AOPA Online Members Only -- An Aircraft Owner's Guide to Aircraft Leasing

An Overview of Leases

People consider leases for many different reasons. The 1970s reason was for tax relief; today, it's for help in paying for the airplane. Still others don't fly their airplanes enough to justify keeping it, and a lease seems a viable business option. Whatever the reason, you must do a self assessment to determine if a lease arrangement is right for you.

When figuring your costs, revenues, and cash-flow projections, be conservative. Do not expect to get rich overnight. Be sure you will be able to pay the monthly mortgage payments and expenses on your aircraft even if the aircraft does not generate any income due to weather or maintenance.

Another important point to consider is that renter pilots simply won't take care of your airplane the way you would! If you are the type who gets upset when you see your airplane's exterior scratched and dirty or your interior with stains on the seats and Fruit Loops crushed into the carpet, then you'd better think twice about leasing your airplane. Realistically, expect your airplane to experience above average wear and tear when being leased.

Depending on the lease agreement, you may experience decreased scheduling flexibility and availability of your aircraft for personal flying.

Choosing the Right FBO

The most important consideration in leasing aircraft is finding the right FBO. The FBO will be overseeing part of the day-to-day operation of your aircraft, including maintenance and scheduling. An FBO with a good reputation and lots of business will keep your aircraft flying and generating revenue for you.

When selecting an FBO, look at the other aircraft being leased — are these aircraft being taken care of the way you will want your aircraft to be treated? Are the airplanes hangared or sitting outside in the grass? You should contact the owners of other leased aircraft and ask them how their experience has been in dealing with the FBO.

Next, check with the CFIs or pilots working at the FBO. How familiar are they with your type of aircraft? Remember that advanced ratings will not guarantee proficiency to fly or instruct in your aircraft. Ensure that they will do thorough checkouts for rental pilots and students. You may want to specify training requirements for all pilots flying your aircraft. A price break may help encourage usage by qualified pilots.

Look at how your aircraft will fit into the mix of other aircraft. If the FBO has mainly high wing Cessna 150s and 172s, a low-wing Piper Tomahawk may not fare too well on a lease. Among other things, students will be training on the Cessnas, and may not want to transition to the Piper, and instructors probably will not want their students flip-flopping between high-wing and low-wing airplanes.

Before deciding on an FBO, do a little marketing analysis to determine the needs of the renter pilots at each FBO. By talking to the instructors or renter pilots at an FBO, you can gauge how much activity your aircraft will have. Find out what the renter pilots in that area would pay to fly. Do they want a fast aircraft with retractable gear? Some may want a fully IFR equipped aircraft with loran or GPS.

Small things can make a difference. An FBO in Tampa, Florida had a well-equipped Cessna 152 with a climb propeller. The aircraft was based at a sea level airport, which did not make a climb prop beneficial. Because of the prop, it was the slowest in the fleet. The airplane sat idle until the owner had a normal prop installed on the airplane. Guess what? The airplane was soon being rented 10-20 hours per week!

A special consideration to those with high performance aircraft, such as a Cessna P-210 or Beech Bonanza: Insurance requirements will severely limit the number of renter pilots available to use that aircraft initially. Also, due to the system complexity of these aircraft, expect higher maintenance costs.

When you finally decide to lease your aircraft, put everything in writing! In the following pages we will offer practical tips and a checklist to assist you in preparing your leaseback agreement.

Aircraft Leasing Rates and Revenues

At the end of the month, or billing cycle, the FBO will calculate your aircraft's expenses (such as maintenance or other items as stated in your agreement) and revenue due you from the lease of your aircraft. The FBO will subtract these expenses from your aircraft revenue and send you a check (or a bill).

Most agreements call for an hourly rate for the use of your aircraft, determined by the Hobbs meter or engine tachometer. Remember that Hobbs meter time is the actual time that the engine is running, while tach time indicates the time the engine is running as a function of full RPM. Tachometer time lags Hobbs time by approximately two tenths per hour, thus you will make more money if you are paid by the time indicated on the Hobbs meter. Few FBOs will guarantee a certain number of hours per month.

What percentage of the FBO's hourly rental charges for your aircraft should you receive? This depends on the arrangements you make with the FBO. If you pay the costs of fuel, oil, maintenance, insurance, hanger or tiedown fees, 80-90% is reasonable. If you decide you don't want to pay for insurance, fuel, or certain maintenance items, you may receive only 40 or 50%.

