Aircraft Lease Assets

6 Months Ended

Jun. 30, 2021

Aircraft Lease Assets

NOTE 2 - Aircraft Lease Assets

2. 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 $13.7 million at the end of their lease terms in the second quarter of 2027. 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.

(a) Assets Held for Lease

During the second quarter of 2021, with the exception of one aircraft that is collateral for a sales-type lease receivable, the Company reclassified all of its aircraft to held for sale as a result of a sale order ("Sale Order") approved by the Bankruptcy Court. At December 31, 2020, the Company’s aircraft held for lease consisted of the following:

Type	Number owned		% of net book value
Regional jet aircraft		4		67	%
Turboprop aircraft		2		33	%

Type	Cost		Accumulated depreciation			Impairment losses			Net
Aircraft under operating leases	$	74,397,700	$	(21,001,300	)	$	(7,633,300	)	$	45,763,100

(b) Sales-Type and Finance Leases

The Company had two sales-type leases, which were substantially modified in January 2020 to reduce the amount of monthly payments and purchase option amounts due under the leases. Although the modifications would ordinarily have given rise to income or loss resulting from the changed term of the agreements, the lessee’s poor compliance with the lease terms led the Company to value the sales-type leases at the fair value of the collateral and, as such, the modifications did not give rise to any effect on income other than that related to the collateral value of the financed aircraft. As a result of payment delinquencies by the two customers, the Company recorded bad debt allowances of $1,170,000 and $333,000 during the first and second quarters of 2020, respectively. During the first quarter of 2021, the Company recorded a bad debt allowance of $821,000 related to one of the two sales-type finance leases as a result of its May 2021 agreement to sell the aircraft to the customer, which occurred in May 2021. During the second quarter of 2021, the Company recorded a bad debt allowance of $326,000 related to the second sales-type finance lease as a result of its July 2021 agreement to sell the aircraft to the customer. The Company expects this sale to occur in the fourth quarter of 2021. The lease remains treated as a sales-type lease.

At June 30, 2021 and December 31, 2020, the net investment included in sales-type leases and direct financing leases receivable were as follows:

	June 30, 2021			December 31, 2020
Gross minimum lease payments receivable	$	1,900,000		$	4,138,000
Less unearned interest		(10,000	)		(88,000	)
Allowance for doubtful accounts		(1,190,000	)		(1,503,000	)
Difference between minimum lease payments receivable and collateral value of leases		-			-
Finance leases receivable	$	700,000		$	2,547,000

As of June 30, 2021, minimum future payments receivable under the remaining finance lease was as follows:

Years ending December 31
2021	$	1,100,000
2022		600,000
2023		200,000
	$	1,900,000

The remaining weighted average lease term of the Company’s assets under sales-type and finance leases was 18 months and 25 months at June 30, 2021 and December 31, 2020, respectively.

The following is a roll forward of the Company’s finance lease receivable allowance for doubtful accounts from December 31, 2020 to June 30, 2021:

Balance, December 31, 2020	$	1,503,000
Additions charged to expense		1,147,000
Deductions upon sale of aircraft		(1,460,000	)
Balance, June 30, 2021	$	1,190,000