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What Are You Allowed To Do Inside Your Aircraft Hangar At An AIP Airport?

by Greg Reigel 6. July 2016 13:05
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What can you do inside of your aircraft hangar?  The lawyerly answer is “it depends.”  More specifically, it may depend in large part upon whether your hangar is on an airport that receives funds from the FAA through the Airport Improvement Program (“AIP”).  If your hangar is on an airport that does not receive AIP funds, then any restrictions or limitations on use of your hangar would likely be dictated within your lease with the airport owner or operator.

However, many airports receive AIP grant funds from the FAA for use in runway and taxiway construction/repair as well as various other airport improvement projects.  In exchange for its receipt of AIP grant funds, an airport sponsor agrees to certain grant assurances.  These grant assurances are contractual obligations that require the airport sponsor or owner to operate the airport in a certain way.

One of these AIP grant assurances requires the airport sponsor to make the airport property available for aviation or aeronautical uses.  Conversely, the airport sponsor also agrees that it will not allow airport property to be used for non-aeronautical uses unless it receives permission from the FAA.

One of the most common, and obvious, uses is aircraft hangar construction.  But, once an aircraft storage hangar is built on an AIP airport, how can the hangar be used?  If you were thinking “aircraft storage”, of course you are right.  But typically an aircraft doesn’t completely fill all of the space within a hangar.  So, what about storage of other items such as tools, equipment, automobiles, snowmobiles, etc.?  And can you build-out an office or personal living space inside the hangar?

In the past, the FAA has taken a very restrictive view regarding permitted hangar use.  However, the FAA recently issued a notice of final policy that clarifies what you can and cannot do within an aircraft storage hangar located on an AIP airport.

According to the FAA, permitted aeronautical uses for hangars include:

1.          Storage of active aircraft;

2.          Final assembly of aircraft under construction;

3.          Non-commercial construction of amateur-built or kit-built aircraft.  In expanding its policy to include all amateur/kit-built construction rather than just final assembly, the FAA recognized that “[i]t may be more difficult for those constructing amateur-built or kit-built aircraft to find alternative space for construction or a means to ultimately transport completed large aircraft components to the airport for final assembly, and ultimately for access to taxiways for operation”’

4.          Maintenance, repair, or refurbishment of aircraft, but not the indefinite storage of non-operational aircraft.  The FAA does not establish an arbitrary time period beyond which an aircraft is no longer considered operational. Rather, the FAA leaves it to the airport sponsor to decide whether a particular aircraft is likely to become operational in a reasonable time; and

5.          Storage of aircraft handling equipment (e.g. towbars, glider tow equipment, workbenches, and tools and materials used in the servicing, maintenance, repair or outfitting of aircraft).

Non-aeronautical use within a hangar that is used primarily for aeronautical purposes, may still be permitted provided that use does not interfere with the aeronautical use of the hangar.  What does that mean?  The FAA will consider certain uses to be interfering with the aeronautical use if they:

1.          Impede the movement of the aircraft in and out of the hangar or impede access to aircraft or other aeronautical contents of the hangar;

2.          Displace the aeronautical contents of the hangar.  The hangar owner may park a vehicle inside the hangar while he or she is using the aircraft and the FAA will not consider that to be displacing the aircraft;

3.          Impede access to aircraft or other aeronautical contents of the hangar; or

4.          Are stored in violation of the airport sponsor’s rules and regulations, lease provisions, building codes or local ordinances.

But what about that “pilot lounge” or “man/woman cave” within the hangar?  Is that a permitted use?  Unfortunately, the FAA’s policy does not provide a “bright line” answer.  According to the policy, the FAA “differentiates between a typical pilot resting facility or aircrew quarters versus a hangar residence or hangar home. The former are designed to be used for overnight and/or resting periods for aircrew, and not as a permanent or even temporary residence.”

