Lease Rental Discounting
Many corporations and individuals earn a significant portion of their income from rents that they derive from their immovable properties. The financing needs of these people are different from the vast majority of the population. It is for this reason that special products like lease rental discounting have been created to meet their needs. In this article, we will understand the features, benefits and applications of this unique financial produce viz. lease rental discounting.
What is Lease Rental Discounting ?
Lease rental discounting works like factoring. Lease rentals are considered to be the bills that are owed by other corporations to the lessor. These amounts are considered to be payments that will be received in the future. Hence, banks deduct time value of money from these payments and pay the balance to the lessor if lease rental discounting is availed.
This means that a rental which is due just next month will have to take a relatively small loss in value as compared to rentals which are far off in the future. Standard concepts related to time value of money apply to such calculations.
Also, lease rentals are not secured by the property but by the rental cash flow that the property is expected to generate. It is for this reason that lease rental discounting agreements have to be signed between three parties. The borrower and the lender sign the usual agreement. The tenant also signs an agreement with the bank and is required to make rental payments to the bank and not to the lessor once such an agreement is in force.
Pre-Requisites to Lease Rental Discounting
Not everyone who has given their property on rent can enter into a lease rental discounting agreement. These agreements can only be entered into if the following pre-requisites are met.
Dual Use of Property
Lease rental discounting allows owners to use their properties more effectively. This is because owners can take one loan against the capital value of the property. At the same time, they can take another loan which is secured by the cash flow that the property in question will produce. Therefore, lease rental discounting offers much needed liquidity which is not present in immovable properties.
Commonly Used By
The following borrowers regularly use lease rental discounting to meet their financial needs.
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.