Back To Basics by jennyyingdi

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									USED AIRCRAFT SALES TALES




Back To Basics:
Aircraft purchasing protocols.
by Gregory P. Cirillo & Gary I. Horowitz
                autious optimism is starting to


  C
                take a hold. After more than a
                year of stagnation, aircraft
                sales are recovering. Buyers
                and sellers are seeing eye-to-
eye on prices, and lenders are stepping up
with viable terms to help get deals done. This
is a good time to (re)consider how you
approach a corporate aircraft transaction –
from the purchaser’s perspective. Call it
Aircraft Purchases 101.
    The acquisition of an aircraft for corporate
or personal use is inevitably a unique trans-
action for the buyer. Even companies in the
business of acquiring heavy, expensive
equipment find themselves lost in new terri-
tory when buying a corporate aircraft. It is
vital that the buying process be undertaken
with a clear delegation of responsibility and
chain of authority to avoid costly errors.
    The buyer’s team composition can vary,
with both internal and external expertise, but       big-dollar decisions get made upstairs.            er, who assists in your aircraft selection and
the functional roles that need to be filled are:         Next, you need a finance/tax person to         helps you meet your mission objectives. This
(i) executive action, (ii) finance and tax           manage the financial aspects as well as the        person could be your chief pilot, but only if
review, (iii) operational analysis and market        enormous range of tax issues and opportuni-        that person has specific experience in aircraft
access, and (iv) document negotiation and            ties that the aircraft will present. This person   evaluation beyond his or her chief pilot role.
legal compliance. Most importantly, the team         needs to be involved at the start because tax          More often, a specific advisor is engaged
should be formed and directionalized before          considerations play a critical role in deter-      that is also an aircraft broker or agent. If a
any aircraft search begins.                          mining the actual cost of acquiring and oper-      broker/adviser is engaged to provide these
                                                     ating a business aircraft.                         services, it is critical that the chief pilot and
PURCHASING TEAM                                          The finance person needs to have the abil-     all others be disengaged from technical
Starting at the top, you need an executive           ity to direct deposits once a suitable aircraft    expert/adviser responsibilities or subordinat-
who can independently make critical deci-            has been identified and take the lead in           ed to the technical expert/adviser.
sions and sign key documents. This is often          securing external financing.                           Internal redundancy and/or conflict is
an executive officer or an officer in the “cor-          Most major lenders will give you a non-        very disruptive to an aircraft acquisition. It is
porate services” division of a large corpora-        binding memorandum establishing the                not unusual for a single buyer to over-stimu-
tion. The executive’s actions will range from        financing terms based upon an assumed air-         late the market by having two or more repre-
signing corporate finance documents to               craft value. In recent months, lender commit-      sentatives making inquiries about the same
approving lavatory fixtures. Without some-           ments have been of questionable value given        aircraft, thereby increasing the perceived
one in this role, the acquisition process            that appraisals have often undercut contract       demand for the aircraft. The buyer also loses
becomes an exercise in frustration and               prices, leaving the buyer with a financial gap     credibility if a seller determines that two peo-
uncertainty.                                         to cover. Nevertheless, it is important to start   ple in the market claim to represent one
   If you cannot have a “leader” who will be         the financing search early, and seek multiple      buyer.
available at a moment’s notice, then you may         lender proposals.                                      A legitimate buyer needs to establish its
need a two-tiered approach where one sub-                Third (and for now the last of the core        credibility quickly because the market is rife
leader can make strategic decisions, and the         team members) is the technical expert/advis-       with dabblers and occasional frauds.              ❯

148   WORLD AIRCRAFT SALES MAGAZINE – October 2009                  www.AvBuyer.com                                               Aircraft Index see Page 4
USED AIRCRAFT SALES TALES



