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3 Things Every Banker Should Know
About Aircraft Financing
Aircraft Financing 101
The objective with this report is to help banks who become involved in aircraft financing to better understand the collateral they are dealing with and the revenue opportunities of this market.
Let’s begin by highlighting some of the more common observations that I have seen since opening my doors in 1992 and evaluating/documenting various aircraft for a number of banking clients across the U.S. and how many problem areas could have been easily avoided with more reliable information.
We will also introduce a few aircraft financing techniques that may help the bank better manage their risks and allow them to make more informed decisions based on analytical data.
The #1 item any bank or banker needs to understand about aircraft financing is that aircraft are like no other asset the bank lends against.
Therefore, aircraft should not be treated like every other asset the bank lends against if the objective is to reduce/manage risk and make informed lending decisions.
If handled properly, aircraft financing can be extremely profitable but there is more fraud, deceit and misrepresentation of the facts in this industry than you may want to realize.
There is no one source or individual to point to in every situation but the atmosphere is one wherein facts which are not verified or details which are not disclosed may lead to erroneous conclusions, evaluations and decisions.
Most issues stem from the bank’s aircraft financing policy – or more appropriately, the lack of an aircraft financing policy.
In many cases, aircraft lending policies contain outdated or incorrect assumptions about the best methods of evaluating and documenting the collateral. In other cases the policy is ignored or overridden altogether.
In the past, the focus has been more on “making the deal happen at any cost” (a strategy that many banks have paid a huge penalty for) but banks have recently started trending toward more caution.
Bank policy and employee efforts, however, have been slow to reflect this trend. I have worked with several banking clients over the years as they development their aircraft financing policies.
The banks that generally do well ( and face fewer regulatory issues ) place an equal emphasis on the aircraft itself, alongside the creditwothiness of the borrower. Policies that reflect the thinking that “aircraft less than $X do not need a formal appraisal” generally don’t perform as well and need more work to avoid regulatory scrutiny.
My usual response to this thought process includes questions like:
Who determines that the subject aircraft is below or above $X and what is the basis for that analysis?
Is there really a belief on the part of the bank that somehow the aircraft that is $0.01 below the stated threshold is somehow an insignificant risk and efforts should be made to avoid any analysis of the collateral?
How does the bank address the value of their collateral as the aircraft or market fluctuates?
In other words, the deal that closed a week ago (when the aircraft was below the threshold) now involves an aircraft that is well above the threshold due to market conditions or improvements of the aircraft itself.
How is this situation adequately addressed in the policy? Who is charged with doing this function and how often is it completed?
What is stopping the bank from doing a proper evaluation of all aircraft and documenting the results? If we were talking about a piece of real estate at the same dollar value, would we make the same decision?
The answers to those questions leads to another gap in aircraft financing policies regarding how aircraft are evaluated and documented.
When my services are called upon during a repossession, I find that very rarely is there any appraisal report on file for the aircraft in question.
Typically, what I see is little more than a number on a piece of paper with very limited supporting documentation.
A banking representative in charge of this project will usually attempt to support this missing documentation by stating that the bank relied more on the strength of the borrower than the asset itself (relationship lending vs. asset based lending).
However, that reasoning is difficult to support given the fact that the loan is in default and the only reason I am being hired as a Professional Aircraft Appraiser/Consultant is due to the diminished strength of the borrower. Now, the bank needs to assess and liquidate their security interest in the asset they did not think was important at the beginning of the loan – and which is now worth substantially less than they thought.
Having documentation on file to support the bank’s collateral decision should be a firm requirement of any bank policy because relationships can and do change over time.
In comparison, real estate transactions require some type of appraisal to be part of the lending process (due to regulations I’m sure) but for some reason aircraft that may have dollar values exceeding an average house several times over may have very little information on file to document the contents and condition of the aircraft.
When aircraft are involved, understanding a specific aircraft’s market value (and how it was determined) is one of the most important attributes in the overall decision making process.
It should not be glossed over or avoided for any reason.
The first myth I will bust is the belief that the market value for any aircraft can be found in a variety of publications and all the evaluator has to do is make a few “adjustments” to determine the actual value of any aircraft.
The reality is that there is NO public database of aircraft selling prices and the “adjustments” an evaluator needs to make involves more parameters than one might think.
