An Aircraft Appraisal is a Valuable Tool -
When setting a selling purchase price for something it is prudent to gather as much valuable information as is possible on each variable that may affect the valuation of an aircraft. Of course, this is important whether on the personal or the corporate level. Costly mistakes can be avoided through the use of a professional aircraft appraiser.
Improper valuations of aircraft by parties who are not qualified to make them, or by those who have their own agenda in pricing the subject aircraft, lead to trouble for the unsuspecting. High values are far more common than low values. No matter whether you are leasing, buying, selling, or are a banker, Leasing company, or insurance company executive, you have a major stake in ensuring that the amount paid for the aircraft is reasonable. And how do you know what is reasonable unless an independent, objective, third party examines the aircraft and its records to verify that it is what is expected?
- For the Financial Institution or Risk Mitigation Agency - The Appraisal documents the value and general condition of the aircraft. The appraisal also supports the bank’s collateral position in the aircraft loan by verifying that the aircraft is what it is said to be. Any Banker who does self-evaluations without any manner of verifying the collateral exists, or that the aircraft is equipped as represented, is putting his bank at risk for a major loss should the client default. There is absolutely no reason to accept a risk of that magnitude when an appraiser can detail the value and general condition of the aircraft for you.
- For the Buyer or Lessee - The appraisal is an impartial, professional opinion as to the value of the particular aircraft being purchased/leased. But it is much more than that. It is a thorough description and inventory of the aircraft that verifies the major selling points for the buyer and financing entity. Further, the appraisal can assist in expediting the sale of the aircraft because the buyer and seller know the fair market value and relative condition of the aircraft through the independent appraisal. .
- For the Seller or Lessor - The appraisal offers the confidence of knowing the general condition and current fair market value of the aircraft being sold/leased as seen through the eyes of an independent third party. The Appraisal is a great selling tool because it gives a potential buyer a solid “feel” for the aircraft in the words of the objective evaluator. After reading the appraiser’s report the potential buyer will have more confidence in the condition and appearance of that airplane than he would another airplane where all that is available is the owner’s description.
An Aircraft Appraisal is an impartial opinion of the value of an aircraft, prepared by experts who know all the factors which make up the current behavior of the used aircraft market. It is an opinion of value based upon experience and repeated analysis of these factors. It is an opinion of value which can be substantiated and justified. It is an opinion of value made by a professional aircraft appraiser.
An aircraft appraiser must acquire all the facts about the aircraft in question. The appraiser thoroughly examines the aircraft log books, inspects the exterior and interior surfaces of the aircraft, and pays close attention to the general condition as well as the maintenance history of the aircraft.
An Aircraft Appraisal provides the reader with:
- A detailed examination of airframe, engines, props and gearbox, instrumentation, avionics as well as all aircraft operating systems.
- A careful review of aircraft documentation, log books, yellow tags and associated records as well as conformity inspection compliance (if applicable).
- A computer analysis of relevant value data.
- A Certificate of Appraisal and the detailed computerized report submitted to the client.
What is the Purpose of an Appraisal?
- To obtain a professional opinion of the present fair market value on an aircraft.
- To obtain a professional opinion of the value on an aircraft to be retro-fitted, renovated or modified.
- To obtain a professional opinion of the value of an aircraft for documentation purposes.
- To verify damage claims resulting from fire, hail, windstorms, accidents and other disasters.
- To provide the basis for decision-making in the commitment of funds for aircraft acquisition.
- To provides persuasive, independent evidence of the condition of an aircraft.
- To assist a prospective purchaser in obtaining financing or insurance.
- To assist a financial institution in substantiating the nature and value of the aircraft as it relates to collateral.
- To assist a financial institution by supporting the loan portfolio for examination by the loan committee and/or bank examiner.
- To distinguishes sellers aircraft from others that may be listed for sale.
Aircraft Appraisal Cost Factors
Fees will vary depending on the type of aircraft, its year, make and model, and the length of time involved in completing analyses of all relevant data.
Time to Complete the Report
The client must allow sufficient time for the appraiser to do a thorough job. The appraiser may spend a short time actually inspecting the aircraft, but will spend considerable time researching data. The Certificate of Appraisal and Inspection Data Sheet Analysis of the appraisal is issued after the physical inspection of the aircraft has been completed.
