Leasing Aviation Articles

Tips For Renting Your Aircraft

If you own an aircraft and are not utilizing it as much as you would like or if you would like to try and recover some of the cost of owning the aircraft, you may have thought about renting your aircraft to other pilots. As a practical matter, that makes some sense. But before you actually rent your aircraft to another pilot, here are a few things you should consider.

Aircraft Owners May Rent Their Aircraft To Third Parties

Tips for Renting your aircraftIt is important to understand that the FAA does not prohibit aircraft owners from renting their aircraft. In fact, the regulations specifically contemplate rental arrangements. So, renting your aircraft is permitted, provided that you comply with applicable regulations. The FAA provides guidance on what is and isn't a permissible rental arrangement in Advisory Circular 91-37B Truth in Leasing (although truth in leasing requirements only apply to large civil aircraft, the general lease concepts discussed in the AC apply to leasing arrangements for all aircraft).

Make Sure Your Insurance Permits Aircraft Rental

Most aircraft insurance policies will extend coverage to other pilots who fly your aircraft provided that the pilots are either expressly identified in your policy or if they have the necessary experience/qualifications to meet the "open pilot" clause of the policy. However, if you are going to charge the pilot for use of your aircraft, you need to confirm that your policy allows you to rent or lease your aircraft to a third-party. Most aircraft policies issued to owners for personal/business flying do allow aircraft leasing, but it is important to confirm this with your insurance underwriter.

Also, rather than paying to obtain their own insurance policy or renter's insurance to cover their use of your aircraft, most renter pilots will want to be named as an additional insured under your policy as this can oftentimes be done at no cost to you or the renter pilot. In that case, renters will typically ask for a certificate of insurance that reflects not only that they are added to your policy, but that they are covered for their operation and use of their aircraft. This is important because it doesn't do the renter pilot any good if he or she is added to the owner's policy but only covered for the owner's operation of the aircraft, rather than his or her own use.

Renting Your Aircraft Can Trigger Tax Consequences

In most states, when an aircraft owner rents an aircraft to a third-party the owner is required to collect and remit sales tax on the rent paid by the third-party for the aircraft. If you are in one of those states, in order to rent your aircraft you will need to obtain a sales tax number so you can collect and remit sales tax to the taxing authority. This is the aircraft owner's obligation and the taxing authority will hold the aircraft owner responsible for any sales tax the taxing authority believes the aircraft owner should have collected and remitted, regardless of whether the renter pilot actually paid the sales tax to the aircraft owner.

Also, when you rent your aircraft many taxing authorities view that activity as commercial activity which then means your aircraft could be subject to assessment of personal property tax on the value of the aircraft, or some portion of the value based upon the pro-rata rental versus personal use of the aircraft. Although not all states assess personal property tax on aircraft, if you are in a state that does you will want to determine your potential property tax exposure before you decide to rent your aircraft.

Conclusion

Although you will also have other things to consider as you decide whether to rent your aircraft to other pilots, these three issues should be near the top of your list. And if you understand and address these issues up front that will help ensure a successful aircraft rental experience for both you, the aircraft owner, and your renter pilot.

Greg can be reached at:

Greg Reigel
Shackelford, Bowen, McKinley & Norton, LLP
9201 N. Central Expressway, 4th Floor, Dallas, Texas 75231
Direct: (214) 780-1482 - Fax: (214) 780-1401
E-mail:  greigel@shackelford.law
Website:  www.shackelford.law

Keep Your Banker Happy

Financing rates for loans and leases are very low. Yet it isn't easy to get financing and the paperwork can be daunting. If you are looking for a lease or a loan for an aircraft, here are a few tips to help you help your financier.

Educate your financier as to how your lease or loan is a great risk. There is plenty of money to lend and financial institutions want and need to do business. They need to do transactions, but they also need to carefully manage their risk. It is up to you to provide them the information they need demonstrating you are a good credit risk. That means lots of financials of course. But is also means that the individual you are working with needs to understand your business.  Much of the decision is based on analytics, but there is room for judgment.

Your local banker with whom you have had a long term business relationship may be more likely to support your need for financing, even if they don't know much about aviation. Educate them on the lower depreciation that aircraft have relative to other transportation forms. Yes, since 2008 aircraft resale values have not fared well, but relative to trucks, they are a much better risk with a much longer life. That may not be obvious to your banker.