You may lease the aircraft to the FBO "wet" meaning that you will pay for all fuel used by the aircraft, or "dry" where the FBO pays for the fuel. Generally, you have little to gain from providing the fuel in the lease of the aircraft. Although you will be running up higher operating costs (for tax purposes) by paying for the fuel, you will also be incurring larger monthly cash outlays. Fuel usage is often very difficult to accurately track, and AOPA has received complaints about FBOs incorrectly charging owners for fuel. Said one owner, "I was charged for 485 gallons over 55 hours of flight time, that works out to 8.8 gallons per hour. Quite a fuel burn for a Cessna 152!" The owner changed his contract the next year so that he was charged a 6 gallons per hour flat rate. Using a flat fuel burn rate per hour can alleviate problems and will help you in estimating costs.

If you decide to pay for fuel, you should inquire about fuel discounts and establish a maximum allowable price per gallon, since fuel prices fluctuate. If the aircraft is leased wet, a maximum fuel price will protect your profits from pilots who fly to areas where fuel prices are sky high, tank up, then submit the fuel bill to the FBO for reimbursement, who in turn bills you the high price!

Determining the Costs

Before entering into a lease, you should estimate how much your aircraft costs to operate on an hourly basis. From this figure, you can determine what hourly lease rate will cover your expenses and make the lease worthwhile.

An operating cost calculator is provided to help you determine the hourly cost of operating your aircraft. Direct costs and reserve allocations will accrue with aircraft usage. Fixed costs (such as insurance, hanger fees, annual inspections, etc.) will be spread out over your projected number of hours flown per year, therefore, your hourly operating expenses will be lower as your flying hour projections increase. We advise owners to be conservative in their flight hour projections, allowing for weather and maintenance downtime.

Aircraft maintenance will probably be the largest single drain on your checkbook. The costs of annual inspections, 100 hour inspections, static system and transponder checks, engine reserve fund, avionics maintenance, routine maintenance (tires, brakes, landing lights, etc.) and the possibility of airworthiness directives (ADs) must be considered. Down time for damage is a worst-case scenario, but should be considered.

When thinking about these expenses, keep in mind that pilots generally prefer to fly airplanes maintained in top condition, both mechanically and cosmetically.

You should specify in your lease agreement who may authorize repairs, and set limits on the repair costs. For example, an owner in Sacramento, California had a clause in his agreement which limited repairs to $500.00 without his approval.

Also specified in your lease agreement should be types of fuel and oil to be used, whether new or reconditioned parts may be used, and who is authorized to perform maintenance on your aircraft.

Some FBOs provide maintenance to lease owners at a discounted rate. You should also negotiate what price you will be charged for parts: full retail, 10% over invoice, or, ideally, wholesale cost. Remember, the FBO is a "business partner."

Another way to reduce maintenance costs is through owner-assisted maintenance and preventive maintenance. During owner-assisted maintenance, you work under the supervision of an A&P mechanic performing tasks such as removing and replacing cowlings, inspection plates, and access panels. Not only will you save money doing this, but you will learn a great deal about how your aircraft works.

Preventive maintenance, under FAR Part 43, allows pilot-owners to perform 29 tasks that do not involve complex assembly operations. These money-saving tasks are outlined in AOPA's Guide To Preventive Maintenance. Many FBOs may balk at an owner-assisted provision in a specific contract, but accept owner maintenance as time allows.

Unexpected maintenance will occur, and you should set up "reserve" funds so that you will have money to pay for these repairs. Maintenance reserve funds should be set up to cover avionics, airframe, engine and accessory repairs. Additionally, you should put aside money for that eventual engine overhaul. The simplest way to manage reserve funds is to put aside a certain amount of money for every hour flown. An operating cost calculator is included to assist you in determining reserve funds.

Insurance

Insurance may be worked several ways. You may keep your existing policy in effect with added coverage for the lease operation, or you may decide to take advantage of the FBO's fleet rate, with much better premiums. Still, commercial coverage may be 2-3 times the private owner rate. Check with the AOPA Insurance Agency for information and guidance: 800/622-2672.

The advantage of keeping your own policy in effect is peace of mind. You have control over the timely payment of premiums, determination of deductibles, and coverage limits.

If you are going to take advantage of the FBO's fleet insurance rate, the FBO will probably be charging back the insurance costs to you. Make sure you are paying for your airplane only! An owner related this experience: "I had a Cessna 172 on lease to an FBO. I had decided to insure my aircraft on the FBO's fleet policy. When checking my monthly statement, I noticed that the insurance was unusually high. After talking to the FBO, I found out that they had simply split the cost of the total premium by the number of aircraft in the fleet. The problem was, there were two twins and another retractable gear airplane in the fleet and these aircraft cost a great deal more to insure! I was being duped by the FBO."

