Uncoordinated Structures and Operations
n anticipation of the acquisition of an aircraft, a great deal of time is spent on establishing a tax efficient and FAA-compliant operating structure. After all of the tax, accounting, aviation and other professionals have weighed in on and agreed upon an appropriate aircraft operating structure, the documents are prepared, the acquisition is closed and the structure implemented.
It is not unusual to find that the FAA letters of authorization (LOAs) for the aircraft (including RVSM) are applied for and issued in the wrong name, that is, in the name of the registered owner of the aircraft instead of in the name of the operator. A very common structure is to have the aircraft owned by one entity and then dry leased to an affiliated or different entity which will operate the aircraft under Part 91 incidental to its primary business. As you may know, a single purpose entity (which typically is the registered owner of the aircraft) is not eligible to operate the aircraft under Part 91 because, by definition, it has no primary business and, therefore, it is not (absent very unique circumstances) the appropriate holder of the LOAs.
We have found that sometimes this error is not discovered until many years after the acquisition when the aircraft has been replaced and application is being made for LOAs for the replacement aircraft.
The morals of the story?
- Be sure that the flight department is included in the structure discussion.
- Provide a schematic of the operating structure that clearly identifies the operator of the aircraft.
- The flight department should not hesitate to confirm with aviation counsel from time to time (at least annually) coordination of the structure with operations.
- The business folks should always alert the flight department to contemplated structure changes.
- This newsletter is intended to inform firm clients and friends about legal developments and other firm news. Nothing in this publication should be construed as legal advice or a legal opinion, and readers should not act upon the information contained in this publication without seeking the advice of legal counsel. Prior results do not guarantee a similar outcome.
In connection with the sale of a pre-owned aircraft, an aircraft is typically subjected to a pre-purchase inspection following execution of the purchase agreement. The purchase agreement ordinarily includes an exhibit describing the scope of the inspection (that is, the tasks that will be accomplished) to be performed at the inspection facility. The parties execute a proposal with the inspection facility, the buyer pre-pays the flat rate cost of the inspection, the aircraft is positioned at the inspection facility and away we go.
While the aircraft is undergoing the inspection, each of the buyer and the seller are attending to their respective tasks. The Seller is organizing the lien release from its lender, obtaining paid-through confirmation from the various service plans and pre-positioning its conveyance documents. The Buyer is typically arranging for its financing, organizing its operating and tax structure, and awaiting the results of the pre-purchase inspection so that it may deliver its conditional or technical acceptance to the Seller. I like to call this period between inspection commencement and conditional acceptance the “quiet period.” Basically, the inspection facility is performing the inspection work-scope to ascertain the aircraft’s status, and the parties are turning inward to work toward closing.
While it may seem that the inspection is mostly a focal point for the buyer, it is equally important that the seller keep apprised of the inspection status. A story painfully makes the point.
Buyer and Seller negotiated the sale of Seller’s aircraft. Part of the negotiation was that the Seller would accept a reduced price if the scope of the pre-purchase inspection was limited to: (i) logbook review, (ii) airworthiness directive search and (iii) engine borescope. That scope should take about a week (being conservative). After four (4) weeks, Seller was curious as to the status of the inspection and learned that, not only had the agreed upon work scope been completed, but that many other tasks had been accomplished at buyer’s direction, some of the interior had been sent out for re-covering (and completed and returned), and the conditional acceptance letter attached a work order reflecting discrepancies that would cost $140,000 to repair. Needless to say, there was a disconnect somewhere. In this situation, interestingly, the buyer was at risk for having refurbished the interior of an aircraft it didn’t own yet!
What are the lessons to be learned?
- Be sure that all members of the team are aware of the terms of the transaction.
- When the inspection commences, calendar an anticipated end date for the discovery portion of the inspection and make someone responsible for reminding the working group.
- Have someone on-site at the inspection facility to monitor the pre-purchase inspection so it does not exceed its agreed scope. This can be done by a technical representative (typically at a daily rate) or by a sales representative with technical knowledge. They need not be on-site every day, and in many cases remote monitoring is possible if the inspection facility is providing daily updates. The cost can be worth every penny.
- Pay attention to the inspection facility updates. A line item in the update reflecting “removal of interior for refurbishment” should give you a clue that the inspection is exceeding the agreed-upon scope.
I was talking with a friend of mine (“Bill”) who has been a business aircraft pilot for more than 50 years, rated on many types of corporate aircraft. We were discussing the Asiana accident at San Francisco International Airport a few years ago in which a commercial airliner crashed on final approach. Both of us watched the newscast of the aftermath online while we were talking on the phone.
