Finance: Paying for upgrades

If an owner has a loan on an aircraft, “You can’t get a second mortgage on it, or a home equity loan, and piggyback on it,” said Adam Meredith, president of the AOPA Finance Co. “Aircraft financing doesn’t work that way.” The owner would need to refinance the existing loan and borrow more money to pay for the improvements.

Here is the good news: Payments may be lowered because refinancing the loan recasts it over a longer amortization period, Meredith said. “Now is a great time for interest rates because they are at historic lows,” he said.

And here is the potential bad news: If you already have borrowed a large amount relative to the value of the airplane and you add extensive, costly improvements, you won’t see a dollar-for-dollar appreciation on those improvements. In general, the dollar value of engine overhauls and avionics upgrades typically translates to about 50 percent of what was spent. New paint and interior adds to the value, but usually not as much.

When talking to lenders, you may wish to obtain an appraisal on the aircraft rather than using a pricing digest, Meredith said. “That will give you a much more exact examination of what the aircraft’s worth,” he said. An appraisal will give the owner more justification for the value of the airplane.

The ideal time to think about paying for upgrades is when you purchase the airplane. Suppose you were to purchase an older single-engine turboprop with the intention of immediately overhauling the engine, ripping out the interior, and getting a new paint scheme. Does it make sense to borrow an additional amount above what you borrow for the airplane? Yes, said Meredith. Those improvements would add hundreds of thousands of dollars in value to the airplane from day one, he added.

Web: www.aopafinance.org