David Mayer, a Partner with the law firm of Shackelford, Bowen, McKinley & Norton, LLP, discusses some of the business and legal issues one should consider when acquiring a new or pre-owned aircraft. Topics covered include:
David Mayer has decades of experience in guiding clients through domestic and international transactions, disputes, and other matters. Currently, most of his work relates to business aviation and aircraft finance.
He likes to describe when he can first help clients: “When they say airplane, I’m in.” In this regard, David advises his clients at all stages of their experiences in buying, selling, structuring, leasing, financing, maintaining, and upgrading private aircraft. His tasks range from simple to complex.
David helps clients evaluate and, when feasible, minimize local, state, and federal taxes, particularly bonus depreciation, associated with purchases and sales of business aircraft, turboprops, and other private aircraft, comply with federal aviation regulations, and manage liability risk that they worry an aircraft may cause.
He represents, among others, high wealth individuals, large private and public companies, private jet owners and lessees, Part 135 and Part 91 operators, flight departments, charter operators, brokers, consultants, and management companies. By representing various lessors, lessees, lenders, and borrowers, David knows both sides of the transaction, enabling him to expedite and achieve favorable results for his clients in a wide array of legal matters.
David has experience as a corporate counsel in addition to his longer experience as a partner in law firms. Adapting to the client’s interest, David provides insightful, thoughtful, and common-sense advice honed in part by calling on his extensive industry contacts in business aviation to enhance the quality and value of the client experience.
He writes blogs for Aviation International Network, in the industry’s AINsight series, which, in part, positions David at the leading edge of legal and business developments in business aviation.
Shackelford, Bowen, McKinley & Norton, LLP represents clients in matters involving business, commercial and entertainment law based on years of experience in courtroom trials and negotiations across the U.S. We assist large corporations as well as individuals in a variety of industries, including aviation, energy, entertainment, financial institutions, health care, hospitality, real estate, and retail automobile sales.
Tony Kioussis (00:33):
Welcome to another Asset Insight Podcast covering the aircraft ownership life cycle. I am Tony Kioussis, President of Asset Insight and your host. Joining me today is David Mayer, a partner at the Shackelford, Bowen, McKinley & Norton law firm. David’s legal practice covers private aircraft purchases, sales, financing, leasing, regulatory compliance, and structuring, risk management, tax planning, and more. He maintains extensive relationships in the business aviation industry, and he joins us to discuss business and legal issues one should consider when acquiring a new or preowned aircraft. So let’s start off with some basics. When someone is acquiring a pre-owned aircraft, what are the types of transactions that you see most often, David?
David Mayer (01:22):
The market is fairly focused at the moment on pre owned aircraft. The manufacturers have slowed down in part because of COVID, the pre-owned transactions have several components to them right now. First, there isn’t a rush to sell aircraft because the market has diminished the values a little bit given again, the unusual circumstances in the economy now. In the pre-owned category, we’re seeing more financing than in the past. Typically, lending is roughly, leasing is roughly 30% of the market activity, now with financing’s and re financing’s there’s a rebalanced in favor of more financing. That in part is for pre-owned acquisitions and also for refinances or cash outs to create liquidity for owners of aircraft again, driven by economic circumstances.
Tony Kioussis (02:26):
Let’s talk about the kinds of professionals that a buyers should engage for an aircraft purchase. For example, I should think that an independent consultant should be engaged to help evaluate the optimum make model for the client’s mission as well as its value and operating costs. But what about tax accountants, attorneys and insurance people?
David Mayer (02:49):
Well, the starting place is to take into account the needs of the buyer or the lessee of the aircraft. The extent to which they have knowledge is very important. For lawyers you want to have specific capability with aviation issues, it is not helpful and indeed can be a detriment to bring lawyers who do not have the aviation background. What is helpful is to have inside counsel or regular corporate counsel to assist on legacy knowledge of the client, to minimize the extent to which client has to get into details about the corporate organization, corporate books, and some of the diligence that’s necessary. But that is just the starting point, in some cases, my clients will come to me and say, I want to buy an airplane, I think this is the kind I want, now, what do I do? So that’s really an invitation to develop a team around the client and the aspiration or intention to buy a whole aircraft. It may be a fraction, but let’s talk about whole aircraft.
