Leaseback (Business not Personal)

JesseD

JesseD

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Jesse
It's always business never personal...

I'm working on getting my PPL (with IFR and Complex, in that order) at the moment. The Flight School was looking to offload an old 172N and offered to do a leaseback, but stated up front it probably wouldn't get many hours. He said that might be useful from a tax perspective. From everything I've read though, that would just put me in the hole. Heck, I could afford to buy the plane outright, but I'm only going to fly it a couple of hours a year (60 or so, considering) probably, not 100hrs + right now.

I don't want that deal though, I would rather make some money. Why buy an old 172 when my ultimate goal is a higher performance 4 or 6 seat bird with a much better usable load / range (e.g. Mooney Ovation, Piper Matrix, et al) in a few years.

What I could do, from a business perspective, is buy a couple of slightly older (2000's) 172's (steam or glass) and offer to lease them back in a true business perspective and (hopefully) make some money with a 2-4 year turnover. They are a Cessna Pilot Center, and the 172 is the most popular trainer plane, but I was wondering what other experiences have been like.

I can't see using them for personal trips, so they'd be on the rental line almost non-stop, except for the couple of hours (1-3, variable) a week I'd be training in one of them. Yeah, that could put me over 100 for the year, but I have a feeling life (and weather B) ) will keep me from actually hitting that.

I'm not going to get attached to the things, they're simply investment vehicles.

I'd be able to purchase one outright at least, possibly 2 depending on the price.

I don't believe the FS is the actual FBO (I do have to double-check this) so they wouldn't be the people performing the work on the planes nor do I believe they own the hangars that they would be stored in. I know they don't work on avionics.

I've been working on some spreadsheets of various costs to see if it was worth going to see my lawyer and such.

Pitfalls?
Warnings?
Ways to tell the scrupulous from the crooks?
Ways to make it a better business vehicle?

I have met a couple of their instructors, and obviously one partner. The instructors I've dealt with are very meticulous starting right at the pre-flight. This is in contrast to one of the instructors I met at a different school that was less so. This school does have one newer bird, but has two others (in the airport local to me, they have 2 locations) that one could probably justify cycling out. They're not trashed, but they are older models.

I'm open for comments here, including the "don't do this no matter what" kind :wink2:
 
OK.

Don't do this no matter what.

There's a great treatise on leasebacks here somewhere, let me find it...
 
The link posted by Spike does a nice job of addressing the philosophy of leasebacks. I thought I'd post a guesstimate at some of the numbers so that the POA collective can comment.

A newer 172 will rent for about $125 wet.
Gas is $4/gallon, or ~$40/hr, and oil costs about $2/hr. This leaves about $83/hr for you and the FBO to split. Your take is going to be in the neighborhood of 80%, so $67.

So let's start adding up the non-direct operating costs...
$5k/year insurance
$9300/year loan payments ($100k financed @ 7% for 20 yrs)
100 hrs + annual + misc maintenance are going to be variable, but in the land of $100 circuit breakers and switches, I'd have a tough time budgeting under $5k for a highly flown rental.
IFR GPS databases will be $500/year.
Hopefully the FBO can hangar the plane for free.
=$19,800 total

So, $19,800/67 ~= break-even in 296 hours.

This figure does not count engine reserve nor airframe depreciation. If, everything goes well, the plane won't need a major overhaul until 2000 hrs. The MOH will cost ~$20k, or $10/hr. So now...
$19,800/$57 = break-even in 347 hrs.

The airframe is going to depreciate as well. This wasn't a super big deal 5-10 years ago, when all but the newest planes were appreciating. Now that trend has reversed, and I think you have to figure in at least $10/hr of airframe depreciation, and given recent trends - $10/hr seems light.
$19800/$47 = 421 hrs, or 35 hrs/month

If you are on a reasonably populated (metro type) area, 35 hrs a month doesn't seem that unreasonable a number to me, but certainly there are days where winds, T-storms, snowstorms, or fog/LIFR make it impossible to fly a 172. And then, there will be days (weeks?) of maintenance downtime where the plane cannot be rented. Certainly, in the winter, cashflow would be tough.

But the risk isn't done there... What happens if the plane gets hit by a snowplow or fuel truck? Insurance should pay for repairs, but what about downtime?

What happens when the FBO goes belly-up? Or the CFI decides to leave the FBO, and there is no one left to teach the students?

How do you deal with a stranded plane? What if it breaks down 300nm away, or is left there by a pilot who didn't want to tempt the weather gods?