Although the FAA then goes on to state that a hangar may not be used as a residence, it does not explain what that means.  As a result, in the absence of a clear definition, it is likely that this type of determination would be made on a case-by-case basis.  So, while some form of pilot lounge or office is likely permitted, at what point that area within the hangar becomes an unpermitted, non-aeronautical use will likely be decided based upon the facts of each case.

Keep in mind that the FAA’s policy on aeronautical use of hangars applies regardless of whether you lease the hangar from the airport sponsor or if you constructed the hangar at your own expense where you hold a ground lease with the airport sponsor for the hangar pad.  Once the airport sponsor receives AIP grants and airport land designated for aeronautical use is made available for construction of hangars, the hangars built on the land are subject to the airport sponsor's obligation to use the land for aeronautical purposes.

But at least now we have a little more guidance with respect to use of an aircraft hangar at an AIP airport.  Construction of an amateur-built or kit-built aircraft is allowed.  Residing in the hangar is not allowed.  Other uses may be allowed if they do not interfere with the aeronautical use.  And although some gray areas remain, the current policy does at least provide some additional clarification and guidance for aircraft hangar use.

 

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Greg Reigel

Is Now A Good Time To Lease An Aircraft?

by David Wyndham 1. July 2010 14:28
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If you are looking at acquiring an aircraft, you may be evaluating whether to lease or buy the aircraft.

What is a Lease?

In a lease, the owner such as a bank (the lessor) allows you (the lesee) the use of an aircraft for a fixed period of time. An operating lease is a lease whose term is short when compared to the useful life of the asset. For example, an aircraft which has an economic life of 30 years or more may be leased to a company for five years as an operating lease. This can be a simple leasing transaction where at the end of the lease, the aircraft is returned to the lessor. There may also be the option to buy the aircraft at Fair Market Value (FMV) at a set point during the lease and/or at the end of the lease itself.

In an operating lease, the residual value risk shifts to the lessor.

In today’s market, pre-owned aircraft values have plummeted and selling prices are relatively low.  Most aircraft values are likely to recover in the next few years. In such a market, why would you want to have the lessor accept the residual value risk? You, as the lessee, have a lower residual value risk than at any time in the last decade. Buying a good quality aircraft now leaves you with a minimal risk of the aircraft losing a substantial amount of its value in the future.

Leasing is better than financing if you do not need the tax write-off from tax depreciation. Aircraft can be written off to zero value for tax purposes in eight or fewer years. If your company isn't making a profit, tax depreciation is of reduced or no value anyhow. Your business, as the lessee still can write off the lease payments as an expense.

You can't use the tax write-off for a personal aircraft. In that case, lease payments/terms may be more favorable than a loan.

If you are a company, leases may be "off balance sheet" as far as long term debt goes.

As a company, the operating lease may be considered as “off the balance sheet” as it is not technically a long term debt. This can improve the financial ratios used to evaluate the fiscal heath of a company. However, the SEC and investors are getting savvier about "off balance sheet" deals. New rules may also affect the ability to qualify a lease for this accounting treatment. This consideration requires tax advice from someone knowledgeable about your business.

Getting out of a lease early is easy, just pay it off!

Are you certain to need the aircraft for the full lease term? You can walk away from a lease at any time: just pay off the remaining lease payments. This can get quite costly. Read your lease terms carefully. If there is a possibility that you will want out of the lease early, you may not be a good candidate for a lease.

Lease or loan: both require financial disclosure.

Credit is tough these days, the financial institution will want to know your full financial picture. If you don’t want to disclose your full finances, then a lease (or loan) may not be in the cards for you.

Need it now, pay cash.

I wrote in 2009 that cash is king in the aircraft transaction. That is still true. You will get the best deal and the quickest closing in a cash transaction. There is no need for pending approval of financing conditions in the purchase and sale.

Leases can work for some companies and individuals. You need to examine your ownership, tax and risk requirements and review the lease documents carefully to fully understand all the terms and restrictions.

