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As the war in Ukraine continues, Russian sanctions appear to be something that will be part of the international economic stage for the foreseeable future. These sanctions seem to make it more likely we will see private aircraft owned or operated in Russia become available for sale. Given that most private aircraft used in Russia are not on the Russian aircraft registry, understanding who the ultimate owner is and being able to show that a real effort was made to conduct due diligence related to any buy/sell transaction is critical.

These sanctions remind us that buyers should make sure they are doing everything possible to “Know Your Customer.” The due diligence necessary on aviation transactions has become more important in recent weeks, and this will continue. It is not enough to depend on a lender, or an escrow agent involved in the transaction to handle the due diligence process. Additionally, it is not advisable to only rely on a contractual provision. As a buyer, you need to make sure you are not negotiating with (and buying from) a sanctioned person, and as a seller ensure there is not an intent to export the aircraft to Russia or any other sanctioned country.

In today’s private aviation market where charter availability is becoming more scarce, pre-owned inventory is at a historic low, and fractional and card programs have slowed down their sales; I am getting an increased number of questions related to how someone can legally share in the use of their friend’s aircraft. The first piece of information to understand when answering this question is if the aircraft is on a FAR Part 135 charter operating certificate. If the aircraft is on a FAR Part 135 charter certificate, then it is easy to charter your friend’s aircraft through the charter company. If the aircraft is not on a charter certificate and is only eligible to be flown under FAR Part 91, then the use of the aircraft is limited. Since most charter aircraft today are very busy with charter, we will assume that the friend’s aircraft is not on a Part 135 charter certificate for the purpose of this article.

If your friend wants to allow you to use the aircraft as an invited guest, even if the friend is not on the aircraft, this is permissive if no compensation is being paid for the flight. However, if there is any type of compensation for the flight, then it is not allowed under the regulations unless one of the exceptions detailed below. These exceptions include a dry lease, time share or interchange.

Before I describe each of these exceptions in more detail, it is important to understand two critical points. First, compensation does not only mean cash but also means things like an exchange of services, use of boat or house, or an expensive present like a watch given in consideration for the use of the aircraft. Second, if the arrangement you make to use your friend’s aircraft under Part 91 is not allowed under FAA regulations, then an illegal charter flight has occurred. The number of enforcement cases for illegal charter flights has grown significantly in recent years and continues to be a top enforcement priority for the FAA.

The most common way to use a friends aircraft is under a written dry lease agreement. A dry lease means your friend is providing (leasing) the aircraft to you without crew. It is then up to the user/lessee to hire and pay for the crew for the flight. Also, and, most significantly, under a dry lease, the user/lessee is in operational control of the aircraft and needs to understand what that means from a regulatory and liability standpoint.

A time share arrangement, which is allowed under 14 CFR § 91.501(b)(6), can be put in place to allow a friend to use your aircraft and your crew. Specifically, under FAR 91.501(c)), a time share agreement “means an arrangement whereby a person leases his airplane with flight crew to another person, and no charge is made for the flights conducted under that arrangement other than those specified.” In this case, the friend can receive payments for the specific items as defined in 14 CFR § 91.501(d), which is two times the cost of the fuel plus some other specific expenses. It does not, however, allow the friend to capture reimbursement for the capital expenses involved in owning/operating an aircraft.

Another option under FAR Part 91.501(b)(6), is an interchange agreement. The interchange agreement as defined by FAR Par 91.501(c) is “an arrangement whereby a person leases his airplane to another person in exchange for equal time, when needed, on the other person’s airplane, and no charge, assessment, or fee is made, except that a charge may be made not to exceed the difference between the cost of owning, operating, and maintaining the two airplanes.”  If both you and your friend have an aircraft and you want to share the aircraft when one or the other aircraft is down for repairs or otherwise unavailable this is allowable as long as there is a written interchange agreement in place. If the aircraft are two different types, there can be an exchange rate included in the agreement. However, there cannot be a true up if the hours utilization is not balanced.

Whether a dry lease, time share or interchange agreement is selected, the agreement must be in writing, kept on the aircraft when in use, and if truth-in-leasing requirements are applicable, then certain language regarding operational control must be included. Additionally, the agreement must be filed with the FAA for truth-in-leasing purposes and at least 48 hours before the first flight. Finally, notice of the first flight must be provided to the local flight standard district office.  Additional considerations include any applicable tax that may be due and the number of agreements in place with regard to an aircraft.  Specifically, if there are a number of agreements (dry lease, time share and/or interchange) for the same aircraft, this could be interpreted by the FAA that the aircraft owner is using such agreements as a sham and is actually conducting an illegal charter operation.

