This is a revision of the article first published in the March 2018 edition of Club Connector. Since publication, we have discovered additional information related to flying clubs leasing aircraft, which is included in this revision.
These questions on leasing an aircraft also relate to the two fundamental types of flying club structures, namely Equity and Non-Equity clubs, so let’s first remind ourselves of these:
Equity Club: A flying club that owns its aircraft, either outright or through some financing plan, is an Equity Club. The aircraft is vested in the name of the club and all members are equal owners of the aircraft, as well as the other assets and liabilities of the club, for example, the cost of the hangar, tools, equipment, etc.
Non-Equity Club: A flying club that leases an aircraft from a party who may or may not be a member is a Non-Equity Club. The club and its members do not own the aircraft but do share equally in the obligation of the lease and any other terms and conditions as defined in a lease agreement. Members equally own other assets, liabilities and responsibilities of the club, just as with an equity club.
Leasing an Aircraft:
We often get asked if the FAA’s definition of a flying club (found in FAA Order 1590.6B “The Airport Compliance Manual”) contradicts the idea of a club leasing aircraft for use by its members. The actual wording in question is “The ownership of the club aircraft must be vested in the name of the flying club or owned by all its members.” There are, however, several other references in the same manual that state that clubs may lease aircraft. For example, “…charter companies, flight schools and flying clubs, all of which may very well lease aircraft under terms that result in owner-like powers”. Another FAA source (FAA Director’s Determination Docket No. 16-01-05) clarifies that “…the FAA interprets ownership to include a long-term, exclusive use agreement if the lease is vested in the name of the flying club.”
So, yes – the FAA supports the notion of flying clubs leasing aircraft and so we mustn’t interpret the term “non-equity” to imply that members have no “ownership” in a club that leases an aircraft. In fact, the FAA has made it clear that members of a non-equity club should be sufficiently financially invested in the idea, that they carry “owner-like” obligations and responsibilities. We’ll look more closely at this in a minute.
There are some immediate and large advantages for a club to lease an aircraft – and there are some equally large disadvantages. On the plus side, a club can get started with very little capital outlay, unlike an equity club that must fund either the full cost of the aircraft, or at least the down payment on a loan. This immediately translates into lower initiation fees, so the non-equity club may find new members quicker and so get the club started sooner. On the negative side, a non-equity club will never own its leased aircraft and so, depending on the “termination” clause in the lease agreement, may be only months away from not having an aircraft to fly. Given that most lessors (owners) are also members of the club, this is rarely a problem.
By the way – a club lease should be an exclusive lease. The owner cannot lease to a club and have non-members “renting” the aircraft. This is part of the “owner-like powers” requirements placed on non-equity flying clubs by the FAA – a club cannot feel owner-like powers if the aircraft could be scheduled outside of the club’s control. Indeed, an ironic inference is that the owner cannot fly the leased aircraft other than as an equal member of the club to which it is leased.
Regarding other costs of a club leasing an aircraft, well, the fixed costs (things that apply even if the aircraft doesn’t fly) are about the same for both equity and non-equity clubs. This includes expenses such as hangar rent, insurance, etc. Whether fixed costs include the annual inspection is a point for discussion later in this article. The other type of cost, that incurred in flying the aircraft (the hourly rate) will generally be the same for both non-equity and equity clubs, as it includes fuel, pro-rata amounts for oil changes, etc. Again, there are maintenance components that demand some discussion…so read on!
The Lease Agreement:
Regardless of every other factor, you’ll not just want, but will need to have a formal lease agreement in place. The agreement will be between the club entity, the lessee, and the owner of the aircraft, the lessor. For all the same reasons that club members should protect themselves from liability claims, so too should an owner who intends to lease an aircraft. As stated in the AOPA Flying Club Resources, we highly recommend that a club Incorporates, rather than establishing as an LLC. Although the levels of liability protection are generally similar, the advantage of a Corporation lies in handling of taxes and the easier path to tax exemption – more on this in a future article. For the case of the lessor (owner), an LLC will generally work well as they are unlikely to seek tax exemption on an enterprise that is designed to generate income, unlike the “non-profit and social” aspects of a flying club.
Pretty much everything in a lease agreement is negotiable and should be negotiated. Expect a tougher negotiation if the owner is not intending to be a club member – they will try to get as much out of the deal as possible. On the other hand, when the owner intends to be a club member, they may be more amenable to covering their costs, rather than making money. Nevertheless, in all cases, the lease agreement should clearly define:
Even in the case of the owner being a club member – or perhaps especially under this situation – be sure to consider each of the above points and put them in writing in the lease agreement. Having this thought out and agreed before any issues arise will make resolution much easier and less personal.
