft, Marine, and RV since 1996. Founded by industry veterans Michael Bryant, Bob Dunford, and Jim Foley, Trident now has offices conveniently located through the US. They have developed more than 20 different institutional partners to ensure a funding solution across a wide variety of general aviation use profiles, providing lending solutions from as low as $25K to more than $10M in both Part 91 and 135 operations.

      “NAFA members form a network of aviation finance services who diligently and competently operate with integrity and objectivity throughout the world. We’re excited to welcome Trident Funding to our growing organization as we celebrate our 50th anniversary,” said Jim Blessing, president of NAFA.

      About Michael Bryant:

      As the founder of Trident Funding Corp, Michael has been in consumer financing for over 45 years, specializing in the larger vessel and aircraft space. He now serves as Senior Credit Analyst for Trident Funding LLC’s aircraft division and works closely with Craig Bowers to supply the best financing solutions for consumer, charter, and light commercial aircraft markets.

      About Craig Bowers:

      Craig has been actively involved in aviation for over 40 years. Learning to fly in high school, he went on to become a Marine Corps pilot, finishing his military career as an instructor at the US Navy Test Pilot School. An active pilot, he is currently qualified as an international captain in the Gulfstream G550 aircraft. Craig has been involved in the active selling and financing of corporate aircraft for the past 20 years and currently sits on the Board of the Northern California Business Aviation Association.

      For more information about Trident Funding, visit https://www.nafa.aero/companies/trident-funding.

      ####

      About NAFA: ​The National Aircraft Finance Association (NAFA) is a professional association that has been promoting the general welfare of aircraft finance for 50 years. Our network of members is comprised of lenders and product service providers who work together to finance general and business aviation aircraft. NAFA sets the standard for best practices in aviation finance by educating its members with the most up-to-date industry trends and best practices. Government legislation, market influences, and industry insights allows member companies to provide the highest quality services the industry has to offer.
       March 05, 2021
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    • NAFA Administrator posted an article
      Texas Partners Bank Joins National Aircraft Finance Association
      Texas Partners Bank Joins National Aircraft Finance Association see more

      FOR IMMEDIATE RELEASE: March 5, 2021 

       

      Texas Partners Bank Joins National Aircraft Finance Association

      Edgewater, MD: National Aircraft Finance Association (NAFA) is pleased to announce that Texas Partners Bank has recently joined its professional network of aviation lenders under the leadership of Alan Smith (Executive Vice President, Specialty Finance Group) and Sam Marshall (Vice President, Specialty Finance Group).

      Established in 2020, Texas Partners Bank is comprised of three independent banks that merged under a new charter: The Bank of San Antonio, The Bank of Austin, and Texas Hill Country Bank. Under this new alliance, Texas Partners Bank has deep resources and strong local ownership to provide greater accessibility and enhanced service opportunities for Central Texas businesses.

      “NAFA members form a network of aviation finance services who diligently and competently operate with integrity and objectivity throughout the world. We’re excited to welcome Texas Partners Bank to our growing organization as we celebrate our 50th anniversary,” said Jim Blessing, president of NAFA.

      About Alan Smith:

      Alan has more than 34 years of banking experience with a majority of those spent in San Antonio, Texas. He currently runs the specialty finance group at Texas Partners Bank, which focuses on lending in niche sectors, specifically aircraft finance. Before joining Texas Partners Bank, Alan was VP of Private Client Services at Compass Bank, where he focused on providing trust, investment, banking, and insurance services to business and private clients. Alan holds an M.S. in Finance from Texas A&M University and is a general aviation enthusiast who currently has his private pilot’s license (PPL).

      About Sam Marshall:

      Sam has 8 years of banking experience, with 7 of those spent in commercial lending. He currently manages the specialty finance loan portfolio at Texas Partners Bank, which consists of an eclectic mix of niche business sectors, including aircraft loans. Before joining Texas Partners Bank, Sam held commercial lending positions with Intrust Bank and Iberia Bank. He holds a BBA in Finance from the University of Mississippi and is a general aviation enthusiast who is currently working towards his private pilot’s license (PPL).

      For more information about Texas Partners Bank, visit https://www.nafa.aero/companies/texas-partners-bank.

