Business Jet Lease

Determination of an appropriate leasing rate

Great news: installments are at their lowest. Poor news: A low strate can cause anger. Lease agreements play an important part in business air travel. Lease agreements transfer the ownership of an airplane from the lessee to the leaseholder (usually, but not always, from the owner). When you think of ownership as a bunch of floors, as I was educated in the law faculty, the lease gives some (but not all) of these floors to the tenant, giving the right to fly the plane when it is in the tenant's ownership.

Aeroplane leasing conditions are sometimes referred to as either damp or damp. Under Federal Aviation Administration rules, a lease is deemed wets if the Leessor directly or implicitly provides at least one crew member with the airplane, in which case the FAA demands that the Leessor maintain operating controls over the flight. This means that a ''wet lease'' is not really a lease, but an arrangement by the leasing company to transport the goods to the borrower.

On the other side, carry leasing is usually an "operating lease" where the licensee runs the plane (or rents it to another person to run it for him). Leaseholders remain owners, enjoy the advantage of fiscal amortization and face the strain of commercial amortization. We have many good reason to lease business planes.

At present, lease is the usual way for an owners to make an aeroplane available for a Part 135 certified person for charters. Lease is also a classical way to separate the obligations associated with the ownership and operation of an aeroplane into different units. In many cases, lease agreements are aimed at making airplanes available to the owner's affiliated companies or at avoiding the need to pay taxes on the sale or use of an aeroplane.

Alternatively to external finance, banks provide clients with operational leasing contracts (usually between five and ten years). What is a faire leasing instalment for an airplane? Banks take into account a variety of elements when determining the interest rating, which includes maturity, interest ratings, creditworthiness of the borrower, option available to the borrower to buy the airplane and its estimate end of life value.

The lease payments to the airlines for the purpose of revenues charters represent the estimated costs per hour for the operation of the airplane and the expected revenues per hour. Usually the charterer takes over approx. 15 per cent of the total income (without additional fuel) and passes on the remaining amount to the owners.

The leasing instalments between airframe owner and operator usually include expert, customary market negotiation geared to the value of the airframe. Typically in a business jet owning environment, a corporate entity purchases the jet and immediately rents it to its mother entity or another corporate entity. Often the object of this agreement is to minimise sales/use duties by shifting the objective of the duty from the sale consideration to the lease instalments.

In essence, the original deal is considered a buy for sell, so the final "sale" taxable is the lease on a per unit (or hourly) basis. There is an overwhelming incentive in such circumstances to keep the leasing rate as low as possible. Suppose the VAT rate is 6 per cent if the plane is rented for $200,000 per months, the $12,000 per months duty, and if it is rented for $20,000 per months, the $1,200 per months duty is a much better rate.

It is unlikely that a state will recognise an arrangement as a good faith lease if the interest is too low. If the State Income Service finds out that you have set the rent low, it can calculate its own interest rates or perhaps ignore the lease entirely and levy a usage fee on the full sale amount.

How do you determine a reasonable leasing instalment? A long period of times, the general principle was 1 per cent of the value of an airplane per months. If you apply this principle, a $200,000 per capita payment would be ideal for a plane you just purchased for $20 million. However, the capital costs today are so low that the 1% per annum principle has much of its significance gone.

The majority of lease payments are well below 1 per cent per annum, especially for long-term leasing contracts for new or almost new planes, and sometimes even below 0.4 per cent. Notice that when determining the installment, the plane is assessed at the beginning of the lease so that if you pay $140,000 per month for a $20 million plane (0.7 percent) in the first year, the actual value of the plane it represents as a percentage of this installment will be much greater 10 years later.

Undoubtedly, this is one of the reasons why rental payments tended to be significantly higher for short-term rental agreements (up to three years) than for long-term ones. As far as you are concerned, you could try to "mark" the leasing instalment to the marked, on a periodic base, so to speak, to take into consideration the decrease in value of the plane.

However, even an economical leasing instalment does not work in every country. Several states have rental rates that are more appropriate than Nixon was presiding. In order to benefit from the Texas re-sale waiver, a lease between affiliates must be in "normal business" and Texas has determined that a lease payment of less than 1 per cent (and more recently less than 1.13 per cent) per month is not permitted.

Consequently, it is advisable, when concluding a lease agreement between related parties, to obtain a signed estimate from an experienced specialist, which you can access from the database when the State Treasury comes knocking on the doors. Plane sale taxes specialist Phil Crowther proposes that you could try to include in your lease that if the state determines that the charge is too low, it will be reviewed retrospectively and automaticly to be the lowest that the state considers appropriate.