Leaseback FAQ

Your Leaseback Questions Answered

 

What is a Leaseback?

What is a Leaseback?

A Leaseback is an arrangement between an aircraft owner and a flight school that provides revenue to the owner and a potential lower cost of ownership. Additionally, a properly structured leaseback is a legitimate leasing business and may provide substantial tax savings for the owner.

Why doesn’t a school purchase their own airplane?

Actually, most schools have a mix of owned and leased airplanes.   A leaseback airplane can be attractive to a flight school as it frees up more operating cash rather than having money tied up their fleet.

The aircraft owner benefits too since he/she may be able to save thousands in taxes and may generate a small profit.

Who Leases Airplanes?

Most leaseback owners are folks who want to reduce the cost of ownership and take advantage of tax benefits available to business owners.

If you enter a leaseback arrangement to become rich, you’re likely to be disappointed.  What a leaseback can do for you is to substantially reduce the cost of airplane owners through both rental revenue and from tax savings that aren’t available to private owners who don’t have business use for their airplanes.

Is there a better time to enter into a leaseback arrangement?

Yes. . . the time is now!  Current tax laws are favorable but things change quickly in Washington.  Your tax benefit is probably the most compelling reason to lease your airplane and if this changes the leaseback ownership strategy may no longer be an option for you.

What are the benefits of a leaseback arrangement?

There are several benefits to leasing your airplane to a busy flight school.  Among them:

  1. Reduce the cost of aircraft ownership.(Some leasebacks may generate a small profit.)
  2. Reduce income tax liability. (In some years the entire cost of the airplane may be deductible!)
  3. In Michigan, leaseback owners may elect to pay use tax rather than sales tax. (This saves the owner thousands of dollars since the tax is passed to the renter.)
  4. Justify the cost of an airplane if the owners flight time may be limited.

Leaseback Airplanes

What is the best airplane for leaseback?

The most successful leaseback airplane is a 4 place IFR airplane like the Cessna 172 SkyhawkSP.

If I already own and airplane, can I lease it to a flight school?

Sure, you can lease an older plane to a flight school but as a general rule, a new (under warranty) airplane like a Cessna 172 Skyhawk SP will perform more reliably and generate a profit for you with fewer hours flown.

If you can afford the newer airplane, you’ll spend less and potentially earn more in the long run.

Can I lease a light sport airplane like the Cessna 162 Skycatcher?

You bet!  Many Skycatcher owners are enjoying success with their leaseback and reaching the profit threshold at fewer hours.  However, always choose an airplane that fits your mission first, and consider the leaseback option with that airplane.  Otherwise, you may have an airplane that costs you less each month, but one that you may not be able to  fly.

How much will an airplane cost?

You can view current prices, specs and performance information at

SuburbanAircraftSales.com

Will my airplane need an engine heater?

If you live in a colder climate, install a heater to protect your investment.

How do I sell my airplane at the end of the lease?

You can contact Suburban Aviation when the time comes to sell or move up.  Suburban Aviation has programs customized to fit your specific need and can help you postpone tax recapture with an attractive move up strategy.

Leaseback Costs

Can I make Money?

While you’re likely to receive a check each month from the flight school, you’re not really making money unless your plane flies more than around 50 hours each month.  After you pay the hangar, fuel, maintenance, insurance and marketing fee, any money left should be placed aside to cover depreciation and tax recapture when you sell the airplane.  This is where most leaseback owners get hung up and  fail to succeed with their leaseback.

If you reinvest any remaining money each moth either by setting it aside or better yet, paying down the airplane you’ll enjoy your profit when you sell your airplane and won’t find yourself  “upside-down.”

Can I make a business of Leasing Airplanes?

Yes, some owners have purchased and leased several airplanes and launched a leasing business with their planes.

How do I Finance my Airplane?

Most finance companies will finance your airplane just as they would any other airplane with the exception that they may require a higher down payment (15%-20%) to reduce their risk should the partnership fail.  Also, don’t expect that the bank will consider potential rental income when qualifying you for the loan.  You must meet the same credit and debt to income standards as other loan customers.

What would my payment be on a Cessna 172 Skyhawk SP?

You can estimate your loan using the handy calculator located here on the Cessna Finance website.

How much will an airplane cost?

You can view current prices, specs and performance information at

SuburbanAircraftSales.com

How many hours each month will my airplane need to fly to break even?

As a general rule of thumb, your airplane should fly at least 50 hours each month to cover the costs of your airplane.  If your airplane doesn’t average 50 hours, you’ll still  reduce the cost of ownership, however the IRS requires that you can show a profit motivation and ongoing months of  low flight time could jeopardize your deductions.

What if my airplane doesn’t fly enough?

If your airplane isn’t flying enough to justify your leaseback arrangement, start by talking with your flight school owner to determine if anything can be done to increase the monthly hours on your airplane.  Perhaps the owner is willing to reduce the fleet size (sell one or more of his owned airplanes) or increase his marketing efforts.  You may come to the conclusion that your airplane is just in the wrong school.  Contact Suburban Aviation to help you find another location or consider other business use, private ownership or selling the airplane.

 

What is the typical fee paid to the flight school?

The marketing fee that you can expect to pay for the services provided by the flight school (aircraft marketing, scheduling, managing maintenance, etc) is 20%.

How is the rental price set?

Work with your flight school to set a aircraft rental price that’s both competitive and cover the costs associated with your airplane including your desired profit/hour. Visit the downloads section of AirplaneNoise for a helpful worksheet to determine your costs.

Who insures my airplane?

As the airplane owner, you are responsible to pay all of the expenses of the airplane including the insurance.  However, your airplane will be insured on the flight school’s policy since the airplane is in the care and custody of the school.

