 By Mike Simmons, President - Plane Data, Inc. There is a science experiment that demonstrates how an animal (including people) can be "boiled alive" without having a painful reaction. This situation can be accomplished when the temperature of the water is changed on a very gradual basis such that the animal doesn't notice it. The point is that the aircraft marketplace can be similar when the market appears "steady" over a very short time-frame thereby creating a misleading, comfortable situation but the cumulative effect over an extended period of time can be disastrous for anyone who depends on the aircraft's value being known and understood. Therefore, it is important to revisit the aircraft in your portfolio routinely to ensure that value issues haven't developed as a result of the market, the owner, usage of the aircraft or all of the above. Not long ago, a previous client asked me to re-appraise his fleet. This client owned three aircraft and has been flying for many years. The need to understand the fleet's value involved insurance - a topic that I have mentioned in newsletters and on line before and I have an article written by a well known insurance broker discussing the impact of over insuring aircraft. When I appraised his fleet about four years ago it was for the bank's financial analysis. The owner was planning on upgrading the avionics along with the engines and my reports attempted to help the banker understand what those improvements would do to the value of those aircraft at that point in time. Fast forward to 2013. The loan is paid off and the improvements have been installed. The owner is now facing a new problem regarding the insured value of the aircraft in that the insurance company believes the values to be excessive and they are requiring appraisals to justify the coverage levels. The changes of these three aircraft and the market were enlightening. First, the overall market value for each of these aircraft fell by about 17% - 30% depending on the data source used and the specific make/model of aircraft. I mention this because if anyone asked - "How's the market doing?" at any point in time, it would have appeared somewhat "stable" on a month - to - month comparison as there have been no recent radical changes in the market over the past few years but the overall cumulative effect has been negative for these aircraft and the reasons vary - but now let's turn to the aircraft in question. All three aircraft are maintained on a Part 135 Certificate (air taxi) and fly regularly. The objective of the owner was to equip all aircraft alike with a conversion from "steam gauges" to glass panels and install overhauled engines. The aircraft in question are all "early '80s" vintage and include a turbo prop, a piston twin and a piston single. After thousands of dollars on improvements, one aircraft actually lost 2% of its value over this 4 year period. The other two aircraft gained value but not as much as you might think. One aircraft increased its value by 24% while the other increased its value by 7% (this aircraft was particularly interesting because the Average Green Airframe Value declined by 86% during this same period!). The aircraft in general were "over insured" but one in particular was insured for more than twice its current value! The owner (a knowledgeable and skilled pilot) was simply unaware of the factors that went into the evaluation of an aircraft and how these factors have changed over the past few years. The owner was not only overpaying for insurance but he was also most likely overpaying his taxes as well. It is important to have the aircraft in your portfolio reappraised every so often and the amount of risk will dictate the time-frame. The example in this article is NOT unique. Once the deal is completed most banks/bankers file the report away and move on to the next deal never to revisit the aircraft or its value again. However, there are multiple parameters at work impacting the overall value of the aircraft over time - both positively and negatively. The usage of the aircraft may be "above average", the aircraft can become damaged in some way, improvements are added and so forth. A legitimate risk management plan revisits the aircraft routinely to document and verify changes to the aircraft itself along with its market value (not to be confused with "book value"). It is important to ask - How old is the appraisal report you have on file and do you even have a certified appraisal report on file? Other questions include - How much trust and reliability do you place in the reports on file and/or the opinion of value? If you are unable to answer these questions, Plane Data, Inc. can help. Plane Data, Inc. is a solutions based company and your current documentation can be reviewed on a confidential basis in order to recommend an appropriate strategy. Please call 800-895-1382 to get started. Mike Simmons is a frequent contributor to InsideBanking.net and to our LinkedIn Group, Inside Banking - Lending Group.
 By: Camilla N. Andrews & Amy R. Brownstein On January 14, 2013, in Riverisland Cold Storage v. Fresno-Madera Production Credit Assn., 2013 Cal. Lexis 253 (2013) ("Riverisland"), the California Supreme Court overturned Bank of America etc. Assn. v. Pendergrass,4 Cal.2d 258 (1935) ("Pendergrass") which, for nearly 80 years, has limited borrowers' ability to challenge contracts based on alleged oral promises made by a lender that contradict the terms of the loan documents. This change in California law will make it harder for California lenders to quickly dispose of such borrower allegations by demurrer or summary judgment, and is likely to result in increased litigation costs - and longer times to complete liquidation - for California lenders. In Riverisland, the borrowers alleged that the lender's vice president had met with them two weeks before a loan modification agreement was signed, and that he represented to them that the lender would extend the loan for two years in exchange for two pieces of additional real property collateral. The borrowers further alleged that when they signed the agreement, which they did not read (although they initialed the pages setting forth the legal descriptions), the lender's vice president assured them that the term of the agreement was two years, and that the two additional pieces of real property were the only additional collateral being taken. In fact, however, the written agreement provided for only three months of forbearance by the lender, and identified eight additional pieces of real property collateral. The borrowers subsequently failed to make payments as agreed, and the lender recorded a notice of default. After the borrowers repaid the loan and the foreclosure proceedings were dismissed, the borrowers filed an action against the lender seeking damages for fraud and negligent misrepresentation. Causes of action included reformation of the restructuring agreement and rescission. Under California law, the parol evidence rule (set forth in California Code of Civil Procedure §1856) prohibits the introduction of outside evidence, such as oral statements or earlier writings, to contradict the terms of a final written agreement. The parol evidence rule is subject to exceptions, however, and allows for evidence challenging the validity of an agreement, or evidence to establish fraud. The decision in the Pendergrass case limited the parol evidence rule's fraud exception, requiring that the evidence offered to show fraud relates to fraud in procuring the written agreement and not a promise that was different from the terms of the agreement. In Riverisland, the lender filed a motion for summary judgment, seeking to have the case dismissed based upon the Pendergrass rule. The California Supreme Court overruled Pendergrass, finding it to be inconsistent with California law, an "aberration," and a potential shield for fraud. 