In general, while it is far simpler to find an aircraft on a Part 135 certificate or a generous friend who is not worried about being paid for the use of the aircraft, this might not be possible. An aviation attorney well versed in FAA regulations should be consulted before there are any payments made for flights under the FAR Part 91 exceptions outlined here. A good alternative to the above scenarios may be to purchase an ownership interest in the aircraft. We will discuss this option in an upcoming article.

 

 

The challenge of historically low aircraft inventory is affecting many of my clients.  First time buyers are beyond frustrated that each time they identify an aircraft to purchase it is already under contract or there are no aircraft listed for sale that meet their purchasing requirements. Current aircraft owners seeking to replace an existing aircraft are struggling with how to time the sale of their current aircraft and purchase a replacement because as soon as good quality aircraft are listed, there are several offers and if they sell too soon, they will be left without an aircraft.  The speed of selling an aircraft has increased significantly and acquiring an aircraft has become progressively difficult in this market.

Adding to the frustration of buyers, is the bold positions many sellers are taking in this unbalanced market, including limiting the amount of time and scope of a pre-purchase inspection, capping the amount sellers will pay to remedy discrepancies and, in some cases, requiring significant, non-refundable deposits before a visual inspection.

The key to navigating this difficult market is creativity, experience and, for a certain aircraft type, global reach. When searching for an aircraft in today’s market, a buyer needs to have someone on their buying team with comprehensive and real-time knowledge of the aircraft market for their target aircraft. As with any difficult market, it often becomes more about who you know and timing.

The buyer’s team must understand how to anticipate or obtain inside knowledge regarding aircraft that are going to be listed for sale and/or that are not listed (off market) but would be sold for the right price.  Finally, the buyer’s team may need global reach, most often for large cabin aircraft, as there may be more international availability.

Additionally, the buyer’s team needs to be prepared to act with urgency when an aircraft is identified.  This team should include an aviation attorney, broker/consultant, escrow agent, insurance provider, management company and lender, if applicable.  The buyer should have a letter of intent already in draft form, deposit in escrow or ready to go to escrow, financing approved, and ownership structure ready to implement.

Finally, and most importantly, the buyer needs to be flexible but not reckless.  Buyers may have to settle on a different aircraft to purchase in the short-term as they seek out their most desirable choice.  Furthermore, buyers may need to concede on certain deal points.

An important caveat in today’s market – a buyer should not give on any items that would compromise safety.  For example, if a seller is unwilling to authorize certain inspections to get a deal done, then the buyer may make a business decision to skip those inspections.  However, buyers may consider doing additional inspections after closing.  Completing inspections after closing exposes the buyer to financial risk but completing the inspections after closing would allow the buyer to have peace of mind knowing the aircraft is in a safe condition.

In today’s market, buyers may need to play by the rules set by the seller, but with creativity, planning, patience, team knowledge, and insider expertise, finding a needle, or an aircraft, is possible.

As aircraft inventory has decreased in the United States, more people are looking at acquiring aircraft not currently on the US registry and moving them to the US.   While a cross border transaction can be more complicated, it may be necessary in today’s market.  Buyers may be more like to find an aircraft to purchase if they are willing to go through the extra steps for the import instead of waiting for an aircraft already on the US registry.

There are some basic steps for the import as well as some common pitfalls for those steps. The general procedure for import is as follows:

