Business Jet Finance Report

In these days of sluggish economic recovery and historically low interest rates, the biggest competition for those offering business jet financing is a four-letter word: cash. Those who still have the resources to buy aircraft often prefer to pay cash rather than finance, for the simple reason that they now have few other attractive places to put their money. The successful financier in today's market either offers staggeringly low rates or is able to structure deals where others fail–because of concerns about the credit, the asset or both.

Though some lenders have seen signs that–as one put it–"deals are starting to get crazy again," with more competition over terms and covenants, others think the finance market cooled off in the second half of 2011. Some lenders find high-net-worth individual buyers returning to the market, but others see rising demand mainly from corporate flight departments that can't further postpone equipment upgrades. Everyone looks forward to a return to prosperous times, when more buyers will want to finance their aircraft acquisitions because they can find better places to invest their cash.

For those who want to finance now, meanwhile, the alternatives haven't changed: they're still loans and leases. And the outlook for loans remains about what it has been for a year or two. Lenders are still offering floating rates of 200 basis points over 30-day LIBOR (more for fixed) and looking for down payments of 10 to 30 percent and relatively aggressive amortization. For leases, on the other hand, the picture is changing because of revised accounting rules. So let's take a close look at your lease options today.

An aircraft lease offers a way to transfer possession of an aircraft without transferring ownership. Why lease an aircraft when you could own it? Because ownership has major drawbacks. One of the first consequences of the recession following the 2008 market collapse was that business jet prices plummeted. If your lease ended in 2009, however, that wasn't your problem: you could simply hand over the aircraft to the lessor and walk away, and lots of lessees did exactly that. Institutions that specialized in aircraft leasing suddenly had a large inventory of highly depreciated aircraft on their hands with few buyers in sight–a dramatic display of the advantages of leasing, rather than owning. (On the other hand, if the lessee wants to keep the aircraft, it generally has the right to buy it at the end of the lease for fair market value.)

As a reason to lease, fear of market depreciation competes with another depreciation issue: unavailability of tax depreciation. You can write off business aircraft incredibly quickly for federal income tax purposes: more than 50 percent of cost in the first two years and up to 100 percent in the first year with bonus depreciation. But this valuable benefit evaporates if you aren't engaged in a trade or business or if the business isn't making money and doesn't have taxable income. Leasing the aircraft from a financial institution instead of buying it allows you to capture this benefit because the financial institution writes off the aircraft in its business and (in theory) passes most of the tax benefit on to you.

A final important reason to lease is off-balance-sheet treatment of the aircraft. A company leasing an aircraft doesn't book it as an asset or the lease as a liability on the balance sheet. Instead, the lease payments are reflected as rent expense on the income statement. At a time when politicians and the general public tend to view corporate aircraft ownership more as an indulgence than a business tool, many companies not eager to highlight ownership of a jet are attracted by the off-balance-sheet treatment of leasing.

Changes to accounting rules may compromise this. The Financial Accounting Standards Board and its international counterpart issued an "exposure draft" of a new rule for lease accounting in August 2010. After being buried by an avalanche of comments, the board is expected to "re-expose" a revised rule in the first half of 2012. It will likely be adopted in something close to its current form and may take effect as early as fiscal year 2013, according to Glenn Hediger, a CPA at Aviation Financial Consulting, LLC.

The basic idea of the new rule is to move a leased asset (such as an aircraft) back onto the balance sheet. Suppose BigCo engages Bank Two to purchase and leaseback a business jet. Bank Two buys the aircraft for $25 million and leases it to BigCo for $140,000 per month for seven years. According to the new rule, instead of showing that monthly payment as a rental expense, BigCo's balance sheet must reflect the net present value (NPV) of the stream of lease payments ($11.76 million over seven years in our example) plus any other costs attributable to the financing (such as origination fees and legal expenses) as an intangible "right to use" asset.

Present value will be calculated using the company's own borrowing rate, and since the present value of future payments is always less than the amount of those payments, the "right to use" asset on the company's books will not only be less than $25 million; it will also be less than the $11.76 million total of the lease payments (assuming no other significant financing costs). But it will still be a big, hard-to-miss asset, with a corresponding lease payment liability, as also calculated at the NPV of the total lease payments.

So far, though the new rule fiddles with the balance sheet, no mention is made of an aircraft.

Hediger, however, pointed out that footnotes to BigCo's financial statements will have to disclose the class of the asset. Depending on a corporation's appetite for transparency, said Hediger, this might be characterized as a "transportation payment" or "aircraft." Thus, for companies playing "hide the peanut," the game may be over.

Will this accounting change have a dramatic effect on aircraft lease financing? Maybe, but the important economic and tax benefits of leases remain: you can still walk away from the aircraft when your lease is over and can still enjoy lower pricing as a result of the lessor writing off the airplane on an accelerated basis.

I sometimes think there's more talk about "asset-based jet finance" than actual asset-based loans being written. Still, even supposedly "credit-based" lenders are likely to focus more today on the value of the aircraft being financed than they would have a few years ago. Many of them, after all, got third-degree burns from repossessed aircraft collateral or returned leased aircraft following the 2008 market debacle, and as a result many follow the so-called "rule of 20," according to which the financed aircraft and the loan (or lease) term must both be less than 20 years. Why? So that if the lender has to repossess or otherwise comes to own the financed aircraft, it doesn't have to go out in the market and try to sell a decades-old jet.

But this doesn't make them "asset-based lenders." The litmus test is whether the bank will provide non-recourse financing–in other words, whether the bank's recourse if the borrower defaults on the jet loan is basically limited to foreclosing on the jet and keeping any down payment (usually hefty in the case of non-recourse finance).