2013 Cal. LEXIS 253, 25-27. Consequently, borrowers will be able to offer additional evidence, such as oral statements allegedly made by a representative of the lender as to the terms of loan documents, to support allegations of lender fraud. What are the ramifications for lenders? Quite simply, lenders may be unable to quickly dispose of claims of oral promises differing from the terms of written loan documents through demurrer or summary judgment. Such claims will most likely result in time-consuming and costly litigation, with most cases brought by borrowers expected to include allegations of fraud, and more cases expected to go to trial. What actions might a lender take to protect itself? While the facts of Riverisland indicate that the initialing of loan documents will likely not be sufficient to support a lender's defense that borrowers had knowledge of the contents of loan documents, there are a number of protective measures that lenders can take to protect themselves from allegations of fraud. • Some experts have recommended the inclusion of arbitration or judicial reference clauses in loan documents which, if enforced, would allow the lender to have the dispute heard by an arbitrator or judge rather than a jury that might have more sympathy for a borrower. • Experts have also recommended that loan documents be provided to the borrower in advance of closing to allow the borrower time to read the documents, possibly coupled with an acknowledgment that the borrower has been encouraged, and has been provided an opportunity, to have the documents reviewed by its own legal counsel. • A lender might require the borrower to re-execute a commitment letter at closing, confirming the pertinent terms of the loan. • A lender might obtain an affidavit, to be signed under penalty of perjury, which is read to the parties and signed by them prior to the execution of loan documents, to specifically disclaim reliance upon oral representations and warranties made by the lender. • Lenders should ensure that their personnel, including outside brokers and agents, are aware of the state of the law on this issue. All employees and agents who interact with borrowers and other loan parties must understand that misrepresentations to these parties may result in a court determining that the borrower and other loan parties are not bound by the terms of the loan documents. Terms and conditions of a loan or loan documents should never be misrepresented to any borrower party. Solutions will vary for each lender and each loan. Please feel free to contact Camilla at (949) 333-4108 or Amy at (215) 542-7070 for additional assistance in addressing this issue. candrews@starfieldsmith.comStarfield & Smith, P.C. | Irvine, CA Office 2955 Main Street, Second Floor | Irvine, CA 92614 (949) 333-4108
This article was republished with the permission of Camilla Andrews, Starfield & Smith, PC. For further information on Camilla visit our InsideBanking
 By Theodore (Ted) J. Hamilton, Esq. The debtor’s bank account is flush with cash! After months of searching and work you finally have it, a payday! You get the garnishment paperwork done the same day and serve it on the neighborhood bank. But the banker looks at it differently. The banker says, hold on a minute. What is wrong with my client? They can’t pay their bills? How did this judgment happen without my knowledge? What about me? What am I to do? Although that loan I have to the debtor isn’t in default and they are current, my loan documents say that a judgment or garnishment results in a default. I have to protect myself. As a result, when the banker receives the garnishment, they freeze the account and file a response to the garnishment stating there are no funds available due to the bank lien on the account. Who gets the money is what both the lawyer for the bank and the lawyer for the creditor are asked. The answer lies in the Uniform Commercial Code and in the facts of each case. A. Perfecting a security interest in a bank account. The Uniform Commercial Code outlines how to perfect a security interest in a bank account. Particularly UCC section 9-314 states that a security interest in a bank account is perfected by control and the security interest is lost when control is lost. UCC section 9-104 defines control of a bank account and states as follows: A secured party has control of a deposit account if: (1) the secured party is the bank with which the deposit account is maintained; (2) the debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor; or (3) the secured party becomes the bank's customer with respect to the deposit account. Thus, once the account is an account at the bank, the bank has control of the account sufficient to establish a security interest if the loan documents so provide for such a security interest. B. What controls the right of a Bank with a security interest to set off against the deposit account?But what controls whether the bank can setoff the amounts in the deposit account against a debt due to the bank? Uniform Commercial Code section 9-340 gives the bank who has “control” over the deposit account the right to setoff amounts in the account against amounts due to the bank. C. When can the bank exercise its setoff rights?If at the time garnishment hits, all loan amounts due to the bank are current, how can the bank claim a setoff right that would take priority over the garnishment lien on the account? Assuming the bank’s documents give the bank the right to a setoff upon default and the loan is in default at the time of the garnishment, the bank will have the right to set off against the deposit account in the bank’s control. But what if the loan is not in default at the time the garnishment hits? The language of the Bank’s loan document must be reviewed on a case by case basis to determine whether the bank takes priority. In the case of In re Szymanski, the court found the term “material adverse change” as defined in loan documents did not allow the bank claim priority over a garnishment on a non-demand note where no evidence existed that the judgment impaired the debtor’s ability to pay the forty thousand dollar loan which happened to also be secured by real property worth over 1.2 million. In re Szymanski, 413 B. R. 232 (Bankr. E.D. PA 2009). Other courts have determined that only if the debt has matured can a setoff occur. See Carbajal V. Capital One, 219 F.R.D. 437 (N.D. Ill E. Div , 2004). Some courts have said that if the debtor is insolvent the bank has a setoff right. Elizarraras v. Bank of El Paso, 631 F.2d 366 (C.A.5. Tex., 1980). In the case of All American Auto Salvage v. Camp’s Auto Wreckers and Citibank, South Dakota, N.A., the New Jersey Supreme Court considered whether the bank had the right to set off funds on deposit against the fees the bank charged on the account as a result of the execution writ hitting the account. 679 A.2d 627 (N.J. Sup Ct., 1996). The court, going through an excellent analysis of the right of the bank to setoff, determined that in equity the bank should have the right to set off for such fees. Id. at 633. The Florida court in the case of Barsco, Inc. v. H.W.W. Inc., examined cases from both Florida and out of Florida for a determination as to whether a bank could prevail against a garnishment of an account. 346 So.2d. 134 (Fla. 1st DCA, 1977) In this case, the holder of the account was not in default on the loans at the time the garnishment hit. The court examined one line of cases involving the loans which gave the bank the right to off-set the depositor’s account without demand or notice. In such cases, this line of cases held the bank still has the duty to take some affirmative action to accelerate when the note has not matured prior to the time of the service of the garnishment writ. Id. at 135. The Barsco court found the UCC leaves it to the security agreement to determine what constitutes an event of default. The Court also found the bank note required the borrower not to dispose of the security without written consent of the bank. Ultimately, the court held the bank’s setoff right took priority over the right of the garnishee to the funds. Each state will have a different version of the Code as adopted and may also have a specific code section dealing with the priority issue on a garnished bank account. These must be reviewed for the state at issue. D. Conclusion A levy or garnishment on a bank account may take priority over a bank’s set off claim against the account if the bank documents are not specific as to the right to set off when the loan is not in default. For bankers this means they must ensure their loan documents give them the right to set off upon a garnishment or execution. Loan documents should include broad language creating a security interest in the account and ensuring the entire amount of the loan will be due if the garnishment hits or if the banker is insecure in the discretion of the bank. The creditor attorney will want to review the loan documents and state law to ensure the bank has the right to set off and claim priority over the garnishment. In the end, the account may still be flush with cash and you may still be entitled to it. Ted Hamilton is a frequent contributor to InsideBanking and Inside Banking - Lending Group on LinkedIn. Ted is AV Rated by Martindale Hubbell, its highest rating. His practice focuses on business representation, business planning, real estate transactions and litigation, commercial litigation, bankruptcy and business litigation, secured transactions and loan documentation and transactions. Attorneys at Law Theodore J. Hamilton, Esq. P.O. Box 172727 Tampa, FL 33602 813-225-2918 ext 14 813-225-2531-fax tjh@whhlaw.comThis article will appear in the Fall edition of the Commercial Law League publication, Commercial Law World. Permission to reprint provided by Commercial Law World.