1. First, a well-drafted purchase agreement should be the road map to the transaction. It should set forth the chronology of the closing and import process, and identify who will pay for each step. The purchase agreement should clearly specify who must pay for the cost of the importation and assign responsibility for either the correction or installation of airworthy items necessary to allow the aircraft to be registered in the United States. Equally important, the purchase agreement should indicate when the full purchase price has to be in escrow and when all of the documents can be released for filing. The deregistration process from the country of foreign registry should not start until all funds are in escrow and all documents necessary for recording the sale are properly submitted at both the FAA and as required in the country of export.
2. The purchase agreement should allow for a visual inspection. During the visual inspection, it is important for the Buyer to have a designated airworthiness representative (“DAR”) present to determine if the aircraft will be considered airworthy in the United States. If the aircraft is not deemed airworthy, the DAR can assess what work will need to be done to meet the standards required for issuance of an airworthiness certificate, and a repair facility can estimate the cost of these items. Understanding these expenses before incurring the inspection fees and before the deposit becomes non-refundable is very important. It can be very useful to have the pre-purchase inspection take place in the United States so that the Buyer can easily view the aircraft prior to purchase. If this is the case, it is important to make sure the Seller correctly imports the aircraft into the United States prior to the start of the inspection.
3. The Buyer needs to build an expert transaction team that includes an onsite technical representative at the inspection facility, the DAR mentioned above, a licensed and bonded United States Customs Broker, local tax counsel to make sure Value Added Tax is not triggered, and local counsel to ensure that good title is being conveyed to the Buyer free and clear of any local liens that might attach to the aircraft in the foreign country.
4. Following a satisfactory visual inspection and pre-purchase inspection, Buyer will move towards closing the purchase of the aircraft. In order to start this process, Seller deregisters the aircraft from Seller’s current country of registration.
5. The FAA receives notice of the deregistration and provides same to the escrow agent. Depending on the exporting country, this can happen the same day or up to a couple of weeks later.
6. The purchase agreement should require that, immediately upon receipt of the notice of deregistration and without any further requirements, the escrow agent will simultaneously wire the proceeds of the sale to the Seller and file the bill of sale and registration application with the FAA.
7. The FAA treats aircraft entering the United States from a foreign registry as a priority and a Temporary Certificate of Aircraft Registration (Fly Wire) is typically issued within one to two days following confirmation of deregistration and filing of the appropriate registration documents with the FAA. If the aircraft has been deregistered outside of the United States, the aircraft cannot be ferried to the United States until issuance of the Fly Wire.
8. The Temporary Certificate of Aircraft Registration should be sent to the DAR who is ready to issue the Certificate of Airworthiness (“C of A”). Prior to issuing the C of A, the DAR will need confirmation that the aircraft has the new United States registration number on it and the transponders have been re-strapped.
9. The aircraft will need to be exported with the approval of a customs agent from the prior country of registration and then imported into the U.S. using the services of a licensed and bonded United States Customs Broker. Only certain United States airports are equipped to import aircraft; therefore, selecting the first United States port of entry based upon advice from the United States Customs Broker is important. Aircraft entering the United States must also display on the windshield a United States User Fee Decal.

The key items in the import of the aircraft are: perfecting the purchase agreement; hiring a DAR, a licensed and bonded United States Customs Broker and an expert transaction team; understanding the costs of obtaining the C of A (and who pays those costs); and sequencing the buying process in a way to properly deregister, register, export and import the aircraft while, at the same time, avoiding unnecessary taxes. The process is more complicated than buying an aircraft domestically, but if the transaction is managed properly, the benefits to the savvy Buyer can make the purchase of a foreign-registered aircraft very rewarding.

As more aircraft reach the end of their useful life, understanding the process for the final sale of an aircraft is becoming more important. If there are no buyers for an aircraft or if an aircraft is more valuable for its parts than as a whole unit, then the aircraft owner should endeavor to find the best possible solution for the aircraft’s final sale. Depending on the aircraft type and the parts inventory at the time, there may be multiple interested buyers for the parts of the aircraft. Once the best offer is found, a sale agreement should be drafted and include all of the necessary deal points. For the final sale of an aircraft, there are additional deal points that don’t apply to a normal sale. Here are a few to consider:

• Is the delivery location going to be the same location as where the aircraft will be parted out? If so, then will the aircraft be deregistered at the time of sale? If so, the sale agreement should not require the purchaser to prepare and file a registration application, but instead file a deregistration notice with the FAA. However, if there is any chance that the purchaser will not part out the aircraft and may instead resell the aircraft, then the deregistration request should not be filed.

If you file the deregistration notice with the FAA it is very difficult to then register the aircraft again at a later date and requires filing proof acceptable to the technical branch of the FAA that the aircraft is still airworthy.

• A detailed list of the loose equipment that is being sold on the aircraft should be attached as an exhibit to the sale agreement. For example, is the aircraft being sold with the china, glassware and flatware on the aircraft or does the seller plan to reuse the china on a future aircraft? Does it include any equipment that was used in the hangar for the aircraft, like a tow bar?
• Is the aircraft airworthy and/or are there inspections that are past due? Usually a sale agreement would require the aircraft to be airworthy. However, that may not be necessary in the case of a final sale. If there are inspections that are past due, then the inspections may not be necessary if the aircraft is already at the location where it will be sold and parted out. However, if the aircraft is not at the closing location or has to be flown after closing to the location where it will be disassembled, then one of the parties may need to obtain a ferry permit. The cost of the ferry permit should be measured against the cost of doing the necessary work on the aircraft in order to make it airworthy.
• The aircraft records, especially burn certificates, are very important when selling an aircraft for parts. The records need to be complete for each part so that the part can be sold and used again. If the records are incomplete the part will have far less or perhaps no value.
• Is it important that the seller retain the registration number? Unlike when an aircraft is being sold and will continue to fly, if the aircraft is being deregistered, there is no need to file a request to change the registration number at the time of closing. Instead, when the deregistration is filed, a request to reserve the registration number back to seller should also be filed. If the purchaser doesn’t plan to deregister the aircraft immediately, the parties should agree on a timeline to return the registration number back to the seller.
• The pre-purchase inspection is far less extensive for an aircraft that will be sold for parts. It is not always as important that all systems be fully functional and therefore the timeline from execution of the sale agreement to closing is more compressed, because the inspections prior to closing may just be a review of the aircraft records and not a fully survey of the aircraft.

