An article by Benjamin T. Branche, Esq., Partner
Published: Szaferman Lakind 2016 Fall Newsletter
A “back-to-back” (B2B) aircraft transaction involves the purchase and sale of an aircraft utilizing an aircraft broker to effectuate the transaction. In a B2B, the architect of the transaction, typically the broker, finds a buyer willing to pay more than a prospective seller’s asking price for a plane. Buyers are willing to pay more than the asking price because they typically need only deal with the aircraft broker who does the work of finding the appropriate seller, validating the premium reflected in the price. The broker typically creates a sole purpose entity (SPE), such as a limited liability company, for each specific transaction, which usually gets dissolved after the transaction is completed. The SPE (owned and controlled by the broker) will then enter into two concurrent contracts, one with the buyer and one with the seller, each in the name of the SPE. Clearly conflicts abound, but it’s not necessarily a bad thing.
While in a B2B, the buyer pays more than fair market value for the aircraft, and the seller receives as the purchase price less than the fair market value of the aircraft, there are good reasons behind making a B2B deal as opposed to a traditional 2 party deal. For example, this type of transaction can result in significant tax benefits for both parties and can be structured to mimic a trade-in, similar to a 1031 exchange. Further, aircraft brokers are familiar with the marketplace and have a built-in network that they can utilize to identify a buyer and seller of an aircraft, which may be difficult for the parties to find on their own.
There are also risks with structuring B2B’s that should be considered before entering such a contract. Since there are two concurrent contracts, each with the SPE and not the other party, there can be issues with securing deposits, who the depositor is, and potential title issues, which are not present in a more typical transaction. Further, complex rules must be followed to receive the tax benefits of a B2B. These risks can be limited by utilizing a responsible and qualified broker along with a knowledgeable aviation attorney to help navigate these complex transactions. While traditional two party transactions may still work, a B2B can open up more options for both the buyer and seller. As B2B transactions have been gaining more popularity, it would be a disservice, and a potentially costly one, not to consider this type of transaction.
Although not typically used in other purchase and sale transactions, the same principals are applied, and the same conflicts arise. Due to the conflicts that arise, awareness, knowledge, understanding and the right team of professionals are indispensable. With the right team, the risks can be minimized, and greater profits/benefits achieved.