David Mayer (04:02):
So you start with the analysis of the airplane itself. The key is to determine that the mission that the client wants to achieve, that is how to use the airplane, where it’s going to go, when and how much of the time it’s going to be used, is absolutely critically important. In some cases, brokers have the capability to conduct an analysis of those factors, but I also tend to offer in addition to a broker, an expert that can determine the value of the aircraft, the extent to which repairs may be necessary and the ownership period of the aircraft or just simply an expert who can evaluate whether the choice of the client is a good one for what they want to achieve. That’s the starting point. A broker is obviously critical to finding the aircraft, evaluating comparative aircraft available in the market and then offering those alternatives to the client.
David Mayer (05:07):
But when you get into some of the detail of how these transactions occur, you want to have those professionals joined by pack specialists, insurance or risk management people and others who know the aircraft and the process, such as inspection facilities, all to participate in the process of purchasing and evaluating the airplane.
Tony Kioussis (05:32):
Let’s talk about the Letter Of Intent or LOI. What terms do LOIs contain when it comes to the acquisition process?
David Mayer (05:42):
Well, first, Tony let’s step back and understand the idea of a Letter Of Intent. From a legal standpoint, this is a document that sets out the basic idea and primary terms of the transaction. It is not intended to be and in fact, it should be clear that it is not a purchase agreement.
Tony Kioussis (06:04):
So why not go directly to the aircraft purchase agreement, why instead form or structure an LOI?
David Mayer (06:14):
So it can be done. But what it lacks is a framework from which the lawyers can draft an agreement and have the essential business terms. If you go directly to a purchase agreement, the extent of detail required means the client is probably going to be more involved in non-business issues or in basic structuring of the transaction in more detail than the LOI would require. The LOI is beneficial to all parties because it lays out the fundamentals and the client can allow the lawyers then to work up the detailed wording. So the LOI provides guidance, as I mentioned before, and in a sense limits the amount of negotiation that may be in the nature of business issues and at the time of the purchase agreement.
Tony Kioussis (07:03):
Much quicker, more efficient way of starting the transaction and then allowing time that allows you to put together a more complete aircraft purchase agreement, is what you’re saying.
David Mayer (07:16):
Yes, it’s a guide post for all parties.
Tony Kioussis (07:19):
Assuming the buyer plans to finance the aircraft, should the LOI say that the purchase is contingent on the finance closing?
David Mayer (07:27):
If you ask a seller, the answer will be absolutely not. The reason is that the financing approval process is detailed, requires a lot of diligence, and at the end of the day may result in a negative answer. So a seller who goes through the process of preparing to deliver title to the buyer would be left at the altar if the buyer can’t come through with the financing. So the seller is going to say no. On the other hand, the buyer would like nothing better than to be able to walk the deal, should the lender not plate.
Tony Kioussis (08:02):
So then who drafts the aircraft purchase agreement between the buyer and the seller? Is it the buyer or the seller what’s traditional?
David Mayer (08:11):
Traditional in market these days can be very different. Most of the time a buyer wants to control what it needs. It’s going to say what it wants first and hope that the seller comes along. But I have clients for whom I’ve drafted purchase agreements, particularly those who do multiple transactions, where they may be selling aircraft to others in a series of transactions or in different transactions, but want to maintain similarity in the terms to which they agree. In that case, the seller will offer up its form, but that would not be what is traditional in the market. In some cases, when the parties on the buy side do not have the same level of sophistication as the seller, that’s another reason the seller might do it. But generally in my transactions, I see the buyer with transaction counsel with an aviation background that absolutely require the draft.
Tony Kioussis (09:15):
Other than price, are there issues that are most important for the aircraft purchase agreement to address such as delivery condition, liens and maintenance condition?
David Mayer (09:24):
Absolutely. There are a number of issues that are core as far as lawyers are concerned. In the main, their job and the job that I try to do is to make sure that the client has a clean, good condition airplane, and a good quality representation and indemnities that the buyer’s getting good title. And whether you’re on either side of the transaction, that’s very important. Now, the positions, obviously the parties will differ. One of the absolutely critical business and equipment issues, relates to an inspection of the aircraft. The idea is that the buyer will do an inspection to make sure that that’s the airplane that buyer wants with the right to walk away if it’s not. And the seller will pay for correcting what is described as discrepancies, discrepancies oftentimes is the subject of negotiation, because these are the corrections to the aircraft that may relate to whether the aircraft is okay for the FAA or not. And it may get down to the detail of what the plane looks like.
