How Could Financing Agreements Limit Jet Usage?

If you’re considering financing an aircraft acquisition, have you considered some of the restrictions that may be placed on your operation of the aircraft? Gerrard Cowan speaks with some leading aircraft finance organizations to learn more...

Gerrard Cowan  |  12th December 2022
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Gerrard Cowan
Gerrard Cowan

Gerrard Cowan is a freelance journalist who focuses on aerospace and finance. In addition to his regular...

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Business people examine paperwork in front of private jet

Finance agreements can impose restrictions on several aspects of aircraft operations, from maintenance demands to the precise use of the business jet. With that in mind, how should borrowers make sure they obtain the right agreement for them?

There are a wide range of areas in which lenders commonly identify certain restrictions or conditions. A spokesperson for the National Aircraft Finance Association (NAFA) noted that lenders can stipulate private versus commercial use, known as Part 91 and Part 135 operations respectively, in the US.

“We often see the security agreement specifically define the particular utilization permitted,” the spokesperson said.

Luci Johnson, Senior Vice President of PNC Aviation Finance Operations, said that some lenders choose to place restrictions on aircraft and can do so for a multitude of reasons.

For example, PNC Aviation Finance does not finance third party charter-only operations, so when it finances an aircraft, it layers in restrictions on this specific type of usage and total hours of operation. “The reason we do this is to ensure that the aircraft is for their business purpose versus an investment asset,” Johnson explains.

However, these structures can be modified to accommodate some charter usage, depending on the borrower’s intent. Some PNC Aviation Finance clients do operate 100% Part 135, but they only fly the owners and related parties.

“Third-party charter clients would never step foot into the aircraft, so in these cases, it’s the intent we’re underwriting, not the actual technical classification.”

It is important to fully disclose how and where you will operate your aircraft and discuss these areas with a lender, says Adam Meredith, president of AOPA Finance. An intention to utilize the aircraft for Part 135 charter operations will almost always impact a lender’s decision, he notes, so discussing this up-front is critical.

Many lenders will be fine with some limited 135 usage, but only for a limited number of hours or a certain percentage of the aircraft’s use over the course of the year.

“If you intend to lease your aircraft for any kind of commercial operations, that too can be problematic,” Meredith adds. “If you intend to have the aircraft used for anything other than personal and your business’ use, you should discuss this [with your lender] first.”

Location Matters

The location of operations could also be a factor, Meredith highlights. “There are a number of countries that can be problematic and it’s important to not only ensure you have complete insurance coverage but also that the lender doesn’t prohibit travel to those areas.”

Johnson echoes the importance of location, noting, “we also place restrictions on where they can operate or store the aircraft, to avoid, for example, sanctioned countries”.

Joe Catarina, Chief Credit Officer at Global Jet Capital, adds that a lender may restrict the jurisdictions to which the aircraft might travel internationally, or limit the amount of hours it can be used annually, or in total through maturity. They may also require loan-to-value covenants related to the value of the aircraft against the outstanding principal on loans and finance leases.

“Of course, in default situations, a lender may impose additional restrictions, including – but not limited to – grounding of the aircraft,” he adds.

Brad Harris is President and CEO of Dallas Jet International, which supports clients in international business jet transactions. He, too, points to the importance of operating an aircraft Part 91 versus Part 135, and notes the potential for geographical restrictions, particularly “if you’re going to countries that are not politically stable or sanctioned”.

A lease would likely be slightly more restrictive than a loan, Harris says, because a loan is typically either an asset-based arrangement or a straight debt loan based on the borrower’s credit rating and other factors. “A lease would be a little more restrictive than just regular straight financing because of the lease return conditions or provisions,” he says.

Limitations for Leases

Jurisdiction restrictions and capped hours are common to both loans and leases, according to Catarina. Loan-to-value covenants are less common in operating leases, he adds, but can still be present in a finance lease, where ownership title is transferred to the lessee at the end of the contract.

“An additional consideration with respect to operating leases is the requirement to coordinate on registration items with your lessor as they will be recorded as the owner at the FAA,” he adds.

A lease can be more restrictive since the underwriter will potentially have greater liability, “so typically we’d set a residual value based on expected usage and maintenance of the aircraft,” Johnson explains.

On a standard loan, restrictions can vary based on the quality of the asset owner’s credit, she adds. “However, asset-based loans are more restrictive relative to credit- based facilities because of our higher reliance on the aircraft’s value.”

Maintenance Matters

Maintenance can also be an important focus for lenders. Harris highlights the potential requirement for enrolment on an engine maintenance program but adds “financial institutions typically are not trying to be cumbersome – they just want to protect their interests”.

For example, Johnson says PNC Aviation Finance might require an engine maintenance program to ensure the aircraft’s future value is maintained. It could also limit the types of modifications that can be made to the aircraft – for example, stipulating that the owner cannot change the function or operating capability.

And lenders often receive copies of maintenance tracking reports such as a Continuous Airworthiness Maintenance Program (CAMP) prior to closing, noted NAFA’s spokesperson, “and then have the right to obtain them on a recurring basis during the term of the loan”.

“Underwriters can implement the same maintenance restrictions as the manufacturers and the FAA,” Johnson adds. “If additional maintenance is required, then that means there’s some sort of special circumstance involved that we’ve negotiated upfront with the client.

“This could include requiring upcoming inspections to be completed prior to closing, or another specific, unique need.”

Advice from the Experts

The following is some of advice offered by the experts to those who are planning on financing an airplane acquisition anytime soon...

Be clear on your intentions: according to Catarina, borrowers should be clear about the operational intentions of the aircraft. “The goal of financing documentation is to negotiate, and to not have to constantly revisit it during the term of the financing. The more items you can sort out prior to closing the financing, the easier the administration will be.”

Meredith agrees, noting that matters such as intention to use the aircraft for any commercial operations or to fly it through potentially hostile areas “should be discussed ahead of time to ensure you do not default on any loan covenants”.

Similarly, for Johnson, “the biggest piece of advice we give to our clients is to be transparent with your intended aircraft usage upfront”. Buyers should engage advisors during the development of their aircraft operation so that all applicable laws are being followed, especially regarding areas like potential tax consequences or regulatory violations.

“Operations that vary from original representations can only create issues and incur greater expenses to resolve.”

Harris recommends borrowers ensure they get the best advice possible, such as an aviation attorney who specializes in financing. In some cases, he highlights, “they could certainly rewrite some of the finance agreements to protect the borrower, more than the borrower trying to do it alone.”

More information from

AOPA Finance:
Dallas Jet International:
Global Jet Capital:
PNC Aviation Finance:
National Aircraft Finance Association:

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