Making a decision to sell an aircraft for parts, can be an emotional decision for an aircraft owner because they have often times flown in the aircraft for many years, arriving in many locations with lasting memories. The emotional impact is greater when the aircraft is being sold for parts instead of to someone else who will use it. As a result, the emotional component can sometimes prevent the best business decision from being made. As an example, I have had a client who searched for someone to buy the aircraft for reuse and sold the aircraft at a lower price than could have been achieved if they had considered selling the aircraft for parts.

When an aircraft is sold for the final time, there are differences in the sale process. The delivery location is far more important, as is loose equipment list and complete aircraft records. Be sure to take the differences into account when entering into the sale agreement.

Once a decision has been made to sell an aircraft, there are certain steps that should be taken in order to make sure the aircraft is ready to be sold. By taking these steps in advance, you will make the sales process easier and will avoid losing a potential sale.

Company Status. A business search should be done on the secretary of state website where the selling entity is registered.. The selling entity needs to be active and in good standing. If is not, the selling entity will need to take steps to bring the entity back to an active and good standing status with the state of registration. A sale agreement should not be signed unless the entity is in good standing, since most sales agreements contain a representation that the selling entity is in good standing.

Title Searches. For a few hundred dollars, a title search (for both the Federal Aviation Administration (“FAA”) and International Registry (“IR”) can be prepared by any of the law firms or aircraft title companies in Oklahoma City, where the FAA registry is located. More often than you might expect, there are liens on an aircraft that the seller did not know about. Clearing an aircraft title of old liens can be time consuming, especially when the lienholder no longer exists,  has changed names, or has been acquired by another company.

Aircraft Records Organization (paper and electronic). The keeper of the aircraft records should be tasked with making sure all entries in the log books and computerized maintenance tracking system are complete and up to date. The paper aircraft records should be organized and reviewed to make sure there are no missing entries. All aircraft records should be gathered and centralized so that when it is time to ship the aircraft records for the pre-purchase inspection, there won’t be a delay.

Specifications Sheet. When the aircraft is listed for sale a specification sheet which describes the aircraft will be developed to marketing purposes. It is imperative that this specification sheet is reviewed by technical experts to make sure the aircraft is being advertised correctly. In some instances, the specification sheet is added to the sale agreement as an exhibit and the seller agrees that the aircraft will be in the condition detailed in the specification sheet at the time of closing. If the specification sheet is not accurate, it could cause the buyer to negotiate a lower purchase price, demand the aircraft be as advertised, or terminate the sale.

Loose Equipment. A list should be prepared showing all of the loose equipment being sold with the aircraft. This way there is no debate as to which loose equipment is being sold with the aircraft and which items the Seller is allowed to keep.

Inspections. All upcoming inspections should be performed and if there is any deferred maintenance it should be brought current. During the sale process, the buyer may request that Seller handle all inspections through a certain future date. Therefore it is a good idea to understand what inspections are coming due in order to understand the economic impact of the item being requested.

Registration Number. It is important to decide if the registration number currently on the aircraft is going to be retained for future use by the seller. If so, I recommend starting the process to change the registration number and retain the old number even before listing the aircraft for sale, or as you are listing the aircraft for sale. It can take 6-8 weeks for the FAA registry to process the change request and issue the 8050-64 form which allows the registration number to be changed. Therefore the change request should be made early in the process in order to complete the process prior to sale.

Loaner Equipment. If there is any loaner equipment on the aircraft it should be disclosed as part of the sale process. For example, if  an engine overhaul is taking place and a loaner engine is currently on the aircraft, arrangements need to be made with the service provider to transfer all agreements to the new owner as part of the sale process.

Maintenance Programs. If the aircraft is on any parts programs, APU, engine programs, or the like, the program provider should be contacted to confirm that the programs are paid current and there are no deferments or deficits on any programs. Any deferments or deficiencies will need to be resolved by the seller.

Building the Sales Team. When you are ready to list the aircraft for sale, you should hire an aircraft broker/consultant to handle the listing for you who has a good understanding of the market for your particular aircraft. This aircraft broker/consultant will be able to help you set a realistic sale price, market the aircraft and handle the logistics of the sale for you. Additionally, you should also have an aviation attorney on retainer who is ready to immediately review a letter of intent or draft a sale agreement when an offer arrives.

By taking the steps above, including building the right sales team, buyers will find less fault with the aircraft and be more willing to buy your aircraft. A properly pre-planned and organized aircraft sale can help make the sales process straightforward and more efficient.