A transaction without strict oversight can




                                                                                                                                                          PHOTO COURTESY OF DUNCAN AVIATION
degenerate into a collection of under-the-
table side-deals and sub-brokerages, all to
the detriment of the buyer and seller.
    Once you have identified the target air-
craft, the team will expand to include some-
one responsible for regulatory (FAA and
DOT) compliance, drafting and reviewing
transaction documents, starting with offer
letters and broker agreements, and progress-
ing to the purchase agreement and agree-
ments relating to aircraft use, storage, main-
tenance, repair, insurance and crew.
    After selecting an aircraft and before clos-
ing, the buyer must develop an ownership
and operational structure that is legally com-
pliant and consistent with the buyer’s tax
strategy. This could be done by an in-house
attorney, or an outside attorney (like your
authors). In-house attorneys, although expert
in many areas, are generally not familiar
with aircraft transactions and the federal avi-
ation regulatory structure, so engaging exter-
nal legal counsel may save time as well as                 reject the aircraft after the inspection is    INSPECTION
mitigate risk.                                             complete, and determine the seller’s obli-     The inspection of the aircraft generally starts
                                                           gations to correct discrepancies (at sell-     at the LOI stage, and can continue well after
LETTER OF INTENT                                           er’s cost) if the buyer accepts the aircraft   the APA is signed. The most common inspec-
After the buying team is organized and func-               after the inspection and agrees to take        tion regime is a two-stage inspection.
tioning, and the desired aircraft has been                 delivery.                                          The first inspection is a document review
identified, the buyer and seller should nego-        7.    Pick a time for closing.                       and aircraft ground inspection to get the
tiate and sign a Letter of Intent (LOI) for the      8.    Clarify who pays for aircraft movement         buyer over the ‘hump’. The preliminary
aircraft’s purchase and not jump right into                costs.                                         inspection involves minimal aircraft down-
the Aircraft Purchase Agreement.                     9.    Have the seller agree that buyer has the       time, and is largely to establish that the air-
    The LOI is a very small, and inexpensive               exclusive right to purchase the aircraft       craft shows well, and is the make and model
step, but it will determine the direction of the           during this time and will otherwise take       represented, with the right equipment, and
transaction to follow. Although generally                  the aircraft off the market.                   that the records are substantially correct and
non-binding, the LOI allows the buyer and            10.   Agree to enter into a definitive Purchase      complete with damage history fully dis-
seller to work-out the core terms of the deal              Agreement within a short time-frame.           closed. A preliminary inspection may be
and roadmap the transaction. Without an                                                                   used to give the buyer an idea of whether the
LOI, the parties either plow forward with            AIRCRAFT PURCHASE AGREEMENT                          interior is acceptable, or needs to be refur-
inadequate direction and expectations, or            After the LOI has been signed, the parties           bished. The preliminary inspection is the first
they tend to get bogged down in the Aircraft         need to execute an Aircraft Purchase                 fork in the road – the buyer can reject the air-
Purchase Agreement details, and the transac-         Agreement (APA). The APA spells out the              craft or proceed to a deeper, second
tion may stall out or blow up.                       details for the aircraft’s purchase, establishes     inspection.
    The LOI should cover ten main points:            the pre-closing process and timeframe for                The second inspection involves a greater
1. Describe the aircraft, engines, equipment         completing the transaction, and binds the par-       investment by the buyer (often $50,000 or
     and documents that will convey.                 ties to the deal.                                    more paid to an authorized inspection facili-
2. Determine the purchase price.                         The APA fleshes out the LOI. If terms            ty), and a greater risk to the seller (more air-
3. Establish the amount of the buyer’s               under the APA contradict the LOI, as is often        craft downtime and a risk of finding a major
     deposit, who will hold it, the conditions       the case if the LOI is not carefully drafted,        discrepancy). An aircraft transaction that falls
     for its return or forfeiture, and who pays      then there has been a step backwards in the          apart after a major inspection can deter
     the escrow agent’s fee.                         process, and additional negotiations between         future buyers. This inspection can take a few
4. Agree upon the physical condition that            the buyer and seller become necessary.               weeks or longer if facilities are booked up.
     the aircraft must be in at the time of              A good APA will be easily readable and               Usually, the inspection is done after the
     delivery, along with clear title and no         unfold like a story with a beginning, middle         APA is executed, and determines whether
     liens.                                          and end. A successful APA will allow the par-        the aircraft meets the detailed physical stan-
5. Work-out the pre-purchase aircraft                ties to understand their rights and responsibil-     dards as established in the APA. Typically,
     inspection regime and criteria – select the     ities during each stage of the transaction,          the inspection facility will open two accounts
     inspection facility, the scope of the           thereby preventing conflict that wastes time         – one for the seller’s expenses (fixing discrep-
     inspection, including test flights, timing,     and resources. In particular, the APA should         ancies) and one for the buyer’s expenses
     and who pays the costs for the inspection       clearly lay out each party’s pre-closing obliga-     (paying for the inspection and covering dis-
     and the movement of the aircraft to the         tions, since a closing can be delayed by minor       cretionary fixes that the buyer elects to
     inspection facility.                            oversights, such as failing to timely register       undertake).
6. Establish the buyer’s right to accept or          with the International Registry.                         Your adviser/broker - and if applicable

150   WORLD AIRCRAFT SALES MAGAZINE – October 2009                    www.AvBuyer.com                                               Aircraft Index see Page 4
                                                                                                                                                               USED AIRCRAFT SALES TALES



