What Is Key Money?

[macleod101]

i really can't make head or tail why if i want to rent a unit and i'm thai posting under my husbands name, why i should need to pay key money. is it a deposit which is refundable, i had no idea about this..

[Ling Kae]

i really can't make head or tail why if i want to rent a unit and i'm thai posting under my husbands name, why i should need to pay key money. is it a deposit which is refundable, i had no idea about this..

Hi, if you are talking about renting a condo or a similar place to live in the deposit is to cover the water, electric and phone bill. It is to cover the owners risk of what you use over the month. A good example would be like this: Rent for condo 1 Month 10,000 baht, deposit 5,000 baht. At the end of the Month you run up 3,000 baht of bills so when you move out you will pay the 3,000 baht from your deposit and then get 2,000 baht back.

If you are talking about a business then it is a different story, I hope that helps.

[macleod101]

im talking about a businesss, i understood it to be the same for property leasing and commercial leasing, in another thread it was expected that i had to have 800000baht for key money, this sounds ridicoulous

thganks for your help

[OldAsiaHand]

Key money is very rare here, but common in places like New York. Of course, I can't say for certain that the term is being used the same way here either, but I can tell you what it means out there in the real world.

Key money is NOT a deposit. You do NOT get it back. It is simply a payment you make for the privilege of signing a lease.

Key money is commonly charged in New York, for example, when you sign, say, a sublease at a favorable, below-market rate. The leasor in effect 'sells' you the right to the below-market rate by charging you key money. The right to sign the favorable lease has a tangible value, so the owner charges for it as he would any other property right. It's that simple.

[Ling Kae]

im talking about a businesss, i understood it to be the same for property leasing and commercial leasing, in another thread it was expected that i had to have 800000baht for key money, this sounds ridicoulous

thganks for your help

In that case it is for goodwill or because it is in a prime location. I can't speak for your precise business but farangs who purchase bars for example nearly always have to pay key money.

It works like this, a bar is full every night, everyone can see it is doing well. This puts a premium on that bar because it is an established business with plenty of customers. It is not uncommom for such a business to be sold on to a new buyer with say a 1 million baht key money tag. Then you have to pay rent on top.

You can get that money back if you sell it to someone else and maybe you can even sell it for more but you never own it. If your lease runs out in 3 years for example and the Thai owner wants to bulldoze that land then you will lose that key money because that business is no longer worth anything.

If it is an empty building then you can be sure key money is being paid because it is in a prime location. Key money is negotiable.

There are professional business advisers around like Sunbelt Asia who can better advise you than what I can but this is a rough guide. Good luck.

[Chang_paarp]

One way of looking at key money is this:

A commercial lease of a premesis is 10M baht for 5 years, it may consist of 5M key money and 1M per year. It is not a refundable security deposit. High key money lower rent. It becomes an asset as part of the business. Key money is negotiated as part of every commercial lease and renewal I have seen on Thai business web sites.

Another thing to appreciate is that it is not uncommon to have t to pay to total lease money up front. There are businesses available with a 25 year lease pre paid. This is not uncommon in the larger shopping centres.

Ask Greg from Sunbelt Asia or a suitable proffessional in the area to help, as much of these numbers can be negotiated.

If I remember correctly leases over 3 years can be registered with the land department, which gives better security of tenure, and makes the lease an asset.

[OldAsiaHand]

im talking about a businesss, i understood it to be the same for property leasing and commercial leasing, in another thread it was expected that i had to have 800000baht for key money, this sounds ridicoulous

thganks for your help

In that case it is for goodwill or because it is in a prime location. I can't speak for your precise business but farangs who purchase bars for example nearly always have to pay key money.

It works like this, a bar is full every night, everyone can see it is doing well. This puts a premium on that bar because it is an established business with plenty of customers. It is not uncommom for such a business to be sold on to a new buyer with say a 1 million baht key money tag. Then you have to pay rent on top......

If someone is actually using the term that way, they are not using it correctly.

Key money refers to a payment for the assumption or signing of a lease agreement ONLY. If you buy a bar, you will be buying an operating business. You will sign an agreement to purchase the business, which will include a negotiated price for the fixtures, inventory, and good will. The agreement will also provide for your assumption of the lease for the property in which the bar is operating. If the agreement provides for the payment of key money in connnection with the lease assumption, that is different from the purchase of the business's good will.

