Tips for a Straightforward Jet Transaction

Mapping the often complex path toward aircraft purchase, Attorney Keith Swirsky provides a guide for successfully completing a transaction

Keith Swirsky  |  22nd November 2017
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    Keith Swirsky
    Keith Swirsky

    Keith Swirsky is President of GKG Law, P.C., and Chairman of the firm’s corporate aircraft and...

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    Mapping the often complex path toward aircraft purchase, Attorney Keith Swirsky provides a guide for successfully completing a transaction

    The decision to purchase a business aircraft can take many forms. It may be one that evolves over time for a first time buyer, or the decision may be made rather quickly for those familiar with Business Aviation and trading up from an existing aircraft. 

    Either way, once the determination to purchase an aircraft is made, the most common next step is to contact an aircraft broker.

    The aircraft broker then works to identify the most suitable aircraft and put into place a Letter of Intent, and an aviation attorney is hired to prepare the purchase agreement.

    Either concurrent with the negotiations of the purchase agreement or after execution thereof, additional parties are contacted, such as prospective lenders and management companies.

    While the foregoing approach will work, it is not ideal. The following paragraphs will detail a ‘best practices’ A to Z approach to acquiring a business aircraft.

    Aircraft Financing

    Financing is generally the longest lead-time item if used in the acquisition of a business aircraft. In the typical transaction, working with the lender becomes a fire drill because the process often begins late in the game.

    Ideally, contact with prospective lenders should be initiated as soon as the decision is made to finance the purchase.

    Commonly, several lenders will submit financing proposals—a process that typically takes two to four weeks in order to select the lender and refine the proposal. 

    While some lenders require specific make, model and serial number in order to submit a proposal, it is possible to provide the lender with a close approximation of the desired aircraft type and cost and then proceed on a non-binding basis.

    Once a lender is selected, it can take a week or longer for the borrower to submit complete financial and other data, thereby allowing the lender to obtain credit committee approval and commit to finance the transaction.

    Thereafter, it can take a week or two to obtain draft loan documentation. Clearly, the entire process is lengthy, so getting an early start is essential.

    Tax Attorney

    Concurrent with initiating contact with a lender, it is generally preferable to contact an aviation tax attorney. If the attorney is contacted prior to the lender, the attorney can provide referrals to lenders that will fit the client’s profile.

    If the attorney is contacted later on, he/she can still provide referrals to aircraft brokers, management companies, escrow companies and any other participants to the purchase transaction.

    In addition, many aviation attorneys are skilled at both FAA and tax matters, as well as the mainstream transactional and commercial issues, allowing for completion of all State and Federal tax planning and formation of a special purpose entity to take title, if appropriate.

    With the planning completed early on in the process, the transaction will proceed more smoothly from the perspective of having a coordinated Letter of Intent and purchase agreement, having the acquiring entity formed, identifying state(s) where the aircraft can be delivered, and other important matters.

    Tax-Free Exchange

    In addition, if the aircraft purchase is tied to the sale of an existing aircraft, the tax planning will include the benefits of conducting a tax-free exchange and if warranted, implementation of all related structuring.

    Certain aviation tax attorneys are adept at planning and structuring tax-free exchanges, or if not, can make a referral to a company specializing in conducting tax-free exchanges.

    The timing associated with the tax-free exchange depends on whether the transaction will be structured as a forward or reverse tax-free exchange:

    • In a forward exchange the existing aircraft is sold first and the replacement aircraft is acquired second. In such cases, documentation is relatively simple, and it is possible to fully document the tax-free exchange within two or three business days prior to the closing of the sale of the existing aircraft.
    • Conversely, in the event of a reverse exchange, the replacement aircraft is acquired prior to the sale of the existing aircraft, and because of the complexity of structuring a reverse exchange, a minimum of one week or preferably longer is desired.

    Once ownership structuring has been conducted and the loan process initiated, it is timely to contact an aircraft broker. Commonly an aircraft broker will expeditiously select an aircraft make and model that meets the client’s mission and other requirements, and recommend available aircraft in the marketplace.

    Letter of Intent

    Most aircraft brokers will also have a template Letter of Intent pieced together from prior transactions. While using the broker’s template is tempting from the perspective of timeliness and cost, a good aviation tax attorney should be able to prepare the letter of intent on the day needed and for minimal cost. 

    Without a doubt, a Letter of Intent prepared by an aviation tax attorney will be comprehensive, unambiguous, and will dovetail with the definitive purchase agreement.

    On average, negotiations of the Letter of Intent should take one week, factoring in reaching an agreement on the purchase price. Once executed, the attorney will prepare and negotiate the purchase agreement over a period of roughly two weeks. Of course, the timeline may move slower or quicker depending on specifics.

    Pre-Purchase Inspection

    Concurrently with completing the purchase agreement, negotiations regarding all financial and other due diligence matters should be completed with the lender. After contract execution, it is normal for the aircraft to immediately undergo the Pre-Purchase Inspection, which, depending on the size of the aircraft, can take anywhere from one to three weeks.

    During the pre-purchase inspection, the lender should be preparing loan documents and circulating them for review and negotiation, which should take at least one week and possibly longer.

    Aircraft Management Provider?

    In the event external aircraft management is desirable, the selection of an aircraft management company should commence while the purchase agreement is being negotiated. Once selected, it is customary to allow one or two weeks for the preparation and negotiation of management documentation.

    In some transactions, it is necessary to execute such documentation prior to closing. For example, in some states the sales tax planning will rely on a common carrier exemption, which requires the aircraft to be leased to a common carrier (a.k.a. a charter company) at the time of title transfer.

    And Finally…

    While it is not always part of an aircraft transaction, time permitting, it is advisable to have one or two pre-closing conference calls to ensure that all items on the closing checklist are completed in a timely manner.

    Implicit in the above roadmap is the requirement for several phone calls to complete all acquisition structuring and tax planning, to work through pre-closing requirements including registration of the acquiring entity as a sales tax vendor (if appropriate), to complete sales tax exemption and other relevant forms, to obtain board approval, and to complete various other items identified on the closing checklist.

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