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11 September 2019
The purchase of a business jet is a huge step for a client. Whilst the client will obviously be very excited about owning their new trophy asset, many will not realise the legal, commercial and technical ramifications involved in the purchase. This article discusses the main areas involved in the acquisition of a pre-owned business jet, which is likely to be the more common occurrence for most UHNW clients rather than the acquisition of a new business jet, where there are generally fewer legal and technical issues.
The first thing to be considered is whether the client has considered renting rather than purchasing an aircraft. Business jet dealers generally advise that if the client is not going to fly at least 150 hours a year they should be renting.
Furthermore, has the client been made aware of the costs involved in owning a business jet? The cost of owning and maintaining a business jet can be in the region of £1 million ($1.24 million) per annum, which includes hangaring, maintenance and crew, and fuel adding a cool £250,000 if the client is flying around 200 hours annually.
The second thing which needs to be considered is whether the client will be fully funding the acquisition or will require finance. Typically, specialist aviation lenders will lend a maximum of 70-80 per cent of the purchase price. Once the lending institution has agreed in principle to finance the acquisition, the client’s lawyer and the lawyers representing the financer will agree the structure of the loan and the security required.
In some cases lenders will prefer a finance lease rather than loan finance and, since legal ownership of the aircraft remains with the lending bank, generally there will be less security documentation to be negotiated. Some private clients, however, may be unattracted to leasing, albeit the process is simpler, since they are keen to tell their new passengers that they have purchased rather than merely leased their new jet.
In order that the client receives proper expert advice from the beginning of the transaction, it is essential that the correct team of advisors is assembled. Typically this will include a lawyer, a broker, tax advisors, technical advisors, insurance brokers and valuers.
An initial question that the client and their advisors will need to address is whether the client has already identified the particular aircraft they wish to purchase. They should be considering the size of the aircraft they require in terms of maximum number of passengers, the maximum range they will require the aircraft to fly, the number of crew which will be required and an array of other issues such as the cabin height and whether they expect their passengers to be able to stand without crouching!
Business jets range from very light jets, mid-size jets, super mid-sized jets, large jets and long-range jets; with the price dramatically increasing across that spectrum.
It is essential to manage the client’s expectations. Clients used to the relative simplicity of buying a trophy asset such as a Ferrari or an expensive piece of art need to be advised on the relative complexity of acquiring a pre-owned business jet with the process involved being outlined right at the start.
Once the aircraft has been identified (often via the broker) the advisors will need to consider which jurisdiction the aircraft is registered in and the jurisdiction in which it will be registered following purchase. De-registration from one jurisdiction and re-registration in another jurisdiction can have pitfalls. In any event, the advisors will need to discuss with the client the various choices of aircraft registry available in the context of many factors, including who is to operate the aircraft, where it will typically fly, tax issues and, if finance is being provided, the financier’s preference.
Typically the acquisition process will take around six weeks. Since the deal can easily go pear-shaped if all team members are not necessarily gelling, ideally they should all meet, if only in a call, right at the beginning of the process. A successful acquisition is very much a team effort. Each member must know his or her parameters and one team member should project-manage and perhaps be the liaison officer with the client. As is commonly the case, the extent to which the client wishes to be kept apprised of every detail or simply on a need-to-know basis will vary from client to client.
The typical aircraft acquisition transaction involves first, the Letter of Intent (“LOI”). This establishes the initial deal terms and may be greatly negotiated; depending on the detail. This is generally followed by the negotiation of deposit and escrow arrangements, the latter being the typical method adopted where an independent escrow agent deals with the holding of the deposit and ultimately, if the acquisition completes, the holding of completion documentation and completion monies. This will be followed by the Aircraft Purchase Agreement (“APA”), based on the LOI, but with many more often lengthy provisions relating to the transaction.
The critical Pre-Purchase Inspection (“PPI”) details are generally included in the LOI and/or APA. It is critical because it is the only opportunity to inspect the aircraft. It is carried out by an independent third party to ascertain that the aircraft is in the condition specified in the LOI or APA. The purchaser will normally pay for the PPI and there is generally a great deal of negotiation regarding defects (there will always be some in a pre-owned aircraft) since the seller will be required to remedy those prior to delivery. One area which can give rise to great concern at the PPI stage is the discovery of damage and corrosion. Generally it will be far better for the client’s broker, if possible, to be familiar with the history of the aircraft and the likelihood of corrosion/damage prior to committing to the PPI.
By now, tax advisors should be advising on customs duties and VAT if the aircraft is being imported into the EU (Brexit may well create further complexities!). They will also advise generally on taxes which may arise at both export and import locations and, in that context, the optimum location for delivery of the aircraft.
Also, by now, aviation insurers should have been brought in to advise on both the indirect and direct insurance cover available for the aircraft.
During the transaction many other processes need to be undertaken, in particular title searches and dealing with the aviation authorities in the jurisdictions where the aircraft is to be de-registered and subsequently re-registered.
Assuming that all has gone to plan, the completion arrangements will need to be put into place. This involves ensuring that all the buyer and seller contractual conditions under the APA are satisfied as well as the completion funds and completion documentation, such as the Bill of Sale. The closing completion call may involve many parties. Albeit generally (and hopefully!) a short call, it needs to be properly planned and managed so that there are no unpleasant surprises. With proper advice and planning throughout, the potentially lengthy and complex acquisition process will go smoothly; as, it is to be hoped, will the client’s flights!
This article was originally published in Wealth Briefing on 11 September 2019: https://www.wealthbriefing.com/html/login.php?aid=184829 (Subscription is required)
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