 

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David Wyndham

Airplanes Can Make People Act Crazy

by Greg Reigel 1. January 2008 00:00
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As I reflect back on 2007, a variety of my experiences with clients re-affirm my long-held belief that airplanes can make people act "crazy". Why do I believe that? Well, over the years I have had multiple clients who are intelligent individuals, but when they became involved with airplanes they did things that, to me, were just plain crazy. That doesn't mean they are bad people. On the contrary, they are often some of the most honest and good-natured people you will find. Unfortunately, in the face of the aviation disease with which we pilots are all infected, these individuals' common sense sometimes takes flight.

Several examples of this "craziness" come to mind:

1. Individuals buying or selling aircraft on a handshake without a written purchase agreement. Now, don't get me wrong, I will be the first to admit that, in a perfect world, this is the way a deal should be done. Unfortunately, we don't live in a perfect world and successful handshake deals are few and far between. A similar, and equally distressing situation for me, is when a client presents me with a purchase agreement he or she has already signed and asks me what the language means, or the client informs me that the other party now wants to get out of the deal and the client wants to know if he or she can stop them, what happens to the earnest money etc.

In the latter situation, the purchase agreement was typically not reviewed by an attorney or someone else with the needed knowledge to protect the client's interest. In both situations, the client lost the opportunity to negotiate and not only protect his or her interests, but also to make sure that the deal is structured the way he or she wants it structured. When you are spending the amount of money necessary for an aircraft purchase (e.g. thousands and, oftentimes, hundreds of thousands of dollars), it seems crazy to me not to have a negotiated and written agreement dictating exactly how the transaction will proceed and what will happen if the deal doesn't close.

2. I see clients making similarly crazy decisions when they lease aircraft without a detailed lease agreement. In the absence of a written aircraft lease agreement an aircraft lessee may be exposing him or herself to liability for more than just an hourly lease fee. For example, what happens if the aircraft is damaged while in the lessee's possession? For what is the lessee responsible? Does the lessor have insurance to cover the loss and is the lessee also insured? Who is responsible for the cost of maintenance and/or repairs when the aircraft is in the lessee's possession? A written aircraft lease agreement should provide answers to these questions so both the aircraft lessor and aircraft lessee each know where they stand.

3. Another less than prudent client decision, in my opinion, occurs when a client buys an aircraft without having a title search performed to identify any liens or encumbrances against the aircraft. The client later learns that the aircraft was, and still is, encumbered by a lien, mortgage or some other similar security interest. The client then comes to me wondering whether he or she has any recourse against the seller. Unfortunately, at that point in time the client's remedies may be limited.

If the client had obtained a title search before the closing, the client would have been aware of the lien(s) and could have required the seller to satisfy the lien(s) or the client could have either satisfied the lien(s) directly from the purchase proceeds or simply terminated the transaction. Often in this situation the client did not sign a purchase agreement or the purchase agreement is very short and less than thorough. As a result, the purchase agreement may not provide much assistance. In any event, the seller has typically spent the purchase price paid at closing and may or may not have the resources to satisfy the lien(s), not to mention any payment to the client for damages he or she may incur as a result of the lien(s).

4. Another potentially serious error would be talking to an FAA inspector or "calling the tower" prior to consultation with an aviation attorney. You have probably heard the story: A pilot is on a flight and some type of incident occurs (e.g. runway incursion, altitude/clearance violation etc.) and ATC instructs you to contact the ATC when you land. Or, at some point in time after the flight in question, an FAA inspector contacts you to discuss the flight. Although you are not required to talk to the inspector or call ATC, many times pilots feel obligated to call and think they can explain the situation or otherwise "make it go away." Unfortunately, this is far from the truth. Typically, during his or her communication with the inspector or ATC the pilot not only confirms that he or she was operating the aircraft, but the pilot also may make other admissions that the FAA will later use against the pilot.

A similar situation occurs when a pilot receives a letter of investigation ("LOI") from the FAA. According to the LOI, the pilot has 10 days to respond. However, rather than consulting with an aviation attorney before sending a response, the pilot sends in a response to FAA again trying to explain the situation or otherwise "make it go away." Here again, the pilot oftentimes makes admissions that the FAA will later use against the pilot.