Pick your aircraft like a banker or risk manager. New aircraft are easier to finance, but older aircraft do get financing. Turbine financing rule of thumb: aircraft age at the start of the lease/loan plus the length of the term should not exceed 15 years. Example: your should be able to get a five year term on a 10-year old aircraft. Don't expect the five-year term on the age 20 aircraft. Also expect to put 20% down on the loan - more if the aircraft is older. That down payment is the cushion the banker needs to keep what is owed well under what the outstanding debt is at any time.

Reducing financial risk also means that the banker will favor, or even require, a guaranteed hourly maintenance program on at least the engines. This is routine with leases. Lease return conditions generally require all components have at least 50% of their useful life remaining or you pay a detriment adjustment. The engine guaranteed hourly maintenance program both covers the time to overhaul adjustment plus makes the returned aircraft at lease-end more popular in the resale market, either in another lease or as a sale.

Plan on time to research and secure your financing. Talk to your banker early in the acquisition process and see what information they will need. You may need to check out several sources. One banker that deals with turbine equipment up to $5 million in value isn't likely to want to do a deal on a new mid-size business jet. Know who and what your options are.

There are a lot of financial uncertainties in any time. Right now the oil/energy markets, China, the Middle-East, and the US election are in the front of their anxieties. When looking for financing or a lease, don't add to them! And yes, cash is and always will be King. 


 

The Business Mission Drives The Aircraft Mission

Image: Gulfstream G650

The Gulfstream G650 and Citation Ten vie for the world’s fastest business jet. But if you need to get an accident victim from the accident scene to a hospital fast, you most likely need a helicopter. Business jets are not designed to land beside the highway and helicopters won't do for a long cross-country flight. I'm stating the obvious, but how many aircraft choices seem to ignore this?

"To execute the corporate mission" is the answer to the business question "Why do we have an aircraft?" If the aircraft is a personal aircraft, the "why" may be "to enjoy flying." What type of flying is fun to one person can be very different from another. In the world of business aircraft, whether the business is high tech, services, hospitality, acute care, etc., the why of the aircraft must be tied into the why of the company. If it isn't, then the aircraft may be a mismatch to the company mission.

The closer the aircraft's mission can be tied into the reason for the corporation's existence, the more secure the aircraft (and aviation employees' jobs) will be. If IBM were having a tough year financially, no one would ever suggest that they get rid of all their computers! How close does the mission of your business aircraft fit into the reason your company exists? If the aircraft went away, would it have a negative impact on the ability of its users to successfully execute the company's mission?

Our own company mission is: The mission of Conklin & de Decker is to enable the general aviation industry to make more informed decisions when dealing with the purchase, operation and disposition of aircraft by furnishing objective and impartial information.

We are much too small to afford a corporate aircraft, but if/when we get there, the aircraft better directly support our ability to "enable the general aviation industry to make more informed decisions." The added value to the business from the person(s) using the corporate aircraft must exceed the costs of having that aircraft. If the leader of a corporation is worth $1 billion dollars to the corporation, and their use of the company aircraft enhances that value, then the $1 million budget for the aircraft should be easily defensible. If the mission of the health services company includes providing critical care to a large community, then the EMS helicopter should be easily defensible.

A company has a written mission statement that is used to guide its daily business. The aviation department should also have a written mission statement. That mission statement should support the mission of the corporation. The aviation department should be part of the corporate structure just as legal, human resources, IT and other departments. Your may not be making widgets, but you are making the making and selling of the widgets easier and more productive.

After that, the next step is developing the measurement criteria for the aircraft to enable management to determine how well the aircraft is at meeting its mission needs. Then, and only then, can you start the analysis of speed, range, payload, cabin, and performance needed to make a wise aircraft choice.

What you then end up with is measureable criteria that can be used to evaluate the aircraft choices. Each of those criteria stem from the assigned mission of the aircraft. The assigned mission of the aircraft is directly supporting the mission of the corporation. Thus, the answer to the question of why do we need eight seats and 2,400 NM range, is to support the corporate mission.

A caution here is that in some situations, supporting the senior leadership can be mistaken for NOT supporting the corporation. There are no easy answers to the "big boss uses company jet for private retreat" headline. But, that personal use of the corporate aircraft better be documented and reported.

Business aircraft of all types can be used to further the successful mission accomplishment of the corporation. These missions need to be in writing and clear enough so that the justification of the use of a business aircraft can easily be done.

