Many lessors and lenders are willing to modify the terms of an aircraft lease to suit the specific needs and objectives of each client. Instead of thinking in terms of a particular type of lease, such as an operating lease or an off-balance sheet loan, it may be more helpful to think in terms of the features you desire in the lease. Below are questions to ask yourself about features that may be negotiable and some of the ways that one feature may impact another.
How long do you want the lease term to be?
Generally speaking, the longer the term, the lower the lease payment will be. However, the length of the term may have other consequences. If the lease is for a term that is up to, or greater than, a certain percentage of the useful life of the aircraft, or if rental payments add up to a certain percentage of the aircraft's value, the lease may have to be treated as a capital finance lease for tax purposes. The result would be that the lessee could not deduct the rent, but instead would deduct depreciation and interest on the debt.
Another issue is whether the aircraft will qualify for a long-term lease. Newer aircraft are likely to qualify, but older aircraft with less residual value may not.
The company also may have reservations about committing to a long-term lease obligation, even though the payments are lower. If this is a concern, ask whether a longer term lease could include an early-termination provision. Such a provision might allow the lessee to sell the airplane and provide that if the sale proceeds are below a certain amount, the lessee has to pay the difference to the lessor or lender.
Does balance sheet treatment matter?
A capital finance lease is generally long-term but would not qualify for off-balance sheet treatment. An operating lease is for a shorter term and it would typically qualify. If properly structured, an off-balance sheet loan may qualify for treatment as a lease rather than as an asset and corresponding debt on the balance sheet. However, an accountant may be uncomfortable with treating the off-balance sheet loan as a lease.
Do you want to end up owning the aircraft?
Depending upon a variety of factors, including the likely residual value of the aircraft, you may or may not want to ultimately own the aircraft. If you do want ownership, or want the option of ownership, leases can include buyout provisions, or provide that ownership transfers to the lessee automatically upon termination of the lease.
Which tax treatment is best for the company?
If the lease is a "true lease," the rent can typically be deducted as an expense, but there will be no depreciation or interest deduction. If the lessee is treated as an owner for tax purposes, the rent cannot be deducted, but depreciation and interest can generally be deducted. The Alternative Minimum Tax, the expected income of the company, the amount of the rent payment compared with the depreciation deduction, balance sheet treatment and other factors may bear upon your assessment of which tax treatment will be most desirable.
Aircraft leases are about more than just the payment. Consider the questions discussed above and present your concerns to your lender or lessor. There's a good chance that you will be able to negotiate an aircraft lease with terms that correspond to the important features that you would like in the lease.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.