Another point to consider when using fleet insurance is the coverage. Are you specifically covered on the policy as a named insured when flying your airplane? Who will be reimbursed for damages (and what amount) if your aircraft is involved in an accident — you, or the FBO? Who will be covered for liability if your aircraft is involved in an accident — you, or the FBO? When the aircraft is added to the FBO's policy, you should be identified as an "additional insured" or "named insured" on the FBO's policy. This will provide you with liability coverage. By insisting on being a named insured, you will be alerted if the coverage changes, (i.e., the FBO changes the coverage limits and "forgets" to tell you or if the policy is about to be canceled for non-payment of premium).

Important: You should discuss the coverage limits with the FBO's insurance agent and receive a written copy of the policy rather than simply talking to the FBO manager about the coverage.

Scheduling

Most FBOs have rigid scheduling guidelines to maximize the use of their aircraft. Some take a more casual approach. You should ensure that your aircraft will be scheduled as much as possible, generating revenue for you. One owner lost a great deal of income because the FBO rented the aircraft to a pilot who had the airplane for a whole week and only put 2 hours on the airplane! You may want to require that a minimum number of hours be charged to renter pilots if the aircraft is scheduled for a whole day or a large block of time.

Another scheduling consideration is the type of operations you are willing to allow for your aircraft. Landing on unimproved runways may be harder on aircraft. One owner complained that the FBO used his airplane exclusively to train students on soft field landings at a nearby pasture! Another owner said the FBO used his airplane to conduct spin training, which wreaks havoc on the gyroscopic instruments. Some owners of high performance aircraft limit operations to day-VFR only unless accompanied by an instructor or unless specifically approved by the owner.

Provisions should also be made in your agreement to allow you to rent your aircraft when you need it, or another FBO aircraft at a reduced rate if yours is flying.

Tax Considerations

Many of our members lease their aircraft in order to defray their costs of ownership. If you are already leasing your aircraft or if you're thinking about leasing your aircraft, this section of our booklet is designed for you. Our objective is to give you some general insights with respect to tax aspects of aircraft leasing.

The first thing to keep in mind is that your aircraft leasing activity should be supported by an honest intent on your part to make a profit. Remember, if the IRS sees your aircraft leasing activity as a mere excuse to help support your avocation of flying airplanes, you will not be allowed to take tax deductions on any losses you incur in your leasing activity. Therefore, and we cannot emphasize this enough, you should not look upon your aircraft leasing activity as a way of creating a tax shelter. To do so will only invite trouble.

Of course, if your aircraft leasing activity is generating a profit, there are very few tax complications. The IRS is generally quite happy to take their share of your profit and you will be satisfied with the fact that your aircraft is producing revenue.

With this in mind, here are some tax considerations you should be aware of if your aircraft leasing activity does not turn a profit. The first thing you should know is that you cannot take a loss deduction for any amounts that exceed what the IRS considers you to be at risk for in your aircraft leasing activity. Generally speaking, you are considered at risk in an activity to the extent of the cash and the adjusted basis (tax value) of other property you contributed to your aircraft leasing activity. Your at risk amounts will also include amounts that you borrowed for use in the aircraft leasing activity if you are personally liable for the repayment of the borrowed amounts or the amounts borrowed are secured by property other than your aircraft. Therefore, in many cases, if you purchased an aircraft for either cash, credit, or a combination of both, you would be considered to be at risk for the amount of the aircraft's purchase price.

The at-risk rules apply to individuals and to certain closely held C corporations. For purposes of the at-risk rules, a C corporation is a closely held corporation if, at any time during the last half of the tax year, more than 50% in value of its outstanding stock is owned, directly or indirectly, by or for five or fewer individuals.

Once you've determined your allowable losses after applying the at-risk rules, you must now consider whether the IRS's passive activity loss rules will apply to your aircraft leasing activity. The passive activity loss rules were put into effect in 1987 in an effort by Congress to curb what they considered to be abusive tax shelters. The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities. The rules prohibit individuals, estates, trusts, certain closely held corporations, and personal service corporations from deducting losses in excess of income generated by passive activities. Passive activity losses that are not deductible in the current year are suspended and carried forward to offset passive activity income generated in future years.

The IRS defines passive activities as trade or business activities in which you do not materially participate and rental activities, regardless of the level of your participation. Since most of us earn the bulk of our income through activities in which we materially participate (i.e., our jobs), it is generally to our advantage not to have any losses classified as passive activities. Therefore, in order to have your deductions effectively reduce your tax liability, you'll have to show that your aircraft leasing activity is not a rental activity. You will also have to show that you materially participated in your aircraft leasing activity.

So how in the world are you going to be able to show that your aircraft leasing activity is not a rental activity? This seemingly impossible task is made possible by specific exceptions to activities considered by the IRS to be rental activities. The exceptions discussed below seem particularly appropriate if you are the typical individual who is leasing his aircraft to other pilots through an FBO.