      ####

      About NAFA: The National Aircraft Finance Association (NAFA) is a professional association that has been promoting the general welfare of aircraft finance for 50 years. Our network of members is comprised of lenders and product service providers who work together to finance general and business aviation aircraft. NAFA sets the standard for best practices in aviation finance by educating its members with the most up-to-date industry trends and best practices. Government legislation, market influences, and industry insights allows member companies to provide the highest quality services the industry has to offer.
       March 05, 2021
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    • NAFA Administrator posted an article
      Operational Control And Aircraft Leasing: What’s The Big Deal?
      Operational Control And Aircraft Leasing: What’s The Big Deal? see more

      NAFA member, Greg Reigel, Partner at Shackelford, Bowen, McKinley & Norton, LLP., discusses operational control and aircraft leasing.

      From the FAA’s perspective, operational control in aircraft leasing transactions is not just a “big deal”, it is “the” deal.

      What Is Operational Control?

      14 C.F.R §1.1 defines operational control as “the exercise of authority over initiating, conducting or terminating a flight.”  In a “wet” lease situation, since the lessor is providing both aircraft and crew, the lessor maintains operational control of all flights.  And in the absence of a specific exemption (such as under 14 C.F.R. § 91.501(c) the lessor who is operating an aircraft under a wet lease will need to have an air carrier certificate to legally operate the aircraft.

      In a “dry” lease situation, the lessee provides its own flight crew, and the lessee exercises operational control over its flights.  The lessee’s operations may be conducted legally under 14 C.F.R. Part 91 without an air carrier certificate.

      It is important to keep in mind that the FAA will look beyond the actual written agreements to determine who has operational control.  Although a lease may be written as a dry lease and says “Dry Lease” at the top of the agreement, for example, that does not mean the FAA cannot take the position that the arrangement is really being conducted as a wet lease.  And if the FAA takes that position when the lessor who is actually operating the aircraft for the lessee does not have an air carrier certificate, then that will be a problem for the lessor, and potentially for the lessee as well.

      Why Does It Matter?

      If the lessor is exercising operational control, then the flight must be conducted in compliance with regulations that are stricter than Part 91 (i.e. Parts 121 or 135). Those regulations limit the types of airports the lessor may utilize, crew qualifications, crew rest and duty times, maintenance requirements etc.  Additionally, the lessor under a wet lease arrangement is required to remit federal excise tax on the amount charged to the lessee.

      Alternatively, if the lessee has operational control under a dry lease the lessee is permitted to operate under the less restrictive and less costly requirements of Part 91.  And federal excise tax is not due on the amounts paid by the lessee to the lessor, although sales tax is often assessed on the lease rate.

      How Do You Determine Who Has Operational Control?

      The FAA has issued guidance for determining which party has operational control in a leasing arrangement.  Advisory Circular 91.37B Truth in Leasing provides FAA inspectors with an explanation of leasing structures and how they may or may not be compliant with the regulations.  Although AC 91.37B only applies to aircraft subject to the requirements of 14 C.F.R. § 91.23, and it is not regulatory in nature, FAA inspectors also use this guidance when reviewing leasing structures that are not subject to truth-in-leasing requirements.

      Here are the types of questions an FAA inspector will ask when the inspector is trying to determine which party has operational control in an aircraft leasing situation:

      • Who decides crewmember and aircraft assignments?
      • Who accept flight requests?
      • Who actually initiates, conducts, and terminates flights?
      • Are the pilots direct employees or agents for the lessor, the lessee, or someone else?
      • Who is responsible for aircraft maintenance and where is that maintenance performed?
      • Who decides when/where maintenance is accomplished, and who pays the maintenance provider for that service?
      • Prior to departure, who ensures the flight, aircraft, and crew comply with regulations?
      • Who determines weather/fuel requirements, and who pays for the fuel at the pump?
      • Who directly pays for the airport fees, parking/hangar costs, food service, and/or rental cars?

      If properly drafted, an aircraft dry lease agreement should answer these questions and, to the extent the answer for any item is “the lessor”, then the lease should explain that answer and how it does not negate lessee’s exercise of operational control.

      For example, if the aircraft is leased to more than one lessee, it may make more sense for the lessor to retain responsibility for maintenance to ensure that the aircraft is consistently maintained in an airworthy condition.  Similarly, lessor maintaining an insurance policy insuring the aircraft and the various lessees may be necessary to make certain the aircraft is insured appropriately.