                                                                                                                                            pages emailed to the escrow agent/law firm
PHOTO COURTESY OF DUNCAN AVIATION




                                                                                                                                            in OKC, but for the most part, the closing is
                                                                                                                                            routine. There is rarely a face-to-face closing
                                                                                                                                            with a conference table full of papers and
                                                                                                                                            haggard executives ‘noodling’ out the details.
                                                                                                                                                Closing can get exciting when time zones
                                                                                                                                            become a factor. For example, to sell an air-
                                                                                                                                            craft under U.S. registry to a buyer who will
                                                                                                                                            put it under U.K. registry, with a mortgage,
                                                                                                                                            you need to engineer the closing such that it
                                                                                                                                            happens during a window of time when the
                                                                                                                                            U.S. registry and the U.K. registry are both
                                                                                                                                            open so that the U.S. registry will issue the
                                                                                                                                            “all clear” de-registration statement, thereby
                                                                                                                                            allowing the U.K. registry to accept title and
                                                                                                                                            lien documents.
                                                                                                                                                Closings also become more challenging
                                                                                                                                            when banks are involved because they want
                                                                                                                                            liens on the aircraft when they have a loan
                                                                                                                                            outstanding, so the seller’s bank will want
                                                                                                                                            payment before releasing a lien, and the
                                                                                                                                            buyer’s bank will want a lien before releas-
                                                                                                                                            ing payment; thus the use of escrows and the
                                    your chief pilot - will be the primary on-site      have its state sales/use tax and personal           importance of a simultaneous closing.
                                    representatives creating the inspection scope,      property tax planning strategy in place, or
                                    and working with the seller’s adviser should        risk an unpleasant surprise from the state in       POST-CLOSING WRAP-UP
                                    a discrepancy be identified. Make certain that      which the aircraft is delivered or hangared         After the buyer takes delivery and title to its
                                    your on-site adviser(s) has the signed APA          (or both). The buyer will also want to do fed-      aircraft, the buyer’s post-closing concerns
                                    on hand defining the scope of the inspection,       eral tax planning in order to maximize              should include: (i) gathering up the docu-
                                    the applicable deadlines and the delivery           deductible aircraft expenses and deprecia-          ments ASAP, since they will be in multiple
                                    condition, and that your adviser understands        tion, and avoid unnecessary federal excise          locations, (ii) making certain that the tempo-
                                    the key language describing what is a devia-        taxes on air transportation services.               rary U.S. registration (‘pink slip’) is on the
                                    tion or discrepancy from the required deliv-           Finally, the buyer needs to work-out the         aircraft together with a copy of any lease,
                                    ery condition.                                      post-closing ownership and operation struc-         and (iii) applying for authority to engage in
                                        Your adviser should consult with counsel        ture by creating an aircraft management             international operations, since you cannot do
                                    when a disagreement arises as to responsibil-       team, and taking care of such details as            that on a temporary registration.
                                    ity for rectifying a discrepancy. Lastly, make      insurance, an aircraft maintenance program             If a buyer can follow the above aircraft
                                    it clear that the inspection report belongs to      and a hangar facility.                              purchasing protocols, it will be assured an
                                    the buyer, and cannot be released by the sell-                                                          organized aircraft purchasing process, with
                                    er to future buyers without your consent.           CLOSING                                             minimal unnecessary conflict or ambiguity,
                                                                                        Most first-time buyers of used aircraft find        and good prospects for completing the air-
                                    PRE-CLOSING ACTIONS                                 the closing process to be much less exciting        craft purchase on the buyer’s terms and to
                                    There is much activity after the APA is signed      and dynamic than expected. Logically, it            the buyer’s satisfaction.
                                    and before the closing, and so the buyer’s          should be like any large asset or real estate
                                    team needs to work together to complete the         closing, with paper flying, and last minute         ❯ Greg Cirillo is a partner and Gary Horowitz is
                                    deal on time. There are three broad categories      details being worked out. This tends to not         Special Counsel with the Washington, D.C. law firm
                                    of pre-closing activities - Delivery Matters,       be the case due to geography.                       Wiley Rein LLP, representing private and commercial
                                    Tax Planning, and Preparation for Post-                 Aircraft title and lien documents for U.S.      operators, owners, lessors and financiers in structuring
                                    Closing Operations.                                 aircraft need to be recorded in Oklahoma            the sale, acquisition, ownership and operation of air-
                                        The APA should lay out the buyer’s pre-         City, Oklahoma (OKC), and mostly in origi-          craft, and providing Federal tax and state sales and
                                    closing delivery obligations, which include         nal form. Therefore, key papers like bills of       use tax planning services. Greg can be reached at Tel:
                                    pre-positioning documents for filing with the       sale, registration, leases and lien releases will   +1 703-905-2808, email: gcirillo@wileyrein.com.
                                                                                                                                            Gary can be reached at Tel: +1 703-905-2845,
                                    FAA (e.g., the Aircraft Registration                be in OKC before the closing date.
                                                                                                                                            email: ghorowitz@wileyrein.com ■
                                    Application (AC Form 8050-1), and a                     Other filings take place electronically with
                                    Statement of U.S. Citizenship if the buyer is       the International Registry (IR) (nominally in
                                    an LLC), registration with the International        Ireland). The aircraft is usually idling in a
                                    Registry as a Transacting User Entity (TUE),        state chosen for tax reasons. The closing
                                    performing lien searches, finalizing financing,     ‘event’ involves the release of documents for
                                    possible pre-funding of the purchase price          filing in OKC and the IR, release of the pur-
                                    with the escrow agent, preparing and putting        chase price payment by the escrow agent to
                                    a trust in place if the buyer is a non-U.S. enti-   the seller, and formal delivery of the aircraft
                                    ty, and obtaining a flywire if there will be        to a buyer’s representative.
                                    international operations shortly after closing.         Of course, there will be last minute revi-
                                        Prior to closing, the buyer will want to        sions reflected in side letters, or changed                 GREG CIRILLO                GARY HOROWITZ



                                    Advertising Enquiries see Page 8                                   www.AvBuyer.com                       WORLD AIRCRAFT SALES MAGAZINE – October 2009       151

								
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