After listening to the press briefings and information about the approach, Bill said “you know Stew, that accident happened at 30,000 feet.” That was an odd statement. It crashed on the runway, didn’t it? Bill said, “what I mean is that the decisions and planning (or lack of it) made well in advance of final approach caused the accident.” Low and behold, the NTSB later concluded that the probable cause of the accident was the flight crew’s mismanagement of the aircraft’s descent during visual approach (including due to the lack of training on planning and executing visual approaches).
Planning an aviation transacting skillfully and thoroughly demands a carefully prepared letter of intent—it’s the difference between soaring and crashing. I was thinking about how I feel, as an attorney that handles aircraft transactions, each time I receive an email from a client saying “We’re buying a business aircraft and just signed a letter of intent/offer to purchase. It’s attached. Can you help us with the purchase agreement?” Going through my mind is “Umm, well, you did what?!” A client whose business is real estate, or venture capital, or widget-making, signed something (prepared by someone) to buy a multi-million dollar aircraft. Essentially, the client tried to “land” the transaction without experience in the space or legal assistance, much like operating a complex aircraft from a manual drawn on the back of a cocktail napkin.
“Stew, why get hung up on the letter of intent? It’s non-binding and it doesn’t matter. It’s a throw-away.” The letter of intent (sometimes called an offer to purchase) is the roadmap for the transaction. It should contain important elements so that (i) the parties have a meeting of the minds on the terms of the transaction, (ii) the purchase agreement negotiation is efficient due to clarity of deal terms in the LOI and (iii)
the buyer (or seller) is protected from commitments and exposures that they don’t understand.
The letter of intent is a legal document which, if not drafted properly, can result in – you guessed it – a “crash on the runway,” meaning, of course, that the transaction de-rails. LOIs come in all shapes and sizes and differ in their approach depending upon the skill and objective of the person that drafted it. Often we see a letter of intent that says very little – the “wet your whistle” variety– with few terms other than deposit, purchase price, basic delivery conditions, and a commitment to sign a purchase agreement. Sometimes they do not contain the most basic of terms like a way to exit if the purchase agreement isn’t executed within a certain time period, or identify whether the transaction is “soft” (a rejection right) or “hard” (without a rejection right) or whether it is “binding” or “non-binding.” Even a short “basic” letter of intent can be a recipe for disaster, or at minimum cause the client to spend a lot of time (and money) only to find that the buyer and seller had very different understandings of the transaction with no mechanism to terminate without liability or an accusation that the LOI was in fact a binding contract.
Much like a proper approach to landing, an aircraft acquisition or sale requires proper planning at or prior to the letter of intent stage using a team of advisors experienced in the space, much as you would for the purchase of any other multi-million dollar asset or business. The earlier that team can be involved in planning for the transaction (that is, the
“higher the altitude”), the more likely that a buyer or seller will not find itself in an “un-stabilized approach.”
Buying an aircraft is usually expensive enough, but in our experience there are some key things that can push legal fees higher than expected. Most are behaviors that can be avoided with the proper gameplan at the inception of the transaction.
1. Advisors, representatives and others involved go outside their “swim lanes.”
We see this with even the most sophisticated team of advisors. Usually, even though experienced aviation counsel is involved, an advisor will interact with the escrow agent or the lender without coordinating with counsel, or perhaps even circulate legal documents that they have prepared. The result is time spent “unscrambling the egg.”
2. Sign a letter of intent without review and expect to change the deal later.
Even when they state that they are “non-binding,” letters of intent (or offers to purchase) are legal documents which, if not worded properly, can lead you to set expectations in the mind of the other party that, when reviewed by experienced advisors, could require change and disappointment. For example, can the aircraft be rejected after the inspection? Or can it only be rejected for serious issues? Or can it not be rejected at all? Does the letter of intent expire if a purchase agreement is not executed within a certain period of time, or is it silent? When counsel is only involved after signing the LOI, negotiations can become more time consuming.
3. Use representatives that do not understand the value of other professionals in the transaction.
When representatives and counsel work together as a team, each having an understanding of his or her respective role, the transaction typically proceeds efficiently and smoothly. If the opposite is true, alot of time can be spent by all participants in a struggle for control.
Top officers at large companies and ultra high net worth individuals, like celebrities, are often surrounded by trusted managers, advisers and others. Although the aircraft is a business asset, it also is typically a purchase in which the principal has personal and intimate involvement.