 By Jeffrey Feldman There comes a time in every lender's portfolio when its workouts are no longer working out, and the only commercially reasonable course of action is to sue the obligors. When a lender participating in the SBA's 7(a) program sees that time approaching, it must work closely with its counsel to ensure that its litigation plans fully comply with the SBA's requirements. The first step towards a valid litigation plan is the retention of qualified collections counsel. The SBA requires that the attorney hired by the 7(a) lender have expertise in debt collection and bankruptcy law, be licensed to practice law where the litigation will be conducted, maintain adequate malpractice insurance, and have no conflicts of interest. In addition, the attorney's fees must reasonable for the locality where the litigation is being brought, and his or her billing practices must conform to the SBA's requirements. A lender should confirm these understandings in its written engagement agreement with its counsel. The most important threshold issue to be addressed by the lender and its counsel in formulating a litigation strategy on a 7(a) loan is whether it is necessary to submit a litigation plan to the SBA for approval. In general, a written litigation plan must always be prepared and submitted for approval in advance by the SBA unless: (1) the litigation qualifies as "Routine Litigation," or (2) the SBA grants a limited waiver of the need for a litigation plan. "Routine Litigation" is uncontested litigation for which the estimated legal fees do not exceed $10,000 in the aggregate. A limited waiver of the written litigation plan requirement may be granted by the SBA in its discretion upon request if certain extraordinary circumstances exist that warrant granting a temporary waiver. The form and content of any litigation plan submitted by a lender and its counsel should follow the template used in the SBA's official form, which is available at www.sba.gov. Every section of the form should be completed in order to avoid delays in its processing. Although the form is completed by counsel, the lender is responsible for providing its counsel with a variety of information and documentation related to its loan that must be included in the plan. If the litigation plan involves a bankrupt obligor or a claim against a deceased obligor's estate, the SBA requires that a specific series of steps be taken to protect the SBA's interests. Where applicable, lenders should ensure their proposed litigation plan references and fulfills those requirements. In addition, a lender should also review its litigation plan to ensure that it does not incur legal fees that the SBA either will not pay or has the discretion not to pay. Finally, the lender should also review any proposed pro-rata application of legal fees and recovery between the SBA loan and any other loans. When the plan is complete, it should be promptly submitted to the SBA for approval via e-mail to loanresolution@sba.gov. Once received, the SBA will generally approve or deny the litigation plan within 15 business days. If the SBA fails to do so, however, that cannot be deemed an implied consent by the SBA - it must provide its express consent to the lender in writing. After the plan is approved, a lender must monitor its litigation to determine whether (a) it has taken any actions that materially deviate from, or were not included in, the original litigation plan, and/or (b) it has incurred any expenses that exceed the estimates in the existing plan by more than 15%. If either has occurred, the lender must submit an amended litigation plan to the SBA for approval prior to taking any further action. Similarly, a lender who has been pursuing Routine Litigation without an approved plan must submit a litigation plan when (a) it incurs legal fees in excess of $10,000 or (b) other changes occur that render its litigation "Non-Routine." SBA lenders should select qualified litigation counsel who are experienced with the regulations governing the liquidation of SBA loans to ensure that their pursuit of the obligors' assets does not inadvertently jeopardize their own most valuable asset - the SBA's guarantee. For more information regarding litigation plans, please contact Jeff at JFeldman@StarfieldSmith.com or (215) 542-7070. Starfield & Smith, P.C. protects the interests of its lender clients through a staff of experienced attorneys and paralegal loan processors. Their expertise in SBA guaranteed loans encompasses the breadth of the SBA's lending options, including the 7(a), 504, Express and Export Working Capital programs. If you would like to learn more about Starfield and Smith, PC visit their website at http://www.starfieldsmith.com/.A special thanks to Jeffrey for sharing this article with our members and Camilla Andrews who originally introduced us to this article on the Inside Banking - Lending Group.
By Kim Machotka
As of September 30, 2011 the FDIC reported over $50 Billion in Other Real Estate Owned (OREO) on the books of the 7,436 financial institutions it insures. That almost incomprehensible number is nearly five times more than the amount reported only four years ago. This figure includes a whopping 1.3 Million residential OREO properties for sale according to RealtyTrac. Banks have suddenly found themselves in the role of selling real estate instead of making loans to purchase real estate. As you can imagine, turning bankers into marketing experts overnight is not as easy as one might think. Banks have traditionally turned to the expertise of local real estate agents and attorneys that they have established relationships with to help them market and sell their OREO property. With the expansion of internet, and the explosion of OREO property on the books of banks, banks have expanded their OREO marketing strategies to include new online marketing services to capture a broader base of buyers and investors reaching across the globe.
After several years of unwanted experience, banks are now realizing the true cost of holding OREO property on their books. Although the cost of maintaining an OREO property varies by geographic location, the holding cost for a bank can be as high at 10% of the property value on an annual basis. This may seem high, however when you consider the many expenses a bank incurs during the process such as real estate taxes, heating, cooling, lawn care, snow removal, weekly or monthly property visits, appraisals, legal fees and additional bank staff, it is easy to see how the expenses add up to astronomical numbers. Given that the total value of OREO properties is $50 Billion plus in the United States, Banks are spending as much as $5 Billion annually to maintain their current OREO portfolios.
With such overwhelming expenses associated with maintaining OREO properties, it is not hard to understand why many banks are targeting the reduction of OREO properties as their number one priority for 2012. In some cases, OREO properties make up more than 10% of bank capital or equity. This causes a significant drain on bank earnings and on their ability to lend money that ultimately helps our economy grow. Banks with large OREO portfolios recognize that addressing this OREO problem is key to staying in business and to stimulating our stagnant national economy.
For this reason, banks are now more motivated to try new and creative ways to market their OREO properties. Some of the more efficient, effective and economical ways to market involve the internet in some type or form. Given the exponential increase in the use of the internet in recent years, it is not a surprise that 88% of US home buyers utilized the internet during their search to purchase real estate in 2011 according to the National Association of Realtors. Banks are paying attention to statistics like these and so is a growing cottage industry of online websites catering to OREO properties. Internet services available to buyers and sellers of OREO property vary widely, including some free and many fee based individual real estate agent websites, auction websites, specialized OREO listing services and even bank owned property lists on a banks own website.
In any case, an increased online OREO marketing effort, especially those that expand the marketplace for the bank, can provide an excellent Return on Investment for a bank. For example, a bank with $10 Million in OREO property could spend as much as $1,000,000 a year maintaining the portfolio. For as little as a few hundred dollars a month, a bank can expand its OREO marketing reach to a national and even international marketplace with the right online tool and marketing strategy.
With almost 40% of home sales in 2011 considered "distressed sales", it is evident that buyers and investors of OREO properties are active in the marketplace. Savvy investors and buyers are constantly looking for new ways to capitalize on the sometimes 20-40% discounts that bank owned property and repossessed assets can offer. Banks are sometimes willing to sell at these unadvertised stellar discounts due to the cost savings associated with not having to maintain the properties for an additional one, two or even three years. These deals can take some work to find as these somewhat ‘secret’ lists held at banks are not always available to the public and sometimes a buyer or investor will need to contact the bank directly to search them out. Nonetheless, finding the right online marketing strategy and website can be an effective, efficient and economical solution for connecting buyers and sellers of OREO property and reducing the burden of OREO property in the portfolios of banks across the country.