Both of these situations represent lost opportunities to mitigate damage, minimize investigation, avoid providing admissions or other evidence that will later be used against the client by the FAA or, at a minimum, to have an aviation attorney run interference between you and the FAA. Although FAA enforcement actions are not criminal proceedings, they have the potential to significantly limit, if not revoke, an airman's privilege to operate an aircraft. Representing yourself in such actions without aviation legal expertise is, to me, acting crazy.

These are just a few examples of the things some people unwisely do, or fail to do, when they become involved with aircraft. No doubt the "type A" personality of some pilots has something to do with this phenomenon, as may the excitement and love of aircraft and aviation felt by those of us enamored with aviation. Regardless of the cause, I encourage everyone involved with aircraft to temper their emotions and to handle these types of situations in a businesslike and professional manner. Trust is great, so long as both parties are trustworthy and reasonable. If you are a pilot or aircraft owner, you have a lot at stake. Make sure your interests are protected. If you are unsure of exactly what your interests are and how they need to be protected, get help. With some guidance and a little common sense, you too can avoid making "crazy" decisions involving aircraft.

What is your crazy story, you are not a pilot unless you have heard of a couple "crazy" stories. Please post one, we all learn from other pilots experiences good or bad. Please remember this is the internet and anything you post can be seen by all, so be funny be inspired but most of all be nice! Here's wishing all of you safe and enjoyable flights through the new year!

Lease Pros and Cons

by David Wyndham 1. September 2007 00:00
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A lease may be an attractive way to acquire an aircraft. Before you go down that path, there are a few things to know.

In a basic definition of an aircraft lease, the owner (lessor) allows another the use of an aircraft for a fixed period of time or at will. The lease most of us are familiar with is called an operating lease.

An operating lease is a lease whose term is short compared to the useful life of the asset. For example, an aircraft which has an economic life of 30 years or more may be leased to you for 5 years on an operating lease. This can be a simple leasing transaction where at the end of the lease, the aircraft is returned to the lessor. There may also be the option at lease end to buy the aircraft at Fair Market Value (FMV). If the buy-out is significantly less than FMV, then it isn't a true operating lease, but more of an installment sale.

What are the advantages of a lease?

Leasing is less capital intensive than cash purchase. You don't tie up all your cash (if you have it available) and many leases require smaller up front payments than even traditional loans.

Leasing shifts the residual value risk to the lessor. Aircraft values depreciate over time. If you tried selling your used aircraft in 2001 - 2003, you lost a lot of value. If you are selling a popular turbine airplane today, you'll likely come out even or maybe ahead! With a lease, you shift this risk (and reward) to the lessor.

The lessor gets the tax write-off. Aircraft can be written off to zero value for tax purposes in eight or fewer years. If the aircraft is predominantly for business and your company is profitable, you may want the tax advantages of ownership. However, personal use aircraft don't have any tax advantages, so by having the lessor use them, you may get a lower rate than with a traditional loan.

A lease allows you to walk away at lease end without having to be concerned with selling an owned aircraft. If you completed an aircraft lease in 2001-2003, you did not face the loss of residual value that the owner did.

Operating leases also have disadvantages.

A lease can place restrictions on the operations of the aircraft. A lease may restrict where you can base or how you can operate the aircraft or prohibit commercial operations. These items can be negotiable.

Leases have return conditions. When returning an aircraft from a lease, you must return it in some pre-agreed state of condition. Failure to do so will have financial consequences.

Early returns from a lease can be costly. If you break a lease, you may be responsible for the remaining lease payments.

Leases can work for some companies and individuals. You must examine your ownership, tax and risk requirements and review the lease documents with your tax advisor to see whether a lease work for you.

Anyone had either a good or poor experience with a lease? Please email me (leaving out the individual party's name) and let me know.

