BeechTalk - BT - Can used turbine aircraft prices get any crazier?

Username Protected · **Posted:** 04 Nov 2022, 15:38

Username Protected wrote:

[quote="Rich Wheeler" It amuses me greatly that everyone is losing their minds over interest rate increases that have only taken rates back to what is historically normal, and even then it's the low side of normal.

A 12 year period of near zero rates was a historical aberration.

Best,
Rich[/quote

Agreed.
However, if that 12 year period induced historically high debt, since the cost of funds was historically low, now that we're on the way back to historically “normal" interest rates, the results will not be pretty.

Most humans have a relatively short memory.

Maybe, maybe not. If, like you said, that debt is at historic levels, it would be debt locked in historically low rates.

Best,
Rich

Username Protected · **Posted:** 04 Nov 2022, 20:09

Rates are going up but real rates are down due to inflation. Debt is still cheap and being eroded by negative real rates.

Username Protected · **Posted:** 04 Nov 2022, 23:23

In the end it might be foreign pressure that finally cools the Fed's too-late discovery of fiscal responsibility. For all of our pain and uncertainty the foreign central banks are the ones crying bloody murder. Our (now) ever increasing rates is playing merry hell with their economies/fiscal policy. Our political imperative to get inflation under control before the next presdential election is causing a good bit of beggar-thy-neighbor on our part. I know it is often discussed these days but you have to wonder how long all Western economies (not to mention our enemies) will be willing to worship at the dollar altar. Frankly they don't have much choice currently, and that's *good*, but I keep getting a vulnerable feeling about the whole Bretton Woods regime. I'm no knowledgeable expert but I am a professional worrier!

Username Protected · **Posted:** 05 Nov 2022, 11:26

Username Protected wrote:

Not necessarily.

Of course if you bought a house with a 30 year fixed 3% mortgage and you plan on keeping the house for at least 7 to 10 years, you’re not worried about the near term interest rates. But buying assets like airplanes that have shorter term fixed rates, or even if self liquidating, but by nature of the asset, are not necessarily kept for the full term of the loan, results in higher turnover. Either because of upgrade or a change in mission/utility, or discretionary income available for the aircraft.

A huge portion of debt (almost all CRE) is not self liquidating. Some is adjustable but much of it is 3-5 year with a balloon on a 25-30 year amortization schedule. When that note comes due, the options will be to either refinance at 2 to 3 times the cost of funds, or sell the asset. All the buyers in the market at that point will price in the higher interest rates on the purchase of that asset which will in turn affect the pricing of the asset.

I always felt that gambling on a variable interest loan was a suckers bet for something essential like shelter, but hey, thats me.

Best,
Rich

Username Protected · **Posted:** 05 Nov 2022, 11:40

I’m going to ask my friends in aircraft financing how often they do balloons or ARMs, I’m betting it is rare.

The idea that inventory levels will increase because of distressed sales might actually come to pass in pistons, but in the turbine world I just don’t see it.

The reality is these companies cashed in on huge tax breaks, the recapture would negate the benefit of liquidation.

Username Protected · **Posted:** 05 Nov 2022, 14:50

Username Protected wrote:

The reality is these companies cashed in on huge tax breaks, the recapture would negate the benefit of liquidation.

This could end up being the worst of all worlds. Companies stop flying the plane for optics or expense reasons but can't afford to sell it due to the tax implications. So then the planes rot.....

Username Protected · **Posted:** 05 Nov 2022, 15:09

Username Protected wrote:

The reality is these companies cashed in on huge tax breaks, the recapture would negate the benefit of liquidation.

This statement makes no sense. Bonus depreciation is really no different than straight line depreciation, you just get it sooner. Recapture applies to both scenarios equally, and if you complete the full service life of the asset, you will still have a zero basis in the asset, so you'll still owe capital gains at the time of sale.....most likely from a tax basis of zero, meaning every dollar of the sale on the asset will be subjected to capital gains tax, so what are we excited about, the potential 10-15% difference in the ordinary income tax rate vs the capital gains rate?

There's no avoiding it....bonus depreciation is not free money, and anyone who describes it as such doesn't fully understand it

Username Protected · **Posted:** 05 Nov 2022, 16:51

Username Protected wrote:

The reality is these companies cashed in on huge tax breaks, the recapture would negate the benefit of liquidation.

This statement makes no sense. Bonus depreciation is really no different than straight line depreciation, you just get it sooner. Recapture applies to both scenarios equally, and if you complete the full service life of the asset, you will still have a zero basis in the asset, so you'll still owe capital gains at the time of sale.....most likely from a tax basis of zero, meaning every dollar of the sale on the asset will be subjected to capital gains tax, so what are we excited about, the potential 10-15% difference in the ordinary income tax rate vs the capital gains rate?

There's no avoiding it....bonus depreciation is not free money, and anyone who describes it as such doesn't fully understand it

Username Protected · **Posted:** 05 Nov 2022, 18:07

Depreciation recapture will also come knocking once you have a year where business use drops below 50%. I gotta believe that once a small business starts to tighten its belt, depreciation recapture or not, that jet sitting in the hangar is going bye bye.

Username Protected · **Posted:** 05 Nov 2022, 19:26

Username Protected wrote:

so what are we excited about, the potential 10-15% difference in the ordinary income tax rate vs the capital gains rate?

There's no avoiding it....bonus depreciation is not free money, and anyone who describes it as such doesn't fully understand it

The tax rate difference floats my boat. If I sell the plane right now and get full recapture, there will still be six figures of free money in my pocket I didn't give to the government.

Not everyone's tax situation is the same; some can use bonus depreciation in ways others can't.

Username Protected · **Posted:** 05 Nov 2022, 20:10

80 percent of my income is now passive and falls out of the sky. Taxes are brutal in CA.

Username Protected · **Posted:** 05 Nov 2022, 20:58

Username Protected wrote:

Not necessarily.

Of course if you bought a house with a 30 year fixed 3% mortgage and you plan on keeping the house for at least 7 to 10 years, you’re not worried about the near term interest rates. But buying assets like airplanes that have shorter term fixed rates, or even if self liquidating, but by nature of the asset, are not necessarily kept for the full term of the loan, results in higher turnover. Either because of upgrade or a change in mission/utility, or discretionary income available for the aircraft.

A huge portion of debt (almost all CRE) is not self liquidating. Some is adjustable but much of it is 3-5 year with a balloon on a 25-30 year amortization schedule. When that note comes due, the options will be to either refinance at 2 to 3 times the cost of funds, or sell the asset. All the buyers in the market at that point will price in the higher interest rates on the purchase of that asset which will in turn affect the pricing of the asset.

I always felt that gambling on a variable interest loan was a suckers bet for something essential like shelter, but hey, thats me.

Best,
Rich

Username Protected · **Posted:** 06 Nov 2022, 01:22

Username Protected wrote:

80 percent of my income is now passive and falls out of the sky. Taxes are brutal in CA.

There is no such thing as passive income, in my experience. You work for it one way or the other.

Username Protected · **Posted:** 06 Nov 2022, 08:38

Username Protected wrote:

80 percent of my income is now passive and falls out of the sky. Taxes are brutal in CA.

Times are tough all over. Live anyplace where there are people, and they'll get their pound of flesh one way or another. Property taxes in FL are heading to orbit and insurance of any kind is usurious.

I can move to a state with income tax and come out net plus.

Best,
Rich