The product is aimed at providing finance to property owners who have fixed rent receivables. This way, loans are provided by banks and housing finance companies against the future rent that the property will earn and not on the repaying capacity of the borrower.

The loan amount is calculated by discounting the cashflows (future rent receivables) by the prevailing rate of interest. The terms and conditions regarding the extent of finance, rate of interest, service charges, etc. differ with companies though the basic concept remains the same.

Let's take an example with HDFC's rental discounting. Suppose an individual wishes to purchase a commercial property, say, in a mall for Rs 1 crore but does not have the requisite income to repay the EMI or wants to be cash neutral with this purchase.

This is where rental discounting comes in. We are assuming that since he is buying a commercial property, he will lease it out and earn rent. Thus, the future rent receivables become a part of the future earnings. The financier will discount all the future cashflows by the prevailing rate of interest and arrive at the net present value (NPV) of the property.

This will be the estimated loan amount and the borrower will be eligible for a loan to the derived NPV.

The lesser and lessee will have their own rent agreement. In addition, the financier will enter into an agreement with the lessee to pay the rent directly to the former. This way the financier safeguard's its loan.

Another point to remember is that this product does not necessarily aid acquisition cost. It could be used to fund the working capital requirements or other such financial needs.

The maximum term is flexible but since the agreement between the lessee and the lesser can change anytime or there could be a change in the terms of agreement, the financier will not want to lend for a very long time and generally restrict the term to 7 or 8 years.

While calculating the NPV, keep the escalation clause in mind. Whenever the lessee and the lesser enter into an agreement, the escalation of rent is also decided in advance. Say, the agreement states that the rent will increase after every three years at the rate of 15%.

Then, if the agreement is for 10 years and the rent being paid is Rs 1 lakh every month, at the end of 36 months, the rent to be paid will increase to Rs 1.15 lakh and at the end of 72 months the rent will increase to Rs 1,32,250.

The rent received by the lesser is the gross rent amount minus TDS. So, if the rent receivables are assigned to HDFC, it will have to consider the net rent receivable i.e. the gross rent minus TDS to arrive at the NPV.

Though the entire process sounds relatively simple, in reality the financier has to be comfortable with the lessee to begin with.

For this, the lesser or the borrower will have to identify a property or commercial space that will fetch him good rent and that too from a creditworthy source.

Source : The Economic Times