Without question, PNC Bank is a market leader in this type of finance, offering aircraft loans featuring non-recourse, limited recourse and limited financial disclosure. Though few, if any, other aircraft lenders offer true non-recourse loans, several are willing to give greater weight to the value of the asset than traditional "credit shops." These lenders are worth seeking out if you want the value of your aircraft to play a major role in obtaining financing.

This is a good time to acquire most jet models and a good time to finance the purchase. You can buy a lot of airplane for a relatively small capital outlay and obtain low-low-interest-rate financing. Unlike the dark days in 2008, aircraft finance is there if you want it, though you may have to shop around for the deal that's right for you.

The Three Types of Aircraft Leases
Financial institutions offer three basic kinds of business jet leases:

Capital Lease:
A capital lease is really a purchase agreement disguised as a lease. If the lessee makes all the payments, in due course it comes to own the aircraft. Capital leases are rarely used to structure a business jet purchase, however.

Operating Lease:
An operating lease, by far the most common type, is specifically designed to avoid being a capital lease: the lessor owns the aircraft for all purposes and only transfers possession to the lessee, who is entitled to walk away when the lease expires.

Synthetic Lease:
A synthetic lease is an operating lease for accounting purposes and a capital lease for tax purposes. The lessee owns the aircraft for tax purposes, but because it flunks certain accounting tests, the lessor remains the owner for accounting purposes. In other words, the lessee can write off the cost of the aircraft for tax purposes even though the aircraft doesn't show up as an asset on its books–a way for the lessee to have its cake and lease it, too. Synthetic leases enjoyed a brief resurrection a few years back but have become rare and, for reasons explained in the accompanying story, will probably soon be a distant memory.

A few variations you should know about:
A wet lease is a leasing arrangement whereby a person agrees to provide an aircraft and at least one crew member.

A dry lease is a lease of an aircraft with no crew members.

In a head lease, also called a master lease, the lessor is the aircraft owner and controls one or more subleases.

A sublease is a lease of an aircraft from a lessor that itself leases the aircraft from another lessor.

Private and Commercial Banks and Affiliates

Banc of America Leasing
Global Corporate Aircraft Finance
15301 Dallas Parkway, Suite 830
Addison, TX 75001
Michael T. Amalfitano
(972) 455-5855

CBI Leasing, Inc.
Aircraft Finance
Commerce Bank N.A.
Lake Forest, IL 60045
Sean K. Patrick
(847) 295-4601

Chase Equipment Finance, Inc.
10 South Dearborn
Chicago, IL 60603
David Nehf
(312) 732-7195

CIT Aerospace, Business Aircraft
2 Lincoln Centre, Suite 200
5420 LBJ Freeway
Dallas, TX 75240
Michael Kahmann
(972) 677-1401

City National Bank
Aircraft Finance
9 Executive Circle, Suite 105
Irvine, CA 92614
David W. Maurer
(213) 673-8929

The Citigroup Private Bank
Global Aircraft Finance
666 Fifth Ave., Fifth Floor
New York, NY 10103
Mary T. Schwartz
(212) 559-0561

Deutsche Bank Private
Wealth Management
Private Aviation Finance
222 S. Riverside Plaza, Suite 25 SE
Chicago, IL 60606
David W. Rodin
(312) 537-1510

Fifth Third Bank Leasing
225 Franklin St., 26th Floor
Boston, MA 02110
Matt McNamara
(617) 573-5191

First Republic Bank
Aviation/Marine Finance
111 Pine St., Fourth Floor
San Francisco, CA 94111
James F. Simpson
(415) 296-5783

1st Source Bank
100 N. Michigan St.
South Bend, IN 46601
Jeffrey Lindstadt
(800) 348-2406

Key Equipment Finance
Corporate Aviation Finance
225 Franklin St., 18th Floor
Boston, MA 02110
Patti Ann Sullivan
(978) 261-5201

PNC Aviation Finance
4355 Emerald St., Suite 100
Boise, ID 83706
Wayne Starling
(888) 339-2834

RBS Corporate Aircraft Finance
525 William Penn Place, Mail Stop 153-2618
Pittsburgh, PA 15219
Thomas W. Aiken
(412) 867-4236

Scope Aircraft Finance
140 E. Town St., Suite 1400
Columbus, Ohio 43215
Robert Kent
(614) 221-5773

SunTrust Equipment
Finance & Leasing Corp.
Corporate Aircraft Finance
300 E. Joppa Road, Seventh Floor
Towson, MD 21286
B.J. Honeycutt
(410) 307-6732

U.S. Bank Equipment Finance
Capital Equipment Group–Corporate Aircraft
9050 17th St., Seventh Floor
Denver, CO 80202
Peter Georgelas
(303) 585-4036

Wells Fargo Equipment
Finance, Inc.
Corporate Aircraft Division
333 S. Grand Ave., Third Floor
Los Angeles, CA 90071
Robert C. Lebano
(213) 253-6125

Other Financial Institutions

Cessna Finance Corp.
100 N. Broadway, Suite 600
Wichita, KS 67202
Frank Ford
(239) 481-5310

Export-Import Bank of
the United States
Transportation Division
811 Vermont Ave.
Washington, DC 20571
Robert F.X. Roy, Jr.
(202) 565-3557

GE Capital Corp.
Corporate Aircraft Finance
10 Riverview Drive
Danbury, CT 06810
Brent P. Godfred
(203) 749-6657

Guggenheim Partners, LLC
Business Aviation Group
9 Sunset Circle
Woodbridge, CT 06525
James A. Crowley
(203) 393-7247

Prudential Capital Group
3350 Riverwood Parkway S.E., Suite 1500
Atlanta, GA 30339
Robert Penfold
(770) 701-2410