Recently, Punjab National Bank entered into a Rs.900 Crore Lease Rental Discounting Deal with K Raheja Group. This financing will enable the K Raheja Group, one of India’s leading developers in commercial real estate, to repay existing loans and redeem outstanding debt instruments, supporting the Group’s ongoing expansion. SNG & Partners has acted as legal counsel for Punjab National Bank (PNB).
K Raheja Group, known for its high-profile commercial and residential projects, shopping centers, and ventures in the hospitality sector, is set to leverage this funding to fuel its future growth strategies. This transaction further cements K Raheja’s financial position in the market, allowing the Group to expand its real estate portfolio.
What is Lease Rental Discounting (LRD)?
Lease Rental Discounting (LRD) is a financial tool where a property owner (usually of commercial real estate) can obtain a loan based on the rental income they receive from tenants. It is a type of loan that uses the rental payments from leased properties as collateral to secure financing from a bank or financial institution.
Here’s how it works in more detail:
- Loan Basis: The loan amount is typically determined by the rental income the property generates. The bank assesses the rental agreements between the property owner and tenants, calculating the loan based on a percentage of the monthly or annual rent, as well as the expected future rent payments.
- Tenure: LRD loans are usually long-term, often aligned with the duration of the lease agreements.
- Repayment: Loan repayment is structured based on the rental income, so the rental payments from tenants are often routed directly to the bank to pay off the loan. This provides a steady cash flow for loan repayment, making it lower risk for both the borrower and the bank.
- Interest Rates: Interest rates on LRD loans tend to be lower than other commercial loans, as the consistent rental income from reliable tenants makes the loan relatively secure for the lender.
- Uses: Property owners can use the funds from LRD loans for various purposes, such as paying off other debt, financing new projects, or expanding operations.
- Eligible Properties: Typically, LRD is available for commercial properties leased to reputable tenants, as this lowers the risk for lenders.
Example
A mall owner who leases out retail spaces to stores and brands could apply for an LRD loan. The bank would assess the rental income agreements and may lend a portion of the projected future rent earnings as a loan, allowing the owner to unlock funds without selling or pledging other assets.
Overall, Lease Rental Discounting is widely used by real estate owners to access liquidity based on their leased assets, supporting business expansion and financing without having to sell the property.
