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What You Need to Know Before Buying a Used Business Aircraft
The inventory of used business aircraft for sale has ballooned over the last four years, just as aircraft values have plummeted by an average of 40–60 percent on many models. The good news for shoppers is that there is a large selection of available planes to choose from and, in most cases, prospective buyers have the upper hand when negotiating a deal.
However, those seeking to purchase a previously owned airplane still face a host of challenges in closing a transaction. For one, the drop in values has made it harder to determine the fair market price of a used aircraft. Then there are the usual considerations that need to be addressed, including how the plane will be used, and where it will be based.
Used aircraft purchasers also must navigate through a maze of tax laws, especially at the state level, that sometimes can conflict with Federal Aviation Administration rulings. And, those who plan to finance their purchases will undergo increased lender scrutiny to qualify for a loan.
For that reason, the experts all advise anyone shopping for a used business aircraft in today's market to start by building a team of experts, each specializing in a particular aspect of the purchase process, to guide you.
"There are four partnerships you should have in a purchase," says Jay Mesinger, CEO of Boulder, CO-based J. Mesinger Corporate Jet Sales, Inc. and an NBAA board member. "A broker, an aviation tax attorney, a lender and a management company."
The first thing they will help the buyer do is determine how the aircraft will be used. Will it be flown on long-range, international flights, or will most of the travel be regional?
"We have a three-stage process," says Mark Bloomer, president of Bloomer deVere Group Avia, Inc., in Camarillo, CA. "We start by looking at tax consequences and then we come up with a slate of (purchase) options. That's the analysis phase, which is probably 60 percent of the work."
Once the type of plane has been decided upon, along with the capital budget, phase two involves making the actual acquisition.
"We go out and look at the airplanes and demo them as required, shepherding them through a pre-buy [inspection] before taking delivery," said Bloomer. Phase three is putting the aircraft into service with the flight department.
The transaction itself is rather straightforward, says Janine Iannarelli, president and founder of Houston-based Par Avion Ltd. "The letter of intent and subsequent Purchase and Sale Agreement (PSA), as well as all other paperwork related to the transfer of the asset, are typically between the buyer and seller directly," she adds.
During the process, she advises that buyer and seller establish and define expectations and agree on exactly when key events are to take place.
"By doing so, you create a roadmap and calendar that will advise both parties where they should be at a particular point in the transaction," says Iannarelli. "The PSA is the governing document and what you will fall back on in the event of a dispute, or confusion over responsibility."
Determining where the aircraft will be based also is an essential part of the process and can have a tremendous impact on state taxes and fees. Federal taxes can be just as tricky, especially for Part 91 and Part 135 uses.
"There is absolutely no broad-brush-stroke advice or set of procedures to follow," says Jeremy Cox, vice president of JetBrokers, Inc., in Chesterfield, MO. But a buyer "who only follows his/her nose on the tax ramifications of business aircraft ownership and operation is being set up for a likely run-in with the IRS," he adds. Cox urges used aircraft buyers to consult an attorney seasoned not just in tax law, but FAA regulations, as well.
If you plan to finance the purchase, experts say it's good to shop early for a lender, and use one that is experienced in aviation finance. That's especially important when dealing with older planes because in today's tight lending market, they can be difficult to finance.
"This is the first recovery that I've ever been through that did not have a robust lending component helping forge the way," Mesinger said. "Lenders are very skittish, and until recently, nobody had any interest in financing a 20-year-old or older airplane. Today, there are at least a few lenders who won't say 'no' to the general idea, but they will take a harder look at the specific plane."
Another challenge facing the used aircraft buyer is determining the fair market value of their target aircraft. According to Cox, the process requires, "an Excel spreadsheet that is populated by recently sold information, [data on] comparative aircraft and the target aircraft, Vref or Bluebook base values, and great swaths of hard-won experience and knowledge."
If you're buying from an overseas seller, the buying process gets even trickier.
"You want to be sure you're buying an airplane from a seller who has the plane registered in a country whose FAA equivalent has a process for recording liens and ownership," says Mesinger. "Many countries don't…so there's no way to do a title search."
Another important consideration for the purchaser of a foreign-registered aircraft is what it will take to place the aircraft on the U.S. registry.
"Just as the EASA (European Aviation Safety Agency) governed countries have become concerned about modifications made to aircraft being exported there, so too is the FAA," notes Iannarelli. "One needs to make sure that the (imported) aircraft is in compliance with FAA requirements for operation, or understand what will it entail to make it so. This directly correlates to the money that may need to be spent on the import process and subsequent issuance of the U.S. Certificate of Airworthiness."
And these are just a few of the issues to be tackled when purchasing from an international seller. For that reason, Mesinger advises buyers to shop in the U.S., unless they simply can't find the plane they want in America.
Additional tips to consider include:
- Factor in the price of upgrading avionics, especially on older aircraft
- Always conduct a complete pre-purchase inspection to discover any possible discrepancies before you buy the plane
- Draft a thorough purchase agreement to protect your interests
- If financing, apply for a loan early in the buying process to ensure that funds will be available when you find the right aircraft
NBAA provides a compendium of services to help guide prospective buyers through the many considerations involved in the business aircraft buying process. The NBAA Aircraft Resourcing Options Characteristics is a particularly good guide for novices to the process, according to Cox. "This is one document that I use fairly often when I get somebody who I consider to be a 'greenhorn'," Cox said.