Look at it this way. It doesn't matter whether you pay for the premises in rent or key money. What matters is what the leased premises cost you. Twelve months rent at, say, B10,000 per month plus B120,000 in key money ads up to B240,000 for the year. That's exactly the sample as paying B20,000 per month and no key money.

[Sunbelt Asia]

Key money is a gratuity paid by a prospective renter to a landlord before he or she can move into a property. The term "key money" applies almost exclusively to Asia. In the United States, it is illegal for landlords to require key money. However, prospective renters who are willing to pay more for a property often pay. “Key money” is non-refundable to the renter and is not illegal in Thailand as long as the Landlord pays tax on this gift. How much key money needs to be paid depends on how good the location is.

Usually, landlords use one of two methods when renting out places: either they require key money – which means a lower monthly rent – or they ask for a deposit, which entails paying a higher monthly rent, but at least you get the deposit back (minus any charges for damages).

www.sunbeltasiagroup.com

[~G~]

Key money, which is very common here, is a way asset owners use to make sure they get as much money in advance as possible, thereby minimizing the losses in case the tenant closes down his buisness or just defaults on his payments.

One can say that the proportion of key money reflects the balance (or lack of) power between the owner and the tenant. More money in advance pratically means more control and bargaining power over the tenant.

Twelve months rent at, say, B10,000 per month plus B120,000 in key money ads up to B240,000 for the year. That's exactly the sample as paying B20,000 per month and no key money.

This is not exactly the same, due to reasons I mentioned above, in addition to:

1. The greater finance burdon for the tenant. If you expect to make 25,000 baht a month income from that asset, you can easily pay 20,000 a month (ignoring other expsenses). On the other hand, you might not have all the required key money before you start operating.

2. The Time Value of Money. With today's interest rates, one can get over 6% interest a year in risk-free deposits. In your example, the owner can start earning the interest on a full year's rent in advance, on the expense of the tenant of course.

[~G~]

“Key money” is non-refundable to the renter and is not illegal in Thailand as long as the Landlord pays tax on this gift.

Correct, but unfortunetaly in practice there are plenty of cases this is indeed a tax-free "gift" which is not reported as income and without a formal receipt for the tenant.

Usually, landlords use one of two methods when renting out places: either they require key money – which means a lower monthly rent – or they ask for a deposit, which entails paying a higher monthly rent, but at least you get the deposit back (minus any charges for damages).

Yes, and some landlords ask for BOTH key money AND deposits.

Edited July 27, 2006 by ~G~

[Sunbelt Asia]

Correct, but unfortunetaly in practice there are plenty of cases this is indeed a tax-free "gift" which is not reported as income and without a formal receipt for the tenant.

We strongly advocate for someone to report any "key money" expense and demand a receipt. The key money transaction should be justifiable and transparent in every stage. Please bear in mind that if someone does not report this expense, they are involved in tax evasion and even money laundering if you cannot justify the amount of money in the key money transaction. You can not say “My money was just lost in thin air”

If the only way around this, is to pay the income tax the Landlord would need to pay and you still find the expense is reasonable. Do so as long as you get the receipt.

www.sunbeltasiagroup.com

[Heng]

Key money is very rare here,

Incorrect. It's actually the basis of a huge number of rental agreements.... for example: nearly all of the rental shops in Pratunam, Chatuchak, and every single Mall and Central department store plaza area employ it.

Key money is NOT a deposit. You do NOT get it back. It is simply a payment you make for the privilege of signing a lease.

Correct. More commonly known locally as "seng." Can be used as a verb or a noun. It allows for faster break even points for building/real estate investments and it allows those who don't have large amounts of capital to buy or rent (for high rent areas) retail space to make a living.

[~G~]

If the only way around this, is to pay the income tax the Landlord would need to pay and you still find the expense is reasonable. Do so as long as you get the receipt.

Either that or otherwise people pay it from their own pocket, not from company's cash. Both ways practically mean you pay their tax.

[~G~]

Key money is NOT a deposit. You do NOT get it back. It is simply a payment you make for the privilege of signing a lease.

Correct. More commonly known locally as "seng." Can be used as a verb or a noun.

I always though the Thai word is "Ginpao"? Is there a difference?

[Heng]

Key money is NOT a deposit. You do NOT get it back. It is simply a payment you make for the privilege of signing a lease.

Correct. More commonly known locally as "seng." Can be used as a verb or a noun.

I always though the Thai word is "Ginpao"? Is there a difference?

