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What should be included in broker agreements

What did you agree to pay your broker? When do you pay your broker? How long is your exclusive listing with your broker to market your aircraft? We recommend putting your agreement in writing.

How to choose a closing location

Closing location is an important term in a purchase and sale agreement. It has a significant impact on state taxes you might owe. Know the implications before you agree to a closing location.

What due diligence should you review in connection with your aircraft purchase?

In addition to the FAA Aircraft Registry reports and International Registry reports received from the escrow agent, an aircraft buyer should consider obtaining UCC, tax and judgment searches. While federal law in general requires aircraft liens to be filed with the FAA, there are some notable exceptions. Federal tax liens are exempted from the Transportation Code, and are not required to be filed with the FAA to be perfected. These liens are generally aimed at the company, but could encumber the title to any aircraft owned by the company. While State tax liens do not have a specific exemption from the Transportation Code, many states have taken the position that they do not need to comply with the Transportation Code, and therefore have asserted liens against aircraft and/or engines even when they have not filed liens with the FAA.

Should you buy title insurance?

Are you buying a repossessed aircraft, an aircraft out of bankruptcy, or one which has had many owners? If so, you may want to consider title insurance. Previously title insurance for aircraft did not offer much protection, but newer title policies now cover the risk that you may not own legal title to the aircraft, and they offer protection from claims on matters that have been filed with the FAA, and for a certain level of federal and state tax liens. Additional state and federal tax lien coverage may also be available for purchase.

What is the “IR report” telling me?

The International Registry (“IR”) report on the airframe and engines is part of the title search you want to receive from  the escrow agent. It shows all registrations that have been made against the specific serial number airframe and engines of the aircraft that was searched.  This includes sales, financing, leasing, assignments of leases, discharges of financing, and termination of leases. These filings should generally follow the chain of ownership and financing reflected in the FAA records, with each filing except the current ownership and financing having been released. However, some buyers opt not to register their purchase on the IR, so some of the history may be missing.  If your airframe has a long history, or was owned in a fractional program, it will have a long IR report.

What financing is available for a business aircraft?

We can assist with reviewing the aircraft security agreement received from your lender as well as any operating leases and financing leases involved in financing your business aircraft.

What to include in Letters of Intent and Offers to Purchase

Your letter of intent should include all of the terms that are most important to you.  You do not want to wait until the very last open issue in your purchase agreement to discover that you and the other party will never reach agreement on a critical point.

What to include in Purchase Agreements and Sales Agreements

A purchase agreement prepared by your aviation counsel can help avoid some common problems. Some of the significant issues the purchase and sale agreement should address include (i) the scope of the pre-purchase inspection; (ii) what discrepancies the seller must pay to repair; (iii) the condition the aircraft is to be in at delivery time; (iv) when the deposit becomes nonrefundable; (v) whether the buyer has a right to reject the aircraft after the pre-purchase inspection; and (vi) whether the seller can decide not to repair any discrepancies and terminate the agreement.

Can a company organized outside the U.S. register a corporate jet in the U.S. in its name?

No. Generally, a corporate jet may be registered in the U.S. only when the corporate jet is owned by a U.S. citizen. Per United States Federal Aviation Regulation (FAR) 47.2, with respect to an entity, U.S. citizen is defined as a corporation or association organized under the laws of the United States or a State, the District of Columbia, or a territory or possession of the United States, of which the president and at least two-thirds of the board of directors and other managing officers are citizens of the United States, which is under the actual control of citizens of the United States, and in which at least 75 percent of the voting interest is owned or controlled by persons that are citizens of the United States. See the Owner Trust Topic for an alternative if the entity does not meet this definition.

Can a corporation organized in Delaware, but which is owned by a non-U.S. citizen register a corporate jet in the U.S. in its name?

No. Per FAR 47.2, at least 75 percent of the voting interest must be owned or controlled by persons who are citizens of the United States or of one of its possessions. See the Owner Trust Topic for an alternative.

Can a limited partnership with a corporate general partner register a corporate jet in its name in the U.S.?

No. Per FAR 47.2, U.S. citizen means a partnership of which each member is such an individual. Each partner, whether a general or limited partner, must be an individual who is a U.S. citizen. See the Owner Trust Topic for an alternative.

Do the same registration requirements exist for corporate jets operated in a fractional program?

Yes, registration requirements for corporate jets are the same, whether they are operated under Part 91, Subpart K of Part 91 (fractional rules) or Part 135. There are operational differences that may affect the way ownership is structured.

The corporate jet will be sold under a lease with an option to purchase. Should the aircraft be registered in the name of the lessor or the lessee?

See what is commonly referred to as the Leiter Letter in the Federal Register, Volume 55, No. 192, Wednesday, October 3, 1990 regarding Treatment of Leases with an Option to Purchase. Generally, the lessee should be recognized by the FAA for registration purposes when (i) the purchase option is ten percent or less of the value of the aircraft; or (ii) the purchase option price is above ten percent, but if the option is not exercised, the lessee must pay a residual value or termination sum equal to or  exceeding the purchase option price; or (iii) the purchase option price is above ten percent, and there is no mandatory full payout if the option is not exercised, but the option price is less than the lessee’s reasonably predictable cost of performing under the lease if the option is not exercised.

What is an owner trust?