The IRS will not consider your aircraft leasing activity to be a rental activity if:

  1. The average period of your customer's aircraft use is seven days or less. You can calculate the average period of customer use by dividing the total number of days in which your aircraft was rented by the total number of rental periods. So if you are leasing your aircraft through an FBO and your aircraft is rented 150 days in a year for 50 distinct and continuous rental periods, your average period of customer use will be three days. Therefore, you will have met the requirements for the exception and your aircraft leasing activity will not be considered a rental activity;
  2. You customarily make the rental property available during defined business hours for nonexclusive use by various customers; or
  3. The average period of your customer's use is 30 days or less (as figured in exception (1) above), and you render significant personal services in connection with the leasing activity. The IRS tells us that significant personal services include only services performed by an individual.

    Also, the personal services provided do not count if they are:

    1. Services needed to permit the lawful use of your aircraft;
    2. Services to repair or improve property that would extend its useful life; or
    3. Services that are similar to those you would commonly provide with long-term rentals; for example, cleaning and maintenance or routine repairs.

Based on these exclusions we believe that some aircraft leasing activities can succeed in avoiding being labeled by the IRS as rental activities. However, we are aware of at least one Tax Court case where the IRS appears to have successfully taken the position that when your aircraft is leased through an FBO, the FBO is your only customer. Obviously, this position would make it impossible for you to meet any of the exceptions outlined above. One possible way to avoid this problem is a carefully drafted agreement, drafted by a competent tax professional, which makes it clear that the FBO is only assisting you by providing services as a scheduler and collection agent. Therefore it might behoove you to think about revisions to your current agreement with your FBO to make sure it doesn't appear as if you are leasing your aircraft to the FBO. We've provided you with a sample agreement to assist you and your tax consultant. Please be aware that this sample agreement needs to be carefully reviewed by your tax professional before you put it to use. We can't guarantee that the agreement we've suggested will give you success when the IRS darkens your doorstep. However, it might give you a fighting chance.

Even if you're able to clear the first hurdle and avoid having your activity labeled by the IRS as a rental activity, you must still show that you materially participated in the aircraft leasing activity, in order to avoid the classification of your losses as passive. The IRS considers that you have materially participated in your aircraft leasing activity if you satisfy any one of the following tests:

  1. You participated in the aircraft leasing activity for more than 500 hours;
  2. Your participation is substantially all of the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity; or
  3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year.

While the tests listed above are designed to measure whether your participation is material, there are also guidelines published by the IRS defining participation. Generally, the regulations define participation as any work you (as a person with an interest in the aircraft) do with respect to the aircraft leasing activity. However, if you perform legal, tax, or accounting services as an independent contractor, those services will not be counted toward participation.

While our experience indicates that very few, if any, of our members will meet the 500 hour test (see item 1 above), the substantial participation and 100 hour participation tests can be met. However, it is absolutely critical that you carefully document all the work you do for your aircraft leasing activity, in order to successfully assert your material participation. We are aware of at least one audit in which the IRS has taken the position that an FBO is an "individual" as contemplated by the regulations outlined above. This interpretation makes the test for material participation far more difficult to pass if you lease your aircraft through an FBO, since it would require you to put more total hours into your aircraft leasing activity than did all of the combined employees of your FBO. Again, this interpretation of the regulations by the IRS has not been challenged in court.

Cash Flow Projections

Before launching into leasing, you should meet with your tax advisor to determine a five-year cash flow projection with operating statements and corresponding tax benefits. This will provide you with a means to track the success of your lease activity and enable you to make yearly adjustments to your lease agreement as necessary.

A simplified sample operating statement is provided below:

Gross Income:
(from rental)
$12,600.00
less:
insurance:
(1,500.00)
hangar: (1,400.00)
maintenance: (3,700.00)
misc. (150.00)
interest: (4,750.00)
Net Income: $1,100.00
less:
Book
Depreciation
$8,575.00 (Tax Purposes)
Operating
Profit (Loss) ($7,475.00)

Lease Agreement Provisions

When you have selected an aircraft to lease and an FBO to lease your aircraft, a legally binding, written agreement should be prepared stating the conditions of the lease. Before you sign this agreement, you should have a qualified attorney review the lease agreement. AOPA members on the Legal Services Plan may have their lease agreement reviewed free of charge. We have provided many important provisions that you may wish to include in your lease contract. The following is reprinted from an article in AOPA Pilot ("AOPA's Aircraft Leasing Checklist," February 1985), with additional points provided by the author.

AOPA Aircraft Leasing Guidelines

Parties

Identify the parties to the lease-use the complete address for both. If one of the parties is a corporation, use its full name and list its state of incorporation.

