Most popular aircraft types, depending on their age and other factors, may be commercially financed with leading lenders. Valuations for finance purposes are based on a desktop valuation indicated by industry ‘Bluebook’ guides, and/or as assessed by an independent appraiser appointed by the financing institution.
The following simplistically describes the four commonly available financial alternatives offered by financial institutions to prospective purchasers of corporate aircraft:
Loan With Mortgage - A standard loan (available in any major currency) whereby title to the aircraft will be with the purchaser and a mortgage will be granted to the lending institution. The mortgage will be registered at the national registry having an acceptable Registry of Aircraft Mortgages. Capital allowances for the aircraft are for the borrower and interest payments under the loan are tax deductible for the borrower. Both the aircraft as an asset and the loan as a liability will appear in the balance sheet of the borrower.
Lease Purchase - In terms of taxation treatment, this has no difference to a loan with mortgage. The difference is that during the period of lease (say five years), ownership of the aircraft will be with the lender and this will automatically transfer to the borrower at the end of the lease period upon payment of a nominal purchase option sum. As in the case of the loan with mortgage, this is ‘on balance sheet’ to the borrower.
Finance Lease - In this situation, the ownership of the aircraft resides with the financial institution (lessor) and the borrower (lessee) pays a rental to use the aircraft. The lessor takes the capital allowances and the benefit of these is reflected in the rental payments. Title to the aircraft cannot pass directly to the lessee at the end of the lease term. The total rental payments under the lease are tax deductible for the lessee. The asset and liability will be ‘on balance sheet’ for the lessee.
Operating Lease - This is in many respects the same as above, however, as a result of the lessor (the financial institution) taking a residual value position on the value of the aircraft at the end of the lease term, the operating lease is ‘off balance sheet’ for the lessee (borrower). In terms of taxation treatment, it is the same as a finance lease.