If an entity does not fit the FAA’s definition of U.S. citizen eligible to register a corporate jet in the U.S., the owner may place the corporate jet in a trust (commonly known as an “owner trust”) and have the corporate jet registered with the FAA in the name of the trustee (commonly called the owner-trustee). The owner trustee holds legal title to the corporate jet. There are several institutions which routinely act as owner trustee for aircraft in the U.S. The owner enters into a Trust Agreement with the owner trustee and the Trust Agreement is recorded (becomes public record) with the FAA. Each trustee must be either a U.S. citizen or a resident alien and they must submit to the FAA a copy of each document affecting a relationship under the trust. There are additional requirements for an affidavit from each trustee.  Persons who are neither U.S. citizens nor resident aliens may not have more than 25 percent of the aggregate power to direct or remove a trustee, either directly or indirectly. Those persons may have more than 25 percent of the beneficial interest in the trust. The aircraft owner will need to select and engage a trustee. The tax department will need to confirm that they are comfortable that the trust utilized will be treated as a grantor trust for federal tax purposes.

How to Avoid the Sole Purpose Flight Department Company Trap?

The FAA prohibits owning a corporate jet and employing the crew in a sole purpose entity so that the sole purpose entity operates the jet to provide flights to other entities. You risk FAA civil penalties, IRS taxes, penalties and interest and the possible denial of coverage by your insurer in the event of a claim after an accident.

What are Aircraft Charter Agreements?

Many aircraft owners lease their aircraft to a charter company to have the aircraft chartered by third parties to help cover the costs of operations. State tax issues, federal tax issues, fireblocking of the interior, crew training, maintenance issues and sometimes financing issues are just a few of the factors in this decision.

Company Aircraft Use Policies

As part of the company’s risk management program, you may consider formalizing your aircraft use policies for both company owned aircraft and any employee owned aircraft used for the business. This will help the company be aware of the risk management issues. Violation of the FAA reimbursement/consideration requirements can carry risk exposure for both the employee and the company.

What are Cost-Sharing Arrangements?

Under the non-commercial flight rules which are in FAR Part 91, there are limited opportunities to be reimbursed for flights to others. Dry Leasing is an option. Timesharing is another option, but an owner can only charge a limited amount for a timeshare flight. Another alternative is to lease the corporate jet to a company which has a charter certificate and to allow them to charter the corporate jet to others.

What are Fractional Interests & Jetcards?

We can assist you with negotiating changes to the standard program documents provided by fractional companies.

How do joint ownership or co-ownership work?

Joint ownership requires that each party own an interest in the aircraft per FAR 91.501. If you form a company to own the aircraft, that company generally will not be able to operate the aircraft per the FAA regulations. That company must dry lease the aircraft to the operators.

What is an Aircraft Interchange?

Consider an interchange if you want to use another aircraft and crew in exchange for your aircraft and crew. An interchange is limited to an exchange for equal time and no charge, assessment, or fee is made, except that a charge may be made not to exceed the difference between the cost of owning, operating, and maintaining the two airplanes.

International Aircraft Operations

We can help identify issues needing further help:

  • importing and exporting aircraft
  • cabotage concerns when flying internationally
  • European Union’s NCC requirements

Aircraft Management Company Arrangements – Part 91 and Part 135

Your management company handles the day to day details for your aircraft and you want to negotiate a good and thorough initial agreement to avoid future disputes.

What is a dry lease?

A dry lease is the lease of an aircraft without any crew. Under a dry lease, the lessee generally has “operational control” and the responsibility and liability that accompanies operational control.

What is an aircraft timeshare?

Timeshare is defined in FAR 91.501(c) as “an arrangement whereby a person leases his airplane with flight crew to another person, and no charge is made for the flights conducted under that arrangement other than those specified in paragraph (d) of this section”. This option is generally available only to large aircraft, however, the “NBAA exemption” to FAR 91.501 may apply. An owner can only charge an amount limited by regulation for a timeshare flight. Other issues can trip-up an unsuspecting aircraft owner, so careful planning is essential.

Can you Fly Candidates running for Office

Aircraft owners need to be aware of applicable regulations before providing flights to candidates.  Failure to comply with all regulations could land you in an unflattering article on the web.

Aircraft Insurance

Does your insurance policy have the proper parties reflected as the operators of the aircraft?  Has your risk manager spoken with your aviation counsel to confirm that the aircraft operations comply with the FAA regulations?

Should You Review and Audit aircraft operations

Facts change and laws change.  Consider reviewing your aircraft operations every 18 months to identify any regulatory and risk issues.

Securities & Exchange Commission

If you are a publicly traded company there are aircraft registration issues to consider as well as proper disclosure in SEC filings of personal flights.

1031 Tax-Deferred Exchange

Effective January 1, 2018, a 1031 tax-deferred exchange may no longer be utilized for aircraft.

Federal Income Tax for aircraft

There are issues such as depreciation, passive activity losses, hobby loss rules and federal excise taxes to be considered.  There are also rules about charitable flights.

Personal Use/Non-business Use/Entertainment Use of aircraft

Consider the IRS and FAA implications if any company executives use the company jet for personal trips.  The FAA generally limits reimbursement and there may be a loss of federal tax deductions by the company and additional income for the executive.

State Sales & Use Tax on aircraft

There are state sales/use taxes, state property taxes and may also be registration requirements and gross receipts taxes.  Each state has different requirements and different exemptions. Any state in which the aircraft spends a significant amount of time should be reviewed for possible tax issues.  Some states have always been aggressive about taxes on aircraft and this trend is accelerating.

Protect Your Investment with Jetstream

Buying or selling an aircraft can create a legal nightmare for business owners who don’t anticipate the kinds of problems that can arise. You don’t want to wait until a dispute arises about the condition or history of an aircraft, or damage to an aircraft occurs that may or may not be covered by insurance. That is why it’s important that you retain legal representation from an experienced aviation attorney.

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