Understanding and Negotiating Aircraft Leases

by Greg Reigel 1. July 2007 00:00
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If you own an aircraft, but are not fully utilizing the aircraft, how can you maximize your investment in the aircraft? What do you do if you cannot afford to own an aircraft, but you still want to fly? The answer to these questions for many people is aircraft leasing. An aircraft lease can allow an aircraft owner to maximize the use of the owner's aircraft and recover some of the owner's expenses. It also provides an opportunity for someone who cannot afford to own an aircraft to fly.

However, leasing an aircraft involves a number of issues between the owner who is leasing the aircraft to another person, the "Lessor", and the person leasing the aircraft from the owner, the "Lessee". A written aircraft lease should be used to address the issues between the Lessor and Lessee so that each party has a clear understanding of what to expect during the relationship. The parties should pay careful attention to some of the following lease provisions:

Lease Term. This provision establishes the duration of the lease. The lease can be for a fixed term (e.g. 6 months or 1 year etc.), on a month-to-month basis or, in some cases, it may be indefinite with the Lessee leasing the aircraft as needed or on a one time only basis.

Knowing the potential duration of your lease becomes especially important in situations where the Lessor does not have an obligation to renew or extend the lease. If the lease does not provide otherwise, a Lessor could have the ability to refuse to renew or extend a lease even after the Lessee makes commitments based upon the Lessee's belief that the Lessee will continue to have access to the aircraft. Although this may seem unfair, the language of the lease will govern the rights between the parties. Thus, understanding this information up front is essential because it will allow the Lessor to assess the Lessor's ability to use the aircraft or lease it to another party and it will allow the Lessee to accurately assess the Lessee's ability to make commitments in reliance upon the Lessee's access to the leased aircraft.

Use of the Aircraft. The use provision details the types of activities for which the aircraft may be used. Other than the obvious use of flying the aircraft, the lease should establish the types of operations in which the aircraft may be used. The scope of use typically distinguishes between private use (e.g. pursuant to FAR Part 91) and commercial use (e.g. pursuant to FAR Part 135 or other commercial operations such as flight instruction, sightseeing flights, powerline patrol etc.). The terms of the lease should specifically identify permitted uses and any prohibited uses. If the Lessee wants to lease the aircraft for commercial operations, as opposed to private operations, this use will have a direct impact on the maintenance and insurance for the aircraft. The Lessor may or may not want the aircraft for such operations and, if the commercial operations are permitted, the Lessor will likely want to assess the increased costs directly to the Lessee. Thus, it is imperative that the scope of use be identified so the lease can properly address any issues that arise from the anticipated use.

Additionally, once the lease is executed, if the language of the lease does not allow a desired use, the Lessee's desired use may only be possible by obtaining permission from the Lessor. It is much easier to include the appropriate language in the lease prior to signing, rather than attempting to change the lease or obtain the Lessor's permission after the fact. Thus, to the extent possible, the Lessee will need to have a good idea of how the Lessee intends to use the aircraft both at the beginning and throughout the term of the lease.

Scheduling. The lease should explain the method and timing for scheduling use of the aircraft, whether by the Lessor or the Lessee. Scheduling can be done on a "first-come, first-served" basis or one party may have priority or pre-emptive rights over the other. If one party has pre-emptive rights over the other, how and when can those rights be asserted? The lease should also address scheduling of the aircraft at a time when the aircraft is due for maintenance. Typically, a lease will include language that prohibits any period of maintenance, preventive maintenance or inspection from being delayed or postponed for the purpose of scheduling the aircraft, unless the maintenance or inspection can be safely conducted at a later time in compliance with applicable laws and regulations.

