The lease term is the period of time that a lease will be in effect
The maximum lease term dictates the latest possible end date of a lease. Lease terms can be for a set period of time — known as a fixed lease term — or last indefinitely. They may also have various options that change the length, such as extension or cancellation options.
The absolute maximum term allowed for leases will vary by state, which in many cases is 99 years. Some states leave lease limits up to the lessor and lessee. Other states put limitations on only certain types of leases, such as leases with municipalities, or agricultural leases.
Related to GASB 87, the maximum lease term is important in determining if the lease is classified as a short-term lease (less than 12 non-cancelable months). Short term leases are not subject to GASB 87 reporting. For more information regarding short-term leases, click here.
Example:
A municipality signs a one-year lease for office equipment that is non-cancellable. There is a three month extension option. Thus, the maximum lease term is 15 months, making the lease subject to GASB 87.
What’s important here?
When determining whether a lease is considered short-term — and subject to GASB 87 — all extension options are counted (regardless of the probability of being exercised).
If a lease is cancelable, the maximum lease term includes the amount of time that either party must provide notice. Thus, the maximum lease term for a cancelable lease will be the non-cancelable period plus the notice period.
For example, a state agency signs a five-year lease for equipment. After six months, the lease is cancelable by either party with a 30-day notice. Thus, the maximum lease term is seven months and would not be considered a GASB 87 lease.
