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Restructuring the Ownership and Use of Aircraft


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Restructuring the Ownership and Use of Aircraft

  1. 1. Fort Lauderdale, Florida | Washington D.C. Fort Lauderdale Executive Airport  5525 NW 15 th Avenue Suite 301A  Fort Lauderdale, FL 33309 USA Phone: 954-763-5565  Restructuring the Ownership and Use of Aircraft By: Derek Bloom Aviation Legal Group Fort Lauderdale, Florida and Washington, D.C. Date: July 26, 2016 _________________________________________________________________ There are a variety of reasons why some Russian owners of aircraft are interested in restructuring the ownership and use of their aircraft. Faced with Russian controlled foreign corporation disclosure requirements, some owners are seeking a legal means of keeping confidential that they are the beneficial owner of a legal entity outside of Russia that owns an aircraft. Others do not want to disclose that they are the beneficiary of a trust outside of Russia that owns an aircraft. Yet, such persons desire to have continued use of an aircraft registered outside of Russia. Other Russian owners are seeking a means of lowering the cost of aircraft ownership, and taking advantage of the lower cost of capital in Europe and the United States. Others are interested in recovering the use of capital that is invested in an aircraft, which is a depreciating asset. With the continuing decline in value of many aircraft, some owners desire to shift to others the risk of future financial losses due to continued depreciation of aircraft. Still others may find that they have a suitable partner to jointly own and use an aircraft, and to share the cost of owning and operating the aircraft. Others may presently own more than one aircraft and desire to trade multiple aircraft for one aircraft, and for the new aircraft to be financed. The purpose of this article is to present an overview of aircraft transactions and legal structures that may be of interest to persons with the foregoing concerns. Prominent among the possibilities to be considered is a sale and leaseback of an aircraft. Notwithstanding some difficulties in relations between Russia and the U.S. and Europe, the most active market for Russian owners of aircraft looking to restructure ownership of their aircraft, or to refinance an aircraft, is in the U.S.. The U.S. has multiple entrepreneurial aircraft finance companies that have the financial resources, appetite, and risk tolerance to purchase Russian- owned aircraft. Scott C. Burgess Derek A. Bloomπ  Admitted to practice in Florida & the District of Columbia; Florida Supreme Court Certified Civil and Appellate Mediator π Admitted to practice in the District of Columbia
  2. 2. Page 2 of 6 A reality in the marketplace for used aircraft is that there is much less appetite in Europe for the purchase of Russian-owned aircraft due to more prevalent concerns amongst European-based prospective purchasers about wear and tear on aircraft based in Russia. In contrast, there are many more U.S. buyers for Russian-owned aircraft, at the right price. There are brokers in the U.S. looking for aircraft to import to the U.S. for resale within the U.S. or elsewhere. There are also a number of U.S. aircraft finance companies interested in providing financing to Russian aircraft owners who own, or are acquiring, certain types of aircraft. Transaction Outlines 1. A Sale Leaseback Transaction Assume there is a Russian owner of a 2008 Global 5000 that has a value of $16,000,000, and that the owner desires no longer to own the aircraft directly or indirectly, but wishes to have continued exclusive use of the aircraft. One solution would be that a U.S. aircraft finance company may purchase the aircraft and enter into a lease with the Russian owner with the following general terms. Lessee – Entity owned or controlled by the client (Limited Financial Disclosure Required) Aircraft – 2008 Bombardier Global 5000 Aircraft Value: $16,000,000 Structure - Operating Lease with a purchase option at the end of the term. Title of aircraft will remain with Lessor during the term of the Lease Term – 36 months; a term of 24 to 60 months is also possible Security Deposit – 30% of aircraft value, which is refundable upon lease termination if the purchase option is not exercised. Cancellation: Lessee may cancel the lease after one year for a penalty of one month's rent. Aircraft Registration – a jurisdiction acceptable to the Lessor Aircraft Operation – Aircraft must be managed by an independent aircraft management company approved by the lessor at its sole discretion. Maintenance – Aircraft must be on a 100% Engine Maintenance Program; and other maintenance reserves may be required depending on the aircraft Deposit from Lessee 30%, being $4,800,000 Monthly Dry Lease Rental $224,000 Term (months) 36 Purchase Option Price at end of term $6,342,611 Closing Fee $100,000 Anticipated aircraft value at end of term Assuming a 10% annual depreciation rate, is $11,838,000 Security Deposit Credited towards purchase option price.
