Lending capital increasing for older business-turbine aircraft
Need a business airplane? Have the business write a check. If your business can afford an airplane, it must have the funds… Right? Well no… not exactly…
The world of modern business and finance, it doesn't work that way. In general, business consultants and accountants advise against depleting cash resources on asset purchases for the business. They typically counsel the preservation of cash assets by letting the aircraft itself serve as the collateral against a promissory note for the funds (yes, a loan).
Despite the protestations of some in the political world, the majority of the business world views credit as a good, useful, necessary, element of capitalism. Cash business simply isn't always smart business. So, we borrow. Businesses use their good credit in a way that pays off at tax time – a way cash typically can't mirror.
The asset's depreciation remains the same regardless of how the owner acquires the aircraft. Loans and leases, however, pay in tax benefits beyond the depreciation deduction we apply to our businesses aircraft. All those costs associated with the loan itself, for example, are generally tax deductible. We still must generate the funds to cover those loan-associated costs, and we must generate the funds to pay for steps in the transaction even when we use cash. It's in this area that a few operators suffered problems in the past.
As many an operator learned, misuse of credit valuations to benefit from the equity can be dangerous. A small percentage of operators found themselves and their aircraft in the equivalent of real estate's worst financial nightmare: An upside down relationship between market value and principal obligation. The issue caused problems – both selling and buying.
Together, the problems on both sides of the table exacerbated, as many prospective purchasers learned during the unfolding months of the Great Recession, via a paralysis in the market – even for borrowers with stellar qualifications and a reasonable down-payment. Many found themselves subject to something along the lines of aviation ageism, making hundreds of airplanes difficult to sell, trashing their values and - in an interesting twist - driving up the costs of buying the affected aircraft, all of which was a little ironic – and pretty self-perpetuating.
And therein came the rub.The increased costs of buying coupled with other operating expenses lessen the appeal of these aircraft under existing tax laws; it’s safe to say accelerated depreciation was not a big help here.
But, lenders will be lenders: jump into present day, and after six years in which short-term Federal Reserve Interest Rates have hovered a notch away from free, money is more and more available, and investors are eager to see some return in excess of bank notes.
The loan market for older pre-owned business-turbine aircraft has still changed - it's not quite as freewheeling and open as before the Great Recession – but it is by far and away more liberal and flexible than in the past six years, and that's something dealers, brokers, sellers and, in particular buyers, are happy to see!
The Irony of the Outcome
Six years ago, lenders willing to write notes for aircraft older than 10 (and particularly 20 years) began holding out for shorter terms, higher interest rates, larger down-payments and reduced exposure. They argued that doing otherwise would put them at risk of suffering comparably to the housing market, whereby owners of heavily leveraged properties suddenly found the market inverted, with owners essentially upside-down in terms of asset value versus loan principal due the lender. That phenomenon served to further exacerbate and perpetuate the housing-market contraction.
The only real risk in the aircraft-sales arena ultimately turned out to be the self-inflicted nature of some of the value and sales damage – the part enhanced by the tighter lending practices and the reduced sales (and residual values) that came to those aircraft affected by the practice. It was always doubtful whether many business aircraft operators treated their business-turbine aircraft assets as the kind of cash cows so many homeowners did: taking out equity through ridiculously expansive refinance offers to finance vacation homes, boats and travel.
Those unfortunates got great loan deals before finding themselves painted into unforeseen corners when flexible-rate notes ballooned in costs just as home values plunged. Failure to keep up ultimately lead to foreclosure, a bloated resale market and years of slow rebuilding: trapped homeowners looking to extend their lifestyles; not business aircraft operators looking to expand their businesses.
Excessive caution and resistance to committing even readily available resources held back sales of both new and pre-owned business aircraft – particularly in the lower half of the size spectrum and, in particular, at the owner-flown and light Business Aviation levels.
Funds are back, today, however. Options are more flexible; choices remain good and prices still tilt toward the buyer’s market. Access to finance works only if other elements align – and today's improved terms prove as good as promised. Consider the terms outlined by prospective lenders: would their terms tempt you? Would such terms work for your fiscal situation?
The good news is that lenders increasingly see older aircraft as less risky once past the 20-year mark. The bad news still afflicts aircraft between five and 20 years of age.
Getting what you See…
Some operators turn to banks, some to other lenders – and some put their needs in the hands of an all-in-one shop experienced in, and capable of helping a prospect navigate the entire process: From disposal of an existing aircraft, to locating, negotiating and acquiring the next airplane – and arranging the financing needed to complete the transaction.
That's the scope of services offered by Sojourn Aviation (www.sojournaviation.com), a four-year old company. Industry veteran Brad Hatt is a familiar name and face in Business Aviation thanks to his 29 years of professional experience in General Aviation. Before founding Sojourn in 2010, Hatt amassed an impressive résumé in Business and General Aviation including a highly successful period at Hawker Beechcraft. In his closing role as President of Hawker Beechcraft Commercial Aircraft, Hatt managed a business unit worth more than $2 billion in revenue.
Nextant Aerospace founder Kenn Ricci is part of the executive team at Sojourn, serving as chairman of the company. His résumé is equally impressive and arguably better known thanks to his start-ups that include Flight Options and Nextant among others.
With the company's own access to competitive finance options and the many other avenues available today, Sojourn offers sellers and buyers a near-seamless process through the transaction maze.
Apogee Finance Company is a more-recent entry into aircraft finance specializing in aircraft older than 20 years – from Citations and Challengers to Gulfstreams and King Airs. Down payment requirements are minimal, according to the Ft. Worth-based company, and terms to 20 years are available.
That's increasingly common in the market. Companies such as AirFleet Capital, CFS Aircraft Lending, and Aircraft Finance Corp. are increasingly working deals for aircraft that were ‘difficult-to-impossible’ to finance a few years ago.
The National Aircraft Finance Association represents many of the largest and smallest institutions dealing in aircraft loans and many of its member companies counsel their clients that the view of business aircraft is different today than six, maybe seven years ago. Among the biggest differences: the end of the appreciating aircraft syndrome. “Those days have passed,” said one NAFA member.
It's a change from the heady days of record-breaking sales back in the first decade of the century – when mere delivery positions appreciated enough to make selling the slot a money-maker for many.
“That transition made financing older airplanes a real struggle for a few years – but it looks like that time has passed and the new normal requires dealing in older airplanes...If you want to keep doing business,” the NARA member added. “There aren't enough new-airplane finance opportunities to go around and support all of the players who are coming into the market – but there are enough in the pre-owned market to keep many of us open.”
And the ability to finance the many older, serviceable business-turbine aircraft on the market bodes well for a healthier business-aircraft market ahead.