Article author Kim Machotka is an entrepreneur from Madison, Wisconsin and President and Founder of BankMarketplace.com, an online service that markets OREO properties and other repossessed assets for Banks and Credit Unions. Searching OREO property on the site is free to the public and offers direct access to bank owned property and repossessed assets including vehicles, real estate, equipment, recreational vehicles and more
By Mike Semanco, President & COO, Hennessey Capital Factoring as we know it is defined as the purchase of accounts receivable, discounted at some percentage, to provide immediate cash to a business. In return for cash, credit and collection services, the factor charges a fee for its services. Factoring can take many forms ranging from recourse/discount, non-recourse/traditional, full notification, non-notification, and so on. However, one thing is clear: It is becoming a much more recognized way to finance early-stage and high-growth companies and carries much less of a stigma than it did in years past. Factoring companies have an opportunity now, more than ever, to educate entrepreneurs about the power and possibility of utilizing factoring to grow their business. The interest of business owners is piqued like never before as they seek new and non-traditional means to finance their companies. It is critical that factors provide them with clear and relevant information and also demonstrate the dramatic impact that this type of financing can have on their business in order to ultimately generate greater adoption, acceptance and excitement around factoring receivables. Today, companies of all sizes can use some version of factoring. It ranges from a small business owner just starting out financing their first invoice to a large corporate entity selling off their receivables to a third party at quarter end to clean up their balance sheet. No matter the size of the company or the industry they are in, factoring is an easy way to generate cash for the business. Since I started in the factoring business in 1993, I have seen many companies utilize factoring for their operations. Some used it very effectively and others used it to disguise a flawed business model. My first exposure to factoring was with a company that had plenty of cash and a bank line but, being in the retail business, they wanted to leverage the factors expertise setting customer credit limits. The client used factoring as a form of credit insurance, in addition to receiving some cash flow. The factor put in place a non-recourse agreement where they assumed the risk of their client’s customer/debtor filing bankruptcy and the client relied on the factor to determine how much should be sold on open credit. Having a few more dollars in the bank account was a secondary benefit. Fast forward to the recent Great Recession when bank lending tightened and credit seized even the strongest factors and asset-based lenders became lenders of first resort, not last, as they were viewed in years past. Times have changed and discussions with potential factoring clients changed from, “What will my customer think about us factoring?” to “I need cash to maintain my business and my customer will understand why I have chosen to factor my receivables.” In addition to the change in the perception of factoring, the viewpoint on the cost associated with factoring has shifted as well. Our company has a policy of transparency and is the first to admit that if a company can obtain a bank line of credit to finance their business, they should take that approach since it is a lower cost of financing. In a climate where credit is tight, whether it is due to the economy, a company’s financial track record or it just makes good sense to leverage your receivables; clients have come to justify the additional cost associated with factoring. All of us in the industry have stories like this but one in particular I recall resonates well, as it involves a father-and-son team who landed their largest order with a Fortune 500 customer they had been courting for years. A $3 million sales commitment spanning 12 months was like winning the lotto for a family business generating $2 million in total sales the previous year. With solid margins on the new order and a bank that they have worked with for years, how could they not receive the line of credit increase they needed to double their sales? “If you only had more real estate, we would be happy to help,” said their banker. As their CPA reviewed the contract margins and explained why he thought factoring would make sense, they decided it was a viable solution. It turned out to be just what was needed. After financing $3 million in sales and having to give up a small portion of their margin to do so, they were left with the ability to pay off the bank at the end of 12 months and control their own destiny. The client saw the factoring cost as an investment. They gave up a small portion of their margin to finance a bigger project that not only generated significant income over 12 months but gave them exposure to a whole new customer base and new opportunities. As I said, we all have these success stories. Factoring has always been a simple product to use, even 20 years ago. Today, with factors leveraging technology and online reporting, it truly can be a 24-to-48 hour turnaround from an initial inquiry to funding. As technology becomes increasingly mobile and information can be exchanged with relative immediacy, the flexible nature of factoring will continue to respond to the evolving needs of business owners. As the economy recovers, which it will, although some days it seems like it may never happen, and when the pent-up demand is presented to small and midsized companies, factoring will be a perfect solution for them to take advantage of new opportunities. Banks will increase their lending to business owners but, as we have seen in the past, they cannot help every growing company. Factoring will be the source of credit for early stage companies due to their insufficient track record as it always has. As existing midsized companies are faced with new projects and increased orders, they will be able to leverage the incremental solution that factoring brings to those with current bank lines of credit. It is the perfect way to complement a bank line of credit and over the last few years, we have seen many more banks being receptive to signing subordination agreements and allowing their clients to fund incremental sales through the use of factoring. With all the economic uncertainty in the market and traditional credit struggling to return to normal levels, one thing is certain: Factoring will remain a solution to help small and midsized businesses with their cash needs. Factoring has a long history in the world of credit and has stood the test of time when it comes to financing a growing business. Mike Semanco is the President & COO of Hennessey Capital, a working capital firm headquartered in Rochester, Michigan. Hennessey Capital provides factoring and asset-based lines of credit to growing businesses. The company recently launched FACTOR FINANCE – a program dedicated to helping factors with a lending need less than $3 million and was launched to meet the demand of underserved factoring companies. Learn more about Hennessey Capital at http://www.hennesseycap.com or connect with Mike at msemanco@hennesseycap.com.
By Mike Simmons Banks may be choosing to ignore a serious problem with their collateral when financing aircraft - and in some cases, they may be contributing to the problem unnecessarily! Avoiding the current market value of aircraft has serious implications now as well as in the future when financing and insuring the aircraft. In a nutshell, it is a mismanagement of the collateral that places unnecessary risk on the bank. Banks and bankers operating at the "next level" in their aircraft financing efforts know that it is a good idea to check their portfolio periodically to understand how the value of the asset is changing to avoid being exposed due to market changes or unknown impacts to the aircraft itself. Setting minimum insurance levels too high from outdated or inaccurate information may also force owners to overpay for premiums but it can also impact the bank's collateral in ways they may not have considered. Recently a friend of mine, Steve Johns of LL Johns & Associates Insurance ( www.lljohns.com), submitted an article for my newsletter and website. I have known Steve for some time and trust his opinions and those of his staff. This particular article came about from a discussion at an aircraft financing event (between a banker who finances aircraft and familiar with the issue, Steve and me). This discussion focused on the need to understand the current market value of the bank's collateral in their portfolio for insurance reasons. In some cases (think turbine aircraft here), banks or bankers may set a minimum insurance level as part of their policy or simply leave the insurance up to the owner but doing so has an impact on the bank's risk level in the event damage occurs. As an insurance broker, Steve sees many situations that can easily be avoided with a little planning in the early stages of financing along with routine checks of the aircraft's market value during the life of the loan - which would be consistent with proper risk management and collateral management strategies. Aviation Consumer also published a related article geared more toward the piston market. The concepts are similar but when damage occurs, the insurance company will essentially make a "fix it" or "total it" decision - and the damage event may be related to the aircraft being in the wrong place at the wrong time (envision those weather related issues here) more than improper handling of the aircraft. In some cases, aircraft may have previous damage events or other attributes that would impact the aircraft’s value (and related insurance value) which go unnoticed or undocumented if not properly researched. When a subsequent damage event occurs, there are likely to be several insurance “surprises” related to the repairs. If a decision is made to “fix” versus “total” the aircraft (due to a