Lease Rental Discounting: a Good Option to Explore

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If you own a commercial property, you should consider the lease rental discounting loan. Here’s how.

Many people who own a commercial space need to raise a loan at some point. The process of raising funding becomes easier when there is an owned property in possession to set aside as collateral.

Many people use their commercial property to raise loans against. A good loan product to try out in this connection is the Lease Rental Discounting (LRD) loan that gives the owner good flexibility in monetising the property. This is a great benefit attached to owning commercial property. Apart from loans against mortgage, equity and top-up loans against property, you can also avail of a lease rental discounting loan which is given based on the property’s current rent potential. 

This simply means that the commercial property makes its owner eligible for a loan based on its rent receivables.

How does lease rental discounting work?

Though these loans were initially given to small businesses, today, almost every person is eligible for lease rental discounting loan. Those who normally avail of these loans include doctors, sole proprietors of small businesses, lawyers, and even public and private limited companies with a high annual turnover.

Broadly, a lease rental discounting loan is a loan procured against the rent that the commercial property receives/will receive over a certain tenure of time. In the case of lease rental discounting, the rent is paid back to the financing institution in lieu of monthly EMIs. However, the payment model differs greatly from the usual one: in this loan, the rent is credited every month to the lending institution via an escrow account. The rent is given to the escrow account directly by the current occupant of the commercial premises.

The owner of the premises, i.e. the loan borrower does not get any portion of the monthly rent. The rent is directly routed to the escrow account. Most financial institutions offer lease rental discounting for up to 10 years. Also, the loan amount is never higher than 70 per cent of the commercial property’s market value at the time of application. 

Who is eligible?

Properties with completely clear titles and no issues with ownership are eligible for lease rental discounting loan. Additionally, there should not be any existing outstanding loans on the property at the time of application. Properties which have been rented out for less than six months to the occupant at the time of application of the loan are also not eligible.

Documents required

A loan applicant in this category needs to submit documents such as the agreement of the commercial property, a copy of the lease deeds/agreement with current lessee, bank statements for six months counting backwards from the date of application showing the rents credited to the account, residence proof of the property owner, IT returns for last two years, PAN card/Aadhar card copy and at least two signed passport size photographs are to be submitted with the loan documents.

Other documents include the sanction plan for the property, tax receipts, Nil Encumbrance certificate, and title deed. The lending institution will scrutinise all submitted documents, conduct due diligence and guide you through the entire process till loan disbursal.