For convenience, you may want to attach a specific, short title to each party for use throughout the lease-for example, "LESSOR" and "LESSEE," "FBO" and "OWNER," etc.

Purposes

Identify the purposes of each party behind the lease. To define your activity (for tax purposes) as active, name the FBO as an agent or broker acting on your behalf to lease the aircraft to your ultimate customers.

Aircraft

Identify the subject aircraft completely. This should include at least make, model, serial number and FAA registration number.

Do you also wish to list the major components and accessories to the aircraft such as radios, engines and propellers? If so, you also should identify these items, at least by serial number.

Term

What will be the term of the lease? What is the commencement date, and what is the termination date?

Do you want to provide an option to renew the lease? Who can exercise the option? How and by whom can it be exercised? You should require advance written notification of the termination. This should be tendered sufficiently in advance of the termination of the first term of the lease to allow you time to search for another lessee if the lease is not being renewed.

Do you want to provide for early termination of the lease? If so, who can terminate, and for what reasons? (What provisions will be made if the lessee in the agreement is not using the aircraft; the aircraft is destroyed; or the tax laws are changed?)

Before specifying a term and considering renewal options, you should check for any tax ramifications that might stem from the form of organization of your business.

Rental Rate

How much will you be paid for the use of the aircraft? Will the rate be hourly, monthly, etc.? If hourly, will the hours be tachometer hours or Hobbs meter hours? Will you pay for fuel and oil?

When will you be paid? Monthly? How long after the close of the billing period does the lessee have to pay you? What if the lessee is late in his payments? (Do you want to charge interest on late payments?) Will the lessee guarantee a certain amount of minimum usage of the aircraft per month or per year? Will you require some type of security from the lessee such as a security deposit, a security interest, etc., to ensure that you get paid?

Aircraft Use

What uses may the lessee make of the aircraft? List specific restrictions, such as operating in and out of unimproved airfields (grass strips), off airport landings, IFR, spins or acrobatics, night operations, and flights leaving the United States. You should make sure at least that the lessee does not use the aircraft in violation of the insurance requirements, the pilot qualification requirements of the lease, FAA regulations or local, state or federal laws.

Will the lessee have exclusive use of the aircraft? Can the lessee justify exclusive use or will you need multiple lessees in order to have a chance of making a profit?

Do you want to use the aircraft? Should you "rent" your own aircraft at arms length? Do you want to make any special arrangements with the lessee for your use? (For instance, who will have priority if both of you want to use it at the same time — especially if the lessee already has a renter scheduled?) You should evaluate carefully the tax ramifications of making "personal use" of your aircraft, even for a limited amount of time.

Approved Pilots

What minimum qualifications will you require of pilots who operate the aircraft? Consider airman certificate type, rating, total time, and time in make and model.

What minimum qualifications for pilots does your insurance require? Make sure that they are included.

Do you want the pilots to receive a checkout from the lessee, regardless of prior experience? Who can administer the checkout?

Do you want to impose currency or recent flight requirements on those pilots operating the aircraft?

Aircraft Base

Where will the aircraft be based? Will it be hangared or tied down? Will you pay for these, or are they included in the rental rate? What if the lessee has two separate business locations? What if one of the parties moves? Can the aircraft base be moved? If so, who can approve the change?

Aircraft Modifications

Do you want to authorize the lessee to make any modifications to the aircraft, for example, adding a GPS?

If the answer is yes, what happens to the added equipment at the termination of the lease? Does it become your property, which must be left in the aircraft, or does it remain the property of the FBO, who must pay to have the equipment removed and restore the aircraft back to its original condition? Do you want to be able to approve any modifications to the aircraft? What about approval of the facility making the modification?

Will the modification change insurance requirements?

Return of Aircraft

At the termination of the lease, in what condition must the aircraft be returned to the owner? Reasonable condition? The same condition as when delivered, except for ordinary wear and tear? Make it clear that you have the right to inspect the aircraft at the time it is being returned.

Where will the aircraft be returned? Who is responsible for any liens that may have been placed on the aircraft while it was leased? What about any added equipment?

What if you have to repossess the aircraft? Who will be responsible for the legal fees that are incurred during repossession? Who will pay for any necessary repairs after repossession?

Set a time limit for the settlement of any claims you may have for damages that are discovered at the time of the aircraft's return.

Insurance

Who will procure the insurance? Who will pay the premium? Will you both get insurance? Will the other party be listed as a named insured on your insurance policy? What if you sue each other? If you both get insurance, should you get it from the same company and/or the same broker?

What will be the liability limits of the insurance? What will be the hull deductible amounts, and who will be responsible for paying the deductible in the event of a loss?

Which party adjusts a hull loss with the insurance company? Under whose insurance will the claim be made? (Consider whether the loss occurred during the lessee's use of the aircraft or your use.)