  3. 3. Page 3 of 6 A lease with the foregoing terms may be considered to be not an operating lease but a finance lease because there is a fixed price for the purchase option. So, the proposed terms may have to be amended in order to allow the aircraft finance company to remain as the registered owner of the aircraft, if it were to be registered in the United States. 2. Trading in Multiple Aircraft Toward One Aircraft Assume there is a Russian owner of two aircraft that each have a value of $8,500,000, and each is subject to a loan and security interest in the amount of $4,000,000. The owner also owns a third aircraft that has a lien against it of $2,000,000. The owner desires to acquire use of a new aircraft that costs $20,000,000, to pay off each existing loan, and to have a special purpose company receive a loan to finance the purchase of the new aircraft. The aircraft will then be leased to an operator selected by the owner, and the operator will let the owner have exclusive charter use of the aircraft. The aircraft manufacturer (OEM) would be motivated to facilitate the proposed transaction in order to book the sale of the new aircraft by year end. The OEM may agree to accept a trade-in of the two existing aircraft that each have an appraised value of $8.5 million. However, due to softness in the market for used business aircraft in mid-2016, and in exchange for taking the risk of re-sale of the two used aircraft, the OEM will want a bargain price on the two trade-ins, allowing it to make a profit on their re-sale. Therefore, assume the OEM would agree to purchase each used aircraft for $7.0 million. After the trade-ins are completed, the OEM would credit $14 million toward the new aircraft. Before the two used aircraft may be traded in, each needs to be de-registered in the countries where they are presently registered. A certificate of export airworthiness needs to be obtained in both countries, which entails an inspection by national civil aviation inspectors. The aircraft need then to be delivered to an agreed location, let's assume in the U.S. There, they will be inspected again so that any airworthiness deficiencies are identified and corrected to the OEM's satisfaction, and at the seller's expense. The two lenders with loans secured by the existing aircraft need to release their liens on the aircraft, liens which are recorded both in the national registries where the aircraft are registered, and in the International Registry. A lender needs to be located which will provide a loan of $16,000,000 secured by a pledge of the new aircraft with a value of $20,000,000. The use of the loan proceeds would be 1. Payoff of amount owed on 1st aircraft ($ 4,000,000) 2. Payoff of amount owed on 2d aircraft ($ 4,000,000) 3. Payoff of amount owed on 3rd aircraft ($ 2,000,000) 4. The balance of Loan Proceeds: $ 6,000,000 Total: $16,000,000 The new aircraft would be paid off with 4. The balance of Loan Proceeds: $6,000,000 5. The value of trade-in of 1st aircraft paid to OEM $7,000,000
  4. 4. Page 4 of 6 6. The value of trade-in of 2d aircraft paid to OEM $7,000,000 Total: $20,000,000 The closings of all the transactions would need to be synchronized in one time zone so that no party is unsecured for more than a moment in time at the closing table. The transaction also involves negotiation of the aircraft purchase agreement for the new aircraft, the two trade-in agreements, the loan agreement, a mortgage and security agreement, an irrevocable power of attorney for a lease termination, an irrevocable deregistration and export request authorization, an assignment of a lease agreement, an aircraft management agreement and its assignment, an owner trust agreement and aircraft operating lease agreement, legal opinions, a stock pledge agreement in multiple jurisdictions, corporate resolutions, appointments of agents for service of process, aircraft maintenance contracts for the engines and APU, insurance, bills of sale, certificates of acceptance, International Registry searches and filings, U.S. customs entry documents, and corporate and personal guarantees. Once the transactions are closed. use of the new aircraft may made available to the owner by means of a lease or charter agreement. 3. Establishing Joint Ownership of One Aircraft Assume there are two Russian persons who are friends, and each owns one aircraft. Assume both aircraft are underutilized, and both owners desire to reduce their cost of ownership and use of aircraft. However, both owners still desire to have access to an aircraft as needed. A solution may be for one owner to sell his aircraft and to purchase a 50% ownership interest in his friend's aircraft. Joint ownership may be established in a number of way. The most direct approach would be for each owner to organize a special purpose company (SPC) that would purchase a 50% ownership interest in one of the two aircraft, after the second aircraft was sold. Alternatively, an SPC may be formed that would own 100% of the aircraft ("JV SPC"), and each owner may have its SPC purchase 50% of the JV SPC. Of course, if there were three or four joint owners, the percentage ownership of each participant may be adjusted accordingly. If the aircraft were to be registered in the U.S., one or both SPCs may act as the trustor and cause title to the aircraft to be conveyed to an owner trustee run by the trust department of a U.S. bank. Ownership of the aircraft by such a non-citizen trust would ensure the eligibility of the aircraft for registration with the Federal Aviation Administration (the "FAA"). The bank acting as trustee would then enter into a operating agreement, which may be a lease agreement, that transfers the right to possess, use and operate the aircraft from the owner trustee to the trustor(s). The owner trustee may then enter into an operating agreement with a commercial operator which would allow both Russian persons to use the aircraft. Several variations may be envisioned whereby there is only one trustor interacting with the U.S. bank that is to act as owner trustee, and there is joint ownership of an SPC that owns the trustor one or two tiers higher up in a corporate structure above the SPC. The second partner in this deal may acquire a right to charter the aircraft for a number of hours and appear to be a charter customer rather than an owner.