Structuring a Leaseback for Success

What if my airplane doesn’t fly enough?

If your airplane isn’t flying enough to justify your leaseback arrangement, start by talking with your flight school owner to determine if anything can be done to increase the monthly hours on your airplane.  Perhaps the owner is willing to reduce the fleet size (sell one or more of his owned airplanes) or increase his marketing efforts.  You may come to the conclusion that your airplane is just in the wrong school.  Contact Suburban Aviation to help you find another location or consider other business use, private ownership or selling the airplane.

 

What is the typical fee paid to the flight school?

The marketing fee that you can expect to pay for the services provided by the flight school (aircraft marketing, scheduling, managing maintenance, etc) is 20%.

Where can I get a copy of a leaseback agreement?

Work with your attorney to create an agreement for your leaseback or visit the AOPA’s website for a super sample agreement.

How is the rental price set?

Work with your flight school to set a aircraft rental price that’s both competitive and cover the costs associated with your airplane including your desired profit/hour. Visit the downloads section of AirplaneNoise for a helpful worksheet to determine your costs.

Do I need to lease my airplane to qualify for the tax incentives?

No, if you have other business use, you may be eligible for tax savings.  The leaseback arrangement allows you to qualify because you’re actually starting a aircraft leasing business.  Visit with your tax planner  to determine the best way for you to own an airplane.

Can I set up my own LLC?

You can, but you’re probably best to seek professional help with this business start-up.  There are unique requirements with this type of aviation business.

Who insures my airplane?

As the airplane owner, you are responsible to pay all of the expenses of the airplane including the insurance.  However, your airplane will be insured on the flight school’s policy since the airplane is in the care and custody of the school.

Who maintains my airplane?

As the airplane owner, you are responsible to pay all of the expenses of the airplane including the maintenance.  However, the school will manage the normal maintenance of the plane as part of the management fee that your pay them each month.  It’s their responsibility to keep the plane clean, safe, legal and in the air generating revenue.

How long is the typical lease?

Most leases are 1-2 years with an option.  Also, most have a 30 day out for either party.

Can I fly my plane if it’s on a leaseback?

Most owners buy the plane so they can fly it.  If your school is geographically friendly, you’ll want to make arrangements to fly your plane with the school.  Usually, you’ll rent your own plane without the marketing/management fee.  This allows you to deduct 100% of the plane as business since the school is renting the plane 100% of the time.

One thing to remember. . . the more you fly, the less your plane is available to rent.

 

Finding a Leaseback Location

What questions should I ask a flight school owner?

Once you identified a school, schedule an appointment to meet with the owner to determine whether you see eye to eye on critical issues regarding the use of your airplane.  For a list of some questions to get you started, visit our downloads page. 

Who maintains my airplane?

As the airplane owner, you are responsible to pay all of the expenses of the airplane including the maintenance.  However, the school will manage the normal maintenance of the plane as part of the management fee that your pay them each month.  It’s their responsibility to keep the plane clean, safe, legal and in the air generating revenue.

How do I choose a good school?

Start by locating the Cessna Pilot Centers in your desired area.  You can enter your zip code to find the nearest schools.

Once you’ve found the Cessna Pilot Centers, narrow down the prospects.  There are 3 basic areas to evaluate when searching for a good school for a leaseback:

  1. Activity:  How much do the current airplanes fly?  Your airplane will dilute the monthly numbers, so will this be enough for you to justify the leaseback?
  2. Fleet: How are the current airplanes maintained?  Regardless of what you’re told about how well the school will take care of your airplane, “What you see is what you get!”
  3. Team:  Do you like these folks?  Do your business philosophies match?  You’re going into business with this group so make sure you see them as good partners.

 

If you can use some help identifying possible partners in the Michigan and Northern Ohio region, contact Suburban Aviation.

Leaseback Cautions

Can I talk to current leaseback owners?

Absolutely!  As part of your due diligence it’s wise to talk to other owners and particularly those who have leaseback airplanes at the school you wish to partner with.  Have the flight school owner make the arrangement for you since the current owner may see an additional airplane as a threat to his airplane’s flight hours.

Am I liable if the plane crashes?

Your airplane is insured on the school’s policy and they have care and custody of your plane, so unless you are responsible for any gross negligence, you will not likely be liable.

Without a special state statute imposing liability on aircraft owners, an innocent owner who loans, rents or leases an aircraft to another party is usually not held liable for the negligence of that party in most states. Brown v. Astrin Enterprises & NAFTA et al, 989 F. Supp. 1399, 1406 (N. D. Alabama, 1997)

What are the reasons that leasebacks fail?

You leaseback arrangement can fail for a couple main reasons:

  1. You spend your monthly check rather than pay your airplane expenses and reduce your debt with any money left over
  2. Your plane doesn’t fly enough hours.
  3. You tolerate a bad situation rather than move your airplane when you determine the situation won’t be rectified.

Remember, you always have the “back doors” to move your airplane or sell.

Can I limit the number of pilots that rent my airplane?

There are several IRS requirements that your leasing business must meet to be eligible for the tax incentives.  One of these requires that you customarily make the rental property available during defined business hours for nonexclusive use by various customers.  For a list of the other requirements, visit our downloads page for the Leaseback Tools.

Will I get audited by the IRS?

As with any business, there’s always the risk of an IRS audit.  However, if you follow the leaseback rules and keep good records you have nothing to worry about.  The tax savings you’ll enjoy are not exclusive to aircraft leasing.  Your airplane is business equipment and like any other piece of equipment (tractor, copier, press, etc) there are procedures set up to depreciate and deduct your business equipment.