Aircraft Loans - The ABC’s of Aircraft Financing

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Aircraft Financing ABC’s - Appraisal

An appraisal is an optional tool that the lender may decide to employ to assure that the value of the aircraft supports the lender’s loan-to-equity ratio. Cases where it’s not always deemed necessary include the purchase of new aircraft, or when the lender is extremely experienced in aircraft financing (typically not a commercial bank) and the aircraft in question is a smaller single or twin engine.

Though it mostly benefits the lender, if an appraisal is required, the buyer picks up the tab. The only upside, from the buyer’s point of view, is the emotional confirmation that the agreed upon price is a fair one. Unless, of course, the purchase agreement contained a contingency clause that the aircraft appraise at or above the purchase price. In those cases, it provides a legal exit for the buyer to abandon or re-negotiate the deal.

Title Search

The lender will employ a title company to conduct a title search on the aircraft. A title search identifies the past owners, and any existing liens or other encumbrances of record. Both lender and buyer expect a ‘clean’ or clear title. The lender, for it’s part, will not close without one, and will rightfully insist that old liens be released by filing the proper paperwork with the FAA (the agency that administers the national recording system covering title to – and liens against – aircraft), and that existing claims be resolved.

While the buyer is necessarily burdened to some extent, it is ultimately the sellers responsibility to pass on a clear title at the closing.

Title Insurance

Title insurance protects against recorded rights that may have been missed in a title search. Depending upon the policy, it may also protect against ownership disputes, forged documents, fraud, and purchase of a stolen aircraft. Lenders commonly purchase title insurance (on the buyer’s dime) to protect their security interest in the aircraft after the transaction closes.

Aircraft Insurance

The lender will require that you purchase and maintain aircraft insurance, and provide proof of that insurance at the closing. Aircraft insurance is a combination of property insurance for the hull, and liability coverage for bodily injury and property damage resulting from the ownership or use of the aircraft in question. It’s never too early in the process to begin sourcing and comparing insurance providers and coverage, as the field is complex and the associated costs can be a significant factor in determining your eligibility for financing a particular aircraft.

Beyond the differences in providers, the cost of aircraft insurance is determined by a number of factors, including the make and model of your aircraft, the value of that aircraft, how the aircraft will be used, how it will be stored, and your flight experience and rating. Additional pilot training can often lower insurance premiums.

The Closing

At the closing, the loan documentation is executed and funds and title are transferred. The buyer will be expected to sign...

1. A promissory note, detailing the terms of the loan, obligating the buyer for the outstanding loan balance, and outlining remedies the lender may take if the borrower reneges on his obligations.
2. A security agreement, giving the lender a security interest in the aircraft.

If the purchase required the guarantee of a third party (called a surety), that individual or business entity will be expected to execute a guaranty that obligates them to repay the loan in the event the borrower defaults.

By the way, for a nice, peaceful closing with no deal-busting surprises, read Aircraft Loans - Avoid the Shouting and the Fistfights. And for practical tips and advice from actual borrowers themselves, check out  Aircraft Loans, Moans and Groans.

-- D. Alan Carter

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