David Mayer (10:41):
Another very important aspect that I just mentioned is the warranty of title. And that is that the seller is conveying to the buyer, a title free from anyone else’s interests. That includes any interest that is registered or recorded with the FAA and registered on the international registry. The international registry by way of background is an electronic system with the physical home located in Ireland, by which all States, meaning countries around the world that are parties to a convention called the Cape Town Convention, can record, what’s called an international interest or title. An international interest covers a variety of interests like secured loan agreements or assignments. But title is very important apropos to this notion of title to the aircraft, where title is shown to be in the name of the buyer and will show no liens with respect to that title, both on the international registry and equally with the FAA.
David Mayer (11:54):
There’s tax aspects that are very important to the parties. And this goes into a variety of issues relating to the sale and those issues focus on sales and use taxes. So there are many other issues that go into the purchase agreement, but those are the ones that have the most money attached to them.
Tony Kioussis (12:17):
Let’s cover regulatory issues. How do the Federal Aviation Regulations affect the aircraft purchases and structuring?
David Mayer (12:25):
Federal Aviation Regulations probably is absolutely the foundation of every US transaction. There are corresponding regulations of various types around the world, which we have to take into account. And we do take into account with respect to non US registered aircraft. As it relates to transactions, again, this is at the core of every transaction where the regulations determine and focus on who the operator is and safe operations. The mission of the FAA is to ensure safe operations. And when they think about that, they think about someone or an entity. So it’s a person or entity that is qualified to be the operator. And that is a term of art that refers to the individual or company that will have the authority over the origination, the operation, and the termination of any flight. If that person is not a qualified operator, then the FAA will have a situation in which there can be a potentially actionable violation of the rules.
Tony Kioussis (13:48):
From the standpoint of exposure, should I have a limited liability company or trust own my aircraft to protect me from liability? And also can the LLC or the owner trust operate the aircraft?
David Mayer (14:03):
The LLC or trust have different uses, or they are used by different types of owners. Let’s start with the LLC. Most often you see an LLC being used by people who believe that if the LLC owns the aircraft or if the initial lessee, that that will protect them with a barrier or a shield from liability. And that’s something of a misnomer or a misunderstanding of how LLCs work. The LLC has a function and a sole function for most of these transactions. The plane is owned by the LLC, or it’s the lessee, and that’s all it’s supposed to do. It’s not supposed to operate it, it’s simply is there to own it. Now, the true owner would be behind the LLC as a member, there can be more than one member and therefore folks that have partial interests in the airplane through their membership. So to explain if an LLC has two members and they have equal interest, they would be 50-50 owners as members and the LLC would own 100% of the airplane.
David Mayer (15:23):
So then the question is, are those members protected against liability in the LLC or because the LLC is in front of them? The answer has two parts, first as to contracts and transactions by the LLC. An LLC that is properly documented and cared for has annual meetings, runs through the formalities and is structured properly, can resist some contract claims with success. Every one of these situations of course is determined by the factual circumstances. On the other hand, the second aspect of this, the one that most people think about is if there’s a crash or some accident or incident, those are different types of circumstances. The LLC will block a claim of a plaintiff for harm to individuals, even wrongful death, which means unfortunate circumstance occurs where there’s a loss of life in the use of the airplane and the estate, or the family will come after the LLC to claim damages.
David Mayer (16:33):
Generally, insurance is carried at the LLC level, but it’s important to understand a practicality that exists here. Plaintiff’s lawyers will go after the members period. They will go after the LLC. Now, why do they do both of those things? First of all, with respect to going after the members, the idea that an LLC can be used to block liability for the people really responsible, is a matter that differs throughout the US in different States and there’re different standards to get through to the members. But the policy is that if someone behind the LLC is really responsible, then the likelihood that they have some personal liability is there. Let me supplement that by talking about an owner trust, the owner trust is similar in context to an LLC, in that it is a pass through entity or an entity that only serves the purpose of owning the airplane. So some of the very same issues exist there except for one major difference. The trustees are passive and the liability once again, can move through the owner trust directly to the true owners, the beneficial owners.
Tony Kioussis (17:53):
You alluded to this issue earlier tax planning, which is always an important issue, especially bonus depreciation. When is the appropriate time to consider Federal State and local taxes in the purchase process? And explain bonus depreciation, if you will.