Many evaluators may believe that the final number is “close enough” but this is really an irrational belief because that type of conclusion would really involve an analysis comparing the results from at least two data sources over many makes/models of aircraft over a period of time and it is unlikely that the evaluator with that belief has completed that level of analysis.
I perform an analysis routinely using publications (although not the way you might think) and find the results interesting but rarely consistent.
The publication, of course, is a general guide only and should not be used to appraise a specific aircraft (a paraphrase of the publication’s disclaimer) but there are other limitations and inaccuracies that become apparent as any evaluator works through the process.
In a good number of cases (I would estimate about 30% – 50%) the publication could not be used as the sole resource to reliability determine a specific aircraft’s market value.
This shortcoming is due to issues associated with attributes such as damage history, missing log books or log book entries, airframe/corrosion issues, and so forth.
In those instances another resource must be called upon or the evaluator has choices to make about going forward and most of these choices are not good ones thereby creating problems for the bank in the future due to an incomplete analysis or erroneous results/conclusions.
Another common myth is that the bank has a sufficient “cushion” in their “LTV” percentage such that they are covered in the event of any repossession.
The unfortunate reality is that the evaluation approach initially used (the use of an unreliable publication to determine the aircraft’s value, using third party information about the aircraft from a source connected to the deal, etc.) means the bank most likely over-extended on the loan to begin with.
The 20% or 30% “cushion” that the bank is counting on in many cases simply does not exist or it has evaporated due to the manner in which the asset is disposed of.
There is a mistaken belief that selling the aircraft at auction or turning it over to a broker/dealer will result in obtaining the aircraft’s market value.
A “liquidation situation” (wherein the aircraft needs to be liquidated within X days) does NOT result in 100% of the aircraft’s market value but in something much less.
How much less depends on the liquidation timeframe (some aircraft take over a year to sell under normal market conditions), how the original value of the aircraft was determined, when the aircraft’s value was determined and what may have changed since the initial evaluation.
The traditional 70% or 80% LTV is generally inadequate for this purpose.
So what is the best solution to solve these shortcomings?
Banks that are at the next level in their aircraft financing efforts utilize some type of risk management plan involving an unbiased third party along with solid factual information at the beginning of the loan along with periodic analyses of the aircraft over the life of the loan.
The process typically starts with a Certified Appraisal of the subject aircraft. During the life of the loan, it may be more appropriate to use a Collateral Inspection Report or an updated Certified Appraisal depending on the “risk factor” of the aircraft or the borrower and to also avoid surprises.
Re-visiting the aircraft on a periodic basis can also identify new financing opportunities for improvements related to engine overhauls or avionics upgrades. Using factual data at the beginning of the lending process allows the bank to make intelligent, informed business decisions thereby sending higher risk situations to their competitors.
Some banks try artificial methods of limiting their risk by limiting the age of the aircraft or the type of borrower but this is only a short term solution and it actually limits the bank’s ability to service a larger market (more revenue) that is available to them.
In this section, we’ll be discussing the appraisal itself, who is qualified to provde a report to the bank and the importance of the material within an aircraft appraisal report.
The heart of any risk management plan is an understanding of the aircraft and its records and how these are related to the overall value of the aircraft in the current market – which should be part of any legitimate appraisal report.
However, this brings up earlier questions such as – what is a legitimate appraisal and how are they obtained? How does the bank know they have a legitimate report and what is actually contained in these reports? Who is qualified to perform an appraisal and how much do they cost?
Let’s start with a typical situation that comes up daily – a banker faced with financing an aircraft.
Let’s presume that this banker has financed an aircraft or two during their career but it has been some time since their last experience.
Let’s also presume that this banker has three reports on their desk.
Report #1 is little more than a number on a piece of paper. It may have been obtained through a website or telephone conversation but there may be little else on the page other than the aircraft’s registration number.
Report #2 is commonly called a “desktop appraisal” and contains a few additional pages of information and details about the subject aircraft. It may or may not be signed and the name of the evaluator may or may not be on the report.
Report #3 is a more formal aircraft appraisal report. It contains quite a bit more detail about the subject aircraft and the name of the appraiser is clearly identified on the report and the report is signed.
