Understanding Lease Rental Discounting (LRD)

How fascinating is the idea of adding a property to your portfolio without cash flowing from your pocket and without selling the existing one? Lease Rental Discounting lets you realize it if you have a property in your hand. Lease Rental Discounting is a loan on your property, given by a bank or Non-Banking Financing Institution. Your rental receipts act as collateral for the loan. The lender grants the loan to the property owner on the discounted value of lease rentals.

Several people own commercial spaces and rent them out. Leasing such properties has its own set of benefits, one of which is the ability to obtain a Term Loan against the rental revenue obtained. Lease Rental Discounting (LRD) is a Term Loan made available against income-generating business assets or property. The LRD Loan is based on the assumption that your leased property generates fixed rent, which you may utilize as ‘Collateral’ to create money instantaneously. 

In India, the real estate market is huge. This industry is thought to create the second-highest employment behind agriculture. It is also expected that this business would attract more non-resident Indian (NRI) investment, both short-term and long-term. Bengaluru is expected to be the most popular property destination for NRIs among metropolitan cities, followed by Ahmedabad, Pune, Chennai, Goa, Delhi, and Dehradun.

Also read Real Estate in India: A Thriving Investment Destination.

With the market expanding, prominent Indian banks are implementing Lease Rental Discounting (LRD) for commercial real estate enterprises in India. Let’s look at what LRD is and why it’s so popular in India:

Lease Rental Discounting Loan

The loan amount is calculated based on the concept of the time value of money and discounting. As the name indicates, the time value of money is a concept that evaluates the worth of the money that you receive today. Technically, the value of money decreases due to inflation as time passes. 

For instance, the buying potential of Rs.100 that you have today is less than tomorrow. Put in simple terms; you cannot buy the same property tomorrow with today’s price tag, as the capital appreciates with time. This is called the Discounting of money where you find the present value of the rental payments that you receive in the future.  

The rental income is considered and discounted using the time value of money before the loan is granted. Hence the name Lease Rental Discounting.

Lease Rental Discounting Features?

• Agreement between 3 parties: The loan is backed by the predicted rental cash flow rather than the property in lease rental discounting. The lender offers to lend the borrower a discounted portion of the rent receivables. And the renter signs the rental agreement with the lender, agreeing to make rental payments straight to them once the arrangement is in effect. This arrangement simplifies the lending process by transferring the rent straight to the lender as EMIs against the loan repayment.
• Lower Interest Rates: The loan repayment is through the rent paid by the tenant. So, the monthly installments directly flow to the bank to clear the loan. Since the Lease Rental Discounting is a loan given on rental properties that are commercial or industrial, the returns are high. Hence, the interest rates of LDR are low.
• Longer Lease Term and Balanced Cash Flow: Generally, the lease term is extended to cover the higher loan amount acquired through the property. The rental income repays the loan through monthly installments. You do not have to worry about your rental cash flow which is now being diverted to the loan repayment, as the new investment bought shall balance the income. It hence balances the cash flow, adding a new property to your portfolio without costing you a fortune. 
• Dual-Use of Property: The property is used both for rental income after the loan repayment and also supplies to the needs of the borrower, may it be buying another property or meeting personal expenditures.

Purpose of Lease Rental Discounting?

Unlike other loans that are specific and must be used for the same like home loans, Lease Rental Discounting can be used for any of your purposes of which some are mentioned below.

• Business Expansion: You are granted a loan on your prevailing property’s rental receipts. The loan acquired can be used to expand your business of any kind. This lets you enjoy the advantage of enriching your returns through business expansion without having to spend from your pocket.
• Purchase of New Property: Lease Rental Discounting is generally preferred by people whose primary source of income is through rental properties. So, to enhance their portfolio, they can turn to loans like these as LRD does not require you to pay EMI from your hand. The rental income is diverted to monthly installments. You can purchase a new property that generates income. The existing property is the source of the loan repayment after which you have an added asset to create the payment. This is the smart way of escalating your business.
• Repay other Loans: If you have any other personal loans like home loans, gold loans, and business loans at an interest rate higher than that of the Lease Rental Discounting, you may repay them. 
• Personal Expenses: There is no restriction on the usage of the loan amount acquired through the Lease Rental Discounting. You may use them for your expenditure like education loans, medical expenses, travel costs, and etcetera. 