Should the other party receive notice prior to any changes being made in anyone's insurance coverage? How should the notice be given?

Do you want a Breach of Warranty endorsement? If the lessee violates the terms of your insurance, are you still protected?

Do you need a waiver of subrogation from the lessee's insurance carrier?

Taxes

Who will be responsible for collecting and for paying taxes that result from the lessee's use of the aircraft? For instance-sales tax, use tax, etc.?

Who will be responsible for payment of taxes that result from the ownership of the aircraft: for instance sales tax on the purchase, personal property taxes, and income taxes?

Emergency Repairs

If you are responsible for maintenance, what if the aircraft requires emergency repairs at a distant airport while rented to a pilot? Do you want to be notified, or do you want the lessee to be able to authorize some work on the aircraft for which you will reimburse the lessee?

Do you want to set a dollar limit on the amount of these "emergencies."

Owner's Obligations/Lessee's Obligations

For what will you be responsible with respect to the aircraft? Consider maintenance, annual inspections, 100 hour inspections, tie-down/hangar space, fuel, washing and waxing, repairs and maintaining logbooks.

For what will the lessee be responsible with respect to the aircraft? Consider the items for which you will not be responsible. Also, consider selecting qualified pilots, pilot checkouts, reporting any necessary maintenance or repairs and cooperating in scheduling them, maintaining detailed records of the aircraft's use (make certain that you have the right to inspect these records upon request, so that you can verify the billing, reevaluate the lease, etc.), securing the aircraft when not in use, moving it in and out of the hangar, and ensuring that the aircraft is operated according to approved techniques.

If someone other than you is responsible for maintaining the aircraft, try to specify the standards to which it is to be maintained. If the lessee is to maintain the aircraft, will he give you a favorable rate for labor and parts?

Is the lease subject to Federal Aviation Regulations Part 135? Who will have operational control of the aircraft? You may need to include the information from this section of the regulations.

Default/Enforcement

What if either party defaults on the terms of the lease? What are the rights of the other party?

How will you define default? Failure to make payments? Breach of any of the insurance requirements? Any breach of the terms of the lease? What if the lessee files bankruptcy? What about assignment for the benefit of creditors?

Do you want to provide for arbitration prior to legal action? If so, outline the arbitration procedure. How will the arbitrators be selected? Will the parties be allowed to have their attorneys attend the arbitration proceeding? When will the arbitration be scheduled? Do you want to make the results of the arbitration binding on both parties, or can it be appealed? Who will pay for arbitration?

Assignability of Lease

Do you want to be able to assign the lease to someone else? What if someone offers to purchase your operation?

Do you want the lessee to be able to assign the lease? Would you object to leasing your aircraft to someone you may not know for the remainder of the lease term?

If you allow the lessee to assign the lease, will you release him/her/it from all liability/obligation under the lease?

Agency

Shall the lessee be able to act on your behalf for any/all purposes?

Consider the liability that may result if someone becomes your "agent."

Do you want to be able to act on behalf of the lessee for any purpose?

Owner's Rights

Make certain that you have the right to inspect the records that the lessee maintains on the aircraft so that you can verify billings, reevaluate the terms of the lease, etc.

If the lessee causes you to have doubts about its financial status, do you want to have the right to require additional security or examine the lessee's financial records?

Invalidity of a specific lease provision. What if a court determines that one of the terms of the lease is invalid? Do you want the remainder of the lease to remain valid?

Time of the Essence

Do you want to make time of the essence in the lease? If not, the parties likely will be given a "reasonable time" to comply with any of their requirements under the lease.

Governing Law

Under which state's laws do you wish to have the lease construed and interpreted?

Modifications

Do you want to require that any change to the lease be in writing? If so, it should be signed by both parties.

Waiver of Provisions

Do you want the flexibility to decide not to enforce one or more of the provisions of the lease against the other party on occasion without your actions being construed as a complete waiver of the provisions for the remaining term of the lease?

Signatures

Get signatures from the appropriate individuals or officers. If an officer, be sure to include his/her title with the signature block. Make certain he/she has the authority to sign.

Does your state require any specific formalities for such an agreement? Should it be notarized? Should a corporate seal be affixed?

What is the date the agreement is being signed?

