Lenders need a formal agreement with all parties involved in the ownership of the asset—the aircraft—stating that the lender has a first-priority interest in the aircraft in the event the loan goes into default.
Generally speaking, there are two methods to achieve that aim. The most efficient way is to have all parties to the transaction attach themselves to the loan. The second way is by drawing up an addendum document, commonly known as a subordination agreement. The subordination agreement doesn’t tie the cash-paying participant to any of the debts or other obligations assigned in the loan. It’s a stipulation of first position rights by the lender and an acknowledgment by the cash party of that stipulation.
One of these options is traditional. The other is more customer friendly. In an age when loans have become as commoditized as they now are, lenders should emphasize customer service over tradition.
Lenders might argue that the extra fees generated from creating a subordination agreement is not customer friendly. For instance, for loans between $20,000 and $50,000, that extra cost could approach 4 percent. However, in more upmarket transactions—a Pilatus PC–12, Daher TBM, or Cirrus, for example—where the loan amount is well north of half a million dollars, lenders tend to be more willing to accommodate. That’s because the added cost as a percentage of the total loan is much smaller and therefore only minimally affects them.
We live in a world where people are willing to pay for convenience. It would behoove banks to offer the option of drawing up subordination agreements for lower-value loans if the borrowers believe that to be in their best interest. Doing so relieves the cash partner of loan default liability and credit exposure. And the bank can rightly charge for the convenience. AOPA