What is Lease Rental Discounting (LRD)?

Lease Rental Discounting (LRD) is a term loan offered by scheduled commercial banks and NBFCs against the present value of future contracted rental cash flows from a self-owned commercial, retail, or industrial property, backed simultaneously by:

  1. Assignment of future receivables (rent) via a Tripartite Letter of Instruction / Escrow Agreement signed by the property owner (lessor), the tenant (lessee), and the lending bank.
  2. Equitable or registered mortgage of the underlying rent-generating property itself.

Because the EMI is serviced directly from a ring-fenced escrow account funded by the tenant's monthly rent remit — before the landlord touches the cash — banks treat Lease Rental Discounting (LRD) as lower-risk than a regular Loan Against Property (LAP). As a result, LRD carries lower interest rates (typically 8.75% to 9.75% p.a.), higher Loan-to-Value (LTV up to 70% to 75%), and longer repayment tenures (up to 12 to 15 years).

How LRD differs from regular Loan Against Property (LAP)

Many commercial property owners default to a standard LAP without realising their registered lease qualifies for LRD. The underwriting differences are substantial:

Parameter Lease Rental Discounting (LRD) Standard Commercial LAP
Primary repayment source Contracted monthly rent deposited by lessee into escrow Borrower's operating business income / ITR
Typical interest rate (p.a.) 8.75% – 9.75% 9.50% – 11.25%
Maximum LTV on market value 65% – 75% of property valuation 55% – 65% of commercial property valuation
Maximum loan tenure 10 to 15 years (linked to lease + renewal visibility) 10 to 15 years (linked to borrower age)
Rental DSCR requirement 1.15x – 1.25x on net post-tax rental receipt 1.30x – 1.50x on aggregate business cash flows
Escrow mandate Mandatory tripartite rent escrow account Not required (NACH from operating current account)

You can model monthly repayments on our EMI and financial calculators and read how banks test debt coverage in our DSCR guide.

The LRD eligibility formula: Dual cap of Rent Value and Property Value

Banks sanction the lower of two independent ceilings:

Ceiling 1: Present Value of Discounted Net Rent (Cash-Flow Cap)

First, the lender computes the Net Monthly Rent that will actually land in the escrow account:

Gross Monthly Rent (excluding GST of 18%, since GST must be remitted to the government) Less: 10% TDS deducted by the corporate tenant under Section 194-I of the Income-tax Act, 1961 Less: Monthly municipal property tax and society maintenance charges (if borne by the owner, not the tenant) = Net Collectible Monthly Rent in Escrow

Next, the bank applies a Rental Haircut / DSCR Cushion — typically allowing 80% to 85% of the Net Monthly Rent (equivalent to a minimum DSCR of 1.18x to 1.25x) to go towards the LRD EMI.

Ceiling 2: Loan-to-Value on Property Valuation (Collateral Cap)

Even if a prime high-street retail showroom commands extraordinary rent, the LRD loan cannot exceed 65% to 75% of the independent bank-empanelled valuer's market valuation of the property.

How the tripartite escrow waterfall works every month

To eliminate diversion risk, the bank sets up a dedicated LRD Escrow Account (no cheque-book or outward net-banking access for the borrower):

  1. Tenant's Letter of Undertaking (LoU): Before disbursement, the tenant signs an acknowledgement agreeing to remit 100% of monthly rent only into the designated LRD Escrow Account IBAN/account number, and not to change the payment account without the lending bank's written NOC.
  2. Inflow on Rent Due Date (e.g., 5th of every month): The corporate tenant transfers Net Rent + 18% GST (after deducting 10% TDS under Section 194-I).
  3. Waterfall Priority 1 — GST Release: Within 24 to 48 hours of rent credit, the bank releases the 18% GST portion to the landlord's regular operating current account so the landlord can file GSTR-3B on or before the 20th of the month.
  4. Waterfall Priority 2 — LRD Monthly EMI Appropriation: On the scheduled EMI date (typically the 7th or 10th of the month), the bank debits the LRD principal + interest EMI directly from the escrow balance.
  5. Waterfall Priority 3 — Surplus Sweep to Borrower: Any residual rental surplus (including periodic 12% to 15% every-3-year rent escalations) is swept automatically into the landlord's normal current account.

