Financing Your Aircraft

Business jet finance has become extremely competitive. Years ago, this was a relatively esoteric area, but today, a wide range of providers offer a full range of aircraft financing products, and many people already have a funding source in mind before they sign up to buy a jet. Information on banks and finance companies offering aviation loans is readily available online, including on the Business Jet Traveler website. New sources of jet finance continue to emerge, such as BankOZK (formerly Bank of the Ozarks), whose three-year-old aviation finance department has already grown into a national resource.

Major commercial banks generally offer aircraft finance products. Because they mostly lend deposits, the cost of capital tends to be lower for them than it is for many finance companies, and as a result, their rates are usually very competitive. However, new banking regulations (especially for so-called “systemically important banks”) can effectively increase the cost of capital and push lending rates higher.

Private banks, on the other hand, tend to have lower costs of capital than commercial banks, and the regional banks now dipping their toes into the aircraft finance world. This is due to more favorable capital treatment of private bank loans resulting from historically lower default rates. Rates at non-bank finance companies, which are backed by private sources, can be somewhat higher. But not being banks, they have more flexibility in structuring aircraft financings to meet client objectives on issues like loan-to-value, principal amortization, and term.

As you’d expect, rates remain historically low, and most borrowers choose fixed rates as a result. An ultra-high-net-worth individual today can borrow at 100 basis points over LIBOR, or even less if the bank is desperate to keep the customer in-house for its jet financing, and good credits can typically count on spreads over LIBOR of 120–170 basis points (about 3.5 to 4 percent as of this writing). But LIBOR is going away, and some banks, such as First Republic, are already moving to a different standard. Lease rate factors are generally around 7 percent of asset value but vary greatly depending on the aircraft and the lease term.

As always, changes in the business jet market have affected financing. Several years ago, you could find many good values in used jets, but markets for some models have dried up lately, making careful and informed selection and evaluation of a preowned aircraft more important than ever, a point that has not escaped banks that rely on aircraft as collateral. Higher market depreciation rates for business jets over the last 10 years have made banks leery of risky residual assumptions, which has had several impacts on financing terms.

First, lenders want more cushion in lending against value, and many are beginning the conversation about the business jet loan-to-value ratio with a suggested down payment of 15 to 20 percent, or even more. For the right clients, 100 percent financing is still possible, though not the norm. Second, banks want shorter amortization schedules to get their loans paid down faster. Financial institutions that used to look for 15- to 20-year amortizations are now asking for 10 to 15 years, though again, almost anything is possible for the right client and the right aircraft at the right bank.

The biggest impact of jet value worries has been on leases. In the past 10 to 12 years, lessors have been burned many times when their lessees turned in the keys to severely depreciated aircraft at the end of the lease term. As a result, the appetite at financial institutions, especially banks, for leasing aircraft has greatly declined, opening the door to finance companies like Global Jet Capital that specialize in leasing. Banks also want to postpone the lease termination for as long as possible, and some institutions are reluctant to enter into any jet lease with a term of less than eight to 10 years. At the end of the lease, they may also try to re-lease the aircraft for a few years to reduce and postpone any loss when it is sold. Conversely, if you already have an aircraft lease with a bank, that institution may let you terminate it early if you replace it with a lease for a new aircraft.

Why lease instead of borrowing? A traditional explanation is that, for whatever reason, you can’t use the tax depreciation deductions available against your taxable business income. But the bank can depreciate the aircraft in its leasing business and, in theory, pass most or all of the benefit on to you in the form of lower lease payments. On the other hand, if you can use the tax depreciation but don’t want to lease the aircraft for accounting purposes, you should consider banks that offer synthetic leases. Such leases are treated like debt for tax purposes, allowing you to depreciate the jet, but are treated like leases for accounting purposes.

Another traditional reason for you to prefer a jet lease is that you share the same concerns about declining aircraft values that worry the banks. The advantage of leasing a jet today, however, is mitigated somewhat by lease pricing and terms that take those risks into account. Nevertheless, a lease still transfers exposure to the banks—an important consideration, especially if jet values plummet unexpectedly.

Keith Hayes at PNC Aviation Finance also reports that many of its customers are leasing jets to minimize sales taxes. If you lease an aircraft, states that charge sales and use tax on aircraft generally tax your monthly lease payments instead of the purchase price, which can result in significant savings. If that’s your plan, make sure you have experienced aviation counsel to manage the process.

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Without a special reason to lease an aircraft, though, most jet buyers not paying cash opt for a loan. Rates are attractive, and under the 2017 tax act, buyers who qualify can write off as much as 100 percent of the purchase price of new and preowned jets in the year they are placed in service in the buyer’s business. More jet buyers are refurbishing and upgrading their aircraft after buying them, and banks are often willing to finance a portion of the improvements as well. Debt financing also gives you more flexibility, subject to an initial black-out period, to pay off the loan and sell the aircraft without waiting for a 10-year lease to expire or an unattractive early-buyout opportunity. And if you’re interested in non-recourse financing, you’ll find that banks like PNC and Citizens offer it assuming lower-than-normal advance rates and higher-than-normal interest rates.

It’s good to have a plan for financing your business jet before starting your aircraft search, but for many buyers, this simply means having a talk with their banker. That’s fine, as far as it goes, but it often means that the buyer never tests the waters with other lenders. Financial institutions vary greatly in the aircraft financing terms they provide, the customers they’re motivated or willing to provide the financing to, and the aircraft they’re interested in financing.

For example, Institution X may think it already has too many G550s under lease, and Bank Y may not be interested in financing an aircraft that has been in service for more than 10 years. Consequently, once you’ve identified the aircraft you intend to purchase, it makes sense to request proposals from multiple lenders. However, business aviation is a small industry, so make sure you have the aircraft tied up with an LOI and a deposit before you start shopping for financing.

 If you can afford to purchase and operate a business jet, you’re probably someone who can earn a higher return on your investments than the 3 to 4 percent interest being charged by banks on jet loans. Accordingly, it makes a great deal of sense to consider financing your jet purchase.