Leasing Checklist

  1. Choose an aircraft that will best suit your needs based on: the type of flying you plan to do, operating costs, performance, and personal preferences. Keep in mind the needs of the renter pilots you will be trying to attract.
  2. Calculate the hourly costs of operating and owning your aircraft.
  3. Develop a projected operating statement. Be conservative and realistic. Be certain that you will be able to cover your monthly financial commitments if your airplane does not generate revenue due to weather or maintenance.
  4. Select an FBO in which your aircraft will complement the mix and fill a need for renter pilots.
  5. Negotiate the terms of your rental, including how much revenue you will receive from the FBO.
  6. Consult a qualified tax advisor to determine the most advantageous way to structure your agreement and leasing operation.
  7. Draw up a comprehensive lease contract. Don't leave anything to interpretation, as these things may come back to haunt you! Generally, the more complete your agreement, the less trouble you will encounter.

Frequently Asked Questions on Leasing

  1. How should I depreciate my airplane for tax purposes?

    If your aircraft is used for business or income-producing purposes but is not used in commercial or contract carrying of passengers or freight, you may depreciate it over 5 years using the Modified Accelerated Cost Recovery System (MACRS) and 6 years under the Alternative Depreciation System (ADS). MACRS applies to aircraft placed in service after 1986 and allows for an "accelerated" method of depreciation. An accelerated depreciation schedule provides larger deductions in the early years of the aircraft's life. ADS refers to straight line depreciation. If your aircraft is used less than 50% annually in your trade or business you must use a 6 year ADS (straight-line) depreciation schedule. Aircraft used in commercial or contract carriage of passengers or freight will be depreciated over 7 years under MACRS and 12 years under the ADS.

  2. Is there a way to avoid any state sales tax on an airplane that will be leased?

    Some states exempt sales tax on aircraft that are used in interstate commerce. In some states a lease qualifies as interstate commerce. Consult your tax advisor or contact your state's sales tax division.

  3. What is the best airplane to put on a lease?

    An all-time favorite among those who lease is a 4-place, IFR equipped airplane with a good track record of inexpensive operating and maintenance costs such as the Cessna 172 or Piper Warrior. These types of aircraft hold their value well, and if used for instrument training are usually flown by more experienced pilots who generally take better care of the aircraft.

  4. What percentage should I receive from what the FBO charges for my aircraft?

    This depends on the terms and conditions of your agreement, such as whether or not fuel is provided by you or the FBO, who pays for insurance, tiedowns, etc.

    There is no set industry standard; however, by using the hourly cost assessment worksheet, you should be able to set the minimum amount that will be acceptable to you. In most cases, you should negotiate terms that will allow you to at least break even. If the aircraft is financed, be sure to include loan payments in your break even calculations.

  5. Will I be liable for any damages caused by my aircraft?

    If negligence can be proved, you may be liable for any damages caused by your aircraft. The best defense against this is to lease your aircraft to a reputable FBO and have good insurance coverage.

  6. Should I incorporate to shield myself from liability?

    If you are the sole owner of the aircraft, incorporating will not afford you as much protection as you may think. Incorporating may be beneficial if several individuals share in the ownership of the aircraft.

Sample Lease Agreement

The following document has been provided as a sample to guide you in preparing your agreement. Remember, AOPA members enrolled in the Legal Services Plan may have their agreements reviewed by an attorney!

AGREEMENT

This Agreement is entered into this __________day of __________, 20_____, between __________, hereinafter called "Owner" and __________, hereinafter called "FBO."

WHEREAS, Owner owns an aircraft and wishes to make it available for use to the public for a fee that will earn Owner a profit; and WHEREAS, FBO has a physical presence on an airport and the ability to introduce customers to the Owner for the use of Owner's aircraft.

NOW, THEREFORE, in consideration of the mutual promises and conditions expressed herein, the parties agree as follows:

  1. Aircraft. Owner does hereby make available on the terms herewith set forth, the following described aircraft (the "Aircraft"):

    Manufacturer of Aircraft:
    Model: Serial number:
    FAA Registration No.:
    Engine Make:
    Equipment and Accessories:

  2. Term. The term of this Agreement shall begin at 12:01 a.m. Eastern Standard Time on the day of , 20_____, and end at 11:59 p.m. on the day of , 20_____ or at an earlier date as provided herein. Either party may terminate this Agreement by giving the other party thirty (30) days written notice.
  3. Fees for Aircraft Use. Owner will be responsible for setting the fees for Aircraft use. FBO will make efforts to promote the use of the Aircraft to the public. The FBO will act as a collection agent for the Owner of any fees paid by Owner's customers. These fees will be turned over to the Owner on a monthly basis less any commissions due to FBO in accordance with paragraph 4 below.
  4. Commission. Owner shall pay FBO a commission of $ __________ for each hour flown by customers introduced by FBO as recorded on a Hobbs meter or the tachometer if there is no Hobbs meter installed on the Aircraft. [The commission also could be expressed as a percentage.]
  5. Operation.

    Scheduling. The FBO will maintain a schedule book for Aircraft use on the FBO's premises.

    Aircraft Base. The Aircraft will be permanently based at __________.