Lease tenure vs lock-in period vs loan tenure

The single biggest point of negotiation in LRD underwriting is mismatch between the remaining lease period and the requested loan tenure:

  • Standard 9-Year or 5-Year Leave & Licence / Lease: In Maharashtra, corporate leases are frequently structured as 5-year (60-month) or 9-year (108-month) registered agreements under Article 36 of the Maharashtra Stamp Act, with a 3-year (36-month) hard lock-in period and a 15% rent escalation every 36 months.
  • Can you get a 12-year or 15-year LRD on a 5-year or 9-year lease?
    • PSU banks often cap the loan tenure strictly at the unexpired registered lease period (e.g., 8 years if 8 years remain on the registered deed).
    • Private sector banks and large NBFCs allow 12-year to 15-year LRD tenures even when the current registered lease has 5 to 9 years left, provided:
      1. The property is in a highly marketable commercial micro-market (e.g., BKC, Andheri, Lower Parel, Vashi, Belapur, Thane Wagle Estate, Pune Hinjewadi/Kharadi) with clear Occupancy Certificate (OC),
      2. The lessee is a marquee corporate, bank, hospital, retail chain, or MNC that has invested heavy fit-out capex in the premises (making vacation after year 5 economically unlikely), and
      3. The borrower's personal/corporate net worth and supplementary cash flows provide a secondary cushion at lease renewal.

Worked example: ₹7.50 crore LRD on a Vashi commercial office

Suppose you own a 6,000 sq. ft. commercial office in Vashi, Navi Mumbai valued at ₹11.00 crore, leased to a listed IT company under a registered 9-year Lease Deed (with 3-year lock-in and 15% escalation every 3 years):

Step Calculation Amount (₹)
1. Gross Monthly Rent ₹125 per sq. ft. × 6,000 sq. ft. ₹7,50,000 / month
2. Less: 10% TDS (Section 194-I) 10% × ₹7,50,000 − ₹75,000 / month
3. Net Monthly Rent in Escrow Tenant bears society maintenance & property tax ₹6,75,000 / month
4. Eligible EMI at 85% of Net Rent 85% × ₹6,75,000 (1.18x rental DSCR) ₹5,73,750 / month
5. Cash-Flow Cap (12-yr tenure @ 9.00% p.a.) PV of ₹5,73,750/month for 144 months at 9.00% p.a. ₹5.04 crore
6. Cash-Flow Cap (15-yr tenure @ 9.00% p.a.) PV of ₹5,73,750/month for 180 months at 9.00% p.a. ₹5.65 crore
7. Cash-Flow Cap with Step-Up Escalation Factoring contracted 15% rent step-up every 36 months over 180 months ₹6.35 crore
8. Collateral LTV Cap (70% of ₹11.00 crore) 70% × ₹11.00 crore ₹7.70 crore
Final Sanctioned LRD (Step-Up Structure) Lower of Step 7 and Step 8 ₹6.35 crore

Notice how structuring the LRD as a Step-Up EMI facility — where the bank aligns your EMI schedule with the contracted 15% every-36-month rent escalation in the registered lease deed — increases your upfront loan eligibility from ₹5.65 crore to ₹6.35 crore (an extra ₹70 lakh at day one) without breaching the 85% net rent cap in any year.

Pre-sanction checklist for an LRD application

Before submitting an LRD proposal, ensure 5 items are airtight:

  1. Registered Lease / Leave & Licence Deed: Unregistered or notarised rental agreements are not eligible for LRD. The agreement must be duly stamped under Article 36 (see our Maharashtra stamp duty and registration guide) and registered with the Sub-Registrar of Assurances.
  2. Clear Occupancy Certificate (OC) and Fire NOC: Banks strictly verify municipal OC and commercial usage approval before discounting corporate rentals.
  3. 6 to 12 Months Rental Track Record (for existing leases): Form 26AS / AIS reflection of Section 194-I TDS credits matching bank statement credits. (For freshly signed leases with A-grade tenants, banks can disburse immediately after the security deposit and first month's rent hit the account.)
  4. Lessee Credit Vetting: Audited financials or credit rating of the tenant — multi-tenant LRD is possible if you have 3 to 5 registered tenants in the same commercial building.
  5. Complete Title Chain: Review our LAP document checklist and MODT and Notice of Intimation guide for the title and mortgage documents required.

Want to evaluate whether your leased commercial property qualifies for a step-up 15-year LRD or refinance an existing high-cost LAP into a lower-rate LRD? Explore our Lease Rental Discounting and Loan Against Property advisory services.