If you own a leased commercial property with steady rental cash flows, Lease Rental Discounting lets you capitalise those rentals into a long-tenor loan without selling the asset. Here is how LRD actually works in India.
Commercial property owners in India hold one of the most capital-efficient assets on a balance sheet: a leased building generating monthly rentals on long contracts. Yet most owners leave that asset under-monetised, either sitting idle from a capital structure perspective or sold outright when growth capital is needed elsewhere. Lease Rental Discounting (LRD) is the middle path — borrow against the future rental stream, keep the asset, deploy the proceeds.
This guide, from the Finnova Advisory Real Estate Finance Desk, walks through how LRD works, who it suits, and what to watch for when negotiating the facility.
LRD is a term loan sanctioned against the discounted present value of future lease rentals from a commercial property, secured by a mortgage on the property and an irrevocable instruction directing the tenant to pay rent into a designated escrow account that services the loan.
That single sentence captures the entire structure. The lender lends against the rental cash flow, not the market value of the building.
These are indicative market parameters in 2026 — actual terms vary by lender, property, tenant quality and borrower profile.
| Parameter | Indicative Range |
|---|---|
| Tenor | 7-9 years (some lenders go up to 12-15 years for premium assets) |
| LTV on capitalised rentals | 60-70% |
| Interest rate | Competitive with standard corporate term loans |
| Escrow mechanism | Mandatory |
| Repayment | Equated Monthly Instalments (EMI) from rental collections |
| Prepayment | Usually permitted with notice, sometimes with penalty in early years |
| Security | Mortgage on property + assignment of lease rentals |
The loan quantum is essentially the present value of future rentals over the approved tenor, discounted at the lender's rate, capped by LTV on that capitalised amount.
LRD works cleanly for:
It does not work well for:
Lenders underwrite three things in parallel:
1. Tenant credit. The rental paying entity is effectively the primary obligor from a cash flow perspective. Lenders run tenant financials, credit rating, payment track record and industry exposure. Marquee tenants (IT majors, large banks, listed MNCs) unlock tighter pricing and higher LTV. Unrated or weak tenants either reduce LTV or disqualify the deal.
2. Lease quality. Lease tenor (residual + committed renewal options), escalation clauses, lock-in periods, termination rights, security deposits — all flow into the discounted cash flow. A 9-year residual lease with a 15% escalation every 3 years gives a very different quantum from a 4-year lease with no escalation.
3. Property and owner. Clear title, occupancy certificate, building plans approved, no encumbrances, and the owner's standalone financial profile. Sole-proprietor holdings, family trusts and SPVs all work, but documentation complexity varies.
Tax treatment of prepayment. LRD is a commercial loan; interest is tax-deductible against property income. Prepayment timing interacts with tax planning. Run the numbers with your CA before prepaying.
Lease renewal risk. If your senior lease ends before the loan tenor, lenders may require a sinking fund, cash sweep, or accelerated amortisation. Structure the loan tenor to match or underrun the residual lease, or build explicit renewal mechanics into the facility.
Escalation double-counting. Lenders already factor escalations into the discounted value. Do not count rental growth twice — once in loan sizing and once in your DSCR model.
Escrow discipline. The escrow arrangement is non-negotiable operationally. Rentals must flow through it; out-of-escrow collection is an event of default. Build the receivables process to match.
| Option | When It Wins Over LRD |
|---|---|
| Loan Against Property (LAP) | Property is self-occupied or leased short-term |
| Construction Finance | Still under development |
| REIT sale / fractional ownership | Partial or full monetisation goal exceeds LRD LTV |
| Outright sale | Capital redeployment into higher-return assets |
For owners who want to read more on the LAP alternative, our Real Estate Funding practice has detailed guidance. Also see our companion article on Loan Against Property.
LRD is the cleanest way to extract long-tenor capital from a leased commercial asset without selling it. The winners in 2026 are owners who approach LRD as a structured financing exercise — pre-cleaning lease documentation, securing tenant cooperation, shortlisting lenders with real estate lending appetite — rather than as a generic term loan ask.
If you are evaluating an LRD facility or comparing LRD against LAP, construction finance or a structured sale, Finnova Advisory's Real Estate Finance Desk runs end-to-end structuring. Contact us for a property-specific assessment.
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