Lease Rental Discounting: Definition, Advantages & LRD Loan Eligibility
What is discounting on lease rentals?
Many people rent out their commercial real estate. Leasing such properties has a number of advantages, including the ability to borrow money against rental income. Lease Rental Discounting (LRD), a type of term loan, is given in exchange for commercial real estate or other income-producing assets. The LRD Loan is based on the notion that you can quickly generate revenue by using the fixed rent from your rental property as “Collateral.”
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A Lease Rental Discounting Loan is available from numerous banks at competitive interest rates. Based on the discounted value of projected future rentals and the actual value of the property, the LRD Loan is granted. The loan proceeds may be invested or used by borrowers for personal expenses or as capital for business growth.
What is the process of lease rental discounting?
The financial institution, the borrower who owns the property, and the tenant who leases the property are all parties to a lease rental discounting transaction. Monthly rent receipts from the lease are given as security by the owner for the loan. The lender also evaluates the borrower’s long-term cash flow before approving an LRD-based loan for the given amount.
In other words, the lender “purchases” the borrower’s rent receivables after deducting the time value of money. The renters, not the borrower/lessor, are responsible for making the rent payments guaranteed as loan payback to the lender.
Lease rental discounting is a good choice if you want to successfully satisfy your company’s short-term financial needs.
Lease rental discounting characteristics:
- Instead of the property under lease rental discounting, the loan is secured by the projected rental cash flow. A discounted percentage of the rent receivables may be lent by the lender to the borrower. The tenant also enters into a lease with the lender, pledging to pay the latter directly for the term of the loan. Since the rent is transferred to the lender under this arrangement, the loan application procedure is simplified.
- For the majority of commercial or industrial properties, the lender offers discounted lease rental rates. Companies can access finance at competitive interest rates because of the considerable returns from these sources.
- Owners can better utilise their assets thanks to reduced lease rental payments. Business owners can increase their liquidity by borrowing money against their real estate and utilizing the rental revenue as collateral for another loan.
- To make up for the bigger loan amount, the majority of lenders provide longer loan periods. The business owner doesn’t have to worry about making payments because the loan is repaid through EMIs from the regular rental income. As a result, the company’s cash flow will be balanced.
Reasons for leasing with a rental discount
Lease Rental Discounting provides numerous benefits, and the money can be used for a variety of things, including:
Business Development: A loan against rent receivables is the ideal alternative when the lessor wants to reduce personal expenses while investing in more properties. The money can be use by property owners to grow any kind of business. As a result, they gain from being able to take care of their business demands without having to stretch their budget.
Loan repayment: Owners of real estate can utilise this money to refinance or settle their outstanding debts. Due to lengthier repayment terms and enticing interest rates, lease rental discounting becomes a cost-effective way to quickly pay off high-interest debts.
Property with dual uses: Lower lease rentals allow owners to make better use of their structures. This allows property owners to borrow once against the capital value of their assets. They can also obtain a loan that is secured by the potential future cash flow that the subject property will produce. Thus, lease rental discounting fills the gap in immovable property’s lack of liquidity.
Purchase a new property: Lease rental discounting is an appealing financial option for debtors whose primary source of income is rental payments. The lessor can utilise these monies to extend their portfolio and add additional rental income streams by purchasing a new property.
Additionally, the existing property acts as a form of loan repayment because the lessor does not have to pay the EMIs out of his own pocket with an LRD-based loan. This is an effective way to expand a rental business.
Lease Rental Discounting Loans’ Advantages
Rental Lease For property owners looking for liquidity without having to sell their properties, discounting loans can be a beneficial financing alternative. The following are some benefits of LRD loans:
Easy access to funds: Property owners can profit from their rental income streams and have simple access to financing thanks to LRD loans. Using LRD loans, the owner of the property may secure a loan against potential future rent receipts.
Lower interest rates: Since LRD loans are secured, they often have lower interest rates than unsecured loans. Compared to other loan kinds available on the market, LRD loans feature cheaper interest rates.
Longer loan tenures: LRD loans often offer longer loan terms, giving the borrower more time to repay the loan. Loan payback periods for LRDs range from five to fifteen years.
Flexible end-use options: Property owners can utilise the money they get from LRD loans for a range of things, such as growing their business, buying additional properties, upgrading current ones, and more.
Tax benefits: The interest paid on LRD loans is subject to tax benefits for property owners. Rental revenue from the property may be use to offset the interest on the LRD loan.
Criteria for LRD Loan Eligibility:
Anyone who qualifies may apply for & get a lease rental loan. Below are the eligibility requirements:
Nationality: One must be an Indian citizen who resides in and owns real estate that has been rented out for a profit. Some Banks also permit LRD for NRIs.
Age: To be eligible for a loan, an LRD applicant must be between the ages of 18 and 70.
CIBIL Score: A CIBIL score of 700 or higher makes it easier to get any loan approved.
Employment: Salaried individuals in the public or private sector as well as professionals who work for themselves, such as doctors, chartered accountants, lawyers, architects, consultants, traders, & manufacturers, are eligible for this loan choice. A lease rent discount application can be submit by Public or Private Limited Companies, Proprietorship businesses, or Partnership firms.
The paperwork required for a lease rental loan
Before the loan is disburse, the bank or lender will require the following documents:
- Aadhaar Cards, Passports, Driving Licences, and other forms of picture identification are acceptable.
- Your Balance Sheet and Income Tax Returns, officially certified/audited by a Chartered Accountant;
- A six-month-old bank account statement;
- Properly completed application;
- Document containing the lease; and
- Photographs
Bank Loans for Lease Rental Discounting in India
| Bank | Loan Amount | Tenure | Rate of Interest |
| Bajaj Finserv | Up to Rs. 5 Crores. | Up to 13 years. | 9.00%-14.00% p.a. onwards. |
| PNB Housing Finance | Within the balance of the term of the lease deed, up to 80% of the entire future rent may be collect. | Using an escrow account, for up to ten years or the entire term of the lease. | 8.99% to 11.85% p.a. |
| Axis Bank | Starting from Rs. 5 Lakhs. | Up to 9 years. | 9.90%-10.30% p.a. onwards. |
| ICICI Bank | Up to Rs. 3 Crores. | Up to 15 years. | 10.85%-12.00% p.a. onwards. |
Conclusion on Lease Rental Discounting
Lease rental discounting is a profitable business development tactic since renting property is the most secure investment in the infrastructure investment sector. While restricting the amount of personal capital invest, this can be done. It is a well-balanced instrument for people and companies wishing to diversify their investments without spending a lot of money.
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