Conclusion
Aircraft Appraisers provide a broad range of service to the aviation industry through a professional approach to aircraft valuations thereby setting the standard for aircraft appraisal. Bankers, insurers, purchasers, sellers, and owners immediately recognize the value of an independent aircraft appraisal.
Lease Basics
The details of individual leases can differ widely, but what is included in the basic structure of a lease and the reasons leasing might or might not be attractive is pretty standard.
Under a “true lease,” also known as a tax lease, the lessor owns the airplane and gets to depreciate it. The operator, however, gets to expense the payments.
Leasing is gaining popularity in both the new and used aircraft markets. The prime reason companies opt to lease is that they don’t need, or can’t use, the depreciation expense they normally would get from the airplane.
For the leasing company, the reverse is true. They tend to be funded by people-or even large companies looking for a way to shelter some otherwise taxable income. They don’t necessarily want an airplane, but they do need depreciation. Lessors often talk about how leasing allows a company that needs depreciation to take the expense and then pass the benefits back to the lessee in the form of a lower monthly payment. That may be true to an extent-likely some of the depreciation does come back to the lessee but lessors take the lion’s share of the benefit themselves.
Another big attraction to leasing is that a leased aircraft usually doesn’t show up on the operator’s balance sheet, although some lease details and rental expenses do show up in footnotes to financial statements. (Balance sheet treatment is dictated by Financial Accounting Standards Board rules.) Keeping the airplane off the balance sheet can keep shareholders at bay, and also can enable a company to avoid running into problems with debt covenants that would otherwise prohibit them from borrowing money for an airplane.
Few leasing companies actually have a fleet of airplanes. Instead, flight departments figure out the kind of airplane and equipment they want and leasing companies buy it on their behalf. In general, there is no down payment involved in a lease. The IRS allows the lessee to fund any part of the purchase. However, some leasing companies do charge a refundable security deposit.
Lease payments, which are usually monthly, are expressed in terms of a percentage of the total cost of an airplane. Although rates vary, a good current rule of thumb is approximately one percent per month on a seven-year lease, and 0.8 percent per month on a 10-year lease.
Some leases that don’t meet IRS requirements are accounted for like loans. That means for tax purposes, the operator is also the owner and is entitled to depreciation expenses. There are numerous of reasons why a lease might not meet IRS rules, but the most common issue is a bargain purchase option; the right to buy the airplane at a fixed price that is below market.
The FASB (Federal Accounting Standards Board) also weighs in on lease treatment and purchase options are again a test. Accounting rules will force the lease to be shown on the balance sheets if it has a bargain purchase option or if ownership is automatically transferred at the end of the lease.
To make matters even more confusing, leasing companies also offer what are termed “pseudo leases” or “synthetic leases.” Essentially, these products walk the fine lines between tax rules and accounting rules. For tax purposes, the lessee is considered the owner and is entitled to depreciation. However, for accounting purposes, the lease conforms to FASB rules for off-balance-sheet treatment. That means your company can buy an airplane, but not show the loan liability on its books.
Lease Documentation
With each aircraft leased the company will require the airline to document the following:
- FAA Part 121or 125 Air Carrier Certificate or Part 129 Foreign Air Carrier Authority.
- DOT 401C Certificate of Public Convenience and Necessity.
- FAA Conformity Inspection.
- Aircraft Appraisal Report.
- Certificate of Insurance acceptable to the US DOT with the following coverage limits:
- $5 Million per passenger seat liability.
- $2 Billion per occurrence liability.
- Hull insurance in the amount of the appraised value of the aircraft as of January 1 of each year.
- Reinsurance to bring the nominal $1Million deductible to a $100,000 per incident limit.
- Aircraft Lease Agreement and Assignment of Interest.
- FAA Approved Training Program.
- FAA Approved Maintenance Program.
- Aircraft Certification Workbook (to be turned in at lease termination).
- FAA Approved Flight and Operations Manuals.
- FAA Approved Operations Specifications.
In cases of an airline in the process of certification provisional documentation will be applied until approved documentation can be filed with the leasing company.