Unique Problems Related to Equipment Leasing for Unmanned Aerial Vehicles (Drones)

Authorities reported that an unmanned aerial vehicle almost brought down a Cessna 172 at the Chicagoland Executive Airport, just north of O’Hare International Airport. The National Transportation Safety Board (NTSB) said the drone, operated by a task saturated pilot and monitored by an untrained spotter working for a local police department, was being used to find an armed suspect near the airport. 

And, in doing so, the police operator bent and broke several rules in the heat of the action. As a result, the 13.5-pound DJI Matrix Pro Plus drone hit the bottom cowl of the Cessna 172 on final approach, seriously damaging the airplane, though the instructor and student on board managed to land safely. The next day you learn about all this for the first time, and you find that this drone was part of a fleet of commercial drones your company recently leased to the local police department. What now?  

The use of drones in our airspace system for everything from bridge inspections to delivering pizzas continues to proliferate. In its Aerospace Forecast for fiscal years 2022 to 2042, the Federal Aviation Administration (FAA) noted that over 620,000 drones were registered in its system in Q2 2021, up from a mere 12,093 in Q1 2016. Drones are also becoming more complex (read expensive), with operators now being forced to seek financing arrangements to maintain their fleets. Professional grade drones typically cost above $10,000, with an average unit price around $25,000. 

With the increase in number and cost of drones comes increased opportunity for equipment lessors looking to capitalize on this growth market. However, this opportunity comes with some unique challenges and risks that lessors will need to manage. 

The Lessee 

Federal Aviation Regulation (FAR) Part 107 governs the operation of drones and the certification of remote pilots who operate them. For your lessee to use a drone in commercial operations, it must be operated by a remote pilot certified under Subpart C of Part 107 and operated in accordance with Subparts B and D of Part 107. It is important to adequately vet your lessee to ensure strict compliance with FAR 107. 

State and Local Regulations 

Part 107 requires that a drone not operate higher than 400 feet above ground level. And, for the first time, the FAA has ceded the rights to states and local authorities to govern the operation of drones within that 400 feet. As a result, state and local regulations have exploded, and these regulations are all over the place.  

For example, Hawaii has enacted a law as part of its fishing regulations prohibiting the possession and use of drones in or near state marine waters for the purpose of taking aquatic life. (HRS §188-23.5); Illinois prevents local governments from regulating drone operations, retaining the right to do so as an exclusive power of the State (620 ILCS 5/42.1); Minnesota spells out in detail how data that a law enforcement agency obtains by a drone may be used (MSA §626.19); and Texas prohibits their operation in or over state property (37 TAC §8.21). 
These laws will impact lessor liability. For instance, in Nevada a property owner or occupier may sue the owner or operator of a drone in an action for trespass if the drone is flown lower than 250 feet over the property (NRS 493.103), and Oklahoma subjects the sale of a drone to sales tax (Okla. Admin. Code. 710: 65-13-30.1). Any lessor who looks to participate in this market must do its homework with respect to the nature and extent of operations its potential lessee intends to undertake, and the lessee’s knowledge and understanding of the laws and regulations affecting those operations. 

“Do your homework--not all drones are created equal.”

 

Equipment, Maintenance and Repair 

A careful lessor will also spend time assessing what equipment it is leasing as not all drones are created equal. Is the equipment manufactured by a reputable manufacturer who supports its product with an effective warranty, or is the drone a custom, one-off unit purpose-built for a specific lessee’s needs? It is also important to delve into the drone’s operating system, the computer code that lives at the heart of the drone and controls all its operations. Is that system robust enough to ensure safe operations in accordance with all applicable laws and regulations? FAR Part 89 requires remote identification for drones. Does the drone’s operating system satisfy those requirements? Part 107 also requires formal maintenance programs for some operations. So it is important to make sure that capability is in place prior to leasing a drone. 

Insurance 

Drones go up, and what goes up will come down, sometimes with less than stellar results. There are several major players in the drone insurance market covering the risk of operating commercial drones, so a market for coverage already exists. A lessor will need to make sure the lessee obtains appropriate insurance, naming the lessor as an additional insured, to cover repair of physical damage to the drone and to insure against any liability for injury to people or damage to property arising from the drone’s operation.

Data Security and Privacy 

Drones gather data as part of their operations, and it is incumbent upon the lessor to make sure that its lessee’s data collection is stored securely and not shared with unauthorized parties. Therefore, a lessor should make the lessee’s operations and experience in this area as much a part of the credit analysis as the lessee’s balance sheet and banking relations. 

Conclusion  

Commercial operation of drones is a fact, not a forecast of what will happen in the future. Drones are here in large numbers and already in operation. Drones present a unique opportunity for equipment lessors to capitalize on their customers’ need by providing financing to reputable commercial drone operators to obtain and maintain their fleets. However, the lessor must also understand there are problems unique to the operation of drones that must be understood before any program to lease drones will succeed legally or economically.