The terms "lease" and "leaseback" (sometimes referred to as a "sale-leaseback") may be confusing because they often are used incorrectly and/or interchangeably, but the two actually mean very different things.
A "lease" is an agreement where the owner allows another person or company to use that property for a certain time in return for a specific amount of money. The owner - called the "lessor" - retains ownership of the property, and the individual paying the owner to use the property is called the "lessee."
A "leaseback" is an arrangement where the owner sells the property outright to another and then immediately leases that property back from the buyer for a specific time and amount of money. For example, a flying club that owns a Cessna 172 could sell it to John Doe, and John Doe could immediately turn around and enter into a leaseback agreement with the same flying club. The club would rent the 172 back from John Doe and, in return, pay him an amount of money for the use of the airplane. This constitutes a true "leaseback" arrangement. A situation where an owner simply leases his airplane to a club is known as a "lease."
If you are contemplating either of these arrangements, pay careful attention to the language in the lease documents to ensure they use the proper terminology. The improper use of either term probably wouldn't cause major legal troubles, but when you deal with an asset as expensive as an airplane, it pays to be correct.
Many flight school/flying club aircraft are owned by third parties and not the club or school. These arrangements can provide good income for the owners and are a reasonably dependable source of pilots willing to fly the aircraft. Various arrangements differ on the amount of money the lessee is willing to pay the lessor, so it pays to check with each school in your area to see which would provide the best financial arrangement.
Overall, flying club lease arrangements are sound opportunities, but the aircraft owner should make sure the lease arrangement provides maintenance, liability for damage, insurance coverage, etc. You might want to draft language into the document covering priority of use between the airplane owner (you), and the renter. Also, you should be careful with schools and clubs that own their own aircraft. In these cases, the school/club will have a greater motivation to rent its aircraft before renting a leased airplane. The school or club reaps 100 percent of the hourly charge on their own aircraft, but has to pay a percentage back to the owner of a leased aircraft.
You also might explore leasing your airplane to a Part 135 certificate holder for use in charter operations. These lease arrangements are more complicated than club/school leases and are governed by additional rules found in Part 135. For example, these aircraft are subject to Part 135 maintenance requirements, which are much more stringent.
Drafting a Part 135 lease requires special knowledge, and if the 135 operator doesn't have a lease agreement the FAA has looked at already, then it would be highly advisable to seek experienced legal counsel to draft the lease. These arrangements contain many traps for the unwary. Even if the certificate holder's FAA principal operations inspector (POI) has looked at and approved the lease, another POI may interpret the lease differently and create problems for both the owner and the certificate holder.
FAR 135.25 gives the general aircraft requirements for 135 operators. If the leased aircraft is proposed to be the only aircraft the operator uses, pay careful attention to the "exclusive use" requirements of FAR 135.25. The regulations require each Part 135 operator to have the "exclusive use" of at least one aircraft for the type of operations authorized for the operator.
The regulations don't specifically say so, but the FAA has stated that the owner of the aircraft cannot have priority of use over the customers of the 135 operator. The lease must be drafted carefully, therefore, to track the language of FAR 135.25(b), or a violation may result. The lease also must be for a term of at least six months, according to the regulations. Tread carefully around Part 135 operations and talk to knowledgeable individuals before signing any lease agreements.
While you have the regulations out, take a look at FAR 91.23, the section governing the truth-in-leasing requirements. It applies to large (more than 12,500 pounds maximum certificated takeoff weight) civil aircraft. However, the FAA also has applied this regulation to other aircraft arrangements, including some piston twins, but only under very unusual circumstances.
FAR 91.23 is detailed in Advisory Circular 91-37A. This Advisory Circular is primarily concerned with large aircraft, but it's probably a good idea to review it anyway because it contains some excellent general information on aircraft leasing. The FAA published this advisory circular because it noticed that many owners were avoiding the requirements of compliance with other safety regulations through the use of "devious leases," which put an unsuspecting public at risk. In other words, the FAA was and is concerned about the use of illegal lease arrangements where owners actually sell the use of their aircraft to the public, but don't have the FAA certification required to do so.
This brings up the next point about leasing aircraft outright to other individuals. Outright leases are thick with traps and potential violations or civil penalties for, once again, improperly selling time in an airplane without FAA certification.
Outright leasing can be done legally, but some terms bear examination such as "wet leasing" and "dry leasing." In general aviation, many people describe an aircraft leased with fuel included in the lease rate as a "wet lease." If the pilot must pay for fuel in addition to the hourly lease rate, that is generally referred to as a "dry lease." Many flying clubs and flight schools call their hourly rental charge for an aircraft with fuel included as the "wet rate."
Actually, the FAA doesn't recognize these terms. The FAA doesn't define "wet" and "dry" leases officially, but the old Civil Aeronautics Board described a "wet lease" as a lease of an aircraft with crew included, and a "dry lease" as aircraft only with no crew, and the FAA has adopted that terminology. The distinction becomes a problem when trying to decide who actually has operational control of the aircraft. In other words, if you lease your aircraft to the public for air transportation, is your leasing activity starting to look like a charter operation?
Generally, this problem with wet and dry leasing isn't one you'll encounter when you lease out your light aircraft to others, simply because you won't be leasing it with a pilot. But if you offer to lease your aircraft to someone and fly it for them as well - and receive compensation for your services and the use of the aircraft in return - you are now beginning to approach the dangerous edge of the charter world.
Again, the regulations provide some guidance, but not much. You also might look at some other FAA materials such as the FAA's General Aviation Operations Inspector's Handbook (FAA Order 8700.1) and the Air Transportation Operations Inspector's Handbook (FAA Order 8400.10). It would also be wise, if you are considering any of these arrangements, to contact your local FAA Flight Standards District Office and describe what you want to do.
On these matters, the FAA really is there to help. You might also ask for a written opinion from the FAA about your leasing arrangement and on the specific lease document itself. The FAA could never fault you for seeking their advice first before embarking on some sort of lease arrangement.
Aircraft leasing is a viable and legal way to earn a little income from your flying machine. But you must be thoroughly familiar with the rules and regulations as well as FAA interpretations of certain activities, and your documentation must be flawless. A little up front investigation will pay great dividends in the long run.
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