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.