Types of property Acquired on Lease Rental Discounting Loan?

• Lease or Rental Commercial Property: You can get a loan through Lease Rental Discounting on a commercial property that you should have leased for at least five years to corporate clients. The leasing term is longer to ensure the credibility of the property.
• Lease or Rental Industrial Property: You can also obtain a loan through LDR on an Industrial Property that you have leased to some corporate giant for five years or more.

Lease Rental Discounting Eligibility?

The bank or NBFC has its eligibility criteria to sanction LDR loans. Still, there are some standard eligibility criteria that the lessor should satisfy to avail of the loan. 

• Age: The minimum age of the borrower should be 21 years while the maximum period must be 60 years for the salaried employee and 65 years for self-employed. The full age is the age by which the loan must be repaid.
• Lease Period: The lease period also varies from lender to lender. But the bank will not provide the loan if the lease period is below five years. 
• Other Sources of Income: The EMIs of the loan are paid through the rent from the tenant. If the tenant vacates the property under any unforeseen circumstances, then the borrower must be in a position to repay the loan. The bank checks for the repayment capacity of the borrower and checking for other sources of income is a parameter to measure the repayment capacity. 
• CIBIL Score: The CIBIL Score plays a crucial role in the evaluation of the loan application for processing or rejecting the loan application. A borrower with a good CIBIL score is likely to get the loan sanctioned faster. 

Required documentation for loan application?

The following documents are required to be submitted to the bank for processing the loan application.

1. KYC Documents
2. Income Documents
3. Bank Statements
4. Loan Documents
5. Property Documents

Who Generally Uses Lease Rental Discounting?

• Commercial Property Developers: Shopping area developers, i.e., commercial property developers and also industrial complexes, use the lease rental discounting to leverage their investments. They can get their investment back along with the title of the property. This is the smart strategy adopted by the developers.
• REITs: The rental income generated from commercial properties is much higher than the residential income. Hence, Real Estate Investment Trusts invest in such properties and go for lease rental discounting, which fetches their returns back by which they can invest in similar properties to expand their portfolio.
• High Net Worth Individuals: The commercial properties through which you can go for lease rental discounting are generally not affordable to the common man. Only high-net-worth individuals invest in commercial properties that should be leased to corporate giants. Hence, it is a High Net Worth’s Individuals’ cup of tea. They use it to leverage their investments.

Conclusion

On a closing note, LRD seems to be the best leveraging strategy to augment your portfolio. To be precise, if you have a commercial property, you can bag a loan against your parcel using your rental income as collateral. You can use the procured loan for any purpose.

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Lease Rental Discounting FAQ’s:

What is Lease Rental Discounting (LRD)?

Lease Rental Discounting is a type of loan that a bank or an NBFC sanctions considering your rental receipts as collateral. It can be acquired on commercial rental properties or industrial complexes.

How long must the property be leased to qualify for an LRD?

The commercial property must be leased for five or more years before applying for an LRD on the property.

For what purposes the loan amount of LRD can be used?

Unlike other loans like home loans, the LRD loan amount can be used for any purpose like education expenses, paying your old debts or travel expenditure and etcetera.

Is LRD given to residential rental properties?

No. The LRD is sanctioned on commercial properties that are leased to corporate giants only.

What are the benefits of LRD?

The interest rates of LRD are low, and you can acquire another property with the loan amount without paying EMIs as the rental income from the existing property is diverted to the loan repayment. You can expand your business using the loan or spend on your personal expenses.