Lease Rental Discounting: Definition, Advantages & LRD Loan Eligibility
What is discounting on lease rentals?
Manypeoplerentouttheircommercialrealestate.Leasingsuchpropertieshasa numberofadvantages,includingtheabilitytoborrowmoneyagainstrentalincome. LeaseRentalDiscounting(LRD),atypeoftermloan,isgiveninexchangefor commercialrealestateorotherincome-producingassets.TheLRDLoanisbasedon thenotionthatyoucanquicklygeneraterevenuebyusingthefixedrentfromyour rentalpropertyas"Collateral."
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ALeaseRentalDiscountingLoanisavailablefromnumerousbanksatcompetitive interestrates.Basedonthediscountedvalueofprojectedfuturerentalsandthe actualvalueoftheproperty,theLRDLoanisgranted.Theloanproceedsmaybe investedorusedbyborrowersforpersonalexpensesorascapitalforbusiness growth.
What is the process of lease rental discounting?
Thefinancialinstitution,theborrowerwhoownstheproperty,andthetenantwho leasesthepropertyareallpartiestoaleaserentaldiscountingtransaction.Monthly rentreceiptsfromtheleasearegivenassecuritybytheownerfortheloan.The lenderalsoevaluatestheborrower'slong-termcashflowbeforeapprovinganLRDbasedloanforthegivenamount.
Inotherwords,thelender"purchases"theborrower'srentreceivablesafter deductingthetimevalueofmoney.Therenters,nottheborrower/lessor,are responsibleformakingtherentpaymentsguaranteedasloanpaybacktothelender. Leaserentaldiscountingisagoodchoiceifyouwanttosuccessfullysatisfyyour company'sshort-termfinancialneeds.
Lease rental discounting characteristics:
Insteadofthepropertyunderleaserentaldiscounting,theloanissecuredby theprojectedrentalcashflow.Adiscountedpercentageoftherent receivablesmaybelentbythelendertotheborrower.Thetenantalsoenters intoaleasewiththelender,pledgingtopaythelatterdirectlyforthetermof theloan.Sincetherentistransferredtothelenderunderthisarrangement, theloanapplicationprocedureissimplified.
Forthemajorityofcommercialorindustrialproperties,thelenderoffers discountedleaserentalrates.Companiescanaccessfinanceatcompetitive interestratesbecauseoftheconsiderablereturnsfromthesesources.
Ownerscanbetterutilisetheirassetsthankstoreducedleaserental payments.Businessownerscanincreasetheirliquiditybyborrowingmoney againsttheirrealestateandutilizingtherentalrevenueascollateralfor anotherloan.
Tomakeupforthebiggerloanamount,themajorityoflendersprovide longerloanperiods.Thebusinessownerdoesn'thavetoworryaboutmaking paymentsbecausetheloanisrepaidthroughEMIsfromtheregularrental income.Asaresult,thecompany'scashflowwillbebalanced.
Reasons for leasing with a rental discount
LeaseRentalDiscountingprovidesnumerousbenefits,andthemoneycanbeused foravarietyofthings,including:
Business Development: Aloanagainstrentreceivablesistheidealalternative whenthelessorwantstoreducepersonalexpenseswhileinvestinginmore properties.Themoneycanbeusedbypropertyownerstogrowanykindof business.Asaresult,theygainfrombeingabletotakecareoftheirbusiness demandswithouthavingtostretchtheirbudget.
Loan repayment: Ownersofrealestatecanutilisethismoneytorefinanceorsettle theiroutstandingdebts.Duetolengthierrepaymenttermsandenticinginterest rates,leaserentaldiscountingbecomesacost-effectivewaytoquicklypayoffhighinterestdebts.
Property with dual uses: Lowerleaserentalsallowownerstomakebetteruseof theirstructures.Thisallowspropertyownerstoborrowonceagainstthecapital valueoftheirassets.Theycanalsoobtainaloanthatissecuredbythepotential futurecashflowthatthesubjectpropertywillproduce.Thus,leaserental discountingfillsthegapinimmovableproperty'slackofliquidity.
Purchase a new property: Leaserentaldiscountingisanappealingfinancialoption fordebtorswhoseprimarysourceofincomeisrentalpayments.Thelessorcan utilisethesemoniestoextendtheirportfolioandaddadditionalrentalincome streamsbypurchasinganewproperty.
