The financing of business aircraft has become extremely competitive. Years ago it was a relatively esoteric field, but today a wide range of suppliers offer a full range of aircraft finance products, and many people already have a source of finance in mind before they go. register to buy a jet. Information on banks and finance companies offering aviation loans is easily accessible online, including on the website Business jet traveler website. New sources of aircraft finance continue to emerge, such as BankOZK (formerly Bank of the Ozarks), whose Aviation Finance Department, established three years ago, has already become a national resource.
Large commercial banks usually offer aircraft financing products. Because they primarily lend deposits, the cost of capital tends to be lower for them than for many finance companies, and therefore their rates are generally very competitive. However, new banking regulations (especially for “systemically important banks”) may actually increase the cost of capital and push lending rates up.
Private banks, on the other hand, tend to have lower capital costs than commercial banks, and regional banks are now dipping their toes into the world of aviation finance. This is due to the more favorable treatment of private bank loan capital resulting from historically lower default rates. The rates for non-bank finance companies, which are backed by private sources, may be a bit higher. But not being banks, they have greater flexibility in structuring aircraft financing to meet client goals on issues such as loan-to-value, capital amortization and duration.
As you might expect, rates remain historically low, so most borrowers choose fixed rates. Today, a very wealthy person can borrow at 100 basis points above LIBOR, or even less if the bank is desperate to keep the customer in-house for their airplane financing, and good loans can usually rely on spreads on LIBOR of 120. –170 basis points (about 3.5 to 4 percent at the time of this writing). But LIBOR is going and some banks, like First Republic, are already moving to a different standard. Lease rate factors are typically around 7% of the asset value, but vary widely depending on the aircraft and the length of the lease.
As always, the evolution of the business jet market has affected funding. Several years ago you could find many good values in used jets, but the markets for some models have dried up lately, making the careful and informed selection and evaluation of a used aircraft more important. than ever, a point that has not escaped the banks which rely on plane as collateral. The higher depreciation rates in the business jet market over the past 10 years have made banks wary of risky residual assumptions, which has had several impacts on financing conditions.
First of all, lenders want more protection in loans versus value, and many start the conversation about the loan-to-value ratio of business throws with a suggested down payment of 15-20% or even more. For good clients, 100% financing is still possible, but it is not the norm. Second, banks want shorter amortization schedules to pay off their loans faster. Financial institutions that were looking for 15 to 20 year amortization are now asking 10 to 15 years, but again, almost anything is possible for the right customer and the right plane on the right bank.
The biggest impact of concerns over the value of jets has been on leases. Over the past 10 to 12 years, lessors have been burned repeatedly when their tenants handed over keys to severely impaired aircraft at the end of the lease term. As a result, the appetite of financial institutions, especially banks, for aircraft leasing has dramatically diminished, opening the door to finance companies like Global Jet Capital specializing in leasing. Banks also want to postpone the termination of the lease as long as possible, and some institutions are reluctant to enter into an aircraft lease for a term of less than eight to ten years. At the end of the lease, they can also try to re-lease the aircraft for a few years to reduce and carry over any losses when it is sold. Conversely, if you already have an aircraft lease with a bank, that institution may allow you to terminate it earlier if you replace it with a lease for a new aircraft.
Why rent instead of borrowing? A traditional explanation is that, for some reason, you cannot use the available tax depreciation deductions against your taxable business income. But the bank can write down the plane as part of its leasing business and, in theory, pass most or all of the benefits to you in the form of lower lease payments. On the other hand, if you can use tax depreciation but don’t want to lease the plane for accounting purposes, you should consider banks that offer synthetic leases. These leases are treated as debts for tax purposes, which allows you to write off the jet, but are treated as leases for accounting purposes.
Another traditional reason why you prefer jet charter is that you share the same concerns about falling aircraft values that worry banks. The benefit of leasing a jet today, however, is somewhat mitigated by the rental prices and terms that take these risks into account. Nonetheless, a lease always transfers exposure to banks – an important consideration, especially if the values of the jets drop unexpectedly.
Keith Hayes of PNC Aviation Finance also reports that many of his customers lease jets to minimize sales taxes. If you lease an aircraft, states that charge sales and use taxes on aircraft typically tax your monthly lease payments instead of the purchase price, which can lead to significant savings. If this is your plan, make sure you have an experienced aviation consultant to handle the process.
However, for no particular reason to rent a plane, most jet buyers who don’t pay cash opt for a loan. The rates are attractive and, under the 2017 Tax Act, qualifying buyers can deduct up to 100% of the purchase price of new and used jets in the year they are put into service in the buyer’s business. More and more aircraft buyers are renovating and modernizing their planes after purchasing them, and banks are often willing to finance part of the improvements as well. Debt financing also gives you more flexibility, subject to an initial blackout period, to repay the loan and sell the aircraft without waiting for the expiration of a 10-year lease or a little early buyout opportunity. attractive. And if you’re interested in non-recourse financing, you’ll find that banks like PNC and Citizens offer it on the assumption of lower than normal advance rates and higher than normal interest rates.
It’s good to have a plan to finance your business jet before you start your plane search, but for many buyers, that just means talking to their banker. That’s fine, as far as it goes, but it often means the buyer never tests the waters with other lenders. Financial institutions vary widely in terms of financing the aircraft they offer, the customers they are motivated or willing to provide financing to, and the aircraft they wish to finance.
For example, Institution X may think it already has too many G550s on lease, and Bank Y may not be interested in financing an aircraft that has been in service for more than 10 years. Therefore, once you have identified the aircraft you intend to purchase, it makes sense to seek proposals from multiple lenders. However, business aviation is a small industry, so make sure you have the plane tied up with a letter of intent and a deposit before you start looking for funding.
If you can afford to buy and operate a business jet, you are probably someone who can earn a higher return on your investment than the 3-4% interest charged by banks on business loans. ‘airplane. Therefore, it makes perfect sense to consider financing the purchase of your jet.