lease back

[Pat Rolfes]

We have just formed an LLC to allow us to take our airplane out of our (parent) corporation. The intention is to rent or lease the aircraft back to the corporation on an hourly basis.

I always assumed this was an extremely common practice but am having difficulty finding a rental "template" to use between these 2 companies.

It seems to me there would be a standard that satisfies the governing bodies. My fear is that if I "compose" from scratch it may not accomplish what I'm looking for.

Any thoughts?

Pat:

You need to see your tax professional, and I mean "professional." If you are a member of AOPA, it has a sample lease agreement in the members' section (that you will want to change at least a little bit) located at:

http://www.aopa.org/members/files/guides/aclease.html

If you read that entire article, it will also make you aware of some other pitfalls of leasebacks. However, the main issues you will need to keep in mind are: (1) taxes, i.e., will you meet certain tax requirements to write off the expenses and accept income payments, and (2) maintenance. By doing this, if you take yourself outside of Part 91 operations, then you will be required to meet a higher maintenance standard.

There may also be some legal issues concerning under what state you place your LLC, and whether you could meet a minimum contacts test with that state.

Hope this helps.

Keven
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LovelyWendie

[Jim Rainer]

Don'y forget the FAA. They also have strict rules about leasing or renting planes to avoid a "commercial" transaction which might void your insurance as well has incur a violation.

Jim:

Thanks for the clarification concerning the FAA. That is what I was referring to with my "Part 91" comment above.

Concerning insurance, it *shouldn't* be a problem if the plane is restricted to its previously listed pilots and profiles, but you raise an interesting question. I personally have not seen an issue with insurance in this context, but I certainly wouldn't be surprised if the issue popped up in today's GA climate.

Keven
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ALFONSO DE PORTAGO

[skymaster]

add lessee and lessor as insureed

[Pat Rolfes]

Thanks for the replies. And thanks Keven for the link. I've tried to call AOPA to inquire but have been stuck on hold.

I do have both lawyer and accountant on this and we all believe there is a very thin line (arrangement) that satisfies each of the governing bodies, including remaining part 91. That's why I would think there would be a "tested" template out there.

[Mark McConaughy]

Don't forget to check 91 subpart K also. and they are all correct be very careful how the "lease" is worded. Also all leases must be submitted to the FAA for review.

Mark:

I've never heard of that requirement that the FAA review each lease. Can you point me in the general direction of a statute, regulation, or case that requires that? If so, on a geek/lawyer/constitutional law level, that's a very interesting issue concerning regulation, compliance, and right to contract.

Thanks for the insight,

Keven
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UGGS

[stackj]

There was an article about this in yesterday's Avweb.

http://www.avweb.com/eletter/archive...ll.html#190328

I saw that article but didn't see anything where the FAA has to approve or review a lease. I think the FAA would want to avoid reviewing leases. I assume they are probably like most trial lawyers -- who HATE to draft contracts, but love to criticize them if they go bad.

Kind of the same concept, if the FAA was involved in the approval process of a lease, then it would be difficult for them to criticize the lease or the relationship between the parties later on if the FAA wanted to pursue an investigation or enforcement action for some reason.

Also, their required approval would be a slippery slope of folks' rights to contract (that whole whacky Constitutional thing), and the FAA looking into the status of each party to the lease, their qualifications, whether they are properly registered, incorporated, formed, operated, etc.

FWIW

Keven
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Justin bieber fan

[skymstr02]

The feds only review a lease when the aircraft is on a 135/121 air carrier certificate. Not necessary to submit for a 14 CFR 91 leaseback agreement.

[Mark McConaughy]

Submission of Aircraft to the FAA for review has been an FAA policy for years, it is enforced differently by the regions and district offices but the requirement is still there. The article Jenny pointed to makes a very good point. I've seen all kinds of "situations" where people thought because they had a lease that it is Part 91. As that article pointed out some things you think were ok aren’t.

One of the FAA's big concerns is who has "Operational of the aircraft in question. A check of Advisory Circular AC 120-12 may also be in order. (This will aid in determining if the operation falls under the equipments of 135). The "gotcha" here is that if you don't submit the lease this in it and of itself is a violation.

The regulatory site is;

§ 91.23 Truth-in-leasing clause requirement in leases and conditional sales contracts.
top
(a) Except as provided in paragraph (b) of this section, the parties to a lease or contract of conditional sale involving a U.S.-registered large civil aircraft and entered into after January 2, 1973, shall execute a written lease or contract and include therein a written truth-in-leasing clause as a concluding paragraph in large print, immediately preceding the space for the signature of the parties, which contains the following with respect to each such aircraft:

(1) Identification of the Federal Aviation Regulations under which the aircraft has been maintained and inspected during the 12 months preceding the execution of the lease or contract of conditional sale, and certification by the parties thereto regarding the aircraft's status of compliance with applicable maintenance and inspection requirements in this part for the operation to be conducted under the lease or contract of conditional sale.