high insurance premium) then the owner and the bank is left with collateral that may be much less than they thought. Like Steve's article, Aviation Consumer places an emphasis on having the aircraft professionally appraised to properly document the aircraft’s value prior to closing the deal. The reason is fairly straightforward because an on-site examination of the aircraft and records documents the attributes and market value of the aircraft in question. There is simply no other substitute that is reliable and trustworthy. The Aviation Consumer article also referenced a recent article about evaluating aircraft which is included and I also included my article (on the same topic also published by Aviation Consumer) for reference as well. Banks that set minimum insurance requirements are contributing to their own problem if the level is based on unsupported data - and this level of analysis may also be forcing owners to overpay for premiums. Owners who are free to select their own insurance levels certainly want to pay the minimum but they also want to ensure that they are covered properly. It is equally important to document the aircraft’s current market value and establish the insurance and risk levels accordingly – based on factual data more than guesses. Mike Simmons has written and published many articles on the subject of documenting and evaluating aircraft and worked with a variety of banking clients both large and small as an aviation consultant assisting them in their aircraft financing policies and day to day projects. The aircraft he has been involved with over the years includes single engine piston models all the way up to business jets such as Challengers, Gulfstreams, and Citations along with a few helicopters along the way. Mike’s assignments have taken him all across the U.S. including Hawaii. As a normal course of business, he has observed several bankers over the years making questionable decisions when financing aircraft because those questionable decisions were the easy thing to do at that time, the banker may have been unsure about the right action to take (unaware of the services that could have been helpful) or they simply did not have good data to work from – and these are the types of situations that Mike attempts to highlight along with other options to consider. The objective is to help banking clients make solid business decisions based on creditable, reliable information. Mike Simmons President Plane Data, Inc. 800-895-1382 www.planedata.com
By Mike Simmons The first article in this series highlighted the fact that aircraft are like no other collateral the bank lends against and banks should therefore not treat this collateral like everything else they lend against. For example if we think about real estate and repossession situations, the bank does not have to worry that someone will remove an acre of land and take it across state lines or that a few rooms of a house may be removed before the property is repossessed. A house may be damaged of course but once repaired properly the house rarely suffers decreased value from a “damage event” unless serious repairs are involved. However, the repossession of an aircraft makes the point about their uniqueness very clear and this article will focus on typical issues that I have witnessed over the years and how these situations could be easily avoided. I will leave the legal issues to the attorneys along with the physical aspects of repossessing the aircraft and focus mainly on the evaluation and documentation of the aircraft itself. Of course there is no appraisal report on the market that will keep an individual or business from going into default but there are tools available that can give bankers a “heads up” so that they can make more informed decisions about their next steps and the related collateral. What banks choose to do with this information of course is another matter. One observation I have made over the years is that “doing nothing” or avoiding the collateral at all costs is an easy action to take for many in the banking industry. In many cases the banker who initialed the aircraft loan is not involved with “Special Assets” and they have little or no visibility of the issues involved with repossessing the aircraft so they see very little need to make any changes to their efforts or the current lending policy. From their perspective there does not appear to be any problem. The banker involved with repossessing the aircraft has little or no input regarding bank policy and they see the repossession issues as “just another day at the office” so there is no incentive to make any changes to the current lending policy on this front end either. Unless someone at the corporate level sees an exposure with the bank’s aircraft financing efforts, then they rarely have any desire to take action because aircraft financing and the associated risk is only a very small part of their everyday issues so once again, the easy decision is to do nothing or ignore the problem. But, as someone once said, the very definition of insanity is doing the same thing over and over and expecting different results. No bank or banker wants to be involved repossessing aircraft and they certainly want to take “reasonable” measures to avoid it but unfortunately their current aircraft financing policies are such that they create the very problem they are trying to prevent. Of course the next question is – if a change is needed, what changes to the current aircraft lending policy do you make in order to reduce risk? There are several recommendations I would make that can help. When I have been involved with repossessions, there are common issues that seem to reoccur and I would like to point out a few strategies that could have prevented serious problems had they been implemented or included as part of the bank’s aircraft financing policy. These concepts work for any bank of any size as I have noticed banks large and small avoiding these efforts with essentially the same final results. Only the size of the exposure is different. Aircraft financing policies in many cases tend to be non-existent or fragmented so that bankers are allowed to do the minimum amount of effort to complete the deal (qualifying the borrower aside). The person who initiates the loan completes the deal and moves on to the next opportunity. There was truly very little effort involved in documenting the collateral or understanding/addressing any title issues and the file typically goes into a desk drawer or vault – which may be fine for real estate (even though more paperwork is required due to regulations) but a risky strategy for aircraft. Typically, no follow up activity is undertaken by the bank regarding the collateral until the loan is satisfied. If problems of any sort arise, they are handled by someone else in another department possibly in another state and in more recent times even by another bank/banker after the initial bank when into receivership. Here are the problems that I see routinely and how they could be managed more effectively or avoided altogether. At repossession, the aircraft and records are not “as expected”. This is the most common issue an appraiser sees and the easiest one to correct. At the beginning of the lending process, obtain a professional aircraft appraisal report that involves an on-site examination of the aircraft and records. The appraisal report should document what was found initially along with an analysis of these records. A good example involves the bank’s Security Agreement. Many boiler plate Security Agreements have statements indicating that the term “aircraft” includes all log books and avionics but who inventoried these items at the beginning of the loan and where is this effort documented? Did the log books ever exist for this aircraft and were they original and complete? When the aircraft is being repossessed it is common for documentation to be missing (such as the log books) and avionics may be removed as well. The absence of these items can represent a significant impact to the overall value of the aircraft. In other situations, the aircraft itself really does not exist (possibly never existed) or it is not in an airworthy condition and hasn’t been for some time. If the bank elected to use the single page “appraisals” or simply looked up a number from a publication thereby using many “assumptions”, then the cost of that decision will become obvious very quickly if any legitimate examination of the aircraft and records is involved. It also becomes quite difficult for the bank to “prove” what was or was not part of the aircraft if legal challenges arise. “Engines” have not been discussed but they should be identified separately and in some cases using their own Security Agreement. Engine values can range from few thousand dollars in the case of a single engine piston to several hundred thousand dollars in the case of turbine aircraft – and turbine aircraft typically have two or more engines. In older aircraft, most of the aircraft’s market value may be found in the engines themselves. These engines are designed to be removed and replaced quite easily and changing engines in turbine aircraft is fairly common. If you have a “catch all’ Security Agreement that includes the engine(s), the question is – which engine? Did someone provide a serial number of the engine at the beginning of the loan? Was that number checked? What does the bank do if the engine is removed (for legitimate maintenance reasons) and now installed on another aircraft? Who holds the lien (if there is one) on the engine now installed on the subject aircraft? Where is the first engine? The bank’s Security Agreement typically allows the bank (or the bank’s representative) to make routine visits to check the collateral but banks rarely see the need to do this for some reason. However, these types of inspections should not be avoided. Over time aircraft change for many reasons and the bank has the capability of understanding at a very early point if the owner is running into financial difficulty. One sure sign is the number of hours being flown each year. Aircraft are expensive to fly and maintain. When the owner is financially healthy