What Is a Lease Spread?

A lease is a contractual agreement between two parties that allows one party to use an asset that the other owns, for a specific period of time and a specific amount of payment. Renting is a common form of leasing, and when companies consider leases they are typically considering leasing an office space or factory for their work. Under this definition, lease spread can actually have several meanings, depending on what financial aspect of the process is being analyzed.

One of the most common uses of lease spread is in reference to the actual profit made from the lease. For example, many owners use a mortgage to buy property and then lease that property to others. The owner must then make continual mortgage payments, but is also receiving continual lease payments. The lease spread is the amount by which the lease payments exceed the mortgage payments. This spread is typically represented as an actual percentage rate of difference.

The lease spread as it pertains to profit is useful when companies want to ensure that they are actually making money by leasing their properties. If a lease amount falls below the mortgage payment each month, the owner is actually losing profit each month. Owners want to find a comfortable spread that earns them profit each month and leaves room for changes in the mortgage payment amount and time periods between leases when losses are incurred.

A lease spread can also be considered from a taxation perspective. In this case, owners must represent the money they receive from a lease as part of their tax return, since it counts as income. However, many lease arrangements allow for early payments, or for a certain number of payments upfront, or for other specific payment details outlined in the contract. Rather than communicate all these specifics, the IRS asks owners to simply spread the lease payments out over the length of the lease, making each monthly payment equal.

From an investment perspective, lease spread can refer to the number and quality of leases backing a specific security. Some securities are made from lease-based activities, which are sold and packaged together to create investments in much the same way mortgage-based securities are. Here the lease spread refers to the types of leases contained with a particular security -- the amount of risk that spans the lease and the range of profit that the leases will produce.