Aircraft Lease Assets

6 Months Ended

Jun. 30, 2020

Aircraft Lease Assets [Abstract]

Aircraft Lease Assets

The Company’s leases are normally “triple net leases” under which the lessee is obligated to bear all costs, including tax, maintenance and insurance, on the leased assets during the term of the lease. In most cases, the lessee is obligated to provide a security deposit or letter of credit to secure its performance obligations under the lease, and in some cases, is required to pay maintenance reserves based on utilization of the aircraft, which reserves are available for qualified maintenance costs during the lease term and may or may not be refundable at the end of the lease. Typically, the leases also contain minimum return conditions, as well as an economic adjustment payable by the lessee (and in some instances by the lessor) for amounts by which the various aircraft or engine components are worse or better than a targeted condition set forth in the lease. Some leases contain renewal or purchase options, although the Company’s sales-type leases contain a bargain purchase option at lease end which the Company expects the lessees to exercise or require that the lessee purchase the aircraft at lease-end for a specified price.

Because all of the Company’s leases transfer use and possession of the asset to the lessee and contain no other substantial undertakings by the Company, the Company has concluded that all of its lease contracts qualify for lease accounting. Certain lessee payments of what would otherwise be lessor costs (such as insurance and property taxes) are excluded from both revenue and expense.

The Company evaluates the expected return on its leased assets by considering both the rents receivable over the lease term, any expected additional consideration at lease end, and the residual value of the asset at the end of the lease. In some cases, the Company depreciates the asset to the expected residual value because it expects to sell the asset at lease end; in other cases, it may expect to re-lease the asset to the same or another lessee and the depreciation term and related residual value will differ from the initial lease term and initial residual value. Residual value is estimated by considering future estimates provided by independent appraisers, although it may be adjusted by the Company based on expected return conditions or location, specific lessee considerations, or other market information.

Two of the Company’s operating lease assets are subject to manufacturer residual value guarantees totaling approximately $20 million at the end of their lease terms in the fourth quarter of 2020. Three additional aircraft are subject to manufacturer residual value guarantees totaling approximately $16 million at the end of their lease terms in the second quarter of 2025. The Company considers the best market for re-leasing and/or selling its assets at the end of its leases, although it does not expect to retain ownership of the assets under sales-type leases given the lessees’ bargain purchase options or required purchase.

During the second quarter of 2020, the Company recorded impairment losses totaling $6,706,600 for two of its aircraft held for lease, which were written down based on estimated future cash flow. The Company also recorded impairment losses totaling $3,020,000 on four aircraft that are held for sale: (i) $2,870,000 for three regional jet aircraft that were written down to fair value and (ii) $150,000 for a turboprop aircraft that was written down its estimated sales price, less cost of sale.

(a) Assets Held for Lease

At June 30, 2020 and December 31, 2019, the Company’s aircraft held for lease consisted of the following:

	June 30, 2020					December 31, 2019
Type	Number Owned		% of net book value			Number owned		% of net book value
Regional jet aircraft		9		80	%		9		80	%
Turboprop aircraft		2		20	%		2		20	%

The Company did not purchase or sell any aircraft held for lease during the first six months of 2020. None of the Company’s aircraft held for lease were off lease at June 30, 2020.

As of June 30, 2020, minimum future lease revenue payments receivable under non-cancelable operating leases were as follows:

Years ending December 31
	2020	$	8,077,700
	2021		10,343,800
	2022		8,591,400
	2023		8,591,400
	2024		6,783,900
	Thereafter		1,683,400
		$	44,071,600

The remaining weighted average lease term of the Company’s assets under operating leases was 36 months and 41 months at June 30, 2020 and December 31, 2019, respectively.

(b) Sales-Type and Finance Leases

In January 2020, the Company amended the leases for three of its assets that were subject to sales-type leases. The amendments provided for (i) the sale of one aircraft to the customer in January 2020, which resulted in a gain of $12,700, (ii) application of collected maintenance reserves and a security deposit held by the Company to past due amounts for the other two aircraft, (iii) payments totaling $585,000 in January for two of the leases and (iv) the reduction of future payments due under the two leases. As a result of payment delinquencies by the two customers of these aircraft, the Company recorded a bad debt allowance of $1,170,000 during the first quarter.

In January 2020, the lessee for an aircraft leased pursuant to a direct financing lease notified the Company of its intention to exercise the lease-end purchase option for the aircraft in March 2020. In February 2020, the Company and the same lessee agreed to the early exercise of lease-end purchase options for direct financing leases that were to expire in March 2021 and March 2022. All three aircraft were sold to the lessee in March 2020, resulting in a loss of $52,000. During the second quarter of 2020, the Company recorded additional legal expenses totaling $8,000 related to the sale.

At June 30, 2020 and December 31, 2019, the net investment included in sales-type leases and direct financing leases receivable were as follows:

	June 30, 2020			December 31, 2019
Gross minimum lease payments receivable	$	4,138,000		$	9,096,400
Less unearned interest		(88,000	)		(286,600	)
Allowance for doubtful accounts		(1,170,000	)		(7,700	)
Finance leases receivable	$	2,880,000		$	8,802,100

As of June 30, 2020, minimum future payments receivable under finance leases were as follows:

Years ending December 31
	2020	$	1,013,000
	2021		1,284,000
	2022		1,284,000
	2023		557,000
		$	4,138,000

The remaining weighted average lease term of the Company’s assets under sales-type and finance leases was 31 months and 20 months at June 30, 2020 and December 31, 2019, respectively.

The following is a roll forward of the Company’s finance lease receivable allowance for doubtful accounts from December 31, 2019 to June 30, 2020:

Balance, December 31, 2019	$	2,908,600
Deductions upon sale of assets		(735,200	)
Deductions upon lease amendments		(2,173,400	)
Additions charged to expense		1,170,000
Balance, June 30, 2020	$	1,170,000