What is your mission statement? Does your choice of transportation reflect it? Let us know in the comments section below!

Shared Light Aircraft Ownership Options for Getting Work Done

With a light aircraft, sharing the costs among two or more owners is common. If you own a small business, using a light aircraft may be ideal and time-efficient. Sharing the costs with another owner can bring down the threshold of cost.

Successful shared ownership requires consideration of the Three C's: Compatibility, Compromise and Contracts.

There needs to be a degree of compatibility between the owners. The type of aircraft must be suitable to the owners' missions. A Cessna 206 and a Mooney Ovation have different strengths. So do a PC-12 and a Piper Meridian. If you are becoming a second (or third) owner, make sure the aircraft will be effective at what you need to do: big load hauler or speedy cross-country machine. Just as important as the mission is NOT having similar flying schedules. If both owners need to use the aircraft every Monday thru Wednesday, sharing cannot work. Ideally owner #1 is a weekend flier and owner #2 is a business-weekday flier. Discuss in advance what your expectations are and how you will schedule the use of the aircraft.

Even if the owners have compatible aircraft requirements and complimentary travel schedules, there needs to be compromise. There will be times when you need to allow for flexibility in the schedules. Visiting family for Thanksgiving? Maybe this year you get the plane and your partner gets it for next year. Other compromises may involve the maintenance and upgrades. If you are a heavy-IRF flier and your partner isn't, then your requirements for upgrading the avionics will differ. If you fly for your business and take passengers, the interior standard you have may well exceed the pleasure-pilot.

Lastly, there needs to be a contract outlining the sharing of the costs and the responsibilities of each owner, and perhaps most important: a way to end the shared ownership. Will you split the fixed costs like hangar and insurance along ownership share? Will you set up a reserve account to pay in advance for the maintenance? What about unscheduled maintenance, how will you split the costs? The engine may cost $38,000 for an overhaul, or cost well over that if you want to do an exchange. How soon do you want that engine back? What do you do if one owner wants out (or cannot afford to stay in)? What if you ant to take on an additional partner? This should be in writing to keep the relationship as amicable as possible.

Before entering into a shared ownership, sit down and really look at the costs. The hourly rental at the local FBO may seem high until you figure out the cost of the initial investment and fixed costs. Sharing the ownership of an aircraft can lower to cost to access ownership, but everyone involved needs to work together to maximize the utility of the aircraft.

Are You Insured When You Rent an Aircraft?

When you rent an aircraft from an FBO or some other aircraft owner, you know that as pilot-in-command you have responsibility for operating that aircraft in compliance with the FARs. But other than having to face the wrath of the FAA, what is your responsibility if something bad happens during a flight (e.g. an accident)?  Ideally, you hope you have insurance to cover you.  Unfortunately, when you rent an aircraft, that may not always be the case. The estate of a renter pilot found that out the hard way in a recent case.

In Knezovich v. Hallmark Insurance Co., a student pilot rented an aircraft from an FBO. While he was operating the aircraft solo, he was involved in a midair collision that took his life, as well as the life of the pilot and passenger in the other aircraft. A number of wrongful death lawsuits ensued.  Additionally, the estate of the deceased student pilot sued the insurance company that insured the aircraft seeking a judgment declaring that the insurer owed the estate a duty to defend and indemnify the estate in the wrongful death lawsuits.

Ultimately, the Court determined that the insurer was not required to defend or indemnify the estate of the deceased student pilot because the policy language specifically excluded coverage for a pilot, student or otherwise, who rented an aircraft.  Since the student pilot rented the aircraft for a solo flight, rather than a flight in which he received instruction from one of the FBO's flight instructors, the Court held that the insurance policy did not provide coverage.

Although this is an unfortunate situation for the deceased pilot's estate, this case serves as a reminder to anyone who rents aircraft to confirm that insurance coverage is in place that will protect the renter.  It isn't enough to simply ask the FBO or aircraft owner whether they have insurance. You need to be sure that coverage is in place to protect you, the person renting the aircraft.  If the aircraft owner's or FBO's insurance doesn't provide coverage, you need to know that so you can understand your risk and either obtain coverage elsewhere or go without.

For more information regarding aircraft insurance, please read my articles Aircraft Insurance Coverage: Will You Have It When You Need It? and My Policy Says What?!: Understanding An Aircraft Insurance Policy.

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