Replacing Your Aircraft? 8 Factors to Consider
Replacing Your Aircraft? 8 Factors To Consider — Originally published in BusinessAir Magazine, September 2017, Volume 27, No. 9.
Many current aircraft owners have decided that 2017 is the year to replace their aircraft. With pre-owned prices and residual values for their current aircraft skewing lower, many owners are upgrading to larger, newer preowned aircraft. When replacing a current aircraft with another aircraft, there are a number of important factors to consider:
Ownership structure – Presumably, when the current aircraft was purchased, the ownership structure for the aircraft was analyzed based on several factors including liability, regulatory rules and tax concerns. When purchasing the replacement aircraft, it is important to determine if any of the factors have changed. If so, the ownership structure should be reexamined. Has the usage of the aircraft developed in a different manner over time so that the assumptions made in establishing the current ownership structure no longer apply? Have any state or federal tax laws changed so that a different structure would now be advisable?
Tax considerations – If the sale of the current aircraft will result in a taxable capital gain, then it is important to consider the benefits of structuring a like-kind exchange or a reverse like-kind exchange, as the case may be. Additionally, both the sale of the current aircraft and purchase of the replacement aircraft can generate sales tax liability in the state where the closings take place and in the state where the replacement aircraft is hangared. Additionally, if property tax is collected on the aircraft where it is based, property tax should be addressed in the sale agreement and prorated based on the date the title is transferred.
Timing – Is it more important to (i) have the proceeds from the sale of the current aircraft before purchasing the replacement aircraft or (ii) never be without access to either the current aircraft or the replacement aircraft? Ideally, the proceeds from the sale of the current aircraft are not needed to purchase the replacement aircraft. In that scenario, when the right replacement aircraft is found, it can be purchased immediately, with the marketing and sale of the current aircraft to follow. But if the proceeds from the sale of the current aircraft are needed to purchase the replacement aircraft, it is important to understand there may be a period of several months when neither aircraft is available for use because of the pre-purchase inspection to be performed on the current aircraft and then the time needed to source and purchase the replacement aircraft. If managing without an aircraft is not desirable or practical, then alternative charter arrangements may be necessary to compensate for the gap in aircraft availability.
Timeline – There are many variables in buying and selling an aircraft and a strict timeline is not always possible. Understanding this and having flexibility will make the transition process less stressful. It is difficult to determine how quickly the current aircraft will sell, when a satisfactory replacement will be found and how long the contract negotiations or inspections will take. Additionally, the time it takes to find a buyer for the current aircraft and the time it takes to find the perfect replacement aircraft varies greatly.
Financing – If the current aircraft is financed, will the proceeds of the sale cover the loan amount? If the replacement aircraft is going to be financed, does the buyer want to stay with the same lender or explore other options? Are there any early termination fees in the current loan to consider?
Broker selection – Usually the same aircraft broker/consultant is used to sell the current aircraft and source the replacement aircraft. It is important to make sure the aircraft broker/consultant understands the market for both the current aircraft type and the replacement aircraft type. Many aircraft broker/consultants deal in specific aircraft types. Making sure the aircraft broker/consultant has done recent transactions in both the current aircraft type and replacement aircraft type will help insure that the current aircraft is listed at the appropriate price and that the best available replacement aircraft is selected.
Management Company – If the current aircraft is with a management company, will the replacement aircraft be placed with that same management company or should other management companies be considered? Additionally, if charter revenue is important, does the current management company have considerable levels of charter business for the replacement aircraft type?
Looming 2020 Upgrades – As of January 1, 2020, the majority of aircraft operating within the United States will be required to have Automatic Dependent Surveillance – Broadcast (ADS-B) avionics capabilities. The costs associated with the mandatory ADS-B upgrades should be considered in the purchase price offered for the replacement aircraft.
Once the decision is made to replace a current aircraft, it’s imperative to thoroughly consider these important factors. Advance deliberation will expedite your transaction and make it as stress-free as possible.
Please contact Amanda Applegate at 310-392-5200 or aapplegate@aerlex.com.