David Mayer (18:10):
The idea of bonus depreciation as a lot of people know it, is to allow the buyer to take all the depreciation benefits on the day they purchase the plane or in that tax year to be more accurate. So in a plane that cost $10 million bonus depreciation says that if you qualify as the type of taxpayer and the plane qualifies properly for bonus depreciation, then you can take $10 million of write off into tax year in which you acquire the aircraft. And that is extremely beneficial. Many times my clients will ask and they should ask right at the beginning of a transaction. Well, I want to use bonus depreciation. I had this occurred very recently, and we would talk through this issue as I just described it, we would talk extensively about whether there’s qualification, because if you don’t qualify, you need to go to a slower, probably the straight line type of depreciation. Sales and use tax is not quite as urgent on the purchase price determination, and whether the transaction is affordable, but it can cost a great deal to get this wrong.
David Mayer (19:25):
So in this situation that is most common, the buyer will try to acquire the plane in what is generally called a tax friendly jurisdiction. If a State has little or no sales tax, that’s great. Another way to avoid the tax at the time of sale is to go into a State which has what’s called commonly a fly away exemption. And that means if you get out of Dodge in a hurry, it can be a matter of 10 days, perhaps a little more after the plane is ready to enter into service, then the State will disregard you as a taxpayer, and there will be no tax in the flyaway State. And that is one of the most friendly types of jurisdictions for people to close on an airplane. But there’s another aspect of this that is critical. Some people think that the ability to avoid tax in a flyaway State means they won’t have tax anywhere and that is not a correct understanding.
David Mayer (20:32):
If a plane purchase occurs in a State outside of, and let me use Texas again, as an example, in a tax friendly State, and the plane comes back to Texas and resides in Texas and stays in Texas, then the State of Texas is probably going to look to impose what’s called a use tax. It’s the other side of the coin of a sales tax. It’s the same rate. So in Texas, that’s eight and a quarter percent of the price of the plane in the form of a use tax. Now, this is where the correct tax advice is critical because that tax can be managed through exemptions or structuring. But if a $10 million plane ends up having an eight and a quarter percent tax on it, because someone misunderstands how the flyaway State and the home State interact, that can be a very costly lesson. So the sales and use tax aspect of this is important to consider probably at the LOI stage to make sure that the structure is right. And this structuring then pulls in the Federal Aviation Regulations and other aspects of a transaction. So it’s also extremely important to get right.
Tony Kioussis (21:46):
How does aviation insurance protect an owner or lessee, and will insurance alone be enough to protect an owner or lessee from liability?
David Mayer (21:55):
If you can buy the amount of insurance that you need and you have appropriate structuring, and we talked a little bit about LLCs, which is a common combined issue here, then you have substantial protection. But there’s always additional structuring that I do to help clients minimize their exposure in other ways. But today’s problem with insurances, it’s almost never enough except for major operators, big customers and other categories of commercial operators. It’s way different for a single pilot, single engine plane, for example, where you want to have 10 to $50 million of coverage, but the insurance company will only give you $1 million.
Tony Kioussis (22:45):
Is there anything specific that you would want people to know about your expertise and services within the business aviation community?
David Mayer (22:53):
The business aviation world is what I do. It’s what my team does. That’s all we do. We work both internationally and nationally and are known in these markets. Part of the fun for me of helping clients is bringing the aviation industry to them. So when someone says airplane, I’m in, and what that means is I bring to them what I refer to as my super experts. And that would include people who are able to advise me no matter how much I know there are always going to be experts in different areas who can help me. And more importantly, help my client understand the wide variety of issues that come up in these transactions. So these are all aspects where I am active and our team is then supplemented here not only by those experts who we reach out to around the world, including council, but here we have integrated tax litigation and other areas because we have a soup to nuts approach of regulatory, tax, transactional risk management, all in house.
David Mayer (24:05):
And of course, as I said, I reach out to what I can describe my super experts. So all of those elements, I try to bring to clients and my colleagues here and our team in a cogent way that helps have the best client experience. And hopefully has the client excited about their airplane and getting an opportunity to use the great asset, loving airplanes. I always look forward to them being excited about it.
Tony Kioussis (24:35):
This has been another Asset Insight Podcast covering the aircraft ownership life cycle. Please visit our ever-growing podcast library at assetinsightpodcast.com and select from any number of topics discussed with business aviation industry experts. This is Tony Kioussis and as always, thank you for listening.
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