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.

Maintenance reserves and accrued costs in the accompanying balance sheets include: (i) refundable maintenance payments billed to lessees, which are paid out as related maintenance is performed or at the end of the lease, (ii) for lessees that pay non-refundable maintenance reserves, estimated maintenance costs accrued at the time a reimbursement claim or sufficient information is received regarding maintenance work performed, and (iii) maintenance for work performed for off-lease aircraft, which is not related to the release of reserves received from lessees.

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 December 31, 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 December 31, 2013 and December 31, 2012, the Company’s maintenance reserves and accrued maintenance costs consisted of the following:

	December 31, 2013		December 31, 2012
Refundable maintenance reserves	$	10,480,000	$	14,477,400
Accrued maintenance costs		2,774,100		878,700
	$	13,254,100	$	15,356,100

Additions to and deductions from the Company’s accrued maintenance costs during the years ended December 31, 2013 and 2012 for aircraft maintenance were as follows:

	For the Years Ended December 31,
	2013		2012
Balance, beginning of period	$	878,700	$	1,013,400
Additions:
Charged to expense		8,765,000		4,082,100
Capital equipment		482,900		52,200
Accrued claims related to refundable maintenance reserves		745,600		763,900
Prepaid maintenance and other		1,114,000		239,700
Total additions		11,107,500		5,137,900
Deductions:
Payments		8,297,700		4,614,900
Other		914,400		657,700
Total deductions		9,212,100		5,272,600
Net increase/(decrease) in accrued maintenance costs		1,895,400		(134,700	)
Balance, end of period	$	2,774,100	$	878,700