(2) The name and address (printed or typed) and the signature of the person responsible for operational control of the aircraft under the lease or contract of conditional sale, and certification that each person understands that person's responsibilities for compliance with applicable Federal Aviation Regulations.

(3) A statement that an explanation of factors bearing on operational control and pertinent Federal Aviation Regulations can be obtained from the nearest FAA Flight Standards district office.

(b) The requirements of paragraph (a) of this section do not apply—

(1) To a lease or contract of conditional sale when—

(i) The party to whom the aircraft is furnished is a foreign air carrier or certificate holder under part 121, 125, 135, or 141 of this chapter, or

(ii) The party furnishing the aircraft is a foreign air carrier or a person operating under part 121, 125, and 141 of this chapter, or a person operating under part 135 of this chapter having authority to engage in on-demand operations with large aircraft.

(2) To a contract of conditional sale, when the aircraft involved has not been registered anywhere prior to the execution of the contract, except as a new aircraft under a dealer's aircraft registration certificate issued in accordance with §47.61 of this chapter.

(c) No person may operate a large civil aircraft of U.S. registry that is subject to a lease or contract of conditional sale to which paragraph (a) of this section applies, unless—

(1) The lessee or conditional buyer, or the registered owner if the lessee is not a citizen of the United States, has mailed a copy of the lease or contract that complies with the requirements of paragraph (a) of this section, within 24 hours of its execution, to the Aircraft Registration Branch, Attn: Technical Section, P.O. Box 25724, Oklahoma City, OK 73125;

(2) A copy of the lease or contract that complies with the requirements of paragraph (a) of this section is carried in the aircraft. The copy of the lease or contract shall be made available for review upon request by the Administrator, and

(3) The lessee or conditional buyer, or the registered owner if the lessee is not a citizen of the United States, has notified by telephone or in person the FAA Flight Standards district office nearest the airport where the flight will originate. Unless otherwise authorized by that office, the notification shall be given at least 48 hours before takeoff in the case of the first flight of that aircraft under that lease or contract and inform the FAA of—

(i) The location of the airport of departure;

(ii) The departure time; and

(iii) The registration number of the aircraft involved.

(d) The copy of the lease or contract furnished to the FAA under paragraph (c) of this section is commercial or financial information obtained from a person. It is, therefore, privileged and confidential and will not be made available by the FAA for public inspection or copying under 5 U.S.C. 552(b)(4) unless recorded with the FAA under part 49 of this chapter.

(e) For the purpose of this section, a lease means any agreement by a person to furnish an aircraft to another person for compensation or hire, whether with or without flight crewmembers, other than an agreement for the sale of an aircraft and a contract of conditional sale under section 101 of the Federal Aviation Act of 1958. The person furnishing the aircraft is referred to as the lessor, and the person to whom it is furnished the lessee.

(Approved by the Office of Management and Budget under control number 2120–0005)
[Doc. No. 18334, 54 FR 34292, Aug. 18, 1989, as amended by Amdt. 91–212, 54 FR 39293, Sept. 25, 1989; Amdt. 91–253, 62 FR 13253, Mar. 19, 1997; Amdt. 91–267, 66 FR 21066, Apr. 27, 2001]

Mark:

Please note the caveat in the quoted language that it only applies to "large aircraft" leases, i.e., 12,000 lbs or greater (as defined in some god-forsaken FAR somewhere). Thus, this language is inapplicable to Skymasters and most general aviation birds. I primarily deal with "non-large" aircraft, and thus, was unfamiliar with that reg. Interesting, but directed at large birds.

Keven
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Vanilla

[Ed Coffman]

"involving a U.S.-registered large civil aircraft ".


In my opinion the operative word here is "large" 337's are not "large" aircraft.

Ed
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Penny stock

[Mark McConaughy]

Well,

the whole thing I'm trying to get across is you need to be careful about how you do leases, the reason the FAA tracks that so close is they are looking for illegal 135, (or 134 1/2) operations. As is illistrated in the article Jim Stack Referenced there are some things you would think would be 91 that are not. If you own a business and are trying to do this for tax purposes, you should run the whole thing by a tax atty. and an aviation atty. As they say, there are 97 FSDOs and 97 FAA's. An atty can help you get to the answer that all of the FAA sould accept.

In addition, it is good to note that the FAA like the IRS will tell you they are not responsible for advice they give you. The only person in the FAA who can interpret FARs/Federal Law is The Deputy Chief Council for Regulation in Washington. What ever you get from your local FSDO or inspector is just their opinion. Well,

the whole thing I'm trying to get across is you need to be careful about how you do leases, the reason the FAA tracks that so close is they are looking for illegal 135, (or 134 1/2) operations. If you own a business and are trying to do this for tax purposes, you should run the whole thing by a tax atty. and an aviation atty. As they say, there are 97 FSDOs and 97 FAA's.

In addition, it is good to note that the FAA like the IRS will tell you they are not responsible for advice they give you. The only person in the FAA who can interpret FARs/Federal Law is The Deputy Chief Council for Regulation in Washington. What ever you get from your local FSDO or inspector is just their opinion, nothing more.