      However, responsibility for maintenance or insurance are just two indicia of operational control.  And the lessor’s responsibility for maintenance or insurance does not negate the lessee’s responsibility for ensuring that the aircraft is in an airworthy condition and the lessee’s is properly insured prior to any operations conducted under a lease.  Appropriate language in the lease can explain these issues so an FAA inspector reviewing the lease does not misunderstand and draw the wrong conclusion.

      Also be aware that some FAA inspectors rely upon AC 91.37B but do not fully or properly understand its guidance.  For example, in one instance AC 91.37B states “[t]he FAA has taken the position that if a person leases an aircraft to another and also provides the flightcrew, fuel, and maintenance, the lessor of the aircraft is the operator.”

      This language is sometimes misunderstood by inspectors to mean that a lessee does not have operational control when the lessor is responsible for maintenance.  But that is incorrect.

      The key indicia in the language above is lessor’s providing the flightcrew.  However, lessor’s responsibility for maintenance by itself does not indicate that lessor is improperly exercising operational control over lessee flights.  Although it may indicate that lessor is exercising some operational control, without other indicia of operational control by the lessor, performance of maintenance alone is not conclusive.

      Conclusion

      Operational control in aircraft leasing arrangements is, and will continue to be, an area of special emphasis for the FAA.  Although the terms of the lease and other transaction documents are important, the FAA is not bound by those terms when it is making an operational control determination.  Rather, it will also look at the actual arrangements between the parties, as well as the responsibilities of each party, especially if they are inconsistent with the lease.

      When the FAA determines that lessor is exercising operational control in what is supposed to be a Part 91 dry leasing transaction, you can expect that it will act.  Depending upon the circumstances, pilots and operators could be faced with certificate action and civil penalty action.  It is important to understand the indicia of operational control and to be able to determine which party is exercising operational control in an aircraft leasing transaction.  Only then will you be able to ensure that you are operating in compliance with the regulations.

      This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP., on Feburary 5, 2021.
       March 01, 2021
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    • NAFA Administrator posted an article
      Top 5 Myths About Business Aircraft Operating Leases
      Top 5 Myths About Business Aircraft Operating Leases see more

      NAFA member, Global Jet Capital, explains myths commonly associated with business aircraft operating leases.

      There are more options today for accessing a business aircraft than ever before: from charter, to fractional ownership, to operating leases, to traditional financing. When dealing with large, highly-regulated assets that could cost tens of millions—or more—to own, weighing the options to find what makes sense for your specific requirements can be difficult. To make navigating the sometimes-complex landscape of business aviation a little easier, we’re going to clear up five common myths around operating leases—and explain some of the advantages of this frequently misunderstood financing option:

      1. OPERATING LEASES ARE TOO RESTRICTIVE—IT’S BETTER TO OWN.

      Operating leases let you keep your aircraft for the duration of the lease, which means consistently using your crew, being able to leave your personal effects on board, and enjoying the experience of ownership while putting your capital to better use. Some restrictions on customization that could potentially impact residual value and other usual lease terms apply, but limitations fall within normal patterns of ownership. With the right lessor, you can expect contract terms that are flexible and fit your unique needs, which make the experience of having an operating lease feel anything but restrictive.

      Additionally, an operating lease with a predictable term makes disposition as simple as turning the aircraft back over to the lessor at end of lease—no additional planning or contingencies needed. Compare that to attempting to sell an aircraft when it’s time to upgrade or make changes to your operations. From hiring a broker, to waiting for months (or even years, in extreme cases) to find a buyer, to paying the costs of maintenance, insurance, and storage in the meantime, you may be looking at millions lost in the process.

      2. YOU’RE STUCK IN A CONTRACT WITH AN OPERATING LEASE, WHICH MAKES IT INCONVENIENT WHEN YOUR BUSINESS CHANGES.

      It’s true that operating leases are contractual, while owning a business aircraft outright is not. But, contracts can be created that adjust easily to a changing mission—including allowing for moves to larger or smaller aircraft, the option to extend, or the option to prematurely end the lease altogether. With the right financing partner, you can expect a flexible, custom-tailored contract that feels right.

      In fact, ownership may have risks and limitations that exceed the limitations of a contractual obligation in an operating lease. If a major uptick in your international markets means that your newly purchased mid-range aircraft is no longer up to the task of supporting your business goals, you bear the risk of waiting a long time to sell with capital tied up in an asset that doesn’t suit your needs. When you’re finally able to sell and need to purchase a new business aircraft with a longer range, you’re looking at a potentially lengthy process to secure traditional financing from a lender, coupled with a much larger capital outlay than the refundable security deposit for a lease.