And last, but (in my mind certainly not least) What if there is an accident? The plane could be INOP for months. The damage history will result in a significantly lower airframe value. And worst still... What if there are injuries/deaths in the accident? You've followed aviation lawsuits, right?

All this in the hope that you might make a few hundred or maybe a $1000/month? Sorry to be a downer, but I just don't see the outlay and risk being worth the potential return.
 
wabower said:
Jason's #2 is a pipedream. Nobody who owns the airplane ever makes lots of money on a leaseback. Leasebacks are the aviation equivalent of a poker game where two friends meet a stranger.
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Sorry and I may be the exception, but I had my 172 on leaseback and made enough money to upgrade the avionics, paint it, install a new interior install and 180 HP engine and pay it off. One of the secrets was to keep it maintained and keep it looking nice. It rented about 100 hours a month.

Took it out of leaseback when I had it paid off. When the OP said the FBO didn't think it would rent much that should be a red flag not to do it.
 
You CAN make a modest profit on a leaseback. However, those who do, like Mark, are the exception rather than the rule. Look at the fleet turnover at your typical school, and you find aircraft that are there for 2 years while the owner takes a bath and then bails. Another hopeful owner takes their place. I have done two leasebacks at two different flight schools. The first time, I lost an arm and a leg. The second time, I only lost my shirt. Never again, for me anyway.

The only folks I know of who made good business sense of leasebacks bought new airplanes, accelerated the depreciation to show LLC tax losses that could cover part of their very high personal income tax bills, and then when the accelerated depreciation was up they'd sell the airplane and buy another. But this is something of a Ponzi scheme, too. One friend of mine did it for a while a few years ago, until the turbo Lycoming crankshaft AD grounded his plane for months. The house of cards came tumbling down. Even though the guy was loaded and could easily afford to keep it going, it stopped making financial sense.
 
NC Pilot said:
When the OP said the FBO didn't think it would rent much that should be a red flag not to do it.
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That's partially because it would become the oldest bird on the line. I was looking at the potential for replacing couple in the middle with newer planes. Basically, why would I want the leaseback I do to be the last bird to picked?

At least the FBO didn't try to spin a fairy tale and admitted it might be good for tax purposes and probably defraying some training cost, but not as a profit center. That gives me a glimmer of hope that they're reasonably honest.

The goal of this was to turn a modest profit over the 2-4 year period before they are resold and I buy my personal plane.
 
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Ken Ibold said:
The only folks I know of who made good business sense of leasebacks bought new airplanes, accelerated the depreciation to show LLC tax losses that could cover part of their very high personal income tax bills, and then when the accelerated depreciation was up they'd sell the airplane and buy another. But this is something of a Ponzi scheme, too. One friend of mine did it for a while a few years ago, until the turbo Lycoming crankshaft AD grounded his plane for months. The house of cards came tumbling down. Even though the guy was loaded and could easily afford to keep it going, it stopped making financial sense.
Click to expand...

That's probably what will kill it for me. I don't think the tax benefits are that great for me. Since there's such a slim chance turn a profit, what's the point? I might as well just put the money elsewhere.
 
nyoung said:
... Hopefully the FBO can hangar the plane for free.
=$19,800 total
Click to expand...
Not bloody likely. It'll sit on the ramp. Budget paint and interior replacement and additional avionics work, or else pony up whatever the market rate for hangars is. Medium sized cities you're probably looking at $350 to $500 a month -- if you can even get one.

So that takes you to at least 50 hours a month to break even. Now, keep in mind that you are NOT looking at 12.5 hours a week. You're looking at an oil change every month, which the FBO will charge you $150 for. The hundred hour will run an average of $1000 (in my experience. I know, some people will say they can have it done for $200, but the FBO makes the rules and employs the mechanics. You pay what they charge and don't have much control over it.) Just those two items will reduce revenue days by about 3-4 days a month. The other thing that trainers eat up is tires and brakes. And they are not cheap either. Throw in some weather days and you're looking at needing about 25 hours a week. If your average training flight takes 2 hours and gives you 1.5 hobbs, that means you'd need to be on the schedule for 33 hours a week. Check the FBO's scheduling book and see if anything is scheduled for 33 hours a week.
 
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Ken Ibold said:
Not bloody likely. It'll sit on the ramp. Budget paint and interior replacement and additional avionics work, or else pony up whatever the market rate for hangars is. Medium sized cities you're probably looking at $350 to $500 a month -- if you can even get one.

