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Red Flags to ID a Back to Back Aircraft Transaction

By July 24, 2018 July 4th, 2021 No Comments
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How to avoid a flip

If you are buying a US registered aircraft, there are several hints that you are in a back to back aircraft transaction.

What is a Flip

First, know that a back to back aircraft transaction involves the current owner of the aircraft (Owner) who enters into a contract to sell the aircraft to intermediary (Intermediary) and the Intermediary enters into a contract at the same time to sell the aircraft to the buyer (Buyer).  The plan is that on the closing date, title transfers either directly from the Owner to the Buyer or title transfers from the Owner to the Intermediary (without registration in the name of Intermediary) and immediately transfers to the Buyer which registers the aircraft with the FAA.

Why is it a Flip

Did anyone tell you that the transaction is a flip or a back to back?  Why is it a back to back transaction?   If it is a back to back transaction because you, the Buyer, want to remain confidential, then this may not be possible.  If the Owner has a lender, then export control and anti-money laundering laws and regulations may require that lender to obtain the name of the new registered owner and the source of the funds used to purchase the aircraft.

Who is the Seller vs. Who is the Registered Owner

Is the “Seller” named in your purchase agreement the registered owner of the aircraft on the FAA registry?  If not, ask why your contract is not with the registered owner.

Why Is this Taking So Long

Is it taking a long time to negotiate the purchase agreement and the purchase agreement comments you receive do not reflect your conversations with the “seller” named in your purchase agreement?

Whose Deposit

Know your position on the Intermediary using your deposit to become the deposit for the contract the Intermediary has with the Owner.  In the US, an escrow agent must (for anti-money-laundering and other governmental requirements) know all of the parties in order to perform governmental required due diligence checks.

The Buyer needs to be able to retain its rights to its deposited funds per its purchase contract.  The Buyer also needs to be able to (i) send representatives to the inspection facility, (ii) receive a copy of the inspection report, and (iii) have its representatives on any test flight allowed by the purchase contract.

What Remedies

The Buyer needs to consider its possible remedies if the Owner defaults and the Intermediary is not able to convey the aircraft to the Buyer.

Timing Issues at Closing

If the Buyer obtains financing, the timing of the release of the lender’s funds to Intermediary can become a last-minute challenge.  A lender may not release its funds to a party (Intermediary) which does not have title to the aircraft.

As closing nears, request a copy of the bill of sale that is in escrow.  Is it signed by the “Seller” named in your purchase contract?

Tax Issues – Not Straightforward with a Flip

Tax issues must be reviewed.  If the Intermediary is in the chain of title, how does this affect the sales tax planning performed by the Buyer’s team?  Does the Buyer pay for the flight to the closing location?  Is it a closing location that is near the inspection facility or reasonably “on the way home” for the Buyer?  With a flip transaction, in order to close two transactions in a “good” location for sales tax, it may be necessary to fly the aircraft to a more distant closing location.

Who Represents Your Interests in the Flip

Is the Intermediary representing both the Owner and the Buyer?

Changing Aircraft Registries – Additional Complications

If the aircraft is registered on one country’s registry when owned by the Owner and the Buyer is changing registration to a different registry, be aware that this will add complication to the documentation and the closing process.

 

Michelle M. Wade is a Partner with the aviation law firm of Jetstream Aviation Law, P.A. and counsel clients on the acquisition, financing and operation of corporate jets operated under Part 91 and Part 135 of the US Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com. Michelle Wade (mwade@jetstreamlaw.com)

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