      3. OPERATING LEASES MAKE SENSE IN BAD RESALE MARKETS OR WHEN INTEREST RATES ARE HIGH, BUT NOT WHEN RESALE VALUE IS STRONG OR WHEN INTEREST RATES ARE LOW.

      Even if there is a strong resale market or low interest rates when you choose to purchase an aircraft, consider the risk that you’re taking on with the large outlay of an aircraft purchase. Traditional financing typically requires large down payments and due to volatile geo-political situations, emerging technology, and the natural realities of market fluctuation, there’s no guarantee that a strong resale market for your aircraft will be there when you choose to sell. That low interest rate environment may be gone, which won’t help entice buyers to purchase your pre-owned aircraft. In the meantime, you may have paid more for a depreciating asset.

      Operating leases eliminate residual value risk and provide predicable costs for the duration of the lease. Budgeting stays precise, liquidity stays high, and the future becomes clearer. The resale market doesn’t come with any guarantees—an operating lease contract does.

      4. OPERATING LEASES ARE ONLY FOR CERTAIN KINDS OF AIRCRAFT. YOU CAN’T JUST GET WHATEVER YOU WANT.

      Whether you have your eye on a new or pre-owned aircraft, or if the pre-owned aircraft you’re interested in is a little older than what you would typically expect for a leasing arrangement, there are very few limitations to what can be obtained with an operating lease today.

      Specialists in business aviation financing like Global Jet Capital look to spread risk across a large portfolio, encompassing aircraft from every major manufacturer, every global market, and a variety of age ranges.

      5. YOU CAN ONLY ACHIEVE PRIVACY BY PURCHASING AN AIRCRAFT, NOT LEASING.

      If privacy is important to you, a leased aircraft may actually provide an additional layer of anonymity. An operating lease reduces visibility to an aircraft’s end user, as the public records of the FAA identify the lessor as the owner of the aircraft, giving you greater privacy.

      This article originally appeared in Business Jet Traveler, February 2021.
       February 26, 2021
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    • NAFA Administrator posted an article
      Nine Things to Know When Leasing an Aircraft
      Nine Things to Know When Leasing an Aircraft see more

      NAFA member, George Kleros, Sr. Vice President, Strategic Event Management & Fleet Support at JSSI, shares information on aircraft leasing.

      When leasing an aircraft, what are your maintenance obligations during and at the end of the lease term to ensure that the returned aircraft maintains its value? 

      Focused on that residual value, the lessor will designate a qualified inspector or auditor to perform periodic records reviews and/or asset inspections, throughout the lease period. The intent is to verify the aircraft’s general condition and ensure it remains in compliance with lease requirements.

      After each check, the inspector will send the lessor a report with the graded condition of the aircraft and any specific findings. If anything can or might affect the residual value, you’ll be required to take corrective action to bring the aircraft into compliance.

      At term end, the lessor will conduct an “off-lease” inspection (similar to a pre-purchase inspection) at a factory-owned or authorized service center. All components and systems must be in full working order; or repaired if not. If the major components are near their life limit, you’d be responsible for covering these costs: either a pro-rated percentage based on time consumed, or 100% of the cost to overhaul if it’s close to the event.

      If the aircraft requires repairs for damage or corrosion, you are responsible for the repair cost. Once any repairs required by the lease are completed, any diminution in value due to damage history will be the lessor’s responsibility.

      So what can you do to preserve the value of the aircraft?

      Do …

      • Review the lease document fully to understand the operation, maintenance and return of the aircraft requirements. A good lease-return scenario always starts with a well-defined and documented set of return conditions. Ask questions for clarification prior to signing, to be sure you fully comprehend the broad scope of your obligations.
         
      • Keep the aircraft clean and polished to protect from corrosion and paint deterioration. Unprotected aircraft deteriorate faster than you might expect. The aircraft interior will be inspected for wear, cleanliness, and damage. The exterior will be checked for oil leaks, paint condition, and structural damage.
         
      • Store the records in a secure, dry, fireproof storage cabinet or safe. Damaged or missing records devalue an aircraft and will change residual value. The lessor will come out either annually or bi-annually to see the aircraft and review the records for accuracy and airworthiness.
         