    Owner Use. Owner shall retain the right to contract out hourly use, in which event no commission will be paid under Section 4. Owner may use the Aircraft when said use does not interfere with scheduled use of the Aircraft arranged by the FBO.

    Geographic Limits of Aircraft Use. The Aircraft is not to be operated beyond the continental limits of the United States.

    Limits on Aircraft Use. The Aircraft will be made available only for the purposes of [strike out any that do not apply]:

    1. Personal travel and/or business travel.
    2. Flight training.
    3. Charter.
    4. Demonstration

    [These purposes may be further limited.]

    Aircraft Accidents. Accidents shall be reported promptly to the Owner, and the Owner shall file all necessary reports with the FAA and the NTSB.

  6. Ownership. It is clearly understood that title to the Aircraft shall at all times remain with the Owner, and nothing herein shall authorize FBO or any other person to incur any liability or obligation on behalf of the Owner. Furthermore, Owner warrants that he is the owner of the Aircraft and that he has the full right to execute this Agreement.
  7. Maintenance and Care.

    Fuel and Oil. Owner shall arrange for, at owner's expense, all fuel and oil for operation of the Aircraft.

    Maintenance. Owner, at Owner's expense, shall maintain and keep in good order and repair the Aircraft. Owner shall arrange for, at Owner's expense, all inspections, parts, labor, overhaul and all maintenance and repairs of or for the Aircraft during the term hereof. Owner may arrange for service companies to perform such services. Fueling, maintenance, inspection and repairs shall be made by competent personnel and with proper fuel, oil and other parts in compliance with the operation and maintenance manuals for the Aircraft and with FAA rules and regulations, all under the control and direction of the Owner.

    Hangar/Tiedown. The Owner, at the Owner's expense, shall arrange for the tiedown of the Aircraft or, at the Owner's written direction, the hangaring of the Aircraft.

    Fees. Owner agrees to pay all license fees and other fees, taxes and assessments imposed by any government or municipality that may arise out of the operation of the Aircraft except sales tax, which Owner will arrange to have charged to use as provided by the sales tax law of__________(State).

    Owner's Liability. Owner is and will remain responsible and liable for all damage, confiscation, destruction or loss to or of the Aircraft for any reason whatsoever, including loss of use or diminution in market value.

    Material Participation by Owner. FBO acknowledges that it is the Owner's intent to meet the IRS test for material participation in this activity. Accordingly, FBO agrees that neither its principals nor employees will collectively devote more than 100 hours per year to the Owner's aircraft.

  8. Insurance.

    Hull Insurance and Waiver of Subrogation. Owner will provide hull insurance for the aircraft in the amount of $__________ for the interest of Owner and include a waiver of subrogation in favor of FBO and users.

    Insurance Proceeds. Proceeds from the insurance will be applied to the cost of repairs of the damage covered by insurance, but the user operating the aircraft when it was damaged will pay the deductible portion of the loss, if any.

    Liability Insurance. Owner, at his expense, shall provide a minimum of $ __________combined single-limit legal liability insurance, including passengers', for user's protection.

    Notice of Cancellation. The policies shall provide FBO with at least twenty (20) days notice in writing before termination, modification or cancellation of the policies.

  9. Operator Proficiency. The Aircraft shall be operated only by pilots currently certificated and qualified to operate the Aircraft in compliance with the laws of the United States or any other state or local government authority having jurisdiction therefor, and in accordance with the provisions of the insurance policy or policies issued in connection therewith.
  10. Default. In the event of any breach or default of this Agreement by FBO, this Agreement shall be terminated immediately.
  11. Entire Agreement. This Agreement constitutes the entire agreement between the parties. No statements, promises, or inducements made by any party to this Agreement, or any agent or employees of either party, which are not contained in this written contract shall be valid or binding. This Agreement may not be enlarged, modified, or altered except in writing signed by the parties.
  12. Waiver. Either party's failure to enforce any provision of this Agreement against the other party shall not be construed as a waiver thereof so as to excuse the other party from future performance of that provision or any other provision.
  13. Assignment. This Agreement may not be transferred or assigned without a written authorization signed by Owner and FBO.
  14. Severability. The invalidity of any portion of this Agreement shall not affect the validity of the remaining portions thereof.
  15. Paragraph Headings. The headings to the paragraphs to this Agreement are solely for convenience and have no substantive effect on the Agreement nor are they to aid in the interpretation of the Agreement.
  16. Governing Law. This Agreement is a contract executed under and to be construed under the laws of the State of ____________. Both parties consent to submit any disputes related to this Agreement to the jurisdiction of the [ enter title of appropriate court].

    IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written.

    _______________________
    OWNER

    _______________________
    FBO