  5. 5. Page 5 of 6 Once joint ownership of an aircraft is established in a manner that is suitable for the parties, a number of practical issues may be addressed about sharing the cost and use of the aircraft. The owners may agree that, when the aircraft is not being used by one of them, the aircraft may be chartered by the operator to third parties of an agreed profile, which would help to pay the fixed costs of aircraft ownership. Each owner may be given a non-exclusive leasehold interest in the aircraft, and a commercial operator may be given a non-exclusive leasehold interest in the aircraft to allow it to charter the aircraft. The commercial operator would be charged with management of the aircraft. The management agreement would provide for the sharing of all costs and expenses of every kind associated with the management, storage, operation, and maintenance of the aircraft, including "direct and variable operating costs", "fixed operating costs", "incidental expenses" and a "management fee". The management agreement would typically provide that the commercial operator would maintain a scheduling log for the aircraft. Typically, as between the owners, being the "private operators", would each have an equal, "first come, first served" right to schedule use of the Aircraft, supplemented by particular shared rights around holidays. The commercial operator's right to schedule use of the aircraft would be subordinate to the rights of the private operators. For each flight to be conducted by a private operator, the commercial operator would provide the flight crew. The commercial operator would charge charter customers a minimum amount per flight hour for charter operations and repositioning flights 4. Selling an Aircraft and Switching to Fractional Ownership Assume a Russian owner has come to the conclusion that it is underutilizing its aircraft to such a degree that it no longer makes sense to retain ownership of the aircraft, and all that is needed is occasional use of an aircraft. In this scenario, a solution may be a sale of an aircraft followed by a purchase of a fractional interest in an aircraft through a program such a Netjets', or the purchase of a number of hours of use of an alternative aircraft in a fleet of aircraft through a program such as Vistajet operates. In the Netjets program, an owner typically purchases an actual percentage ownership of interest in a particular aircraft, which results in a right to use that particular aircraft for a certain number of hours. The right to use that aircraft may then be exchanged for use of other aircraft in the fleet, with an adjustment to the number of hours of use depending on the aircraft selected for use. In the Vistajet and other similar programs, the Russian client has purchased a number of hours of flight, but not an ownership interest in a particular aircraft. 5. Selling an Aircraft to a Corporate Subsidiary As a final scenario, assume a Russian owner of an aircraft is also the owner or a significant shareholder in a large business, and he uses the aircraft for personal and business flights. It may make sense for the business to acquire ownership of the aircraft and to allow
  6. 6. Page 6 of 6 continued use of the aircraft by the Russian executive for personal flights if he pays all "variable costs" associated with personal use, and a share of fixed costs. In Russia, it is common for an aircraft used for business purposes to be registered outside of Russia, even in a jurisdiction that limits use of the aircraft to private flights, and then to have the aircraft based in Russia for use on private flights by a sometimes large list of authorized users who are corporate officers. There are many Russian aviation regulatory issues to be managed in such a situation, including the payment or nonpayment of import VAT and import duties. There are weight limits on aircraft that may be imported without payment of customs duties. Other issues include obtaining regulatory approval for who may be onboard a flight for it still to be treated as a private flight, and not a prohibited cabotage flight, and the obtaining of flight permits for private flights. If a corporate subsidiary is a legal entity organized in Europe or the U.S., there are a number more issues to be considered including aviation regulatory and tax considerations for operation, or for avoidance of operation of an aircraft by a corporate flight department company. Also, a U.S. registered aircraft that belongs to a non-citizen trust must be used predominantly within the U.S. We would be delighted to be of assistance to any Russian user of business aircraft who may desire to acquire or restructure its ownership or use of business aircraft.