Let’s also presume that the final number on each of the reports is the same although this is rarely the case.
Here are the questions facing the banker.
Which of these reports should the bank accept and why? Which of these reports is the most accurate and trustworthy? How much do these reports cost?
You may be surprised to learn that all three of these reports technically qualify as appraisals because each of them contains an opinion of value. By definition this is what an appraisal is. Think about this. A casual conversation with someone regarding an aircraft which results in a figure technically carries as much weight in some banks as someone who physically examined an aircraft and provides a detailed report of their findings!
The banker in question also faces a critical choice at this point that will determine the risk level they have committed themselves to and which they have committed the bank to.
Sometimes it is a simple choice that involves proper risk management techniques and in other situations the choice is as serious as supporting bank fraud (intentionally or not).
There are other issues to consider as well such as insurance and the filing/recording of the bank’s Security Agreement but the focus here will be on the evaluation and documentation of the aircraft as part of the bank’s aircraft financing efforts.
Let’s start with the first question. Which of these reports should the bank accept and why?
The answer will depend on the bank’s aircraft financing policy along with the goals and objectives of the bank.
Some of my banking clients have a simple statement in their policy that says (in essence) when an aircraft loan comes up, call Mike Simmons at 800-895-1382 for further instructions.
In these cases, I speak with the banker about the project and we put together a plan that will document the bank’s collateral and ensure a successful transfer of ownership before any funds are disbursed.
In other cases where no policy is in place, the banker is left to figure a process out or make the process up as they go along which leads to a variety of problems for the bank.
These policies may simply state that an appraisal of some sort must be obtained but there is no stated requirement regarding the qualifications of the appraiser or how the result is obtained so the cost to obtain these services tends to be the overriding factor.
After all, if the selling broker is willing to provide an “appraisal” then why hire someone impartial that increases the cost to the bank and the buyer?
However, if we were talking about real estate, then this position would raise several red flags – as it should. Since all three reports meet the technical qualification of an “appraisal” or an opinion of value, then a number from anyone or any resource will meet the requirements of the policy – regardless of their accuracy, reliability or the accountability of the evaluator.
Taking any number from any report is not a strategy I recommend to my clients and choosing a report based on how much it costs to obtain the final opinion of value can be very risky.
An important point to realize when financing aircraft is that all aircraft are not alike nor do they command a certain “value”.
Many individuals have a misconception that a “private jet”, for example, must be worth at least $1,000,000 or more – regardless of its age or condition. After all, it’s a BUSINESS JET!
In this market, this is certainly not the case. There are private jets worth well over $1M but there are also quite a few whose only real value is scrap value and it is critical to know which one is being used for collateral purposes.
A discussion over the phone with the selling broker or the buyer may not highlight which jet is under discussion.
The use of “beliefs and assumptions” also speaks to the manner in which aircraft are evaluated or how the overall process evolves.
Generally, there are two basic concepts when evaluating aircraft. The first involves the use of publications and the effort to “shoe horn” the subject aircraft into the “average retail” configuration.
This type of approach involves the use of “rules of thumb”, SWAGs, assumptions and picking numbers that look right or meet particular criteria with very little analysis involved.
The use of this method introduces several “degrees of error” – some more serious than others and the resulting opinion of value should not be relied upon.
The other method uses a “clean sheet of paper” approach and focuses on gathering specific details about the subject aircraft and making decisions about the final opinion of value based on what is found through first-hand research.
The “degrees of error” are reduced and there are fewer assumptions or “rules of thumb” involved.
In my professional opinion, the “clean sheet of paper” approach leads to a more credible, reliable result that is easily supported as assumptions are greatly reduced or eliminated altogether.
When examining the three reports mentioned, some bankers will also ask additional questions. One key question includes – who is providing this information or report and are they “qualified”?
In many cases, an appraisal is developed and accepted from someone inside the bank (possibly the banker completing the loan).
In other cases the appraisal is accepted from the buyer of the aircraft (the bank’s customer) or the broker with very few questions from anyone at the bank.
Because the aircraft appraisal industry is not regulated, anyone can technically qualify as an aircraft “appraiser” and provide an opinion of value. There are no minimum qualifications, training or certification requirements and typically none specified in the bank’s lending policies.
