Attacking the hot US aircraft market
[nonmember]The US market offers unprecedented opportunities for foreign corporate jet buyers says Rex Reese, an attorney-at-law. But before rushing in they should take steps to keep their money safe by using escrow agents, checking liens and getting good local advice.::join::[/nonmember][ismember]
The US corporate jet market offers unprecedented buying opportunities these days. OEM deliveries are way down from 2008 and 2007 levels. Pre-owned inventories are at an all time high. Accordingly, prices are at or near the bottom. Some say the tide will not turn until 2012. No one really knows.
For Euro-currency buyers, whose buying power in the US has increased significantly during the last decade, and for others, the opportunity exists to buy large cabin jets at mid-cabin prices. We recently handled a pre-owned Falcon 2000 purchase for under US$12 million. The same jet sold for US$21,750,000 in 2007. In the third quarter of 2009, we closed a pre-owned G-V acquisition priced at US$25.5 million, which was US$13 million less than the seller paid in early 2008. In the last quarter of 2009, one of our clients bought a new G150 for US$14.5 million. Already in 2010, we have assisted a client selling an average-time G-IVSP to a European buyer for under US$11 million. Other similarly shocking deals abound.
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. Some offers we have recently seen are 200 basis points lower than 2007 rates.
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.
Soft and hard deals
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 more than likely is 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, sub-optimal 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. 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 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 get the benefit of your bargain. Knowing the pickle you’re in, the seller or trustee might ask you to pay another few million 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 – who can be trusted to perform as contracted.
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 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.