then the aircraft is flown/maintained routinely but when the owner becomes financially strapped then the number of hours begins to decrease or flying/maintenance is halted altogether. Of course there are also issues with damage history since the loan closed or maintenance records that go missing which impact the aircraft’s value as well. Keep in mind that over the years there may be improvements that the bank financed (such as engine overhauls or avionics upgrades), and the bank should verify at some point that this work was completed. At a minimum they should take action periodically to update their records. One way to get a better handle on these situations is to obtain a Collateral Inspection Report. The Collateral Inspection Report is not an appraisal as no opinion of value is provided. However, it does capture key attributes about the aircraft since the initial loan and verifies the contents and condition of the aircraft. The Collateral Inspection Report is also a great tool to verify that upgrades financed by the bank have actually been completed. Having periodic Collateral Inspection Reports in the bank’s file shows internal and external auditors that all efforts are being made to manage the bank’s risk. Furthermore, since no evaluation is included, the aircraft does not need to be identified as a “troubled asset” unless the bank chooses to do so. The “troubled asset” issue aside, it would also be good to have the aircraft periodically re-appraised to better understand the bank’s collateral position and the direction the market is taking as the aircraft market tends to be cyclic. The bank has no lien on the aircraft. There is absolutely NO excuse for this type of situation to occur but it does. Typically, the banker did not understand what effort was involved when securing the bank’s lien position and they believed that a UCC filing alone was adequate – or that no other paperwork was involved at all other than having the borrower sign the appropriate paperwork. In other situations, a cloud existed on the title and the banker thought a simple letter to the FAA would clear things up. Of course, when dealing with a government agency, a simple letter rarely solves the problem. The final result can be that ownership of the aircraft never really transferred or the bank’s Security Agreement was never filed/recorded with the proper agencies. It goes without saying that the bank should always understand the aircraft’s title situation and if ownership will transfer BEFORE disbursing funds because once funds are disbursed it will be difficult to get all parties together to resign any documentation or correct paperwork. When turbine aircraft or helicopters are involved, another agency must be considered (the International Registry) to properly secure the bank’s lien(s) making the process even more complex for all parties. If the title issues are not properly addressed, there may be very serious problems for the bank and the bank’s customer when the time comes to repossess or sell the aircraft. One solution is to obtain professional assistance. Part of my overall service to my clients involves title work (obtaining the title search, highlighting clouds, resolving issues, etc.) but banks can also obtain the same assistance by using a legitimate title company. However, when working with the title company, understand what information/service is being provided and what questions to ask. Asking a title company to provide a title search, for example, is one thing. Knowing what action to take as a result of that search is another and simply sending documents to the FAA may not be sufficient if clouds exist. Routinely I see banks attempting to handle aircraft title issues on their own with less than satisfactory results. Also, if the owner of record is John Smith, make sure that John Smith is selling the aircraft (obvious I know but it does come up). I have also seen some title companies identify clouds when others did not even though both companies were looking at the same file (supposedly). Title problems are normally addressed by the seller but the final authority may be the buyer’s Purchase Agreement if they have one. The Purchase Agreement aside, the bank (and buyer) need to understand WHO is going to clear these title issues, HOW the issue will be cleared and WHO is going to provide evidence that they are addressed before funds are disbursed. The bank that elects to take this issue on without professional assistance needs to ensure these items are identified and addressed. The title company (as good as many are) simply do not provide that assistance unless they are asked to do so and it is up to the banker to ask the right questions and obtain the right documentation before closing the loan. I have worked with several banking clients as a Closing Agent ensuring that all paperwork is in order and ownership will transfer successfully BEFORE funds are disbursed. This ensures that there are no issues with document filing/recording and that everything is in place prior to closing. When required, checks are in place regarding the International Registry as well. It sounds simple but ensuring the appropriate items have been properly addressed early in the process makes the closing much easier and hassle free. The aircraft cannot be sold for the value shown in the appraisal report. When taking physical possession of the aircraft and records, banks at some point hire me to appraise the aircraft and provide them with an opinion of value. The aircraft is usually then turned over to a broker to sell and I typically get a telephone call some weeks later stating that an offer has come in at a value well below the appraised value or the broker cannot obtain whatever value was in the appraisal. The question is – What “value” does the bank really need to identify and focus on? At the time of the initial financing and throughout the course of the loan, the aircraft’s Market Value is the number most banks focus on and the one provided. The Market Value identifies what a knowledgeable and willing buyer and seller would agree upon under normal market conditions with neither party being forced to act. However, when disposing of the asset, the Liquidation Value becomes more important (possibly the Scrap Value in some cases) and the bank needs to ensure the correct value is requested and stated in the report (the Liquidation Value can be requested at the time of the initial loan as well). The Liquidation Value presumes that all efforts are made to sell the aircraft within X days (X is a number provided by the bank). The number of days the bank chooses to liquidate the asset should be selected with some thought and reasoning. Many aircraft, if priced correctly, will sell within about 90 – 120 days. In this market however, some aircraft can take well over a year to sell. If the bank sets the “Days to Liquidate” at 30 (for example) then they will take a significant loss as the timeframe will tend to be unrealistically short for that specific make and model and the bank will almost have to give it away to dispose of the asset in that timeframe. On the other hand, a timeframe closer to the “average number of days on market” will bring something closer to Market Value. In some cases, brokers may tend to be “less than enthusiastic” in their marketing efforts for the subject aircraft or buyers may be “bottom fishing”. Keep in mind that the subject aircraft may have missing records and/or missing equipment so it is not in pristine condition even though these attributes are captured in the appraised value. As a result, brokers may put their marketing efforts toward aircraft that are more likely to sell quicker. The Liquidation Value presumes that “all reasonable efforts” are being made to market and sell the aircraft. My point is that the broker may be listing the aircraft only on their website (and nowhere else) or the buyer may be aware (though the selling broker or other means) that the aircraft has been repossessed by the bank and they can get a “deal”. In cases where the broker is having difficulty disposing of the asset, the bank may be better served by allowing the aircraft to be sold at public auction because of the broker’s efforts. Regardless, knowing the aircraft’s Liquidation Value can help the bank understand what to expect and what to reject when offers are presented. It removes the guesswork and makes the entire process more professional and fact oriented. Also note that the Liquidation Value is not identified in ANY publication and can only be obtained by using a trained professional. Wholesale Value is NOT Liquidation Value. As an Aircraft Consultant, I routinely help banking clients in all phases of the aircraft lending process and I can help your bank too. Many in the banking industry have questions that they want to ask but they may believe them to be too basic. I think that the more information available to all parties, the better the decisions being made and I welcome any question or any discussion on this topic. Mike Simmons has written and published many articles on the subject of documenting and evaluating aircraft and worked with a variety of banking clients both large and small as an aviation consultant assisting them in their aircraft financing policies and day to day projects. The aircraft he has been involved with over the years includes single engine piston models all the way up to business jets such as Challengers, Gulfstreams, and Citations along with a few helicopters along the way. Mike’s assignments have taken him all across the U.S. including Hawaii. As a normal course of business, he has observed several bankers over the years making questionable decisions when financing aircraft because those questionable decisions were the easy thing to do at that time, the banker may have been unsure about the right action to take (unaware of the services that could have been helpful) or they simply did not have good data to work from – and these are the types of situations that Mike attempts to highlight along with other options to consider. The objective is to help banking clients make solid business decisions based on creditable, reliable information. Mike Simmons President Plane Data, Inc. 800-895-1382 www.planedata.com
