Lease Rental Discounting (LRD) makes it possible to raise capital from leased properties. Learn how estimated rental income can be converted into immediate funds without selling the property. This guide analyzes eligibility, benefits, risks, and legal aspects in a practical, decision-friendly format. We also compare LRD with other financing options to clarify where it is strategically appropriate.
LRD (Lease Rental Discounting) Loan Overview
The urban landscape has changed significantly over the past few decades due to an expansion in industrial parks, SEZs, IT parks, logistics hubs, and infrastructure development. A higher level of living has coincided with rising per capita income. Real estate growth in all verticals, residential, commercial, retail, and infrastructure, has been directly boosted by these interrelated variables. Lease Rental Discounting has become a well-liked and scalable financial instrument as a result of these economic trends.
What is an LRD Loan Facility?
LRD, full form Lease Rental Discounting, is a term loan. It is granted by Banks or other financial institutions to developers or individuals who have their property assets given on lease for a specific period of time and earn rental income. Loan amount is determined by discounting the future rental cash flows to their present value. With such a rental yield used as collateral against the loan amount.
Do you know? Your leased property can provide you with funds.
Yes, that is accurate. You can raise money for business expansion, asset purchases, or even loan repayment with the rental income from your home. Lease Rental Discounting (LRD), a loan product, makes this feasible. Often referred to as an LRD loan, it enables property owners to obtain capital without having to sell their asset by leveraging future rental income.
E.g. Mr. Raju, the proprietor of a mall in Delhi, renovated his property using lease rental discounting. By using his future rental income as collateral to secure a loan, he was able to improve the mall, draw in high-end tenants, and this way he boosted his rental income.
LRD loan Benefits
- The facility allows property owners with immediate access to funds.
- The owner of the property does not have to pay the bank, but in return, the tenant of the property directly pays the bank the loan in the form of rental receipts through an escrow account every month.
- This facility gives a long-term solution to cash flow management as the lease/repayment is for longer tenures.
- LRD loan rate of interest depends upon the property value, repayment tenure, the credibility of the lessee, etc.
- LRD loan serves as a multi-purpose loan and can be used for business expansion, financing for the purchase of an asset or new property, or paying off loans
- Owners can access necessary funds without selling their property, which means they can benefit from any future appreciation in property value while simultaneously meeting their current financial needs.
LRD Loan Eligibility Criteria
There are no fixed criteria for eligibility, as it differs from institution to institution. Below is the most preferable one.
1. Age criteria:
The applicant must be 21 years or above but not more than 60 years in the case of a salaried person and 65 years in the case of a self-employed person.
2. Criteria for Borrower:
The borrower must possess a property which leased to a known brand or corporation. The loan is provided to salaried individuals, professionals, or even self-employed individuals.
3. Lease Agreement Period
The lease agreement period is very critical. An important factor for taking a lease rental discounting loan from a bank or NBFC. The bank may or may not provide a loan if the lease period is less than 5 years. This loan is given to rented properties with leases of 5 to 10 years.
4. CIBIL score:
LRD loan provides a loan to a borrower who has a creditworthy CIBIL score. CIBIL score and track record are the decisive factors for sanctioning or rejecting major loan applications.
Pre-requisites to Lease Rental Discounting
The following prerequisites should consider before applying for LRD Loan.
a. Corporate Tenants:
The tenant for the LRD loan should be financially fit to meet the obligations of the bank. That allows banks to ascertain whether or not future payments are likely to come. The banks only discount lease rentals belonging to renowned corporations or brands with a good credit rating.
b. Longer repayment period:
Secondly, the tenure of LRD is usually between five to seven years or can even go up to 10 years. Banks generally do not make short-term lease rental discounting loans. It is for this reason that the amount of loans and the repayment period are usually large. That is not possible to get paid off within a small tenure. Thus, LRD holds larger tenures of repayment.
c. Repayment Criteria
For the repayment of the loan, an escrow account is created. There is the participation of two or more parties, like the borrower, tenant, and banker.
The tenant will ask to transfer their rent to this account. The EMIs will be withdrawn from the same.
How to avail the LRD Loan Facility?
Availing Lease Rental Discounting involves several key steps:
1. Property Assessment
The Financial Institutions evaluate the borrower’s property to determine its current market value and the rental income it can generate.
2. Tenant Assessment
The financial stability and creditworthiness of the owner’s tenants are reviewed to ensure they can consistently pay rent.
3. Loan Approval
Based on the property’s value & expected rental income, the lender decides on how much loan amount to disburse. Usually ranging between 60% and 70%, it may increase based on the tenant’s profile.
4. Legal Documentation
The necessary legal papers are prepared and signed, taking into account the terms and conditions of the loan agreement.
5. Funds Disbursement
Once all documents are in place, the approved loan amount is transferred to the property owner.
Legal consideration of LRD
- The real owner who wants to apply for the LRD facility must have legal rights and possession to the property.
- The owner and tenant must sign a legally binding lease agreement deed that details – lease length, lease price, and any escalation clauses. And the tenant must be financially secure and fulfil the lease term without any defaults.
- It is essential to abide by local rental laws and regulations.
How is a Loan against Property different from Lease Rental Discounting?
The borrowing of money using the entire property as collateral is known as a loan against property. LAP can leverage a larger loan amount against your property’s worth for commercial reasons.
On the other hand, you only receive a specific loan amount against the lease amount that the lessee would pay under the Lease Rental Discounting. That is why the loan is secured by anticipated future rentals, which have to have a regular and fixed rental receipt.
LRD Comparison With Personal and Traditional Loan
Particulars | Personal Loan | Traditional Loan | Lease Rental Discounting |
Purpose of funds end use | Any purpose | Any purpose | Any purpose |
Collateral | Unsecured most of the time | property itself | Lease rental income from the property, or the property itself |
Interest rate | Higher due to the Unsecured loan amount | Depends on property value | Moderate, as the Loan is secured by rental income or property |
Source of Repayment | Personal Income | Personal Income or Rental Income | Rental Income |
Here is how we execute the LRD Funding Process. Let’s learn through a detailed case study.
To Summarise
Lease Rental Discounting (LRD) is a financial product that allows people to leverage their rented properties to get capital. Borrowers can obtain instant financing for business expansion, asset acquisition, or debt consolidation by leveraging future rental income, usually from a reliable tenant with a long-term lease of five to ten years. LRD loans are a wise choice for stable and growth-oriented financing since they provide both security and flexibility, with rental payments sent straight to the lender via an escrow mechanism.
Terkar capital helps me. Thanks for sharing the article
Thanks for sharing the Brief Description of Lease Rental Discounting.
Hi,
We are glad to hear that you found the brief description of Lease Rental Discounting useful. If you have any further doubts or queries or if there’s anything else we can assist you with, please don’t hesitate to reach out.
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Looking for LRD of Rs 10 Cr
Dear Mr Amit Sir,
Thank you for the inputs. Definately we can explore the LRD facility. However we request you share your contact number for quick communication Or contact us here.
Thank you
Best Regards,
Team Terkar Capital
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