The use of internal resources, brokers or buyers is not a recommended approach when there is a need to obtain an impartial opinion of value.
Bankers should also remember that the buyer and the broker have a direct interest in the outcome of the deal and tend to be biased. This does not mean that buyers, brokers and dealers are bad people or dishonest but just that they are biased.
Furthermore, neither the broker/dealer nor buyer has ANY incentive to identify or discuss the aircraft’s market value with the banker nor is there any incentive to identify any attributes about the subject aircraft that would negatively influence the bank’s lending decision.
In fact, the selling broker’s/dealer’s key objective is to obtain as much money as they can for that aircraft as part of the sale (think about the business jet whose value is “scrap value” here).
Evaluators internal to the bank may also be under some pressure to “make it happen” regardless of any facts they may have – or not have. Corporate objectives and revenue targets can also influence evaluation/lending decisions.
Over recent months, internal bank auditors have been recommending the use of “qualified” outside appraisal sources for this very reason.
The bank should be using someone who is unbiased and disconnected with the deal and someone who is following a nationally recognized set of appraisal guidelines and ethical behavior if the objective is to obtain a creditable, reliable and unbiased opinion of value.
The individual in this case should also have some background in aviation. The professional aircraft appraiser should not be thought of as a “deal stopper” but someone who is providing unbiased, critical information about the asset to the bank.
The second question – Which of these reports is more accurate and trustworthy? – may be a little misleading since we presumed that all three reports have the same result or number even though this is rarely the case because “opinions” vary between individuals as do the methods of developing these opinions.
The answer to this question really gets to the heart of “who” does the bank trust and what information/process do they trust. It also involves the appraiser’s “support” of their opinion of value.
If all parties are in agreement about the final opinion of value then there is very little discussion and a mistaken belief that Report #1 is as accurate and reliable as Report #2 or #3.
However, situations routinely arise wherein the final opinion of value is questioned by the bank and/or the buyer and/or the broker/dealer.
This type of condition occurs when the market may be changing rapidly or the broker/dealer/owner has misrepresented the aircraft in some manner. It is at this point when the banker obtains a unique perspective about the report in front of them, the information and details in the report (or lack thereof) and the level of the professional they are dealing with.
Evaluation methods that do not rely on first hand analysis of factual data are manipulated very easily and should be avoided at all costs.
As a result, those reports most trusted by the banking industry contain key details supporting the final opinion of value and those details are obtained from a physical examination of the aircraft and records by a trained professional.
Evaluators who routinely (or solely) use desktop methods typically do not possess the knowledge, skills, and abilities to perform a field appraisal and it shows in the report itself.
Developing an opinion of value is fairly straightforward when assumptions are made regarding the status of all log books, verification of the airframe time, damage history, condition of the airframe itself, verification of documents on board the aircraft and airframe/engine mods – just to name a few key items.
Using reports that are unsigned which contain no statement or scope of work (what the appraiser actual did or did not do to obtain an opinion of value), the appraiser’s relationship to the aircraft, market data supporting their opinion of value or any calculations are indications of a superficial analysis.
The last question involves the price paid for each report.
Unfortunately, there is no single answer here but pricing generally is related to the effort and the type of individual involved. In other words, the bank receives what they pay for.
For example, if the bank goes to a website and pays a few dollars to get a Market Analysis or a number on a piece of paper based on a limited set of data, they can expect limited support and questionable results.
Banks that require professional assistance or desire professional results will pay professional rates but they will also get reliable information and a report that meets or exceeds industry recognized standards along with support from a trained professional appraiser should any questions or issues arise.
Generally, the price paid for a report should be reflective of the type of aircraft under consideration and the effort involved.
Professional rates usually begin at a few hundred dollars for single engine piston aircraft to several thousand dollars for large business jets and helicopters. planedata.com
The only question we have not addressed so far is “why”.
Why should the bank undertake the time and expense to better understand their collateral at all?
After all, the local broker tells the banker that this aircraft is worth $X and he must know what he is talking about – right? The person buying the aircraft is a pilot and they must know what they are buying – right? Or, they are only financing a small portion of the overall value so there is no real need to document the collateral as it is too expensive to follow bank policy – right?
