Attacking the Hot U.S. Corporate Aircraft Market—With Care

Even after 5+ years in a ponderous slump, the pre-owned US corporate jet market remains the global leader in unprecedented buying opportunities. From class to class, pre-owned inventories are at or near their all time highs. Accordingly, prices are 30%-50% of what they were in 2006-07. Many predicted the tide would turn by 2012. It hasn't, and doesn't appear to be any time soon.

Particularly for foreign-currency buyers, whose buying power in the US has increased significantly during the last decade, but generally for all, the opportunity exists to buy large cabin jets at mid-cabin prices, and mid-cabin jets at light-cabin prices. Recognizing the security in financing greatly underpriced jets, many lenders are aggressively seeking deals. For a buyer with assets and strong credit, there is a lot of cheap money out there. Interest rates for asset-based credits are 300-400 basis points lower than in 2007. Interest rates for portfolio-based credits (e.g., margin loans) are at or about 2.00%.

The waters are fine to make a steal in the US market. But before you go charging in, great care must be taken to ensure that you don't lose your deal or your money.

Let's say you found a super buy on a pre-owned large jet, signed a purchase contract and deposited US$1,000,000 with the seller. Assume the contract calls for the buyer to take delivery unless the jet has damage (or damage history) – i.e., a "hard deal" – and the buyer may not walk away as long as the seller makes the jet airworthy. The seller, who could be in or nearing financial difficulty, wants a hard deal in order to hedge against further falling prices. That is, the seller wants to make it difficult for the buyer to walk away from the contract if prices on similar aircraft fall prior to closing.

In a "soft deal" the buyer would normally be permitted to terminate the transaction without cause at any time prior to the commencement of seller post-inspection corrective actions. A buyer might wish to terminate following the inspection for any of a number of reasons – e.g., corrosion, poor general upkeep, suboptimal interior configuration, a better deal is found, etc. In a hard deal, the buyer waives these prerogatives and, as long as the jet does not have damage (or damage history) and the seller makes the aircraft airworthy and otherwise complies with the purchase contract, the buyer must close or lose the deposit.

In order to lock up a great deal, the buyer may not be able to avoid a hard deal. Before you wire your deposit, just make sure you know whether your deal is hard or soft. This is a matter for careful contract negotiation by an experienced aircraft transaction attorney. Additionally, a prudent buyer should ascertain whether the seller has filed for bankruptcy, is planning to file for bankruptcy, or is subject to claims of aggressive creditors whose actions could affect your deal. If possible, it is a good idea to attempt to confirm with the seller's bankers that that the seller is in good standing under its loan or lease, although a positive response does not obviate further inquiry into the seller's financial position.

If the seller files for bankruptcy protection prior to closing, the buyer could be in big trouble. Corporate bankruptcy in the US generally is either in reorganization (Chapter 11) or for dissolution (Chapter 7). Under either form, the jet and all or part of the $1,000,000 deposit could be lost or tied up indefinitely.

Moreover, the seller (or bankruptcy trustee) could disavow the purchase contract altogether or otherwise significantly delay seller's performance, thereby depriving you of your contractual right to buy the jet and retain the benefit of your bargain. Knowing the pickle you're in, the seller or trustee might ask you to pay another few million dollars or it might ignore your contract and put the jet on the market in an attempt to get another few million from someone else. Worst case, you could lose some or all of your deposit and not get the jet. If such sharp dealing occurs after you have invested in a pre-purchase inspection, now you have lost out-of-pocket costs plus, potentially, attorneys' fees in litigation.

After ascertaining that the seller is not in and not heading into bankruptcy, the first line of defense against dealing with a potentially distressed seller is to put the deposit in escrow with an independent party and under an escrow agreement clearly stating that funds are buyer's property until seller complies with all closing obligations. There are a number of well-insured/bonded and competent aircraft escrow agents in Oklahoma City – the home of the FAA aircraft registry and where the closing filings will be made – who can be trusted to perform as contracted. In representing foreign buyers, we have often prevailed on the US seller to escrow the funds with a bonded aircraft escrow agent in the buyer's home base, thus achieving some level of protection from the US legal process.

To protect your bargain, you could demand that the seller escrow a deposit in the amount of buyer's deposit. If seller does not perform under the purchase contract, buyer gets back its deposit plus seller's deposit. This could discourage an opportunistic seller or bankruptcy trustee from overplaying its hand.

If you have managed to get the jet and the seller (sans bankruptcy trustee) to the closing, be careful where you take delivery of the jet. Most US states impose a sales tax on aircraft transactions, some with rates as high as 9%-10%. Ouch! You can either take delivery in one of the few states that have no sales tax on aircraft, or make sure you qualify for an available exception. Several states have a "fly-away" exception for nonresidents who remove the aircraft from the state. Other exceptions could apply.

Finally, to protect the title to the aircraft, the escrow agent should be charged to conduct a title search, file lien releases from any creditors of seller, and record the transaction in the International Registry. The purchase contract should call for the seller to provide at closing both the FAA bill of sale (AC Form 8050-2) and a Warranty Bill of Sale obligating the seller to defend your title to the aircraft in perpetuity.

For domestic and foreign buyers alike, contracting for and closing a corporate aircraft transaction in the US is a highly-nuanced undertaking. Protect your bargain and your money by seeking assistance of a US-based corporate aviation specialist.


Rex E. Reese, Esquire, is a private attorney specializing in business aviation matters. Mr. Reese has handled over 1,000 business aircraft acquisition, sale and financing transactions and is regarded as one of Washington's best tax attorneys. He may be contacted at 703.842.8000, rreese@jetviser.com, www.jetviser.com.