Cross Border Transactions during a Pandemic — Originally published in BusinessAir Magazine, September 2020, Volume 30, No. 9.
During the global pandemic, many US based aircraft buyers are only considering US registered aircraft due to the logistical challenges caused by COVID-19. However, a willing buyer with an expert acquisition team may be able to find a better pedigreed foreign-registered aircraft at a lower price in today’s market. Cross border transactions in 2020 are unpredictable, challenging, time consuming and require a team who can handle unexpected issues and react to various situations which may arise. Here are some of the important elements to consider in these complicated 2020 cross border transactions.
1. The aircraft purchase agreement (the “Agreement”) should be a detailed road map of the transaction. It should set forth the chronology of the entire purchase process, and identify who will pay for each step. The timelines in the Agreement must allow for delays which are outside of the control of the parties due to COVID-19. Also, the parties should determine if extensive delays would allow termination of the Agreement, and if so, include in the Agreement. In addition to all of the key concepts that should be in every Agreement, the Agreement for a cross border transaction in 2020 should also clearly specify: (i) which party pays for the correction of airworthy items necessary to allow the aircraft to be registered in the US; (ii) which party pays the cost of import into the US; (iii) which party has the responsibility for the export, import and customs documents; (iv) when the full purchase price has to be in escrow; and (v) when the deregistration process starts and when all of the documents can be released for filing.
2. The Agreement should allow for a visual inspection. With the COVID-19 travel restrictions changing frequently, it is important that the team who conducts the visual inspection understands local restrictions. During the visual inspection, it is important for the buyer to have a designated airworthiness representative (“DAR”) present to determine if the aircraft will be considered airworthy in the United States. If the aircraft is not deemed airworthy, the DAR can assess what work will need to be done to meet the standards required for issuance of an US airworthiness certificate, and a repair facility can estimate the cost of these items. Understanding these expenses before incurring the inspection fees and before the deposit becomes nonrefundable is very important. It can be very useful to have the pre-purchase inspection take place in the United States so that the buyer can easily view the aircraft prior to purchase and eliminate some of the complexities with traveling during the pandemic. If this is the case, it is important to make sure the seller correctly imports the aircraft into the United States prior to the start of the inspection.
3. The Buyer needs to build an expert transaction team that includes an onsite technical representative at the inspection facility, the DAR mentioned above, a licensed and bonded United States Customs Broker, and aviation counsel that can, among other responsibilities, coordinate and gather relevant information from local tax counsel, and local title counsel to insure that there are no tax issues with closing and that good title is being conveyed to the buyer free and clear of any local liens or encumbrances that may have attached to the aircraft in the country of registration.
4. Following a satisfactory visual inspection and pre-purchase inspection, buyer will move towards closing the purchase of the aircraft. In order to start this process, seller deregisters the aircraft from the current country of registration. Depending on how the Agreement is drafted, the seller may also be required to provide an export certificate of airworthiness in favor of the United States.
5. The Agreement should require that, immediately upon receipt of the notice of deregistration and without any further requirements, the escrow agent will simultaneously wire the proceeds of the sale to the seller and file the bill of sale and registration application with the FAA.
6. The FAA treats aircraft entering the United States from a foreign registry as a priority and a Temporary Certificate of Aircraft Registration (“Fly Wire”) is typically issued within one to two days following confirmation of deregistration and filing of the appropriate registration documents with the FAA. If the aircraft has been deregistered outside of the United States, the aircraft cannot be ferried to the United States until issuance of the Fly Wire.
7. The Temporary Certificate of Aircraft Registration should be sent to the DAR who is ready to issue the Certificate of Airworthiness (“C of A”). Prior to issuing the C of A, the DAR will need confirmation that the aircraft has the new United States registration number on it and the transponders have been re-strapped.
The key items to remember in purchasing a foreign registered aircraft are: perfecting the Agreement; hiring a DAR, a licensed and bonded United States Customs Broker and an expert transaction team; understanding the costs of obtaining the C of A (and who pays those costs); and sequencing the buying process in a way to properly deregister, register, export and import the aircraft while, at the same time, avoiding unnecessary taxes. To be sure the process is more complicated than buying a US registered aircraft, but if the transaction is managed properly, the benefits to the savvy buyer can make the purchase of a foreign-registered aircraft very rewarding.