A Look At Integrating Gemco Into a Leaseback Agreement
Leaseback arrangements are one of the most popular ownership structures we encounter here at Gemco. Many flights schools and aircraft owners who are involved with leaseback airplanes want to take advantage of the benefits of Gemco’s programs, but they are not sure if they can integrate our program into their current ownership structure. We are pleased to tell both parties that they can.
Originally, leaseback arrangements were utilized as a tax shelter for owners who bought new airplanes. Eventually however, they became the go-to method of aircraft ownership because it offers owners the ability to reduce the cost of actually owning an aircraft while providing a flight school with additional aircraft to utilize in their fleet.
Because of their popularity, the contracts used to establish these leasebacks are fairly standardized. Many examples we see here at Gemco are almost exact copies of those provided by AOPA and other popular ownership groups; occasional twists are thrown in for unique situations.
Being legal contracts, we do have to preface this article with the fact that we are not legal counsel here at Gemco. Our discussion here deals with the generalities of leaseback arrangements. We always recommend consulting with your own personal counsel to develop the specific details of working Gemco into a leaseback agreement.
For the most part, almost every leaseback agreement has two major clauses to be concerned about when adding Gemco into the mix: the “Commission” clause, and the “Maintenance” clause. Both of these sections are interrelated, and have an impact on how the relationship between school and owner will play out.
In the majority of cases, responsibility for all maintenance items (including annuals, 100-hours, overhauls, mandatory inspections, etc.) fall onto the shoulder of the owner. A flight school with a maintenance shop in-house usually offers leaseback owners a discounted service rate and a discount on part costs. The details of this are in the Maintenance clause of the contract.
To reflect this, the Commission clause will detail which party gets what payment during the term of the agreement. Assuming that the majority of leasebacks imply the owner is responsible for maintenance, they will receive the majority of the hourly cost charged to customers. However the school is entitled to, and receives, payment for acting as the “middleman,” selling time in the aircraft. This amount is usually fairly low in this type of agreement (10-15%).
For all the complications out there about leasebacks, these quick fundamental principles of payment and maintenance form the basis for where Gemco can be integrated into the equation. Let’s look at how it would work from the two different sides.
I'm The Flight School
As the flight school, the usual knee-jerk reply is, “why should I get involved in this if the owner is responsible for maintenance as described in the agreement?”
Well, the answer is simple: the benefits. By including a clause in your contract that dictates that Gemco will be used, you:
- Add benefits to your leaseback arrangements such as
- The buildup of transferable equity.
- Simplification of accounting by controlling how you amortize your engine.
- Increased aircraft value.
- The ability of the owner to take advantage of Gemco’s fleet discounts.
- Provide protection for your school
- If an owner fails to save up enough money for overhaul, they may be forced to sell their aircraft to meet financial obligations. Worse, the aircraft could end up sitting on the tarmac in an unusable condition. This can reduce a flight schools aircraft availability. If you have students who are working towards their license in that aircraft, you will likely have some frustrated customers who will have to waste their money on transition training to another aircraft in the fleet.
- Avoid contract disintegration
- Although your contract may be clear that the owner is responsible for maintenance, owners can sometimes get surprised when maintenance liabilities come faster than they anticipated, especially overhaul. If their profit from the agreement fails to meet the cost of maintenance and operation, they might not be interested in continuing the arrangement. Gemco prevents this by assuring the owner is prepared, no matter what the flight schools usage is.
The only way for a customer to take advantage of Gemco's fleet discounts with only one engine can only be done through the flight school.
I'm An Aircraft Owner
As an aircraft owner, the solution is simple. Because you are traditionally responsible for all the maintenance costs of your aircraft, enrolling in Gemco can be done without bringing the flight school you lease to into consideration.
However, you might want to bring our program up, because integrating it into your contract with your flight school might allow you to take advantage of special pricing a flight school can get for enrolling multiple aircraft engines.
So How Does It Work
There are multiple ways to integrate Gemco into your agreement. The easiest is to specify in the contract directly that a certain payment will be made to Gemco for each hour the flight school puts on the aircraft. This can be modified to include the owner, or not.
For example, in the Maintenance clause, it can be stated that $xx.xx amount per hour will be sent to Gemco. The value of $xx.xx is the Gemco rate. This makes the accounting easy when it comes tax time. Instead of having to manually calculate the accrued liability the owner accumulated over the year and trying to offset this with the revenue, Gemco automatically removes it as the aircraft is flown at a predictable, fixed rate.
If it is the flight school is responsible for maintenance, they may choose to not include it into Gemco in the contract at all, instead just utilizing the program as they use the aircraft. The story would be the same if the owner was responsible for maintenance and obtained the program on their own.
We encourage you to include Gemco’s program in your agreement. By doing so, it clearly outlines the intentions of both parties, while giving everyone the ability to effectively develop and operational system that ensures that all the liabilities of the aircraft are accounted for. This streamlines determining what the actual profit of the leaseback arrangement is, validating the arrangement.
As always, the experts at Gemco are here to work with you to integrate our programs into your unique situation.