The answers to these questions gets back to the question of cost and the one cost that is not discussed very often – that is the cost to the bank of making a bad lending decision based on inaccurate or incomplete data. In these cases, the costs of obtaining professional assistance are relatively insignificant when compared to the costs associated with losses related to a bad lending decision (loss of the aircraft’s value, additional costs associated with the effort expended by internal resources, legal fees, etc.) and it is these types of losses that we want to avoid or limit.
Unfortunately, the person who initiates the loan at the bank generally is not accountable or responsible if the loan goes into default at some point in the future or they may have left their position altogether.
In default situations, the bank finds out how good their aircraft financing policy and collateral management program really is.
In too many cases, there are a number of “surprises” along the way which could be avoided very easily and cost effectively.
Repossessions and Collateral
We just discussed how aircraft are like no other collateral that banks lend against.
For example, if you think about real estate and repossession situations, the bank does not have to worry that someone will remove an acre of land and take it across state lines, or that a few rooms of a house may be removed before the property is repossessed.
The repossession of an aircraft makes the point about their uniqueness very clear and this article will focus on typical issues that I have witnessed over the years and how these situations could be easily avoided.
I will leave the legal issues to the attorneys along with the physical aspects of repossessing the aircraft. Instead, I’ll focus mainly on the evaluation and documentation of the aircraft itself. Of course there is no appraisal report on the market that will keep an individual or business from going into default but there are tools available that can give bankers a “heads up” so that they can make more informed decisions about their next steps and the related collateral.
One observation I have made over the years is that “doing nothing” or avoiding the collateral at all costs is an easy action to take for many in the banking industry.
In many cases the banker who initialed the aircraft loan is not involved with “Special Assets” and they have little or no visibility of the issues involved with repossessing the aircraft so they see very little need to make any changes to their efforts or the current lending policy.
From their perspective there does not appear to be any problem.
The banker involved with repossessing the aircraft has little or no input regarding bank policy and they see the repossession issues as “just another day at the office” so there is no incentive to make any changes to the current lending policy on this front end either.
Unless someone at the corporate level sees an exposure with the bank’s aircraft financing efforts, then they rarely have any desire to take action because aircraft financing and the associated risk is only a very small part of their everyday issues so once again, the easy decision is to do nothing or ignore the problem.
But, as someone once said, the very definition of insanity is doing the same thing over and over and expecting different results.
No bank or banker wants to be involved repossessing aircraft and they certainly want to take “reasonable” measures to avoid it but unfortunately their current aircraft financing policies are such that they create the very problem they are trying to prevent.
Of course the next question is – if a change is needed, what changes to the current aircraft lending policy do you make in order to reduce risk?
There are several recommendations I would make that can help.
Over the next several pages, I will outline some common issues that seem to reoccur and I’ll list out some strategies that could have prevented serious problems had they been implemented as part of the bank’s aircraft lending policy.
These concepts work for any bank of any size as I have noticed banks large and small avoiding these efforts with essentially the same final results. Only the size of the exposure is different.
Aircraft financing policies in many cases tend to be non-existent or fragmented so that bankers are allowed to do the minimum amount of effort to complete the deal (qualifying the borrower aside).
The person who initiates the loan completes the deal and moves on to the next opportunity.
There was truly very little effort involved in documenting the collateral or understanding any title issues and the file typically goes into a desk drawer or vault – which may be fine for real estate (even though more paperwork is required due to regulations) but a risky strategy for aircraft.
Typically, no follow up activity is undertaken by the bank regarding the collateral until the loan is satisfied. If problems of any sort arise, they are handled by someone else in another department possibly in another state and in more recent times even by another bank/banker after the initial bank when into receivership.
Here are the problems that I see routinely and how they could be managed more effectively or avoided altogether.
At repossession, the aircraft and records are not “as expected”.
This is the most common issue an appraiser sees and the easiest one to correct. At the beginning of the lending process, obtain a professional aircraft appraisal report that involves an on-site examination of the aircraft and records.
The appraisal report should document what was found initially along with an analysis of these records.
A good example involves the bank’s Security Agreement. Many boiler plate Security Agreements have statements indicating that the term “aircraft” includes all log books and avionics but who inventoried these items at the beginning of the loan and where is this effort documented?
