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What is a Regulated Lease?

What is a Regulated Lease?


Regulated leases are governed by certain laws that dictate how they can be structured. These leases require special treatment for GASB 87. 

Municipalities have more disclosures for regulated leases

GASB 87 changed how leases are classified on municipality financial statements. GASB 87 is meant to increase the transparency and usefulness of financial statements published by municipalities and related entities.

Suppose a lease is classified as regulated under the GASB 87 standard.  In that case, the lessee is required to disclose additional information, such as a description of the leasing arrangements and a schedule of expected future payments, and more. 

Certain exempt regulated leases are allowed to recognize revenue based on the payment provisions of the contract. The exception is allowed for lessors whose leases are subject to certain regulations that meet all of the following criteria: 

  1. Lease rates can't exceed a “reasonable” amount — what's “reasonable” is determined by a government official.
  2. Lease rates should be comparable for lessees in similar circumstances.
  3. The lessor can't deny potential lessees the right to enter into leases if facilities are available and if the lessee’s use of the facilities complies with generally accepted use restrictions.

Most aeronautical leases between airports and airlines are regulated leases per GASB 87, as their agreements are regulated by the Federal Aviation Administration (FAA) and the Department of Transportation. Thus, the airline must disclose a description of the agreements and revenues recognized under the agreements — including expected future minimum payments received.

However, according to the FAA, non-aeronautical use leases aren't regulated, as federal laws don't apply to airport access and reasonableness of fees. Aeronautical use is limited to airlines providing services related to the aircraft operation and related activities. 

What’s important here?

If regulations, external laws, or court rulings limit the design or structure of a lease, it could be considered a regulated lease. GASB 87 requires special treatment for such leases, including increased disclosures.