The volume of aircraft financing in Turkey has recently increased due to the reduction of costs in general and securities as well as the stable economic atmosphere in Turkey.

It is not necessary for individuals and legal entities willing to purchase an aircraft to have the total cash in order to purchase the aircraft outright. Even though they have the cash available, tax or cash flow implications may dictate against paying in cash for the aircraft. Thus, these individuals and businesses may purchase their aircraft using financing provided by a third-party.

Aircraft financing includes many players such as financial institutions and lenders that will finance the aircraft for the ones interested to purchase these aircrafts. However, it is a fact that only a limited number of these lenders and financial institutions are experienced with aircraft financing. Therefore, except those, other lenders and financial institutions may not be able to process aircraft financing transactions as efficiently or economically as lenders and financial institutions with more aircraft finance experience.

Thanks to the adoption of the Convention on International Interests in Mobile Equipment (the "Convention") and the Protocol to the Convention on Matters Specific to Aircraft Equipment (the "Protocol" and, together with the Convention, the "Cape Town Convention") by 2013, the Republic of Turkey has become a country which is very fit for aircraft finance in all aspects.

It is known that third parties providing the necessary finance of the purchase of aircrafts are preferred by the buyers. There are many financial institutions and lenders in the aircraft finance market that may finance the purchasing of aircrafts as the third parties.

Aircraft leasing should be considered as one of the main means of aircraft finance. Moreover, it should be noted that aircraft finance is very common and popular in Turkey. This is because of their nature and the option to buy at the end of the termination of the term.

Although the processes and procedures involved in an aircraft finance transaction are similar to other finance transactions, an aircraft finance transaction involves many nuances and unique aspects. Having a general understanding of the nuances associated with an aircraft finance transaction can assist a borrower in successfully closing an aircraft finance transaction.

Direct Lending

Real and legal persons interested in financing the purchase of an aircraft should find a lender who can satisfy his/her needs and aims.

Procedures of financing certainly gets more complicated once the features of the aircraft and the financed amount increases.

To assess the whole transaction, the lender, requires information regarding the aircraft including the model, year, registration and proposed purchase price submitted by the borrower.

The lender would require financial information, a bunch of corporate documents from the borrower such as articles of association and resolutions regarding the approval and authorization of the transaction.

It is quite likely that the lender would require an appraisal of the aircraft in order to ensure that the value of the aircraft is consistent with the lender's expectations for the particular transaction.

The lender will further carry out a title search on the aircraft to detect the current owner and whether any security interests, liens or other encumbrances are registered against the aircraft before the civil aviation authority where the aircraft is registered.

Should any liens, encumbrances or other title defects are revealed upon this research, then the lender would require that any obstacles to be released or otherwise resolved prior to the closing of the transaction. Researches on the judgments regarding the aircrafts will also be performed to ensure that clear title of the aircraft gets transferred to the borrower.

The lenders have security interests over the financed aircrafts, for insuring their rightful interests; it is common for the lenders to purchase the title insurance of the aircrafts. By doing so, accurateness of the registration documentation and that the transaction and security documents' being filed in a timely manner will be ensured by the aircraft title insurer.

In case of any title issues arising after the transaction closes, the title insurer will be responsible for securing the lender's interest in the aircraft and resolving any title defects covered in the insurance.

The loan documents typically associated with a basic aircraft finance transaction include a loan agreement, aircraft security agreements, guaranty and authorization documents.

The Loan Agreement contains the terms and conditions of the loan and the borrower's promise to repayment of the loan pursuant to those terms and conditions. The Loan Agreement also provides the lender with remedies if the borrower does not perform its obligations under such agreement.

The aircraft security agreement or mortgage agreement pledges the aircraft as security for the loan agreement. In the event that the borrower fails to repay the loan, the lender will have the right to collect the debt through aircraft under the possible means applicable under Turkish Law.

In the financing transactions in which the loan is being guaranteed by a third party, the relevant real or legal person third party would need to execute a guaranty that obligates the guarantor to repay the loan in the event that the borrower defaults.

The lender will require that the appropriate parties execute the loan documentation and also other transaction documentations such as a mortgage agreement pursuant to their terms and conditions.

The mortgage agreements shall be duly registered to the Civil Aviation Registry under Turkish Laws in order to protect the property rights against third-party claims, together with the aircraft itself or after the registration of the aircraft to the Turkish Civil Aviation Registry.

It should also be noted that related loan agreements are enjoying tax advantages in Turkey. Only the mortgage agreement is subject to stamp tax under the laws of Turkey. Thus, Turkish aviation practice enjoys a lot of that as well.

On the other hand, the Turkish Party of the transactions should also be careful about the Special Tax called as Resource Utilization Support Fund (KKDF). The maturity of the loans shall be a factor for the assessment of this particular tax.

Financial Leasing

Financial leasing is the most used type of aircraft finance in Turkey mostly because of various tax advantages.

Financial leasing transactions are governed by the Financial Leasing Code numbered 3226 ("the Code").

The lessor should be a financial leasing institution duly established either in Turkey or abroad. Upon the lessee's choice and request, the lessor purchases or provides the Leased Property described in details under the Financial Leasing Agreement ("Agreement") from a third party and transfers solely its possession to the lessee. The lessor does not cease being the owner of the Leased Property during the Agreement's term.

However, the lessee may be granted with the option to acquire the ownership of the Leased Property upon termination of the Agreement with a purchase price agreed therein.

The lessee's main obligation is to pay the agreed lease amount to the lessor under the Agreement.

As a formal requirement, financial leasing agreements are required to be in writing and executed before a notary public in the Republic of Turkey.

The Code does not set forth any specific registration procedure for aircrafts. However, if the lessor is a foreign entity which does not have any branch in Turkey, the financial leasing agreement is required to be registered by the Banking Regulation and Supervision Agency ("BRSA")

The financial lease agreements whose subject matter is the leasing of the aircrafts are also required to be registered with the Aviation Registry pursuant to Civil Aviation Code numbered 2920.

Protecting the lessor against any third party claim with respect to the leased aircrafts is the main function and aim of these registrations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.