      • Keep up with routine and scheduled maintenance tasks, even if the aircraft is not flying for extended periods of time.
         
      • Address interior and exterior wear items immediately. Waiting can compound the problem and cost more to correct.

      Don’t …

      • Assume the lease document allows for the aircraft to operate under different regulations or use than originally defined.  If the aircraft flies only for you under FAR Part 91 regulations, don’t move your aircraft into a for-hire Part 135 air-taxi arrangement without consulting the lessor; it may not be allowed.
         
      • Leave the aircraft outside. Store it in a hangar when not in use. Sun, humidity, and high temperatures deteriorate interiors and paint exterior, diminishing the residual value.
         
      • Let the aircraft sit inactive for long periods of time. Your aircraft still needs to be flown and systems exercised to keep systems lubricated and reduce risk for damage.
         
      • Ignore missing paint and erosion strips. This leads to corrosion and will be expensive to correct.

      The lessor always requires hull insurance at a specific dollar amount, and generally seeks high liability insurance limits.  If you acquire an hourly cost maintenance program (HCMP), it can help ensure that the aircraft meets return conditions. The lease should state clearly that the maintenance program was current at lease inception and that the HCMP will be transferred to the lessor. An HCMP is very desirable in a lease transaction. It helps preserve the aircraft’s residual value, and helps you avoid penalties and extra costs. 

      This JSSI article was originally published in Business Aviation Advisor November/December 2020.
       February 10, 2021
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    • NAFA Administrator posted an article
      COVID-19 Opened the Door to Private Jet Ownership
      COVID-19 Opened the Door to Private Jet Ownership see more

      NAFA member, PNC Aviation Finance, discusses how business travelers and some individuals have bumped up against the limits of charter and fractional private aircraft services and are now pivoting to ownership.

      It's no secret that 2020 changed the landscape of the aviation industry. According to data from the Los Angeles Times[1], 2020 forecasts show that this will be the worst year in the history of commercial aviation with the industry poised to post a net loss of $84.3 billion. Consumer air travel revenue is expected to drop from $876 billion in 2019 to $434 billion in 2020. Initially many individuals considered charter services or fractional shares like JetLinx and NetJets but quickly ran up against usage limits and health concerns as the planes are still shared. As a result, more people are considering direct ownership. Airline brokers have noticed a significant uptick in business. "We're on pace to have one of our best years ever," says David G. Coleman, of Duncan Aviation a private aircraft sales, brokerage and consultancy.[2]

      Key Insights

      • Charter and fractional shares can lower risk compared to commercial airlines but they aren't risk free. Private ownership provides end-to-end control of cleaning, crew health and safety checks as well as limited use of the aircraft.

      • Aviation finance is a fragmented industry. It's important to engage veteran professionals who understand aircraft mechanics as well as financing options.

      • Individuals interested in owning an aircraft should have a clear understanding of the aircraft they are purchasing and be prepared to provide that information to lenders as well. Leasing is also an option, but individuals will want to make sure they've planned for any additional costs and are also well versed in the terms of their lease.

      Charter and Timeshare Services See a Short-term Boost

      While surging in popularity, many corporate travelers are realizing that chartered and shared services only offer limited flexibility in terms of schedule and personal safety standards. "What we're talking about is still a form of mass transit," says Jeff Wieand of Boston Jet Search, a private aircraft broker and consultancy.[3]"There are fewer people involved but the questions remain the same - are they cleaning the plane in between? When was the staff tested? Individuals in these kinds of arrangements don't have much control over the aircraft or the process. The lack of control was a driver toward ownership before the pandemic and more so now."

      Charter and timeshare services also require passengers to book in advance just like conventional travel, which may result in a bit of jostling if your travel schedule doesn't already line up with that of the service provider. While this may not matter much during a normal week, scheduling issues could become especially acute during high travel periods like around the holidays or ahead of virus lockdowns when many people are trying to get to more remote locations.

      Pivot to Ownership

      Historically, owning an aircraft was an all-cash process with a naturally limited audience. But as access to capital has improved, aircraft costs have come down and interest rates have remained low, aircraft ownership is possible for more people.

      "To my mind, what has happened with the pandemic really accelerated trends that were already happening in the private aircraft market. As major carriers continue to cut back on services, if you're someone who needs to be on the road a lot it's a problem," says Coleman. "What we're really in the business of is giving people their time back. And now, with growing health concerns we're helping them find an option that eliminates more of the risk."

