Approaching your first lease negotiation can be daunting but Steven Nixon, ITC-AeroLeasing’s Executive Vice President, is here to guide you through the different steps required to enter a lease, providing an overview of what is involved in the process leading to lease origination.
While the prospect of expanding your business through new operating lease contracts is always exciting, the financial burden it brings can be daunting. Any business growth requires a significant investment in hiring or training pilots and engineers, buying spare parts, equipment, and facilities. In such situations, the option of lowering the upfront cost of new fleet additions through helicopter leases and lease-to-purchase structures can provide much-needed relief.
For this article, we will base our advice on a generic scenario. While additional specifics may apply to lease transactions individually, a typical lease origination would generally follow the same steps. We refer to the operators as “you”, “operator”, and “lessee”, and the leasing company as “leasing company” and “lessor”.
Identifying the helicopter for your mission
The crucial first step in leasing is pinpointing the ideal helicopter for your mission. You understand the criteria that best suit your business, including the model capabilities, configuration, equipment condition, market availability, and acquisition cost. You may already have located, secured with a deposit or outright purchased the ideal helicopter for your company and want to finance it through a sale and lease-back structure or the lessor buying directly from a seller. Alternatively, you may not have even identified a specific helicopter model, let alone a specific helicopter serial number.
In such cases, you can often rely on the expertise of helicopter manufacturers, who can provide sales and technical representatives, demonstrations, operating budget data, etc., to help you with your selection and decision-making.
Some leasing companies have trading teams to search the used or pre-owned market for a suitable helicopter. They may even have experienced technical and sales teams or contacts at major MRSs, brokers, and OEMs who can help you finalise your selection, including performing maintenance or modifications required to ensure the helicopter is mission-ready.
Larger leasing companies often have access to factory-new helicopters by placing speculative orders, which may offer the privilege of early access to a helicopter by the OEM or completion facilities while it is still in the manufacturing process. There are various aspects and levels of support that can make the process of identifying the right helicopter less daunting and more manageable. However, these are often linked to the acquisition cost and budget.
Choosing the best lease structure
Certain leasing companies may have their own areas of expertise concerning helicopter models, new or pre-owned models, operating location/jurisdiction, mission type, and lease structures – i.e., a finance lease, an operating lease, and operating lease-to-purchase – and different payment/rent structures. For this reason, not every leasing partner will be able to offer precisely to product you want. You may find one offer more compelling and suitable for your business, while other operators may find alternative offers that better suit their operation. Operators must consider their own company’s financial goals when selecting a structure and lease provider. This consideration empowers you to make a decision that aligns with your business’s financial objectives.
For more details on the different types of leasing, you can refer to our article on “Understanding leasing” in the June/July edition of RotorHub International.
Once you have identified the preferred helicopter and desired lease structure, you can refine the selection of leasing companies and then begin the due diligence, commercial, financial and legal discussions.
As an operator, you can also prepare documents or information packages in anticipation of the following discussions.
Due diligence (financial and technical)
A leasing company will always check a lessee’s financial reports and may also want to perform an audit, or at least review certification, approval documents, etc., to understand the lessee’s operational and maintenance capabilities, in parallel with commercial negotiations. Unless the lessor already owns a particular helicopter and is specialised in the model, they may need to conduct due diligence on the model’s market share compared to similar models, analyse the current and future market value, and typical remarketing period, in order to quantify the risks associated with the transaction. On the financial side, it is recommended that the lessee has its latest financial data/report ready and available for review.
Factors such as the helicopter model’s market popularity, operator’s industry standing, long-term business model and operating contracts may be considered as part of a holistic view from a lessor’s perspective – it is often a process simply beyond “the numbers”. It is often beneficial for a lessee to demonstrate any additional capabilities that its business might have, displaying the company’s best attributes. A small family-owned operator may find all these steps intense if they are not used to being questioned about their financials and business planning. However, understanding the lessor’s perspective and developing the necessary administrative skills may allow your business to diversify its funding and find a new partner to help grow it. Established helicopter lessors know the industry and the players and can often adapt processes to successfully collaborate with a wide-ranging global network of lessees.
From commercial negotiation to offer letter/term sheet
The fundamental conditions, or terms, would include: the amount of financing, duration of the leasing contract, monthly budget for rent, interest rates, residual value and options available at lease-end. The leasing company would likely present all of these terms and conditions in the form of a preliminary offer letter/term sheet, after some basic discussion between the parties. Standard terms and conditions offered by the leasing company would usually also be included in this initial offer, including a summary of governing law, maintenance and operational obligations, tax treatment, insurance, etc.
The lease is usually initiated when there is a dialogue between the operator and the potential lessor, whereby the parties agree that a specific financing project could be mutually profitable and beneficial for both partis. It often requires a certain level of trust and patience between the parties, but with professionalism and a willingness to understand each other’s perspectives, you can build mutually successful long-term relationships. When the commercial negotiations result in a financial proposal approved by all parties, management members of both companies would then execute the term sheet. This will initiate the next stage of moving on to more formal documentation/contracts.
Term sheets themselves may be treated as legally binding, but they are usually treated as being subject to parties entering into mutually agreeable lease and purchase agreements and, of course, including a successful pre-purchase inspection of the helicopter. However, most transactions that reach the stage of pre-purchase inspection tend to develop into a formal helicopter lease contract.
Technical negotiation
In parallel with or as part of the commercial negotiations, there is the need to discuss certain technical aspects of the helicopter, which significantly affect value and may change during the course of the lease. For example, delivery conditions including maintenance required to make the helicopter mission-ready and modifications, maintenance requirements during the lease, payment/usage of overhaul reserves or OEM provided power-by-the-hour programs, and redelivery conditions. The leasing company will conduct a pre-purchase inspection to ensure the helicopter meets the contractual delivery condition to secure the financed amount. The lessor will discuss with the lessee maintenance obligations and the requires periodic reporting during the lease term, such as providing monthly status reports and similar technical documents to allow the lessor to monitor the condition of the asset over time. Some lessors require the helicopter to be returned according to contractually specified conditions at lease expiry. If a purchase option is offered within the structure of the lease, the lessee must agree with the lessor whether this would be based upon end-of-lease fair market value or at a predetermined price.
Tax negotiation
Any taxes incurred by the lessor by entering a specific arrangement with a lessee would typically be at the lessee’s sole cost, so a clear picture of the tax treatment should be established before initiating the lease. The nature of the aviation business means that the helicopter’s location at the time of acquisition, the operating locations during the lease, and the lessor’s and lessee’s place of incorporation can all have a bearing on potential taxes, with some situations requiring considerations of several tax jurisdictions. There are often ways to structure a transaction to optimise the efficiency of tax payments. However, both parties need to clearly agree upon and understand their obligations to comply with all relevant tax laws. It is sometimes necessary for industry-focused tax specialists to help guide you through this process.
Legal negotiations to the lease agreement
All the above negotiations and processes culminate in the formation of a lease agreement between the lessor and the lessee, as well as a purchase agreement between the seller of the helicopter (which may also be the lessee), and the lessor as a buyer. Each leasing company would use its own templated agreements, with some being more comprehensive than others. It’s essential to involve appropriately qualified lawyers and contract specialists in this final step of the transaction, especially if leasing is a new activity within an operator’s business. The final agreements and related documents are typically placed in an escrow agent, an independent party holding all documentation and funds, only releasing then to the necessary parties once all the closing conditions are met.
Congratulations! The helicopter is now an asset that your company can use to generate revenue for your financial, business and operational goals!
Originally published by RotorHub in the October/November 2024 issue
