Aircraft Lease Assets

9 Months Ended

Sep. 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.

Three of the Company’s operating lease assets 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 third quarter of 2020, the Company recorded impairment losses totaling $300,000 for two of its aircraft held for lease, which were written down based on estimated future cash flow. The Company also recorded an impairment loss of $139,000 on an aircraft that is held for sale, which was written down based on its estimated sales price, less cost of sale.

(a) Assets Held for Lease

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

	September 30, 2020					December 31, 2019
Type	Number Owned		% of net book value			Number owned		% of net book value
Regional jet aircraft		9		79	%		9		80	%
Turboprop aircraft		2		21	%		2		20	%

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

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

Years ending December 31
Remainder of 2020	$	3,234,500
2021		10,512,500
2022		8,760,100
2023		8,760,100
2024		6,931,400
Thereafter		1,683,300
	$	39,881,900

The remaining weighted average lease term of the Company’s assets under operating leases was 35 months and 41 months at September 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 and third quarters of 2020, the Company recorded additional legal expenses totaling $8,600 related to the sale.

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

	September 30, 2020			December 31, 2019
Gross minimum lease payments receivable	$	4,138,000		$	12,772,300
Less unearned interest		(88,000	)		(1,053,900	)
Allowance for doubtful accounts		(1,170,000	)		(2,908,600	)
Difference between minimum lease payments receivable and collateral value of leases		-			(7,700	)
Finance leases receivable	$	2,880,000		$	8,802,100

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

Years ending December 31
Remainder of 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 28 months and 20 months at September 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 September 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, September 30, 2020	$	1,170,000