You’ll find some example lease agreements, and other documents on the AOPA Flying Club Resources page, but let’s delve a bit deeper into just a few of the above points.
All of the following address the “owner-like powers” requirement mentioned earlier, so think of them as best practices – if you follow these, you should remain on the right side of the various parties involved.
Duration: We recommend that a lease should be at least one-year in duration. The club needs to know that it has reasonable long-term access to the aircraft, and the owner needs to commit (and be paid) for that access.
Exclusivity: The club should have exclusive usage rights and access to the aircraft. This even extends to the owner, as mentioned earlier.
Payments: From the above, the club is benefiting from having exclusive long-term access to the aircraft, so it is reasonable to pay the owner a fair fee for that privilege. Many lease agreements include a “base lease fee” that is fair for both the owner and the club - this is typically paid monthly to the owner.
But what is considered fair? Well, in the singular example we can find where the FAA has expressed an opinion on this (FAA Director’s Determination Docket No. 16-01-05), fair was determined to be a base lease fee (of at least) 5% of the fair market value of the aircraft. Now, this was the result of a localized finding that applied to one club, at one airport, at one point in time, and with a very particular set of circumstances, so this must not be interpreted as a guiding rule or regulation. The only reason the FAA became involved in this case was because a club, airport operator and flight school couldn’t resolve a set of complex local issues, and so the case was elevated to a higher power. As always, be careful what you wish for!
Nevertheless, we cite this as an example of what might be considered as a “fair” base lease amount. At the end of the day, this should be part of the negotiation between the club and aircraft owner, and unless the arrangement causes tangible concern to other airport tenants, the airport operator need not be involved.
It is expected that all members share equally in the base lease fee, and, as it is a fixed cost, it is generally included in monthly dues. One other aspect to lease payments is the option for the owner to charge a per-hour fee for reserves to cover life-limited components, such as the engine and propeller. The owner also may add some additional amount for general maintenance – but see the next topic.
So, the lease agreement should include a base lease fee that is negotiated between – and is deemed to be fair to – the owner and the club, and additional per-hour fees depending on who is responsible for various aspects of maintenance.
Maintenance: This runs the gamut from the owner taking responsibility for all maintenance and charging the club appropriately, to the club being responsible for all maintenance in return for a lower per-hour fee. This is the area to carefully and fully negotiate and agree, and it is an area that differentiates club leases from flight school “leasebacks.” In a typical leaseback, an owner makes an airplane available to a flight school at an agreed per-hour rate. The school usually looks after all maintenance and inspections, and charges the owner the full amount.
There is generally no “base lease” fee involved, as the flight school can legally market the aircraft to the general public, so no exclusivity is implied. In the case of a club, as we have seen above, the base lease fee represents the value to the club of having exclusive, long-term use of the airplane, and may or may not cover maintenance.
It so happens that the AOPA Flying Club team established a flying club in Frederick, Maryland, and one of the club members also owns the leased airplane – a 1980 Aerobat 152. The owner wanted the plane to be used and was looking for help in paying the bills. The club needed a plane without taking on debt, so a lease was the obvious solution. In addition to a base lease fee, the club pays the owner $30 per Tach hour of usage. The owner budgeted that this will cover various reserves, and so takes responsibility for major maintenance, including the annual, ADs and limited-life reserves.
In essence, the owner accepts responsibility for matters of airworthiness and things that affect the value of the aircraft, whilst the club accepts responsibility for all wear and tear and other “usage” related maintenance. As examples of this, the club pays for oil changes, tires, brakes, GPS subscriptions, etc., whereas the owner provides an aircraft that meets the mission of the club, including an airworthy aerobatic aircraft, IFR avionics, etc.
The club and owner also came to an agreement regarding the annual inspection. This is clearly a matter of airworthiness, but some of the discrepancies may well be related to usage. So, the owner pays the full cost of labor for the annual, and the two parties negotiate “in good faith” to determine what is wear and tear and what is not. This requires trust on both sides – and trust is an important ingredient for a successful club. By the way, the club also tacks-on a few dollars per hour in addition to fuel, etc., to help cover general maintenance.
So yes – a club may lease an aircraft, but as always, the devil is in the details. If your club is considering leasing an aircraft, be sure to fully understand your maintenance obligations and to budget accordingly. The lease agreement is the key to it all.
If you’d like more information on the lease agreement between the Westminster Aerobats Flying Club, Inc., and Chocks Away Aviation, LLC., please email us at: [email protected]