So that takes you to at least 50 hours a month to break even. Now, keep in mind that you are NOT looking at 12.5 hours a week. You're looking at an oil change every month, which the FBO will charge you $150 for. The hundred hour will run an average of $1000 (in my experience. I know, some people will say they can have it done for $200, but the FBO makes the rules and employs the mechanics. You pay what they charge and don't have much control over it.) Just those two items will reduce revenue days by about 3-4 days a month. The other thing that trainers eat up is tires and brakes. And they are not cheap either. Throw in some weather days and you're looking at needing about 25 hours a week. If your average training flight takes 2 hours and gives you 1.5 hobbs, that means you'd need to be on the schedule for 33 hours a week. Check the FBO's scheduling book and see if anything is scheduled for 33 hours a week.
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Actually, the plane would have been put where I said, and I sure as heck wasn't going to leave them to bake (or freeze) outside. The FS part-owner said hangar and line service per month was 120-160. That would be per bird, as many ins and outs as required, and does come with slightly discounted fuel delivery. Currently there's no self serve fuel here.

The mechanics are actually with the FBO, which is apparently a separate entity. I was going to check that out to make sure, but probably won't now.

I might still buy a bird, but I won't be doing a leaseback as it seems like lottery's odds for payback. I don't play the lottery. I don't expect big returns off of what I invest in (necessarily) but I don't like wild risk. So I'll probably never make a huge killing, but I'll usually not lose too much either...
 
Tax advantages never make a bad business deal into a good business deal.

JesseD said:
That's probably what will kill it for me. I don't think the tax benefits are that great for me. Since there's such a slim chance turn a profit, what's the point? I might as well just put the money elsewhere.
Click to expand...
 
wabower said:
Jason's #2 is a pipedream. Nobody who owns the airplane ever makes lots of money on a leaseback.
Click to expand...

I think Jason got real lucky in that he did his leasebacks during the "rising tide lifts all assets" phase of the economy. IIRC, he even might have made some $ on selling the planes when he was done, too, which I don't think is possible anymore.


wabower said:
Leasebacks are the aviation equivalent of a poker game where two friends meet a stranger.
Click to expand...

LOL. Look around the table. If you don't know who the patsy is, it's you. :ihih:
 
I recently completed a certified appraisal on a Cessna 210 that was purchased by a different owner after spending most of its life on leasebacks. The airframe had almost 8,000+ hours in service, was on its sixth engine and had 11 airframe logbooks, all chock-full of entries.

I typically do a sample count of the number of logbook entries between annuals as a test of the estimated annual down-time, and found the number of oil changes, tire, brake and battery changes to be the highest of any airplane I've ever examined.

It has been painted once and the nose bowl and leading edges have again taken on the appearance of a freighte. The interior has been re-ragged a couple of times and is now in serviceable condition but nothing to write home about.

The guy who bought it has spent a lot of money fixing things that were deferred by the leaseback operator, and components that are just "plumb wore out" from constant use and abuse. I've seen it cycle back through the shop a couple of times, so I know the new owner is flying it, just don't know any of the details of purchase price, continued use, etc.

JesseD said:
Actually, the plane would have been put where I said, and I sure as heck wasn't going to leave them to bake (or freeze) outside. The FS part-owner said hangar and line service per month was 120-160. That would be per bird, as many ins and outs as required, and does come with slightly discounted fuel delivery. Currently there's no self serve fuel here.

The mechanics are actually with the FBO, which is apparently a separate entity. I was going to check that out to make sure, but probably won't now.

I might still buy a bird, but I won't be doing a leaseback as it seems like lottery's odds for payback. I don't play the lottery. I don't expect big returns off of what I invest in (necessarily) but I don't like wild risk. So I'll probably never make a huge killing, but I'll usually not lose too much either...
Click to expand...
 
JesseD said:
That's partially because it would become the oldest bird on the line. I was looking at the potential for replacing couple in the middle with newer planes. Basically, why would I want the leaseback I do to be the last bird to picked?
Click to expand...
My plane was one of the older ones on the line, but it rented more because it looked great, was reliable, carried more, was just as well equipped (pre G1000) and was just as fast as the new ones, but rented for less. It took a while to get there, but it did happen.

At least the FBO didn't try to spin a fairy tale and admitted it might be good for tax purposes and probably defraying some training cost, but not as a profit center. That gives me a glimmer of hope that they're reasonably honest.
Click to expand...
THAT is a good sign. It also means that they would try to rent other planes ahead of this one. It would be really hard to do what I was able to do these days. Not impossible, but highly improbable.
 
