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FINANCING PARTY'S DUE DILIGENCE
As in most typical financing transactions, the lender will require personal financial information from the purchaser, including organizational documents if the purchaser is a corporation or a limited liability company. This type of information would be also be required from any personal or corporate guarantors of the loan.
The lender will also require specific information with respect to the aircraft, such information includes the manufacturer, model and serial number of the airframe and any engines or propellers, if applicable, as well as the proposed purchase price. In many instances, the lender will require an appraisal of the aircraft to ensure that the transaction comports with the lender's loan-to-equity ratio.
With this initial information, the lender will engage a title company or a law firm to obtain a title search on the airframe, engines or any propellers. The purpose of this title search is to determine the owner of record of the airframe and the status of any security interests, liens or other encumbrances which are of record and affect an interest in the aircraft. The title search should include a search of the FAA Registry in Oklahoma City, and where applicable, a search of the records of the International Registry created pursuant to the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment ("Protocol") (usually referred to collectively as the "Cape Town Treaty" or "Cape Town Convention").
Depending on the country of registration of the airframe or helicopter and/or the location of the debtor or seller of the aircraft, the Cape Town Treaty may be applicable where the transaction involves one of the following: (i) an airframe type certified to transport at least (8) eight persons including crew, or goods in excess of 2750 kilograms, (ii) helicopters type certified to transport at least (5) persons including crew or goods in excess of 450 kilograms, or (iii) aircraft engines having at least 1750 lb of thrust or its equivalent in the case of jet propulsion aircraft engines, or in the case of turbine-powered or piston-powered aircraft engines, engines having at least 550 rated take-off shaft horsepower or its equivalent. See Art. I of the Protocol.
The title company or law firm engaged to complete the title search will issue a title report indicating the status of the FAA or International Registry records. The lender will require that any open encumbrances or other title defects be corrected to the lender's satisfaction prior to or at closing. In cases where the debtor does not already own the aircraft, the debtor will need to work with the seller of the aircraft to ensure that the title defects are cured as part of the closing. In addition to the preceding, there may be other requirements from the lender as part of the closing which will depend on the specific transaction, for example, requiring title insurance to be purchased as part of the closing.
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