Lease Payments The lease should establish the amount the Lessee will be charged for the use of the aircraft and method of payment. Several common options include charging a flat hourly rate (with or without fuel), a monthly rate for availability of the aircraft with a corresponding hourly rate for actual use, or a lump sum or "block-time" rate for use of the aircraft for a fixed number of hours. Depending upon the situation, the Lessee may also be responsible for maintenance costs or other fixed costs associated with the aircraft (e.g. insurance, hangar rent, software updates etc.). Additionally, most leases will require the Lessee to be responsible for any other costs associated with the Lessee's operations including landing permits and fees, head taxes, departure taxes, immigration, customs, handling, foreign fuel taxes and surcharges, over-flight fees, navigation and airspace fees and similar charges. The lease may provide the Lessor with the ability to raise or decrease the amounts charged to the Lessee. This is especially true if the aircraft is being provided with fuel, or if the Lessor's is charging certain of Lessor's fixed expenses to the Lessee. Both parties should be sure they understand when this can happen and upon what conditions such a change is based. Although the parties may not be able to control whether or not an increase or decrease in the rent is imposed, by understanding the circumstances upon which this change may take place, each party will be able to plan for and possibly forecast this change in rent. This knowledge allows the Lessor to own and the Lessee to operate the aircraft in ways that may limit the effect of an increase, or take advantage of a decrease, depending upon the circumstances.

Operational Control. The lease should identify which party will have operational control, as defined in the FAR Part 1, Definitions. If the lease is for private use or commercial, non-Part 135 use, typically each party will have operational control of the aircraft when it is in that party's possession. Oftentimes in this situation, operational control will revert to the Lessor during the times when the Lessee is not using or possessing the aircraft.

If the lease is for Part 135 commercial use, the lease will have to specify, and the Part 135 certificate holder will have to actually exercise, operational control over the aircraft. This type of leasing arrangement is currently in the FAA's "bulls eye" and both Lessor and Lessee need to understand and carefully comply with the applicable regulatory requirements. An experienced aviation attorney is recommended to make sure the aircraft lease is in compliance and protects both parties.

Indemnification. Most aircraft leases will contain an indemnification provision. Indemnification, in essence, means the party agreeing to indemnify will reimburse the indemnified party for any money the indemnified party is forced to pay as a result of the actions of the party agreeing to indemnify. The Lessee may indemnify the Lessor, the Lessor may indemnify the Lessee or the indemnification may be mutual. The indemnification may also be limited by any applicable insurance coverage.

Limitation of Liability. The Lessor and Lessee may also want to limit the liability between them. Typically, this limitation prevents either party from recovering any amounts from the other party in excess of the liability limits of the aircraft's insurance for anything other than direct damages. Damages that may be limited include amounts for loss of use, loss of revenue, loss of value, diminution in value or costs associated with substitution or replacement aircraft or transportation.

Truth in Leasing. If the aircraft is a "large civil aircraft", as defined in FAR Section 1.1 (12,500 pounds, maximum certificated takeoff weight), the lease will need to include a written truth-in-leasing clause in accordance with FAR Section 91.23. The clause will need to be in bold print and at the end of the lease immediately preceding the space for the parties' signatures. Additionally, a copy of the lease will need to be provided to the local FAA FSDO prior to any operations under the lease, and will also need to be carried in the aircraft during all operations under the lease.

General Provisions. In reviewing the lease, make sure the lease refers to parties consistently. The aircraft should be specifically identified, along with any accessories or other property that may accompany the aircraft in connection with the lease. Names of persons or entities should also be spelled correctly and should refer to the appropriate party throughout the lease. If the Lessee is a business entity, such as a partnership or corporation, the lease will need to refer to that entity as the Lessee and not to an individual. To the extent that an individual is required to sign the lease on behalf of an entity, the parties will want the lease to refer to the individual in his or her capacity as an officer or partner of the particular entity that is a party to the lease. Even if a personal signature is required as an additional Lessee or as a guarantor for the entity, this formality should still be observed, although ultimately it may be immaterial to the individual's personal liability under the lease.

Finally, it is essential that you carefully review all of the provisions of any aircraft lease before you sign. Consultation with an experienced aviation attorney beforehand can help you protect yourself, whether Lessor or Lessee. By taking the time to understand the aircraft lease, both parties can ensure that their expectations are met and their interests protected.

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Greg Reigel



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