      Navigating the Private Aircraft Marketplace

      There is a robust secondary sales market within aircraft that allows people to invest in pre-owned planes that are in working condition and on established maintenance programs that lenders are willing to underwrite. New planes are also available and financeable.

      For those that are new to ownership, both Coleman and Wieand suggest that it's important to work closely with veteran aviation professionals that can correctly assess the plane itself and the financing options.

      "This isn't like buying a car or a house where you can just compare across and get a sense for what things generally cost," explains Coleman. "You really need to understand the life of the aircraft in terms of where it is coming from, the state of the equipment, and maintenance schedules. And, you have to understand that not every bank is going to finance so you're going to want to engage with brokers and financing almost before you choose the plane so that people are on the same page early."

      Avoid Common Leasing and Owning Aircraft Pitfalls

      For those that want to invest in aircraft ownership, they can choose to lease their own planes or buy them outright. The financing considerations for both options differ.

      Leasing requires careful financing. With a lease, it's important for individuals to understand that they are going to be locked into an aircraft for a period of time even if problems with the aircraft arise. Wieand suggests that it's important to consider the potential for those additional costs when determining whether a lease makes the most sense. A close read of the lease terms is also a good way to ensure that there aren't any surprises if problems arise or if someone needs to break the lease for any reason.

      Focus on alignment first and financing second when taking out a loan. Taking out a loan to cover the cost of an aircraft can remove some obstacles like being locked into a lease period, but individuals will make sure that they are working with well respected financing teams that are familiar with these kinds of transactions. Coleman notes that if you're financing before you buy, lenders will typically want to be clear on the results of a pre-buy inspection so that there aren't any discrepancies with aircraft components or functionality. Appraisals and inspections can vary widely provider to provider so potential owners can avoid problems by working with appraisers and inspection teams that the lender is already familiar with and trusts. Coleman adds that some lenders will not finance specific types of planes so it is important to make sure that individuals align their desires with a finance team that is willing to support them.

      "I have seen people get into situations where they find out that they can't get the financing they were counting on because they didn't do the pre-work," Coleman says. "A seasoned aviation finance team will work closely with you on finding solutions but it's best when they are included early on in the process."

      Ready to Help

      PNC Aviation Finance offers knowledgeable financing solutions to make private aircraft ownership possible and affordable.

      We offer custom-tailored financing packages based on business needs and circumstances. Our experienced aviation finance team understands and has extensive knowledge regarding private aircraft ownership requirements, FAA, insurance, operating leases, etc.

      We can help you look at the implications of each option and help you decide on the best option for you or your business.

      Learn how PNC Aviation Finance can help you fly higher by visiting pnc.com/aviation.

      Sources
      1. Los Angeles Times (July 10, 2020) The rich are flying again -- in the comfort of their private jets - https://www.latimes.com/business/story/2020-07-10/charter-private-jet-flight-covid-19-coronavirus
      2. CEO David G. Coleman, Duncan Aviation (November 2020) Interview
      3. CEO Jeff Wieand, Boston Jet Search (November 2020) Interview

      This article was originally published by PNC Aviation Finance on December 17, 2020.
       February 04, 2021
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    • NAFA Administrator posted an article
      AINsight: How Dry Leases Can Prevent Illegal Charter
      AINsight: How Dry Leases Can Prevent Illegal Charter see more

      NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses how dry leases can prevent illegal charter.

      Is it possible that a subtle shift is occurring away from the pervasive and persistent menace of illegal charter operations? Anecdotally, and perhaps for me just hopefully, I am seeing more aircraft owners, operators, lessees, and lessors asking whether they need some type of leasing or other structure to avoid FAA scrutiny or personal liability.

      Leasing enables a lessee, which may be an individual or entity (person), to lawfully “operate” and thereby exercise “operational control” over an aircraft under the FARs. Only one person has operational control. Leasing offers a broad array of benefits and structures to direct cash flow from lessees to lessors and vendors, manage risk, minimize certain taxes, share aircraft use and cost among unrelated and affiliated parties, and facilitate commercial operations under FAR Part 135.

      But leasing is not an incidental subject, as explained in the General Aviation Dry Leasing Guide developed by NBAA and several other aviation alphabet groups. This 17-page publication informs aircraft buyers, owners, lessors, lessees, lenders, brokers, lawyers, and other advisors about the flexibility, utility, regulatory aspects, and complexity of leasing.

