If you’re not quite ready to take the plunge into aircraft ownership, leasing may be an option that works better for your needs.
In an aircraft leasing arrangement, the owner — or lessor — retains legal title to the aircraft but transfers possession of the aircraft to the lessee. Because of the broad range of options available, not all aircraft leases will meet the above definition.
A variety of leasing options, each with their advantages and disadvantages, is available.
The benefits to a lease structure rather than purchasing a private jet include:
- The lessor takes tax depreciation — a benefit passed along to a lessee through low payments and lower implicit interest rates.
- In most states, sales tax is paid over time through the stream of the low monthly payments instead of up-front, yielding a much lower sales tax liability.
- Custom leasing provides flexibility for upgrade or early buyout options.
- True operating leases qualify for off-balance-sheet accounting treatment, providing shareholder sensitivity benefits.
- Leases provide 100-percent financing in most cases.
Some kinds of leases, such as synthetic or capital leases, have considerably different features from the true operating lease described above, so please confer with your accounting or finance advisor to fully understand each lease product.
When leasing an aircraft, a typical loan term is five to seven years. However, the payments will typically amortize over a much longer schedule, such as 10 to 20 years. This loan structure is created on a mortgage-style note with an end-of-term balloon payment yielding a comfortable payment amortization.
A typical lease term is seven to 10 years. A sophisticated corporate aircraft lessor will be able to customize upgrade or early buyout provisions consistent with your thoughts, preferences and aircraft upgrade plans.
Both floating and fixed interest rates are available if you are considering leasing a private jet. In addition, at times hybrid rate structures are also available. Examples of alternative rate structures include:
- floating with changes in LIBOR every 30, 60 or 90 days
- floating with changes in the prime rate or commercial paper
- fixed annually
- fixed for a predetermined time (e.g., five years) and then re-set
The best interest rate structure for you depends on the rate climate at the time of your closing as well as the length of time you plan to lease the aircraft. Your aviation lender can offer insight on the interest rate structure best suited to your specific transaction.
Early lease termination
If you decide to end your lease early, the early termination process must involve the cooperation of your lessor to determine:
- whether the lease offers a specific early termination option at that point in time
- Fair Market Value (FMV) of the aircraft relative to the Termination Value (TV) of the lease at that point
- whether an aircraft upgrade or replacement is fostering the early lease termination (which is often the case)
If the FMV is less than the lease TV when the lessee returns the aircraft, the lessee will likely have to make up the difference to the lessor with a lump-sum cash payment.
There’s also another option: Instead of returning the aircraft, the lessee may seek permission from the lessor to market the aircraft. In this case, the lessor agrees to facilitate the sale documentation and closing process. This process is typically used when the lessee is upgrading aircraft with the same lessor.
Key questions to ask
When leasing an aircraft, it is important to select a lessor who can demonstrate a successful history of assisting clients with creative early lease termination solutions. Lessors who have successfully managed corporate aviation assets over the last five to 10 years and are not burdened with multiple nonperforming corporate jets are the most creative, aggressive and helpful lessors.
If you are a first-time aircraft lessee, you should ask these questions about financing to make sure your approach to leasing a private jet is well-planned and strategic:
- Do you desire to structure aircraft ownership in the name of an operating corporation, a corporate subsidiary, an individual’s name or a special purpose LLC?
- What individual or company will provide the financial strength for this transaction?
- Will the aircraft operate according to FAR Part 91 (corporate) or 135 (charter)?
- How many hours of annual use do you expect?
- Will you use an internal flight department or an aircraft management company?
- Will you lease or charter the aircraft to related and/or unrelated parties?
For more information about leasing and financing options, visit www.l-lint.com.