By Theodore J. Hamilton, Esq Have you ever thought it would be nice never to have to hire an attorney to collect on a bad loan? Never to have to deal with collection issues at all. Well, this might be possible, if you never made a loan. Otherwise, no matter what you do, you face a certain percentage of your loan portfolio going bad and heading to collections. There are, however, a few steps you can take to ensure most of your loans stay on the positive side of your balance sheet. The first step is a basic one. Make sure you document your loans properly. Make sure you file the UCC-1 or a mortgage to perfect your security interest. If the loan involves other types of collateral such as a liquor license or automobile, make sure you either hold the title or record the lien as required in the state where you operate. If it is a construction loan, make sure that all subcontractors are paid before you disburse. Finally, make sure you get the correct corporation to sign the loan. Ensure the name of the borrower matches with the corporate records filed with the secretary of state and obtain an affidavit to this effect. Finally, get guarantees. A loan without guarantees, especially to a small business, will not be paid when things go bad with the company. Secondly, know who you are dealing with. Our firm receives so many bad loans where the lender has no personal relationship with the borrowers. Knowing who you are dealing with at the outset is very helpful. Go see the location where they operate. How long have they been in operation? If it is a short period of time, find out the prior business of the principals. If they rent, talk to their landlord. Ensure they are current on their rent and have not been late. Before you make the loan, get a chance to learn about the borrower’s business. Ensure you have up to date financials. This includes completed balance sheets and income statements. If you are relying on receivables, review monthly receivables reports and compare them month to month. Review the financials for at least a 2 year period prior to the current date. Ask questions of the owners and the CFO relating to the balance sheet, income statement and receivables report. This type of question and answer period can be very helpful in determining the potential success or failure of the business. You also need to check the public records. Search the Secretary of State for other corporations owned by the borrower. Check the clerk of the court where the borrower resides for any filings. Check bankruptcy filings as well as a precaution. As President Reagan said of the Russians; “Trust but Verify”. With this mantra, you will ensure that the statements made on the application and by the borrower are accurate. Third, go with your gut. How many times have you said, I could see this one coming. Closing the loan may not be worth the hassle, if in 6 months it goes bad and you have to spend your time dealing with a bad loan. Finally, don’t wait to get the file to your attorney if it is going bad. If the loan documents were not created by an attorney, get them to your attorney to review when it does go bad. The attorney can ensure your documents are in order so when you sue, everything is ready. The attorney can also assist in creating loan forbearance documents that deal with many of the defenses raised and eliminate them should suit be necessary. Good luck and may your loans all be paid in full. Theodore (Ted) J. Hamilton is a principal with Wetherington, Hamilton & Harrison, P.A. in Tampa, Florida. He has been practicing law for 20 years and is a member of the Commercial Law League of America, The American Bar Association, The Florida Bar, the Hillsborough County Bar, the National Funding Association and the Tampa Interbay Rotary Club. He has extensive leasing, litigation and bankruptcy experience. Ted can be contacted at tjh@whhlaw.com. (813) 225-1918 ext.14
This is the second in a series of three articles involving topics related to aircraft financing – specifically the evaluation and documentation of the aircraft itself. My objective is to help banks who become involved in aircraft financing to better understand the collateral they are dealing with and the revenue opportunities of this market. The first article highlighted shortcomings in many aircraft financing policies and attempted to debunk several myths about aircraft financing. This specific article focuses on the aircraft appraisal itself, who is qualified to provide a report to the bank and the importance of the material within an aircraft appraisal report. Let’s start with a typical situation that comes up daily - a banker faced with financing an aircraft and let’s presume that this banker has financed an aircraft or two during their career but it has been some time since their last experience or this may even be their first experience. Let’s also presume that this banker has three reports on their desk. Report #1 is little more than a number on a piece of paper. It may have been obtained through a website or telephone conversation but there may be little else on the page other than the aircraft’s registration number. Report #2 is commonly called a “desktop appraisal” and contains a few additional pages of information and details about the subject aircraft. It may or may not be signed and the name of the evaluator may or may not be on the report. Report #3 is a more formal aircraft appraisal report. It contains quite a bit more detail about the subject aircraft and the name of the appraiser is clearly identified on the report and the report is signed. For the purposes of this situation, let’s also presume that the final number on each of the reports is the same although this is rarely the case. Here are the questions facing the banker. Which of these reports should the bank accept and why? Which of these reports is the most accurate and trustworthy? How much do these reports cost? You may be surprised to learn that all three of these reports technically qualify as an appraisal because each of them contains an opinion of value and by definition this is what an appraisal is. Think about this. A casual conversation with someone (who may or may not know anything about the subject aircraft) regarding an aircraft which results in a figure technically caries as much weight in some banks as someone who physically examined an aircraft and records and who provided a detailed report of findings! The banker in question also faces a critical choice at this point that will determine the risk level they have committed themselves to and which they have committed the bank to. Sometimes it is a simple choice that involves proper risk management techniques and in other situations the choice is as serious as supporting bank fraud (intentionally or not). There are other issues to consider as well such as insurance and the filing/recording of the bank’s Security Agreement but the focus here will be on the evaluation and documentation of the aircraft as part of the bank’s aircraft financing efforts. Let’s start with the first question. Which of these reports should the bank accept and why? The answer will depend on the bank’s aircraft financing policy along with the goals and objectives of the bank. Some of my banking clients have a simple statement in their policy that says (in essence) when an aircraft loan comes up, call me for further instructions. In these cases, I speak with the banker about the project and we put together a plan that will document the bank’s collateral and ensure a successful transfer of ownership before any funds are disbursed. In other cases where no policy is in place, the banker is left to figure a process out or make the process up as they go along which leads to a variety of problems for the bank. These policies may simply state that an appraisal of some sort must be obtained but there is no stated requirement regarding the qualifications of the appraiser or how the result is obtained so the cost to obtain these services tends to be the overriding factor. After all, if the selling broker is willing to provide an “appraisal” then why hire someone impartial that increases the cost to the bank and the buyer? However, if we were talking about real estate, then this position would raise several red flags – as it should. Since all three reports meet the technical qualification of an “appraisal” or an opinion of value, then a number from anyone or any resource will meet the requirements of the policy – regardless of their accuracy, reliability or the accountability of the evaluator. Taking any number from any report is not a strategy I recommend to my clients and choosing a report based on how much it costs to obtain the final opinion of value can be very risky as we will find in the final article. An important point to realize when financing aircraft is that all aircraft are not alike nor do they command a certain “value”. Many individuals have a misconception that a “private jet”, for example, must be worth at least $1,000,000 or more – regardless of its age or condition. After all, it’s a BUSINESS JET! In this market, this is certainly not the case. There are private jets worth well over $1M but there are also quite a few whose only real value is scrap value and it is critical to know which one is being used for collateral purposes. A discussion over the phone with the selling broker or the buyer may not highlight which jet is under discussion. The use of “beliefs and assumptions” also speaks to the manner in which aircraft are evaluated or how the overall process evolves. Generally, there are two basic concepts when evaluating aircraft. The first involves the use of publications and the effort to “shoe horn” the subject aircraft into the “average retail” configuration. This type of approach involves the use of “rules of thumb”, SWAGs, assumptions and picking numbers that look right or meet particular criteria with very little analysis involved. The use of this method introduces several “degrees of error” – some more serious than others and the resulting opinion of value should not be relied upon. The other method uses a “clean sheet of paper” approach and focuses on gathering