Additionally,theexistingpropertyactsasaformofloanrepaymentbecausethe lessordoesnothavetopaytheEMIsoutofhisownpocketwithanLRD-basedloan. Thisisaneffectivewaytoexpandarentalbusiness.
Lease Rental Discounting Loans' Advantages
RentalLeaseForpropertyownerslookingforliquiditywithouthavingtoselltheir properties,discountingloanscanbeabeneficialfinancingalternative.Thefollowing aresomebenefitsofLRDloans:
Easy access to funds: Propertyownerscanprofitfromtheirrentalincomestreams andhavesimpleaccesstofinancingthankstoLRDloans.UsingLRDloans,the ownerofthepropertymaysecurealoanagainstpotentialfuturerentreceipts.
Lower interest rates: SinceLRDloansaresecured,theyoftenhavelowerinterest ratesthanunsecuredloans.Comparedtootherloankindsavailableonthemarket, LRDloansfeaturecheaperinterestrates.
Longer loan tenures: LRDloansoftenofferlongerloanterms,givingtheborrower moretimetorepaytheloan.LoanpaybackperiodsforLRDsrangefromfiveto fifteenyears.
Flexible end-use options: Propertyownerscanutilisethemoneytheygetfrom LRDloansforarangeofthings,suchasgrowingtheirbusiness,buyingadditional properties,upgradingcurrentones,andmore.
Tax benefits: TheinterestpaidonLRDloansissubjecttotaxbenefitsforproperty owners.Rentalrevenuefromthepropertymaybeusedtooffsettheinterestonthe LRDloan.
Criteria for LRD Loan Eligibility:
Anyonewhoqualifiesmayapplyfor&getaleaserentalloan.Belowarethe eligibilityrequirements:
Nationality: OnemustbeanIndiancitizenwhoresidesinandownsrealestatethat hasbeenrentedoutforaprofit.SomeBanksalsopermitLRDforNRIs.
Age: Tobeeligibleforaloan,anLRDapplicantmustbebetweentheagesof18and 70.
CIBIL Score: ACIBILscoreof700orhighermakesiteasiertogetanyloan approved.
Employment: Salariedindividualsinthepublicorprivatesectoraswellas professionalswhoworkforthemselves,suchasdoctors,charteredaccountants, lawyers,architects,consultants,traders,&manufacturers,areeligibleforthisloan choice.AleaserentdiscountapplicationcanbesubmittedbyPublicorPrivate LimitedCompanies,Proprietorshipbusinesses,orPartnershipfirms.
The paperwork required for a lease rental loan
Beforetheloanisdisbursed,thebankorlenderwillrequirethefollowing documents:
AadhaarCards,Passports,DrivingLicences,andotherformsofpicture identificationareacceptable.
YourBalanceSheetandIncomeTaxReturns,officiallycertified/auditedbya CharteredAccountant;
Asix-month-oldbankaccountstatement;
Properlycompletedapplication;
Documentcontainingthelease;and
Photographs.
Bank Loans for Lease Rental Discounting in India
Bank
Loan Amount Tenure
Rate of Interest
BajajFinserv UptoRs.5Crores. Upto13years. 9.00%-14.00%p.a. onwards.
PNBHousing Finance Withinthebalance ofthetermofthe leasedeed,upto 80%oftheentire futurerentmaybe collected.
Usinganescrow account,forupto tenyearsorthe entiretermofthe lease.
8.99%to11.85% p.a.
AxisBank StartingfromRs.5 Lakhs. Upto9years. 9.90%-10.30%p.a. onwards.
ICICIBank UptoRs.3Crores. Upto15years. 10.85%-12.00% p.a.onwards.
Conclusion on Lease Rental Discounting
Leaserentaldiscountingisaprofitablebusinessdevelopmenttacticsincerenting propertyisthemostsecureinvestmentintheinfrastructureinvestmentsector. Whilerestrictingtheamountofpersonalcapitalinvested,thiscanbedone.Itisa well-balancedinstrumentforpeopleandcompanieswishingtodiversifytheir investmentswithoutspendingalotofmoney.
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