A lease assignment is an agreement between a property owner and a designated second party that may allow that second party to manage the property for a period of time.
A lease and lease assignment is an agreement between the owner of a particular property and a designated second party. The terms and conditions allow the second party to collect rent payments paid by tenants and manage that property for a period of time. This type of arrangement is most commonly used to pay off a loan or some type of credit given by the second party to the homeowner and remains in effect until the debt is paid in full.
During the transfer of leases, the owner of the property remains the registered owner of the property. There is no transfer of title, although the creditor usually has the privilege to manage the property as they see fit. This means that during the term of the lease, the lender can use part of the income collected to maintain the property, while applying the rest of the collected rent payments to the outstanding balance of the loan amount.
Choosing to create a rental allowance is usually because the landlord needs a quick injection of funds for some reason. Instead of taking out a loan and simply using the property as collateral, the lease assignment allows the landlord to borrow against future income, which materializes as tenants make regular rental payments. As with any type of loan situation, an interest rate is applied to the outstanding balance, and a portion of each month’s income is withdrawn, some of the principal, and also some of the interest owed.
The benefit to the homeowner is that loans with this provision often carry very competitive interest rates. This means that over the life of the loan, the homeowner is likely to pay much less interest on the loan installments. Since a lease transfer can be easily structured between two people, there is also the advantage of not having to go through a bank or mortgage company. If the homeowner can find an angel lender who is willing to advance money now and receive the rental proceeds each month, the paperwork is kept to a minimum and the homeowner can receive the funds advance almost immediately.
It is not uncommon for a lease assignment to also contain clauses that protect the interests of both the lessor and the lender. These provisions provide protection to the lender in the event that the rents collected fall below a certain point due to vacancies. At the same time, the owner is protected from the lender’s attempt to obtain ownership of the property, as long as the monthly payments are minimal.