Consider breaking even "making money"
 
Sure, but who at the cocktail party could he impress with his bull**** about being a big-shot airplane owner?

rpadula said:
You can do that by putting the $$$ under your mattress. And with a lot less hassle. B)
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wabower said:
Tax advantages never make a bad business deal into a good business deal.
Click to expand...
I don't know about never, but you certainly have to know what you're doing and, as in a lot of things, you have to have a boatload of money to make it work.
 
I spent most of my career in the tax advantaged investment business. No amount of knowledge or money can change the basic economics in the US.

Ken Ibold said:
I don't know about never, but you certainly have to know what you're doing and, as in a lot of things, you have to have a boatload of money to make it work.
Click to expand...
 
Impress?

wabower said:
Sure, but who at the cocktail party could he impress with his bull**** about being a big-shot airplane owner?
Click to expand...

Well, if I wanted my nuts intact, I'd better be impressing my wife with money management. :rofl:

Actually, the people we hang around with might worry about money but, aren't impressed by it. Bunch of Hollanders (cheap and drunk), Germans (cheap and drunk), Russians (cheap and drunk), Fins (cheap and drunk), and Irish (drunk). So the only way you'd impress them is if it started, or included, "I got a great deal on..." Well, that and pass around a good bottle of Redbreast or Koskenkorva Viina :cheers:

Okay so we're not that bad, but you'll never catch me flying for a day or two after some major holidays.
 
Re: Impress?

JesseD said:
Okay so we're not that bad, but you'll never catch me flying for a day or two after some major holidays.
Click to expand...

Why not, you got something really fast you can use on those days?
 
It seems to me that with leaseback the lesee is in far too much control. Has anyone tried to change that model? Something akin to where the lessor rents out the plane for a flat rate each month that at least covers his fixed costs and then charges a per hou fee to cover wear costs. The lesee then would have to charge enough to cover both the fixed and variable costs. That means they need to do the work that gets the plane flying in order to cover their cost just like anything else they would rent.

The only thing I really know about lease backs is that I have not seen one that makes me comfortable. I have a friend that leased back his new Cessna and then bragged three years later that the lease back paid for his new engine! One of my other friends pointed out that had the plane not been on a lease back it would not have needed an engine in just three years of use.
 
The market simply won't support a viable economic model for the lessor, for the same reasons flight instructors work for peanuts. We can wool it around until hell freezes, but nothing ever changes. There are undoubtedly some isolated cases in which the lessor has made money, but I'd place the odds at greater than 100:1.

ScottM said:
It seems to me that with leaseback the lesee is in far too much control. Has anyone tried to change that model? Something akin to where the lessor rents out the plane for a flat rate each month that at least covers his fixed costs and then charges a per hou fee to cover wear costs. The lesee then would have to charge enough to cover both the fixed and variable costs. That means they need to do the work that gets the plane flying in order to cover their cost just like anything else they would rent.

The only thing I really know about lease backs is that I have not seen one that makes me comfortable. I have a friend that leased back his new Cessna and then bragged three years later that the lease back paid for his new engine! One of my other friends pointed out that had the plane not been on a lease back it would not have needed an engine in just three years of use.
Click to expand...
 
ScottM said:
It seems to me that with leaseback the lesee is in far too much control. Has anyone tried to change that model? Something akin to where the lessor rents out the plane for a flat rate each month that at least covers his fixed costs and then charges a per hou fee to cover wear costs. The lesee then would have to charge enough to cover both the fixed and variable costs. That means they need to do the work that gets the plane flying in order to cover their cost just like anything else they would rent.

The only thing I really know about lease backs is that I have not seen one that makes me comfortable. I have a friend that leased back his new Cessna and then bragged three years later that the lease back paid for his new engine! One of my other friends pointed out that had the plane not been on a lease back it would not have needed an engine in just three years of use.
Click to expand...

Business and Corporate Aircraft are leased in similar fashion quite often.
 
wabower said:
The market simply won't support a viable economic model for the lessor, for the same reasons flight instructors work for peanuts. We can wool it around until hell freezes, but nothing ever changes. There are undoubtedly some isolated cases in which the lessor has made money, but I'd place the odds at greater than 100:1.
Click to expand...

That good, huh?

Face it: "rational" and "aviation" are rarely found in the same sentence.
 
About once a month - I start convincing myself that I need to buy a plane and workout a leaseback. Mostly because I want a 172 to instruct in. Luckily, it only takes me about 5 minutes to decide that it's a horrible idea.
 
