In the UAE, the Lease Rental Discounting (LRD) option lets property owners borrow money against their future rental income from leased properties. Here’s how it works—
- First of all, the lease agreement should be for a significant duration (e.g., 5-10 years) with a reputable tenant. After that, the Property Owner (Borrower) seeks LRD financing from a bank or financial institution.
- Next, the Bank (Lender) assesses the property’s lease agreement and the tenant’s creditworthiness.
- The bank calculates the present value of the future rental income (often at a discount).
- Provides a loan amount to the property owner, which is typically a percentage of the property’s value or rental income.
Apart from the above, the bank will also set up an escrow account or similar arrangement for the tenant to deposit his/her rent payment directly. Here, the tenant will pay the rent directly to the bank instead of the property owner. This way, the bank gets its money back with a fixed rate and interest.