      Key FAA Leases: Dry and Wet

      It is essential first to understand that a “lease” under the Uniform Commercial Code in part means a transfer by a “lessor” to a “lessee” of the right to possession and use of an aircraft for a term in return for consideration—usually hourly, fixed, and/or variable rent payments.

      In contrast, a true lease might exist when the lessor retains residual value risk—the remaining value of the aircraft at the end of the lease term. Sellers do not take this risk. Finally, a charter is not a lease; it is a service, with no change of aircraft possession.

      Under FAR 91.23, “a lease means any agreement by a person to furnish an aircraft to another person for “compensation or hire, with or without flight crewmembers, that is not a contract of conditional sale.” In this context, the FAA identifies two extremely important categories of leases in Order 8900.1: dry leases and wet leases.

      Dry lease refers to an aircraft transaction in which the lessor provides the aircraft, the lessee independently supplies the crewmembers, and the lessee retains operational control of the flight. FAR 1.1 defines a core regulatory concept of operational control with respect to a flight as “the exercise of authority over initiating, conducting, or terminating a flight.”

      Illegal or unsafe operations may occur when leases or other contracts do not specify who is responsible for operational control of the aircraft and in other circumstances. As such, the FAA focuses on operational control in assessing whether a flight operation is an illegal charter or valid Part 91 operation.

      Operational control under Part 91 does not mean the traveler must fly the aircraft personally. An aircraft owner or lessee typically delegates that responsibility to pilots under Part 91 or charter operator under Part 135. I sometimes refer to the one person that exercises operational control as having the liability target on the person’s back.

      For example, in one of the most common uses of dry leases, an owner enters into a dry lease between a limited liability company (LLC), as the single-purpose aircraft owner entity, to put operational control of flight operations into the hands of one person as the lessee in compliance with Part 91.

      A major business enterprise for profit may be an appropriate dry lessee if the aircraft serves the business of the enterprise whose operations generate substantially more revenue than the operating costs of the aircraft. The LLC owner/member may also agree to an “exclusive dry lease,” with one lessee/operator or “non-exclusive leases” with multiple aircraft lessees/operators under their separate non-exclusive leases.

      The finance world routinely uses exclusive dry leases of various types to enable a lessor to buy an aircraft and lease it to a lessee without crew under a long-term lease. Here, the lessee similarly supplies the crew and assumes all obligations under the lease for the care, custody, and control of the aircraft during the term, including for its maintenance, crewing, operations, cost payments, insurance, and taxes.

      Despite the availability of leasing, new and current aircraft owners still frequently violate the FARs when their LLCs operate the aircraft but have no business other than to own and operate their aircraft, converting the LLCs into illegal “flight department companies.” Such a single-purpose LLC cannot lawfully conduct these operations, share the aircraft for any compensation (anything of value), or offer the aircraft for hire to others unless the LLC obtains an air carrier certificate under Part 119 and operates the aircraft under Part 135. It is quite feasible to use non-exclusive or exclusive dry leases to rectify or avoid these violations.

      In contrast to a dry lease, the FAA defines a wet lease in FAR 110.2 as an aircraft lease whereby the lessor provides both an entire aircraft and at least one crewmember to a lessee. The lessor retains operational control of the flight, unlike a dry lease where the dry lessee supplies its own crew, directs many aspects of flight operations, and retains operational control.

      Another significant distinction exists between Part 91 private operations and Part 135 commercial operations conducted by the air carrier that influences lease structuring. The air carrier (charterer) has the liability target on its back instead of the person that would otherwise exercise operational control under Part 91. This feature appeals to risk-averse Part 91 lessees or owners that want to mitigate the risk of liability for accidents involving their aircraft under their operational control of the aircraft.

      When the Rubber Hits the Runway

      When the conduct of flights blurs the line in determining whether one lessee/passenger has operational control or the lessor/aircraft provider has operational control under Part 91, illegal charter operations may be occurring. Lessees normally must understand and accept operational control and related obligations.

      Although the FAA has no specific criteria to determine when Part 91 dry leases morph into illegal wet leases, lessees should be wary of lessors that offer leases to multiple unrelated parties, induce the parties to hire the lessor’s pilots, and usurp the lessee’s independence in exercising operational control.