Ginpao would be the vernacular. Most folks that would use the term 'ginpao' among themselves would also use the term 'seng' when dealing with the landlord.... since 'ginpao' implies that the landlord is "eating for free" when in reality all he did was amass the capital to purchase whatever the tenant wants to 'seng,' whereas the tenant did not.

[meadish_sweetball]

seng

What is the Thai spelling pls?

[Khun Jean]

This is only relevant for tourist areas and a lot less for other areas.

Try asking for a receipt for the keymoney in a tourist area.

The landlord will laugh in your face.

Tax is what he wants to avoid hence the 3 year contracts and keymoney.

I know cases where the keymoney was the killer for the company after 3 years hard work. Be prepared to lose it all with only a 3 year contract.

If you get an extension and with the same condition, you found a good landlord. If not .. TiT.

Keymoney is an asset, one that gets smaller quickly with time. As such it is not worth anything to a business that wants to run longer than the rental contract. It is not an asset, it is a RISK!

If you work hard and get a lot of return customers, which normally is a growing asset (goodwill), it will be worth nothing with a short lease contract.

And i assume nobody wants to work hard and build a business and have the risk of losing it all because the landlord raises the keymoney to unpayable heights together with a large increase in the monthly rent.

When you don't have a long contract, wait until the landlord has some personal problems, like a gambling debt or some new business that needs money quick.

Don't let the landlords personal problems be your problems. Cover it in a contract and a long lease.

If the landlord wants to cover the risk of the tenant running away, a larger deposit is a much better way.

I'll give an example. Rent 10.000, 300.000 keymoney for a 3 year contract, 1 months rent in advance and 2 months deposit.

You will have to pay 300.000 + 10.000 + 20.000 = 330.000 at the start of the contract.

Instead offer 20.000 baht a month rent, no keymoney, 6 months rent in advance and 2 months deposit. Total at the start 180.000 baht. And try to go for a contract of at least 10 years. Then your hard work maybe pay off and you have some real assets to sell if you want to.

This way you have 150.000 available for starting the business and half year time to pay the next 6 months rent. A much easier start and everything in the books for tax purposes. If the landlord is not interested, why should you be in the keymoney and 3 year contract case. Offering this is a good solution in the middle.

I just suggest this because the OP wants to start a restaurant in a tourist spot, hardly comparable with a big mall or predominantly thai/thai business.

[~G~]

seng

What is the Thai spelling pls?

I was just told it is เซ้ง - and my dictionary says "to change hands (in business)"

Edited July 27, 2006 by ~G~

[meadish_sweetball]

Thank you ~G~.

[Kerryd]

I know cases where the keymoney was the killer for the company after 3 years hard work. Be prepared to lose it all with only a 3 year contract.

And i assume nobody wants to work hard and build a business and have the risk of losing it all because the landlord raises the keymoney to unpayable heights together with a large increase in the monthly rent.

I've heard of that happening. Someone builds up a good business, and when it comes time to renew the rental/lease agreement, the landlord puts the price through the roof.

(The people that made the business successful get priced out of existence, and then the landlord is free to offer this now successful business to someone else).

I'd be especially careful with anything on the water-side of Walking Street. If I recall correctly, the government has already made plans to tear that all down, but is being held up by court actions from the "squatters".

[Heng]

seng

What is the Thai spelling pls?

I was just told it is เซ้ง - and my dictionary says "to change hands (in business)"

Correct.... with a payment involved of course. You can, in many cases sublet property that you seng as well.

[steveromagnino]

seng

What is the Thai spelling pls?

I was just told it is เซ้ง - and my dictionary says "to change hands (in business)"

Correct.... with a payment involved of course. You can, in many cases sublet property that you seng as well.

Correct me if I am wrong Heng (as you would know) but Seng is actually a Chinese word now part of Thai language right?

I use it in my place of work from time to time (being that we lease real estate) and a few full blood Thai with no Chinese blood have been a little surprised to hear me say it; given that most of the language around here is very 'proper Thai' or engrish.

I can guess the Thai equivalent must be chao rayah yao yao, but everyone just says Seng, or lease upfront or similar....

Anyway, one other things, we structure leases so that there is some element of 'service' which and some element of 'lease' which minimises property tax/VAT and so on. I assume the upfront seng element (which we do not charge in the form of key money anyway) is another way to minimise the tax liability, but I am not sure how that is done as I don't get involved with that bit of the business.

Exactly how does this work>....