You just need to rehearse a little bit to get it decided quicker...:D

jesse said:
About once a month - I start convincing myself that I need to buy a plane and workout a leaseback. Mostly because I want a 172 to instruct in. Luckily, it only takes me about 5 minutes to decide that it's a horrible idea.
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It really is quite easy to make a small fortune in aviation.......... Just start out with a large fortune!!
 
jesse said:
About once a month - I start convincing myself that I need to buy a plane and workout a leaseback. Mostly because I want a 172 to instruct in. Luckily, it only takes me about 5 minutes to decide that it's a horrible idea.
Click to expand...


If you want a plane to instruct in get a Citabria and skip the leaseback. Just do it independent.
 
My opinion is that if leasebacks were a great money maker the FBO would create a second company and leaseback to the FBO.
 
Luvrv8 said:
My opinion is that if leasebacks were a great money maker the FBO would create a second company and leaseback to the FBO.
Click to expand...


They aren't a "great" money maker. There is room for one person to make money. There are some operations that are better for the owner than others. Clubs that need planes for the membership to fly. They don't really make money on the rental, however there are members who are instructors who make money that way. These operations are the ones more likely to pay the owner. Busy flight academies as well, however most of those are flight school owned. Typically a flight school will have a mix of school owned and leaseback aircraft. As I see it, most flight schools own as many planes as they can finance themselves and take on what they can in leasebacks. If the FBO is making money renting your plane, you likely won't.
 
I know there are those of us who think leasebacks are a bad idea and those who have made them work. Without going into all of that again, I was wondering if anyone had any good examples of Spreadsheets they've used to model the costs or example lease agreements that they might be willing to share -- I would of course keep everything in confidence.

Additionally, if anyone is willing to offer insight into the "actual" annual maintenance costs (beyond annuals and 100 hours), would welcome a PM from you, too.

Many thanks for your help -- as pilots, if we can learn from others' experiences, we'll be that much better off.

Best,
Tyler
 
wabower said:
Jason's #2 is a pipedream. Nobody who owns the airplane ever makes lots of money on a leaseback. Leasebacks are the aviation equivalent of a poker game where two friends meet a stranger.
Click to expand...


As for 'a lot of money' that's always correct. The other part is only usually correct. You can make some money on a leaseback, it does happen, but it's usually a situation where the owner and leasee are the two friends and the renter is the stranger in the poker game. I remember the first time I looked into it 20 years ago the wide range of terms that were offered at different places.
 
tylerdurden4543 said:
I know there are those of us who think leasebacks are a bad idea and those who have made them work. Without going into all of that again, I was wondering if anyone had any good examples of Spreadsheets they've used to model the costs or example lease agreements that they might be willing to share -- I would of course keep everything in confidence.

Additionally, if anyone is willing to offer insight into the "actual" annual maintenance costs (beyond annuals and 100 hours), would welcome a PM from you, too.

Many thanks for your help -- as pilots, if we can learn from others' experiences, we'll be that much better off.

Best,
Tyler
Click to expand...

The deal you are looking for is a 'demise' type deal where you get a set (low sounding) hourly amount and they handle EVERYTHING else on their dime. Basically they take the plane off your hands, pay you for the hourly use, and return it to you in the stipulated condition at the end of the contract.

Any deal where you are responsible for the maintenance and repairs from your cut of the deal, run from as fast as you can unless you are an A&P IA and are going to do all the maint and repairs yourself. One of the scams to watch for on leasebacks is their service depart will not only eat your profits, but they'll eat your paycheck as well.
 
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Luvrv8 said:
My opinion is that if leasebacks were a great money maker the FBO would create a second company and leaseback to the FBO.
Click to expand...


Many flight schools do own their own planes. They need the leasebacks because they can't afford to buy more planes. Airlines lease planes, heck, even the engines are typically leased. The problem with aviation is the capital requirements are so high and the profits so low that even a good well run flight school will need to have leasebacks for years in order to grow unless the owner is independently wealthy or is backed by the manufacturer.
 
Luvrv8 said:
My opinion is that if leasebacks were a great money maker the FBO would create a second company and leaseback to the FBO.
Click to expand...
You're missing the point -- if they had the capital to purchase the item, they wouldn't need an outside investor.
 
I think you're missing the point. If they created an attractive ROI, the companies would be able to afford them. They don't, and so they can't.

Ron Levy said:
You're missing the point -- if they had the capital to purchase the item, they wouldn't need an outside investor.
Click to expand...
 
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