specific details about the subject aircraft and making decisions about the final opinion of value based on what is found through first-hand research. The “degrees of error” are reduced and there are fewer assumptions or “rules of thumb” involved. In my opinion, the “clean sheet of paper” approach leads to a more reliable result and assumptions are greatly reduced or eliminated altogether. When examining the three reports mentioned, some bankers will also ask additional questions. One key question includes – who is providing this information or report and are they “qualified”? In many cases, an appraisal is developed and accepted from someone inside the bank (possibly the banker completing the loan). In other cases the appraisal is accepted from the buyer of the aircraft (the bank’s customer) or the broker with very few questions from anyone at the bank. Because the aircraft appraisal industry is not regulated, anyone can technically qualify as an aircraft “appraiser” and provide an opinion of value. There are no minimum qualifications, training or certification requirements and typically none specified in the bank’s lending policies. The use of internal resources, brokers or buyers is not a recommended approach when there is a need to obtain an impartial opinion of value. Bankers should also remember that the buyer and the broker have a direct interest in the outcome of the deal and tend to be biased. This does not mean that buyers, brokers and dealers are bad people or dishonest but just that they are biased. Furthermore, neither the broker/dealer nor buyer has ANY incentive to identify or discuss the aircraft’s market value with the banker nor is there any incentive to identify any attributes about the subject aircraft that would negatively influence the bank’s lending decision. In fact, the selling broker’s/dealer’s key objective is to obtain as much money as they can for that aircraft as part of the sale (think about the business jet whose value is “scrap value” here). Evaluators internal to the bank may also be under some pressure to “make it happen” regardless of any facts they may have – or not have. Corporate objectives and revenue targets can also influence evaluation/lending decisions. Over recent months, internal bank auditors have been recommending the use of “qualified” outside appraisal sources for this very reason. There is an article on my website entitled “ What You Should Know Before Hiring an Aircraft Appraiser” that covers more detail than I can address in this article and it discusses the attributes of professional and unprofessional aircraft appraisers. In summary it states that the bank should be using someone who is unbiased and disconnected with the deal and someone who is following a nationally recognized set of appraisal guidelines and ethical behavior if the objective is to obtain a creditable, reliable and unbiased opinion of value. It should go without saying that the individual in this case should also have some background in aviation. The professional aircraft appraiser should not be thought of as a “deal stopper” but someone who is providing unbiased, critical information about the asset to the bank. What the bank chooses to do with this information is another topic. The second question – Which of these reports is more accurate and trustworthy? – may be a little misleading since we presumed that all three reports have the same result or number even though this is rarely the case because “opinions” vary between individuals as do the methods of developing these opinions. The answer to this question really gets to the heart of “who” does the bank trust and what information/process do they trust. It also involves the appraiser’s “support” of their opinion of value. If all parties are in agreement about the final opinion of value then there is very little discussion and a mistaken belief that Report #1 is as accurate and reliable as Report #2 or #3. However, situations routinely arise wherein the final opinion of value is questioned by the bank and/or the buyer and/or the broker/dealer. This type of condition occurs when the market is changing rapidly or the broker/dealer has misrepresented the aircraft in some manner but it is at this point when the banker knows the value of the report(s), information they have in front of them and the professionals they are working with. Evaluation methods that do not rely on first hand analysis of factual data are manipulated very easily. As a result, those reports most trusted by the banking industry contain key details supporting the final opinion of value and those details are obtained from a physical examination of the aircraft and records by a trained professional. Evaluators who routinely (or solely) use desktop methods typically do not possess the knowledge skills and abilities to perform a field appraisal and it shows in the report itself. Developing an opinion of value is fairly straightforward when assumptions are made regarding the status of all log books, verification of the airframe time, damage history, condition of the airframe itself, verification of documents on board the aircraft and airframe/engine mods – just to name a few key items. Using reports that are unsigned which contain no statement or scope of work (what the appraiser actual did or did not do to obtain an opinion of value), the appraiser’s relationship to the aircraft, market data supporting their opinion of value or any calculations are indications of a superficial analysis. We will also see in the last article that making assumptions about key value point can prove to be problematic when repossessions occur and there is no real reason for the bank to avoid obtaining first-hand information about the aircraft from an independent third party. The last question involves the price paid for each report. Unfortunately, there is no single answer here but pricing generally is related to the effort and the type of individual involved. In other words, the bank receives what they pay for. For example, if the bank goes to a website and pays a few dollars to get a Market Analysis or a number on a piece of paper based on a limited set of data, they can expect limited support and questionable results. Banks that require professional assistance or desire professional results will pay profession rates but they will also get reliable information and a report that meets or exceeds industry recognized standards along with support from a trained professional appraiser should any questions or issues arise. Generally, the price paid for a report should be reflective of the type of aircraft under consideration and the effort involved. Professional rates usually begin at a few hundred dollars for single engine piston aircraft to several thousand dollars for larger business jets and helicopters. The only question we have not addressed so far is “why”. Why should the bank undertake the time and expense to better understand their collateral at all? After all, the local broker tells the banker that this aircraft is worth $X and he must know what he is talking about – right? The person buying the aircraft is a pilot and they must know what they are buying – right? Or, they are only financing a small portion of the overall value so there is no real need to document the collateral as it is too expensive to follow bank policy – right? The answers to these questions gets back to the question of cost and the one cost that is not discussed very often - that is the cost to the bank of making a bad lending decision based on inaccurate or incomplete data. In these cases, the costs of obtaining professional assistance are relatively insignificant when compared to the costs associated with losses related to a bad lending decision (loss of the aircraft’s value, additional costs associated with the effort expended by internal resources, legal fees, etc.) and it is these types of losses that we want to avoid or limit. Unfortunately, the person who initiates the loan at the bank generally is not accountable or responsible if the loan goes into default at some point in the future or they may have left their position altogether. In default situations, the bank finds out how good their aircraft financing policy and collateral management program really is. In too many cases, there are a number of “surprises” along the way which could be avoided very easily and cost effectively. The final article will focus on aircraft repossessions and disposals and how proper collateral management helps avoid “surprises”. As an Aircraft Consultant, I routinely help banking clients in all phases of the aircraft lending process and I can help your bank too. Many in the banking industry have questions that they want to ask but they may believe them to be too basic. I think that the more information available to all parties, the better the decisions being made and I welcome any question or any discussion on this topic. Mike Simmons has written and published many articles on the subject of documenting and evaluating aircraft and worked with a variety of banking clients both large and small as an aviation consultant assisting them in their aircraft financing policies and day to day projects. The aircraft he has been involved with over the years includes single engine piston models all the way up to business jets such as Challengers, Gulfstreams, and Citations along with a few helicopters along the way. Mike’s assignments have taken him all across the U.S. including Hawaii. As a normal course of business, he has observed several bankers over the years making questionable decisions when financing aircraft because those questionable decisions were the easy thing to do at that time, the banker may have been unsure about the right action to take (unaware of the services that could have been helpful) or they simply did not have good data to work from – and these are the types of situations that Mike attempts to highlight along with other options to consider. The objective is to help banking clients make solid business decisions based on creditable, reliable information. Mike Simmons President Plane Data, Inc. 800-895-1382 www.planedata.com
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