This can result in direct participation by the principal in the minutiae of the acquisition instead of remaining in his or her normal role of providing a broad objective to his or her advisers and letting them, and experienced aviation counsel and other aviation professionals, work through the detail. Objectivity of the lead adviser can be compromised in favor of keeping the principal happy, being ” respectful” or even patronizing. This is especially difficult when the principal imports his business experience from an unrelated area into a corporate aircraft transaction, where what is “customary” or “market” is completely unrelated to his or her substantive business experience.
When the aviation professionals give advice and the lead adviser says “we appreciate your advice but the [principal] would like you to include that provision in the offer anyway despite the risks you have described”, the expertise and years of experience of the aviation professionals have little value. They become nothing more than scriveners. As transaction attorneys, our responsibility is to describe the risks to the client and then, if the client’s direction is merely one of business risk and his decision is an informed one, to implement the client’s instruction. Some are content to proceed in that manner in an effort to keep up the pretense that the principal is “all knowing”, but shouldn’t Elvis have been told hat he had a problem at some point before the 70’s? That he was hurting himself? That you will protect him by telling him what you think instead of what he wants to hear? Remember, it was a child that said that the emperor wasn’t wearing clothes.
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It is not uncommon for an aircraft buyer to want to change the registration number on an aircraft, and it is similarly common for a seller to want to “retain” the registration number of the aircraft that he or she is selling if it has personal meaning or for other reasons. Unfortunately, changing the registration number of an aircraft is not like obtaining a “vanity”plate for your car. There is a process, and it takes some time, and there are some definite traps of which to be wary.
One trap to be wary of is that if there is a pending request for a number change, the FAA will not process a transfer (or bill of sale) for the aircraft. So, the request needs to be withdrawn. This is why we suggest that requests for number changes in connection with a purchase/sale only be made at closing. So, don’t be anxious to make that request until you’ve spoken with an aviation professional, or you will be sorely disappointed at closing.
Let’s take an example. In this example, Buyer owns an aircraft and is buying a second aircraft (we’ll call it New Aircraft even though it is pre-owned). Eventually, the old aircraft will be sold. Buyer likes the number on Old Aircraft (N12OA) and wants to put it on New Aircraft (N56NA). Here’s the process:
1. Reserve a number for assignment to Old Aircraft. We’ll use N12OB. Usually, you like it to be a number that will not require too much painting over the old number. Here, only 1 letter would need to be painted over. It takes about 1 to 2 weeks for the reservation to appear in the system.
2. Request that the FAA assign Special Registration Number N12OB to Old Aircraft to replace N12OA.
3. As number changes are not a priority item for FAA, approximately 4 to 6 weeks after the request, the FAA will issue FAA Form 8050-64 authorizing that the number on Old Aircraft can be changed to N12OB. This authorization is valid for a year.
4. Once the new number has been ‘placed’ on Old Aircraft (usually a sticker or painted), Form 8050-64 should be signed and the original filed with FAA. The copy of the signed and dated form is stapled to the existing registration card and then you can legally operate under the new number N12OB. There are some other things to do as well, like re-strap the transponders and obtain a replacement CofA with the new number, and change numbers on documentation, but that’s beyond the scope of this explanation.
5. When the 8050-64 form is filed with FAA, you’ll want to be sure that the aviation professional that files the form reserves the old number N12OA back to the owner of Old Aircraft (which we are assuming here will be the owner of New Aircraft). The reservation of the old number back to the owner of Old Aircraft will be reflected in the FAA system in about 2 weeks. Yes, 2 weeks.
6. When the FAA system shows that N12OA has been reserved back to the owner, it’s time to make the second request. Either at the closing on the acquisition of New Aircraft or thereafter (it depends upon whether the reservation of N12OA has been completed before or after acquisition of New Aircraft), have your aviation professional submit a request to FAA to change the number on New Aircraft from N56NA to N12OA.
7. Approximately 4 to 6 weeks after the request, the FAA will issue FAA Form 8050-64 authorizing that the number on New Aircraft can be changed from N56NA to N12OA. This authorization is valid for a year.
8. Once the new number has been ‘placed’ on New Aircraft (usually a sticker or painted), Form 8050-64 should be signed and the original filed with FAA. The copy of the signed and dated form is stapled to the existing registration card and then you can legally operate under the new number N12OA. Of course, if you want to keep N56NA, you’ll need to request that the FAA reserve it back to owner.
How many weeks did you count before the final number was able to be placed on New Aircraft? If we were ambitious, 1 week to reserve a number for Old Aircraft, 4 weeks for the 8050-64 form authorizing change from N12OA to N12 OB to be issued, 1 week for N12OA to be reserved back to owner, 4 weeks for the 8050-64 form authorizing change from N56NA to N12OA. Total: 10 weeks.
