3.Maintenance Reserves and Accrued Maintenance Costs

Maintenance costs under the Company’s triple net leases are generally the responsibility of the lessees. Most of the Company’s leases require payment of maintenance reserves, which are based upon lessee-reported usage and billed monthly, and are intended to accumulate and be applied by the Company toward reimbursement of most or all of the cost of the lessees’ performance of certain maintenance obligations under the leases. Maintenance reserves are characterized as either refundable or non-refundable depending on their disposition at lease end.

Refundable maintenance reserves received by the Company are accounted for as a liability, which is reduced when maintenance work is performed during the lease and reimbursement to the lessee is paid. Such reserves are refunded after all return conditions and, in some cases, any other payments due under the lease are satisfied. Any refundable reserves retained by the Company to satisfy return conditions are recorded as revenue when the asset is returned.

Non-refundable maintenance reserves are recorded as maintenance reserves revenue (assuming cash is received or collections are reasonably assured). The timing difference between recording maintenance reserves revenue as usage occurs and recording maintenance expense as maintenance is performed can have material effects on the volatility of reported earnings.

At September 30, 2013 and December 31, 2012, the liability for maintenance reserves and accrued maintenance costs consisted of refundable maintenance payments billed to lessees based on usage and accrued maintenance costs for both off-lease aircraft and lessee maintenance claims for non-refundable maintenance reserves. Refundable maintenance reserves at December 31, 2012 also included a $6,528,500 payment received from a lessee when its two aircraft leases were assigned to a new lessee upon the sale by the original lessee of all of its assets to the new lessee in 2012. In the first quarter of 2013, the two subject aircraft were returned to the Company by the new lessee in connection with the new lessee’s bankruptcy and the $6,528,500 payment was recorded as maintenance reserves revenue. At September 30, 2013 and December 31, 2012, the Company’s maintenance reserves and accrued maintenance costs consisted of the following:

	September 30, 2013		December 31, 2012
Refundable maintenance reserves	$	9,711,600	$	14,477,400
Accrued maintenance costs		2,669,700		878,700
	$	12,381,300	$	15,356,100

Additions to and deductions from the Company’s accrued maintenance costs during the nine months ended September 30, 2013 and 2012 for aircraft maintenance were as follows:

	For the Nine Months Ended September 30,
	2013		2012
Balance, beginning of period	$	878,700	$	1,013,400
Additions:
Charged to expense		6,239,900		3,174,500
Capital equipment		384,800		52,300
Accrued claims related to refundable maintenance reserves		605,900		578,100
Prepaid maintenance and other		134,100		333,500
Total additions		7,364,700		4,138,400
Deductions:
Payments		4,770,000		3,233,900
Other		803,700		292,400
Total deductions		5,573,700		3,526,300
Net increase in accrued maintenance costs		1,791,000		612,100
Balance, end of period	$	2,669,700	$	1,625,500