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The ’How to Buy, Sell & Upgrade Aircraft’ AvBuyer Guides
Written by industry experts to help you make the right decision when selling, buying or upgrading your aircraft.
How to Buy Aircraft: Private jets and business aircraft — by Brian Heisman
Because buying used corporate aircraft or private jets usually involves an expenditure of several million dollars or more, the process involves significant financial issues. This article will highlight those various issues, and identify some high level recommendations, and provide a quick process checklist on how to buy a pre-owned business aircraft or private jet. These recommendation can be universally applied whether you are buying a used Gulfstream, Learjet, Boeing Business jet, Dassault Falcon, or any other business aircraft or personal jet.
The most important issue is selecting an aircraft for that will perform the mission. Rather than buying a corporate aircraft that will perform the longest mission on a non-stop basis, it may be a more prudent decision to purchase a corporate aircraft that performs ninety percent of all missions non-stop, and elect to charter (or purchase a card) when performing the longer range missions. This approach may save millions of dollars in the acquisition cost as well as significant ongoing operating expenses.
"Read our quick process checklist on how to buy a pre-owned business aircraft or private jet"
When reviewing how to buy a used business aircraft or private jet, it may be that the lower priced aircraft does not have equipment that your chief pilot will determine is needed for your typical operations (and, therefore, consulting the pilot early on in the process is warranted). Any needed equipment can be costly, and take weeks of down time to install. The inspection process itself is critical, as the standard generally is that the seller must pay to place the aircraft in an airworthy condition at the time of title transfer; accordingly, a savvy aircraft buyer will engage a technical consultant to be present during the inspection to advocate the “gray” areas on the buyer’s behalf.
Of course, with respect to “price,” industry professionals who regularly engage in transactions are in a position to know where the market is.
When purchasing a used jet or business aircraft with a customized interior, the completion process should be overseen by an advocate for the aircraft buyer, to ensure that the woods and other materials are to the owner’s satisfaction and the aircraft is completed timely and satisfactorily.
A specialized aviation tax attorney also plays an important role in the process of purchasing a corporate aircraft. It is clear that the aviation attorney for the buyer should prepare the Letter of Intent and definitive purchase agreement. Ideally, the aircraft buyer will want the smallest deposit as possible as the deposit usually constitutes liquidated damages in the event of a buyer default. In addition, the buyer will want the right to reject the aircraft for any reason at the conclusion of the inspection.
The ownership and operating structure is important as there are numerous issues that are affected by how the structure is organized. For example, ownership structuring affects liability protection planning, economic and cost sharing arrangements, federal aviation regulatory compliance, federal income tax deductions for operating expenses and depreciation, and federal excise taxes. Few attorneys and accountants are familiar with these issues as they apply to aircraft, as this is a highly specialized area.
The ownership and operating structure impacts the liability for sales and use taxes. It is commonplace in the corporate aircraft market for the seller to not collect sales tax from the buyer. Some buyers may assume, without further inquiry, that because the seller did not collect sales tax, it is because none is due. Nothing could be further from the truth, as typically the standard purchase contract provides that the buyer is liable for all sales taxes and shall indemnify the seller in the event taxes are imposed by any state. The sales and use tax system is currently complex and arcane, and it is very possible for more than one state to impose a sales or use tax on the same aircraft purchase transaction.
When financing the purchase of a used corporate aircraft, typically the aircraft owning entity is the borrower, and the high net worth individual (or the corporate parent holding company) is the guarantor. The actual structure of the loan documentation has a bearing on whether tax benefits flow to the owner(s) of the aircraft owning entity. Additional costs will be incurred if a restructuring of the loan documentation is requested after bank counsel has generated initial drafts. Not surprisingly, an attorney who regularly negotiates aircraft loan documentation will also be familiar with customary commercial terms, and can enhance the deal terms.
Separately, creating an in-house flight department, or selecting a professional management company, are significant elements in the process, and, for the first-time aircraft owner, warrant retaining an expert to advise on.
A long term view is also appropriate when an aircraft is purchased by two or more individuals. The standard and simple approach taken by most non-aviation professionals, is to utilize a single entity to hold title to the aircraft, and for the owners to take an ownership interest in the single entity. While this structure may be expedient in the short term, it has longer term implications. For example, if an aircraft is purchased and hangared in the state without sales tax but then utilized regularly in a state with sales tax (and where one of the owners resides), such as Florida, then Florida may assess a tax on the entire purchase price of the aircraft. In contrast, if two entities were initially created to take ownership of the aircraft as 50/50 tenants in common, then Florida may only have the right to tax 50% of the value of the aircraft, associated with the owner that resides in Florida.
As another example, if both owners wanted to sell, but wanted to acquire different aircraft, pursuant to a tax-free exchange, it would be impossible to do so without the single entity acquiring both aircraft. This result would not generally work, as it is assumed that each owner would no longer be interested in being tied in a single entity for their prospective separate operations.
There are other issues that pertain to the choice of entity and structuring acquisition of the aircraft, too numerous to go into in this brief article.
To recap, buying a used corporate aircraft or private jet requires careful up-front analysis on the proper choice of aircraft to suit the mission, the choice of the proper aircraft with the necessary avionics for future operations, and finally the retention of an advisor to oversee and advocate the buyer’s interests in an inspection process, as well as an interior completion process. Understanding the right price to purchase the aircraft for requires the assistance of a knowledgeable industry expert, or else the buyer may overpay for the aircraft. Creating the ownership and operating structure, and engaging in advance federal tax, state tax and federal aviation regulatory planning, can add hundreds of thousands or millions of value to the transaction in the form of tax savings. Understanding how to structure a loan, and even determining what are commercially reasonable loan terms, as well as commercially reasonable terms for professional management of the aircraft, all areas where lawyers, accountants, aircraft brokers and other aviation advisors can significantly contribute.
By Keith Swirsky and Brian Heisman of GKG Law
Keith Swirsky is President and Chairman of the Aviation Group and Tax Group. Partner concentrating in the area of business aircraft transactions, tax and business (transactional) representation with emphasis on federal and state taxation and federal regulation of aircraft ownership and operations, structuring and negotiating mergers, acquisitions and reorganizations, tax-free exchanges, and tax and corporate planning for the creation of aircraft operating structures.
Brian Heisman is an Associate of GKG Law concentrating in the area of business aircraft transactions, tax and business (transactional) representation, with emphasis on federal and state taxation and federal regulation of aircraft ownership and operations, structuring and negotiating mergers, acquisitions and reorganizations, tax-free exchanges, and tax and corporate planning for the creation of aircraft operating structures.
For more information please see: www.aviationtaxlawyer.com