So when you hear “let’s change the number,” it’s a little more complicated than that.
Regards. SHL.
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The Federal Aviation Administration (FAA) recently issued proposed civil penalties ranging from $63,000 to $91,000 against three companies for alleged violations of Hazardous Materials Regulations (HMR). One such violation was for failing to properly mark a box containing two 12-ounce cans of spray paint. http://www.faa.gov/news/press_releases/news_story.cfm?newsId=16794&omniRss=press_releasesAoc&cid=102_P_R
Applicable Hazardous Materials Regulations are complex and require the proper marking, labeling, and packing of hazardous materials in addition to proper training of employees that ship hazardous materials and recordkeeping.
Violations and civil penalties are common, largely due to the fact that many companies are unaware that they are improperly shipping hazardous materials and are subject to the FAA’s jurisdiction for doing so. To make matters worse, because many of these companies do not understand the FAA enforcement process, they unwittingly aid the FAA in making its case against them.
Typically, a company finds out that it has violated HMR by receiving a telephone call or letter from the FAA seeking information about the shipment. At this point, unaware that the information they provide will likely be used against them in the FAA’s subsequent enforcement action, the company provides an explanation or written statement that often indicates that they have likely violated additional regulations. Believing that their cooperation in the matter has resolved the issue and absolved them of any wrongdoing, the company is often shocked to later receive a Notice of Proposed Civil Penalty (NPCP) for its violations of HMR. Given that penalties for violations of HMR may range from $10,000 – $50,000 per violation, just one improper shipment could lead to a penalty in excess of $100,000.
Very often, companies often do not appreciate the adversarial nature of this process, which is why they seldom benefit from admitting to violations of HMR or dealing directly with the FAA. Instead, it is advisable to discuss the issue with counsel experienced with enforcement proceedings relating to HMR prior to submitting any response to the FAA’s request for information.
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On June 10, 2016, Lapayowker Jet Counsel, P.A. will be relocating from Fort Lauderdale to newer, larger office space, at Lakeside Office Center, 600 N. Pine Island Road, Plantation, Florida. Family and community involvement continue to be important ingredients to our culture and our move will provide attorneys and staff with additional opportunities for personal and professional growth, and provide our clients with convenient access.
We look forward to continuing to serve the business aviation community.
LAPAYOWKER JET COUNSEL, P.A.
Business aviation – we serve it, we live it, we love it!
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I am often asked by a client buying or selling an aircraft “how quickly will this deal be done?” or ” how much will this cost?” My answer is always the same: If you can tell me how everyone in the deal will behave, I can tell you generally how long it should take and how much it should cost. But the success of an aircraft transaction, like any transaction, is dependent upon the participants being experienced, practical and level-headed.
If you’ve ever played Blackjack, you know that there are certain “rules” that you’re supposed to follow. If the dealer is showing a card on top of a 6 or less (we assume the dealer has a 10 underneath), because the dealer needs to “draw” a card until it has 17, it is likely that it will go over 21 and “bust” i.e. the players will win. So, the rules that players generally follow are : (a) don’t hit (take a card) if the dealer is showing a top card of 6 or under, (b) double down if you have a 10 or 11 and the dealer has something less than a 10 or face card on top, (c) always split aces, and (d) never split tens (it’s likely a winning hand).
The theory goes that if everyone at the table plays by “the rules” then the odds are better that the players will win. If there’s a player at the table that is doing abnormal things, like splitting tens, or hitting (taking a card) when the dealer is showing 6 or lower, then that player will mess up the odds at the table, and the table will lose more often. Heaven forbid you have 2 players like that, and the table can kiss its chips goodbye at warp speed.
How does Blackjack have anything to do with aircraft transactions? Simple. In an aircraft transaction, you typically have the following players at the table: (i) buyer, (ii) buyer’s broker, (iii) buyer’s counsel, (iv) seller, (v) seller’s broker, (vi) seller’s counsel and (vii) the aircraft. Interestingly, a blackjack table holds 6 to 8 players, but that would be too easy. The issue is that if any of the 6 aircraft “players” are inexperienced or behave oddly, then the transaction takes on less than normal process, with much time and energy being devoted to education, discussion and posturing. This can add significant time and expense to an aircraft transaction.
So if you or one of your teammates is thinking about “splitting tens,” and the other players are telling you not to (or looking at you funny) then maybe it’s time to admit that you need help from an experienced player, or perhaps leave the table until you do. Otherwise, your chips will be gone, and so will the deal that you desperately wanted to close.
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