Lease Rental Discounting: Unlocking Real Estate Liquidity Without Selling Your Property

What is Lease Rental Discounting?

Lease Rental Discounting, often abbreviated as LRD, is a financial arrangement where property owners obtain a loan or credit facility from a financial institution using their rental receipts as collateral. Unlike traditional loans that focus on the borrower's creditworthiness, LRD emphasizes the cash flow generated by the property's rental income.

The mechanism involves a careful evaluation of the property's rental income potential. Once a financial institution assesses the property's rental cash flow and determines its stability, they offer a loan amount based on a certain percentage of the rental income. Besides, Read our Blog on Commuting Costs and Rent.

How Does Lease Rental Discounting Work?

The process typically follows these steps:

1. Property and Income Valuation: The lender assesses the property and reviews the existing lease agreements to determine the rental income's stability and predictability.

2. Loan Amount Determination: Based on the future rental income, the lender calculates the loan amount, typically ranging from 70% to 90% of the discounted value of future rental receipts.

3. Loan Disbursement: Once approved, the loan is disbursed to the borrower, often in a lump sum.

4. Repayment Structure: The loan is repaid using the rental income generated by the property. The tenant typically makes direct payments to an escrow account, from which the lender deducts the EMI before releasing the remaining funds to the property owner.

Key Features and Benefits

Liquidity Without Asset Sale

LRD allows property owners to unlock the value of their real estate assets while retaining ownership. This is particularly advantageous for owners who wish to maintain their investment in property but need immediate funds for other purposes. Also, Read our Blog on Guide to Renting Residential Properties in Mumbai.

Flexible Fund Utilization

The funds obtained through LRD can be used for various purposes, including business expansion, debt consolidation, property renovations, or investment in new properties.

Tax Efficiency

The interest paid on LRD loans is often tax-deductible under Section 24(b) of the Income Tax Act, providing potential tax advantages for real estate owners.

Steady Cash Flow

Rental income from the property ensures a predictable cash flow, making it easier for borrowers to meet their repayment obligations.

Current Trends and Statistics

The LRD market has shown significant growth in recent years, with financial institutions increasingly recognizing its potential as a valuable product for property owners. Key trends include:

• Growing Demand: With commercial property markets stabilizing post-pandemic, there's been a notable increase in inquiries and applications for LRD facilities, particularly from owners of office spaces, retail properties, and industrial complexes.

• Competitive Interest Rates: Lenders are offering competitive rates to attract borrowers, with interest rates starting as low as 8.45%.

• Extended Loan Tenures: Many institutions now offer LRD loans with tenures up to 15 years, providing borrowers with greater flexibility in repayment.

• Digital Transformation: The application and approval process for LRD loans is becoming increasingly digitized, with some lenders offering end-to-end online processing, reducing turnaround times to as little as 7-10 days.

Eligibility Criteria and Requirements

Corporate Tenants

LRD is typically approved when tenants are financially strong corporate entities. Lenders rely on the creditworthiness of tenants to ensure the stability of rental income streams. Also, Read our Blog on How to Determine the Right Rent for Your Mumbai Property.

Longer Lease Terms

The remaining lease tenure must be substantial, usually 5 years or more. Longer leases provide lenders with greater confidence in the continuity of rental income.

Property Type

LRD is most commonly available for commercial properties, including office spaces, retail complexes, industrial units, and warehouses.

Documentation

Applicants generally need to provide identification documents, lease agreements, audited financial statements, income tax returns, and bank statements.

Comparison with Traditional Loans

LRD differs significantly from traditional loans in several key aspects:

• Collateral Basis: While traditional loans rely on the borrower's creditworthiness and may require additional collateral, LRD uses the future rental income as the primary security.

• Interest Rates: LRD typically offers lower interest rates compared to unsecured loans due to the secured nature of the borrowing.

• Repayment Terms: LRD loans often have longer repayment periods, ranging from 5 to 15 years, compared to shorter tenures for many traditional loans.

• Fund Utilization: LRD provides greater flexibility in how the borrowed funds can be used, with no restrictions beyond general lending guidelines.

Case Studies and Examples

Commercial Office Building

Consider a property owner with a commercial office building leased to a reputable tech company for 10 years at ₹5 lakh per month. Through LRD, the owner could receive a lump sum of ₹3.5 crore, with the tenant making direct payments to an escrow account from which the lender deducts EMIs. Besides, Read our Blog on How To Decide Whether To Rent or Buy A House.

Retail Complex

A retail complex owner with multiple tenants on 7-year leases might secure an LRD loan of ₹10 crore at 8.5% interest, using the future rental income to fund the expansion of their business portfolio.

Conclusion

Lease Rental Discounting represents a sophisticated financial tool that empowers real estate owners to unlock the value of their properties without relinquishing ownership. As the real estate market continues to evolve, LRD offers a compelling alternative to traditional financing methods, particularly for those with stable rental income streams from commercial properties. With its numerous benefits, flexible terms, and growing acceptance among financial institutions, LRD is poised to play an increasingly important role in the real estate finance landscape.

For property owners seeking liquidity while maintaining their investment in real estate, Lease Rental Discounting presents a strategic opportunity to leverage future income for present financial needs. As with any financial product, consulting with a financial advisor to assess individual circumstances and objectives is recommended before proceeding. For those in pursuit of their dream home, investment opportunities, or a sanctuary to call their own, Jugyah provides top housing solutions with its intelligent technology.

Frequently Asked Questions

Q1. What types of properties qualify for Lease Rental Discounting?

A1: LRD is primarily available for commercial properties, including office spaces, retail complexes, industrial units, warehouses, and shopping centers. Some lenders may consider high-value residential properties with long-term rental agreements, but this is less common.

Q2. How is the loan amount determined?

A2: The loan amount is typically calculated as a percentage (70-90%) of the discounted value of future rental receipts, based on the property's rental income, lease duration, tenant creditworthiness, and market conditions.

Q3. What are the interest rates for LRD loans?

A3: Interest rates for LRD loans vary by lender but generally range from 8.45% to 9%, depending on the borrower's profile, property type, and market conditions.

Q4. Can I prepay my LRD loan?

A4: Yes, most LRD loans allow prepayment, though some lenders may charge a fee for early repayment. It's essential to review the specific terms and conditions with your lender before proceeding.

Q5. Are there tax benefits for LRD loans?

A5: Yes, property owners may be eligible for tax deductions on the interest paid on LRD loans under Section 24(b) of the Income Tax Act.