Aircraft Dry Leases

Aircraft Dry Leases

There are numerous reasons companies place aircraft in leasing structures – and several legal responsibilities flight department personnel need to be aware of.

Leasing is a common practice for business aircraft, but not always well understood. Aviation personnel may fly, maintain and schedule an aircraft without giving much thought to its ownership and leasing structure – until it affects the operation.

“I think people are sometimes put off by it because leasing is complex and setting a lease up requires legal consultation,” said Ryan Demoor, a financial analyst for aviation at Amway. “But there are good reasons for it, especially when there are users with different needs for the airplane.”

Business airplane leases fall into two categories: leases from a bank, which are simply a means of financing to acquire an aircraft, and related-party leases, which are a way to facilitate utilization of the aircraft. A business may set up a lease between related parties for several reasons, including FAA regulations, state sales-tax planning, risk management and sharing the use of an aircraft.

Nonexclusive Dry Lease

 

 

 

 

 

 

FAA Compliance Considerations

For certain types of aircraft uses, FAA operational rules make leasing necessary. Part 91 permits aircraft operations that do not involve compensation or hire, with only a few narrow exceptions. Any type of reimbursement or capital contributions to the entity that operates the aircraft are generally considered compensation.

While Part 91 does allow chargebacks and other methods of cost sharing between entities in an affiliated group, the FAA has limitations on which structures qualify for grouping together. For certain structures involving more than one legal entity or subsidiary, leasing may be necessary in order to share costs between the parties and still comply with Part 91.

For companies seeking to offset the costs of aircraft ownership, Part 91 prohibits offering the aircraft for charter (that would require a Part 135 certificate). However, leasing allows a company to transfer operational control of the aircraft to a Part 135 charter carrier and receive a portion of the charter revenue in the form of lease payments.

“I also see leasing to employees when they need the aircraft for personal use,” said Barbera. “When the company wants to avoid providing use of the aircraft as a perquisite, a time-sharing agreement – which is a type of ‘wet lease’

[in which the lessor provides both the aircraft and the crew] – enables the employee to pay back the incremental costs – limited to two times the cost of fuel, plus some other specific expenses – in exchange for use of the airplane and a flight crew.”

In addition, the FAA’s complex citizenship definitions may prevent a limited partnership or other entity owned or controlled by non-citizens from qualifying as a registered owner on the FAA Aircraft Registry. “In these cases,” said Barbera, “it’s common practice for an owner/ trustee to register the aircraft with the FAA and lease the aircraft or license it to the company for its business use.”

Dry Leases and Sales Tax Planning

The FAA also does not permit a single-purpose entity with no function other than operating aircraft to conduct flights under Part 91. This is often referred to as “the flight department company trap,” and it hinges on the Part 91 requirement that aircraft operations be incidental to the business.

“If you’re under Part 91, the entity that operates the aircraft cannot only be in the business of operating the airplane,” explained Jeff Wieand, senior vice president of Boston JetSearch. “That would not be ‘incidental to the company’s business,’ because, for that entity, air transportation would be the business.”

One of the most common strategies companies use to avoid this trap is having a separate legal entity acquire the airplane. This entity then leases the aircraft to the existing business but does not employ or provide the flight crew. This is called a “dry lease.” The lessee has full operational control of the airplane. For Part 91 operators, federal excise tax generally should not apply to the payments under a dry lease.

Aircraft Dry Lease Leasing is also a common planning strategy for managing state sales-tax payments. Many states have a sale-forresale tax exemption. An ownership structure involving a dry lease to a related party can allow state sales tax to be paid by the aircraft users on each lease payment, instead of immediately upon purchase.

“Whether you want to take advantage of the sale-forresale exemption or not depends on the law in the state you’re in, how long you’re planning to keep the airplane, its purchase price, the sales tax rate and current lease rates,” explained Demoor.

Lease payments should be made at an arms-length rate, and the entire structure must be properly documented. Special attention should be paid to the lease rate, and it may be helpful to have an appraisal of the aircraft’s value to support the amount of the lease payment.

Risk Management and Multiple Users

When an aircraft is used by more than one party, leasing can be the most effective way to allocate ownership liability and operational liability among the various users.

Sometimes, a company’s lenders or other stakeholders will place limits on the types of assets that a company may own. “Similarly, in certain highly regulated industries – such as utilities, banking and insurance – regulations may discourage direct ownership of an aircraft,” said Barbera. “In these cases, it may be necessary for the aircraft be owned in a separate entity and leased to the business that uses it.”

It’s not uncommon for small businesses or business partners to share the use of an aircraft. For example, doctors, real-estate developers or retail franchise owners may find it economical to use a business airplane by sharing the costs among all the users. A common way to accomplish this is through leasing.

“Say you have two business partners,” suggested Demoor, “who together purchase a Beechcraft Bonanza for their work, but one of them travels once a week and the other only needs the airplane about 30 hours a year.

Naturally, they’d want to segregate the ownership costs of the airplane from the usage costs. So each of their companies could dry lease the airplane from a separate entity that owns the aircraft whenever they need to use it.” This structure enables decentralized business users to proportionately bear the operating costs of the airplane, but each lessee is in operational control of all flights under the lease.

“In a structure with several, nonexclusive dry leases, you can’t require the other lessees to use your pilots,” advised Jeff Agur, CEO of The VanAllen Group. “The pilots can be independent contractors or employees of a management company, but cannot be provided by the entity that owns the aircraft.” You can stipulate that any pilot flying the aircraft must meet FAA and insurance requirements, “but each lessee needs to have the flexibility, every time they fly, in choosing a flight crew.”

Be Aware of FAA Requirements

Companies may set up leasing structures for several of the aforementioned reasons, or for other reasons, including federal tax planning, minimizing employee perquisites (required reporting by the Securities and Exchange Commission for directors and executives) and transportation of other related parties, such as board members. Whatever the reason, leasing structures trigger certain FAA regulatory requirements.

A business may set up a lease between related parties for several reasons, including FAA regulations, state sales-tax planning, risk management and sharing the use of an aircraft.

For leases of large (over 12,500 pounds) or turbine- powered aircraft, Part 91 requires a written lease agreement. “A copy of the lease needs to be carried onboard every time you fly,” said Demoor. “Also, the FAA’s truth-in-leasing requirements are two-fold: Within 24 hours of executing a lease, you need to send a copy to the FAA’s Aircraft Registry in Oklahoma City. Second, the first time any entity uses a leased aircraft for the first time, you need to notify your local flight standards district office at least 48 hours prior to the flight.”

Because a dry lease is a transfer of operational control, Demoor stressed it’s critical for flight crews to always keep track of who the lessee and lessor are on any flight. “Especially if you have several nonexclusive leases to different entities,” he said, “you need to know who the actual operator is, who’s responsible for that flight.”

Before a flight is dispatched, Demoor ensures that the flight crew writes down the name of the aircraft owner, the entity operating that flight and the user entity represented by the passengers. “If you’re ramp checked,” warned Demoor, “those will be the first questions out of the inspector’s mouth.”

Also for multiple users, every lessee should be on the insurance certificate. In addition, “you need letters of authorization (LOAs) for each of the different dry lessees,” said Agur. “For every operator, you also need a minimum equipment list and – if applicable – an RVSM and other LOAs that may be required for the flight.”

Dec. 4, 2015 

by NBAA

2017-06-13T02:14:33-06:00 June 14th, 2016|Blog, Economics of Aviation, FAA, Government Regulation, Leasing|