Anatomy Of A Transaction
A Complex Transaction
The acquisition of a corporate jet is a very complex transaction. It should be noted that no two transactions are the same, and while six to eight weeks is commonly needed for completion, the time line can vary considerably.
The lease or purchase should be approached with the requisite legal, tax and aviation professionals working together in a co-operative way, with an emphasis on communication. Sometimes large corporations like to consider using their own in house counsel to handle these matters. We strongly advise against this unless that counsel has experience in aviation transaction matters.
It is worthwhile to retain expert outside counsel because of the potential that an uneducated decision could cost a substantial amount of money. International transactions are even more intricate, since there are two Government agencies to satisfy with regulatory compliance and documentation.
Legal representatives negotiating finite detail in the purchase contract can slow down the acquisition process. Another significant stumbling block can be outstanding maintenance discrepancies found on aircraft under consideration. During these difficult moments, it really does pay dividends to be flexible and let common sense prevail. Deals do sometimes falter at this stage when all that is needed is a little cooperation. Occasionally, the financial institutions can slow a transaction.
The main reasons for this are the enhanced rules and regulations, which are considerably more complex than they were just four years ago. It is recommended that clients get a firm commitment from the lending institution they intend to use before initiating a transaction. Arriving at the bargaining table with this major consideration already accomplished shows the sellers that the buyer is serious.
To locate the best suitable aircraft is often time consuming and requires an in depth analysis of the client needs. It is vital that the aircraft fits precisely the required mission profile, too big an aircraft wastes resource as does an aircraft that is too small. The analysis will include the destination and origination airports and the necessary payload performance, range profile and runway calculations (people, baggage and cargo etc.) as well as the frequency of use. A good faith estimate of direct and indirect operating costs will also be provided.
Once a suitable aircraft has been located that meets all the buyer’s requirements, including a fair and reasonable price, the broker or seller will be contacted. This usually takes the form of a letter of intent under the watchful eye of an aviation legal advisor. This document merely outlines matters to do with pricing and the terms to complete the transaction.
This would include the time frame for both parties to sign the detailed purchase contract, and the length of time to accomplish the pre-buy inspection. Additionally, the amount of refundable deposit to be placed in escrow upon completion of negotiations would be specified.
The timing for the purchase contract is based on advice from legal counsel. The final offer maybe in the form of a letter, and then incorporated in to the purchase contract after the details are agreed upon by the buyer’s and the seller’s legal counsel. The document will also designate where the pre-buy inspection will take place. It also clearly defines at which point the deposit becomes non-refundable, and other matters that are deemed important.
Once the offer is accepted by the seller, all the aircraft’s historical records such as log books and access to maintenance records should be made available. Either the designated airframe and power plant mechanics we recommend, or an independent inspection facility agreed to in the purchase contract conducts the pre-buy inspection. The pre-buy Inspection should be completed within the agreed time frame. At the completion of the Inspection the aircraft is either approved or rejected. Once we are satisfied that the aircraft is as represented pending any outstanding discrepancies noted for corrective action, a letter of acceptance is sent to the seller.
The Seller is obligated under the terms of the purchase contract to rectify any outstanding discrepancies. These discrepancies can range from compliance with Airworthiness Directives and Service Bulletins to various major\minor issues. At times like this common sense and a cooperative spirit should prevail. If the aircraft is rejected, the deposit is refunded. `
Pre-buy inspections can be very complex and detailed. The appropriate extent of the inspection is all dependent on the age of the aircraft and the quality of the maintenance program it has been enrolled in. Certain aircraft brokers are very sophisticated with the aircraft they have on exclusive listing. Before an aircraft is accepted for sale it must meet the broker’s tough inspection criteria. This gives the buyer an extra layer of protection. It should be noted that there is no substitute for an adequate pre-buy inspection.
Once the purchase contract has been signed by both parties, the transaction enters the escrow phase where numerous documents are cleared and title transfer is arranged. Insurance and finance documentation is accepted. Escrow fees are usually shared between the seller and buyer.
The aircraft appraisal for financing is covered by the Buyer. After all the discrepancies are resolved and all the documents are finalized according to the terms of the purchase contract, delivery is arranged. Depending on the State where the aircraft is delivered there can be huge tax implications. That is why it is paramount to utilize an aviation tax professional throughout the transaction to minimize any tax obligations.