Did the log books ever exist for this aircraft and were they original and complete? When the aircraft is being repossessed it is common for documentation to be missing (such as the log books) and avionics may be removed as well.
The absence of these items can represent a significant impact to the overall value of the aircraft. At repossession, the aircraft and records are not “as expected”.
In other situations, the aircraft itself really does not exist (possibly never existed) or it is not in an airworthy condition and hasn’t been for some time.
If the bank elected to use the single page “appraisals” or simply looked up a number from a publication thereby using many “assumptions”, then the cost of that decision will become obvious very quickly if any legitimate examination of the aircraft and records is involved.
It also becomes quite difficult for the bank to “prove” what was or was not part of the aircraft if legal challenges arise.
“Engines” have not been discussed but they should be identified separately and in some cases using their own Security Agreement.
Engine values can range from few thousand dollars in the case of a single engine piston to several hundred thousand dollars in the case of turbine aircraft – and turbine aircraft typically have two or more engines.
In older aircraft, most of the aircraft’s market value may be found in the engines themselves. These engines are designed to be removed and replaced quite easily and changing engines in turbine aircraft is fairly common.
If you have a “catch all” Security Agreement that includes the engine(s), the question is – which engine? Did someone provide a serial number of the engine at the beginning of the loan? Was that number checked? What does the bank do if the engine is removed (for legitimate maintenance reasons) and now installed on another aircraft? Who holds the lien (if there is one) on the engine now installed on the subject aircraft? Where is the first engine?
The bank’s Security Agreement typically allows the bank (or the bank’s representative) to make routine visits to check the collateral but banks rarely see the need to do this for some reason.
However, these types of inspections should not be avoided.
Over time aircraft change for many reasons and the bank has the capability of understanding at a very early point if the owner is running into financial difficulty.
One sure sign is the number of hours being flown each year. Aircraft are expensive to fly and maintain.
When the owner is financially healthy then the aircraft is flown/maintained routinely but when the owner becomes financially strapped then the number of hours begins to decrease or flying/maintenance is halted altogether.
Of course there are also issues with damage history since the loan closed or maintenance records that go missing which impact the aircraft’s value as well.
Keep in mind that over the years there may be improvements that the bank financed (such as engine overhauls or avionics upgrades), and the bank should verify at some point that this work was completed. At a minimum they should take action periodically to update their records.
One way to get a better handle on these situations is to obtain a Collateral Inspection Report. The Collateral Inspection Report is not an appraisal as no opinion of value is provided.
However, it does capture key attributes about the aircraft since the initial loan and verifies the contents and condition of the aircraft.
The Collateral Inspection Report is also a great tool to verify that upgrades financed by the bank have actually been completed. Having periodic Collateral Inspection Reports in the bank’s file shows internal and external auditors that all efforts are being made to manage the bank’s risk.
Furthermore, since no evaluation is included, the aircraft does not need to be identified as a “troubled asset” unless the bank chooses to do so.
The “troubled asset” issue aside, it would also be good to have the aircraft periodically re-appraised to better understand the bank’s collateral position and the direction the market is taking as the aircraft market tends to be cyclic.
The bank has no lien on the aircraft. There is absolutely NO excuse for this type of situation to occur but it does.
Typically, the banker did not understand what effort was involved when securing the bank’s lien position and they believed that a UCC filing alone was adequate – or that no other paperwork was involved at all other than having the borrower sign the appropriate paperwork.
In other situations, a cloud existed on the title and the banker thought a simple letter to the FAA would clear things up. Of course, when dealing with a government agency, a simple letter rarely solves the problem. The final result can be that ownership of the aircraft never really transferred or the bank’s Security Agreement was never filed/recorded with the proper agencies.
It goes without saying that the bank should always understand the aircraft’s title situation and if ownership will transfer BEFORE disbursing funds because once funds are disbursed it will be difficult to get all parties together to resign any documentation or correct paperwork.
When turbine aircraft or helicopters are involved, another agency must be considered (the International Registry) to properly secure the bank’s lien(s) making the process even more complex for all parties. If the title issues are not properly addressed, there may be very serious problems for the bank and the bank’s customer when the time comes to repossess or sell the aircraft.
One solution is to obtain professional assistance.