      Importantly, the lease parties of large civil aircraft (over 12,500 pounds mtow) must comply with FAR 91.23, the Truth-in-Leasing rules. These rules, which protect and inform lessees, require the filing with the FAA of a copy of the lease within 24 hours of signing and notice to the local FAA Flight Standards office at least 48 hours before the first flight under the lease.

      Conclusion

      There is no excuse for operating an aircraft as an illegal charter, especially when leasing aircraft provides a reasonable way to transfer rights to lessees to possess and use an aircraft under the lessee’s operational control. With the guidance of knowledgeable aviation counsel, individuals and entities can operate safely, lawfully, and knowledgeably under the FARs using leases and other related documentation that will survive FAA scrutiny.

      This article was originally published on AINonline on January 15, 2021.

       
       January 27, 2021
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    • NAFA Administrator posted an article
      Return to Lender
      Return to Lender see more

      NAFA member, George Kleros, Senior VP, Strategic Fleet Management and Fleet Support for Jet Support Services, shares nine things you need to know when leasing an aircraft.

      When leasing an aircraft, what are your maintenance obligations during and at the end of the lease term to ensure that the returned aircraft maintains its value? 

      Focused on that residual value, the lessor will designate a qualified inspector or auditor to perform periodic records reviews and/or asset inspections, throughout the lease period. The intent is to verify the aircraft’s general condition and ensure it remains in compliance with lease requirements.

      After each check, the inspector will send the lessor a report with the graded condition of the aircraft and any specific findings. If anything can or might affect the residual value, you’ll be required to take corrective action to bring the aircraft into compliance.

      At term end, the lessor will conduct an “off-lease” inspection (similar to a pre-purchase inspection) at a factory-owned or authorized service center. All components and systems must be in full working order; or repaired if not. If the major components are near their life limit, you’d be responsible for covering these costs: either a pro-rated percentage based on time consumed, or 100% of the cost to overhaul if it’s close to the event.

      If the aircraft requires repairs for damage or corrosion, you are responsible for the repair cost. Once any repairs required by the lease are completed, any diminution in value due to damage history will be the lessor’s responsibility.

      So what can you do to preserve the value of the aircraft?

      Do …

      • Review the lease document fully to understand the operation, maintenance and return of the aircraft requirements. A good lease-return scenario always starts with a well-defined and documented set of return conditions. Ask questions for clarification prior to signing, to be sure you fully comprehend the broad scope of your obligations.
      • Keep the aircraft clean and polished to protect from corrosion and paint deterioration. Unprotected aircraft deteriorate faster than you might expect. The aircraft interior will be inspected for wear, cleanliness, and damage. The exterior will be checked for oil leaks, paint condition, and structural damage.
      • Store the records in a secure, dry, fireproof storage cabinet or safe. Damaged or missing records devalue an aircraft and will change residual value. The lessor will come out either annually or bi-annually to see the aircraft and review the records for accuracy and airworthiness.
      • Keep up with routine and scheduled maintenance tasks, even if the aircraft is not flying for extended periods of time.
      • Address interior and exterior wear items immediately. Waiting can compound the problem and cost more to correct.

      Don’t …

      • Assume the lease document allows for the aircraft to operate under different regulations or use than originally defined.  If the aircraft flies only for you under FAR Part 91 regulations, don’t move your aircraft into a for-hire Part 135 air-taxi arrangement without consulting the lessor; it may not be allowed.
      • Leave the aircraft outside. Store it in a hangar when not in use. Sun, humidity, and high temperatures deteriorate interiors and paint exterior, diminishing the residual value.
      • Let the aircraft sit inactive for long periods of time. Your aircraft still needs to be flown and systems exercised to keep systems lubricated and reduce risk for damage.
      • Ignore missing paint and erosion strips. This leads to corrosion and will be expensive to correct.

      The lessor always requires hull insurance at a specific dollar amount, and generally seeks high liability insurance limits.  If you acquire an hourly cost maintenance program (HCMP), it can help ensure that the aircraft meets return conditions. The lease should state clearly that the maintenance program was current at lease inception and that the HCMP will be transferred to the lessor. An HCMP is very desirable in a lease transaction. It helps preserve the aircraft’s residual value, and helps you avoid penalties and extra costs. 

      This article originally appeared in Business Aviation Advisor on November 3, 2020.


       
       January 12, 2021
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