All posts tagged 'aircraft lease'

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

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.

 

Is Now A Good Time To Lease An Aircraft?

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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