Part of my overall service to my clients involves title work (obtaining the title search, highlighting clouds, resolving issues, etc.) but banks can also obtain the same assistance by using a legitimate title company.
However, when working with the title company, understand what information/service is being provided and what questions to ask. Asking a title company to provide a title search, for example, is one thing. Knowing what action to take as a result of that search is another and simply sending documents to the FAA may not be sufficient if clouds exist.
Routinely I see banks attempting to handle aircraft title issues on their own with less than satisfactory results. Also, if the owner of record is John Smith, make sure that John Smith is selling the aircraft (obvious I know but it does come up).
I have also seen some title companies identify clouds when others did not even though both companies were looking at the same file (supposedly).
Title problems are normally addressed by the seller but the final authority may be the buyer’s Purchase Agreement if they have one. The Purchase Agreement aside, the bank (and buyer) need to understand WHO is going to clear these title issues, HOW the issue will be cleared and WHO is going to provide evidence that they are addressed before funds are disbursed.
The bank that elects to take this issue on without professional assistance needs to ensure these items are identified and addressed. The title company (as good as many are) simply do not provide that assistance unless they are asked to do so and it is up to the banker to ask the right questions and obtain the right documentation before closing the loan.
I have worked with several banking clients as a Closing Agent ensuring that all paperwork is in order and ownership will transfer successfully BEFORE funds are disbursed. This ensures that there are no issues with document filing/recording and that everything is in place prior to closing. When required, checks are in place regarding the International Registry as well. It sounds simple but ensuring the appropriate items have been properly addressed early in the process makes the closing much easier and hassle free.
The aircraft cannot be sold for the value shown in the appraisal report. When taking physical possession of the aircraft and records, banks at some point hire me to appraise the aircraft and provide them with an opinion of value.
Usually the value being requested is the aircraft’s current “Market Value” which is inadequate in a liquidation situation. The aircraft is usually turned over to a broker to sell and I’ll get a phone call weeks later stating that an offer has come in at a value well below the appraised value.
The question is – What “value” does the bank really need to identify and focus on? At the time of the initial financing and throughout the course of the loan, the aircraft’s Market Value is the number most banks focus on.
The Market Value identifies what a knowledgeable and willing buyer and seller would agree upon under normal market conditions with neither party being forced to act. When disposing of the asset, the Liquidation Value (and possibly Scrap Value) becomes more important so the bank needs to ensure the correct value is requested and stated in the report.
The aircraft cannot be sold for the value shown in the appraisal report. When taking physical possession of the aircraft and records, banks at some point hire me to appraise the aircraft and provide them with an opinion of value.
The Liquidation Value presumes that all efforts are made to sell the aircraft within X days (X is a number provided by the bank). The number of days the bank chooses to liquidate the asset should be selected with some thought and reasoning.
Depending on the attributes of the subject aircraft and the market place at the time of liquidation, some aircraft can take well over a year to sell.
If the bank sets the “Days to Liquidate” at 30 (for example) then they will take a significant loss as the timeframe will tend to be unrealistically short for that specific make and model and the bank will almost have to give it away to dispose of the asset in that timeframe. On the other hand, a timeframe closer to the “average number of days on market” will bring something closer to Market Value.
In some cases, brokers may tend to be “less than enthusiastic” in their marketing efforts for the subject aircraft or buyers may be “bottom fishing”. Keep in mind that the subject aircraft may have missing records and/or missing equipment so it is not in pristine condition even though these attributes are captured in the appraised value.
As a result, brokers may put their marketing efforts toward aircraft that are more likely to sell quicker.
The Liquidation Value presumes that “all reasonable efforts” are being made to market and sell the aircraft. My point is that the broker may be listing the aircraft only on their website (and nowhere else) or the buyer may be aware (though the selling broker or other means) that the aircraft has been repossessed by the bank and they can get a “deal”.
In cases where the broker is having difficulty disposing of the asset, the bank may be better served by allowing the aircraft to be sold at public auction because of the broker’s efforts.
Regardless, knowing the aircraft’s Liquidation Value can help the bank understand what to expect and what to reject when offers are presented. It removes the guesswork and makes the entire process more professional and fact oriented. Also note that the Liquidation Value is not identified in ANY publication and can only be obtained by using a trained professional. Wholesale Value is NOT Liquidation Value.