- 27 Apr 2020
- René Armas Maes
- Finance - Biz Av
In today’s overheated market, older and harder-to-finance business jets are being offered at unusually robust prices — and are still being snapped up quickly. Chris Kjelgaard asks what buyers can do to obtain financing and move quickly on a potential deal in the market...Back to Articles
It is clear in the early months of 2022 that the Covid-19 pandemic is continuing to fuel intense market demand for used business jets, whatever their age and category. Many people now purchasing used business jets are first-time buyers who lack experience of dealing with the many complications inherent in investing in, and owning, such sophisticated assets.
One major complication (perhaps the most important one for many buyers) is ensuring that adequate and suitable financing is in place and available at short notice in order to close the aircraft purchase, in a market environment in which sellers are calling the shots.
Many sellers are insisting buyers close deals quickly, and some sales are being unwound when the transaction encounters even short delays. Some sellers are even advertising sales as being “as-is aircraft condition, which could mean ‘first come, first served, and high bid wins’,” says Christopher Lee, Vice President – Aircraft Division in 1st Source Bank’s Specialty Finance Group.
Some sellers advertising such sales are insisting that buyers do not conduct pre-purchase inspections of the aircraft on offer, he says — a requirement that experienced buyers would consider an absolute deal-breaker.
In such an environment, having financing already in place and being able to move rapidly to close the aircraft purchase is paramount.
However, just as important for the buyer is not to rush into an ill-advised purchase which could cause significant financial and operational headaches after the closing. Business jets are too expensive to buy, to operate and to maintain for new owners to risk ‘buyer’s remorse’ lightly (not to mention lumbering themselves with potentially unsellable assets).
So what can buyers of business jets, particularly first-time buyers, do to be able to move quickly on a potential deal and at the same time try to ensure they’re not buying a lemon?
Involve your Bank from the Start
The most basic piece of advice experienced aircraft financiers have for buyers in today’s very hot pre-owned aircraft sales market is “come very early in the process” to your chosen financial institution to source the loan required in order to buy the aircraft.
It behoves buyers to seek out institutions which are very experienced in financing business aircraft, who will know all the potential pitfalls that could aircraft purchase transactions, and can advise buyers how to avoid pitfalls that could occur.
But even if a buyer is pre-approved for financing before agreeing to purchase a specific aircraft, in today’s market the inventory of available used aircraft is lower than it has been for a long time. As a result, there is considerable pressure on buyers to close their purchases quickly before sellers are influenced to cancel transactions in order to accept new, higher bids from elsewhere.
Even after obtaining pre-approval for financing, “You still need to close quickly,” says Lee. “Even timing can be the edge on securing a deal. You need a lender who is quick to act”, he advised, adding that his company’s speed has helped a number of customers in the past 12 months.”
Come Prepared, and Seek Expert Help
Would-be buyers should approach financial institutions fully-armed with extensive documentation of their personal financial situations and asset holdings, for the bank to examine.
“Ultimately, every potential buyer is going to have to present a complete financial package,” says Keith Hayes, Senior Vice President and National Sales Manager for PNC Aviation Finance. “They should present this material proactively, and include as much detail as possible, so that the financial partner can offer the best rates and most aggressive structure” for the financing.
At the same time, each buyer should seek to “assemble an entire team of aviation experts” to support his or her efforts to secure the right aircraft, Hayes adds. Experienced aviation financial institutions such as PNC Aviation Finance and 1st Source Bank’s Aviation Division will assist the buyer in this process, advising the buyer first as to who might be a potentially suitable aircraft broker to source a suitable aircraft.
Other Experts you Need
The buyer’s advisory team should also include an experienced aircraft technical inspector, a specialist aviation attorney and a tax professional who is highly familiar with the particular taxation regulations and implications for aircraft sales transactions, says Hayes.
This team will ensure that the buyer doesn’t make elementary mistakes, such as allowing the purchase to go ahead without the technical inspector having closely examined the aircraft and its maintenance documentation in a pre-purchase inspection (PPI).
Buyers shouldn’t accept ‘as-is’ transactions purely on the seller’s say-so regarding aircraft condition. Only by having an expert technical inspector conduct a full PPI can the buyer become aware of any past damage history attached to the aircraft, the state of its maintenance records (it can be hugely expensive to rectify maintenance records if they are incomplete), and the extent of any metal corrosion affecting the aircraft.
“All [metal] aircraft have some corrosion,” says Lee. “Ideally you will be able to identify any meaningful corrosion in the pre-purchase inspection.”
What inexperienced buyers most need to know is if the aircraft has advanced corrosion, and by conducting the PPI an experienced technical inspector will find if this is the case. In terms of both money and time, advanced corrosion can be prohibitively expensive to repair, greatly increasing the buyer’s required financial investment in the aircraft and also potentially reducing the aircraft’s resale value, even after repairs are completed.
Typically, the aircraft most at risk of incurring advanced corrosion are those which are based or stored near the coast or which do a lot of operations near bodies of salt water, according to Lee.
Despite the market being overheated, “the days of good deals haven’t ended — they’re just getting farther apart,” Lee explains.
However, “in a seller’s market, you have to be more careful regarding due diligence.” In this regard, the buyer’s specialist team — and particularly the financial institution — will be highly helpful, all the more so if the buyer is a first-time purchaser.
“We will provide sound advice that gets [the buyer] to ask the right questions,” he says. “We do this simply by asking questions, to protect the client as well as the bank.”