Edited July 28, 2006 by steveromagnino

[~G~]

Anyway, one other things, we structure leases so that there is some element of 'service' which and some element of 'lease' which minimises property tax/VAT and so on. I assume the upfront seng element (which we do not charge in the form of key money anyway) is another way to minimise the tax liability, but I am not sure how that is done as I don't get involved with that bit of the business.

Exactly how does this work>....

Very easy, they minimize 100% of the tax liability on the key money beacuse they just don't report it as an income at all...

I think a central point to understanding key money in Thailand is that many of the people operating small retail spaces are sole proprietors whose records are not supposed to be that accurate, and are not taxed according to their financial reports but based on different criteria. They can't care less for a formal receipt, and that makes it easy for the landlords (that in many cases own the property directly, not as a company anyway) to avoid tax on this payment.

Then comes the foreigner with his shining Thai Co., Ltd., VAT Registered and all, and tries to fit into this system... Finding out that he needs to pay the tax on the landlord's income as well...

[Thaipwriter]

Keymoney is the dealbreaker. That's what keymoney is.

[Nawtilus]

Macleod, you are not the only one who thinks this key money idea sucks.

The actual idea of key money up front is ok if the lease per month is a bargain.

The problem is that we have the people that want the key money and the people that sell the businesses with key money and they all believe they are offering you bargain basement rental amounts.

Surprisingly many people do not simply divide the key money amount by the months of the lease and add it to the rental to find out what their real lease amount is. Sometimes working out more expensive and not such a great deal afterall.

Secondly the key money that you pay up front, usually considerable amounts, is lost if your business fails or for whatever reason you move on without reselling the business. Ten million baht key money up front is lost and a windfall for the owners and you need to understand that this is what the owners are hoping happens, then they can sell it again....oh sorry lease it again.

The agents and people that support this type of selling...ooops, leasing business arrangements are just as bad as each other.

Best thing is that if you find a business you want to buy, then go and do a deal privately between you and the owner, let the agent get his kicks elsewhere from another sucker. I will give you an example, a business I enquired about had a price of 3.5mil baht and I knew the owner through other avenues and we sat down and discussed it, he only wanted 2.5m baht actually for his business. Same would go for key money amounts and possibly not at all. Might not work every time, but worth a try.

[Moonfruit]

I worry for you Macloed. 345,000THB to set up your business. No idea about the basics of business practice in Thailand. Setting up in a close nit community like Samet.

Do your homework first and lots of it. After you have done that, do some more. Then, spend lots of time on the ground, looking for your place. DO NOT let your wife deal with everything. Every time she does something, ask her what she did, and why she did it. This is the what you would do with any other member of staff in a startup business right?

Good luck, and keep us informed of how its going.

P.S. K. Jeans post hits the nail on the head!

[Heng]

Correct me if I am wrong Heng (as you would know) but Seng is actually a Chinese word now part of Thai language right?

I use it in my place of work from time to time (being that we lease real estate) and a few full blood Thai with no Chinese blood have been a little surprised to hear me say it; given that most of the language around here is very 'proper Thai' or engrish.

I can guess the Thai equivalent must be chao rayah yao yao, but everyone just says Seng, or lease upfront or similar....

Anyway, one other things, we structure leases so that there is some element of 'service' which and some element of 'lease' which minimises property tax/VAT and so on. I assume the upfront seng element (which we do not charge in the form of key money anyway) is another way to minimise the tax liability, but I am not sure how that is done as I don't get involved with that bit of the business.

Exactly how does this work>....

hi there Stevero, yes it's a Teochiu Chinese phrase. I can't think of the Mandarin or Cantonese equivalent as I've never had to use it. Surely your office mates have no reason to be suprised by your using it, as it's the default term to use for all Thai folks in such situations, Thai, Chinese, and Indian/Sikh.

Sure, it'll minimize your tax liability in cases where it goes unreported (like any other unreported income), but for projects (say the new Chatuchak Mall for example... or on a smaller scale that set of 10 shophouse buildings across the street from Carrefour Sukapibal 3, about 1.5 km west of my lot that we discussed a little while back) where all the booths and lots are only available via "seng," that's the project's only revenue, fully recorded with each transaction, and of course fully tax liable.

[Heng]

Macleod, you are not the only one who thinks this key money idea sucks.

The actual idea of key money up front is ok if the lease per month is a bargain.

The problem is that we have the people that want the key money and the people that sell the businesses with key money and they all believe they are offering you bargain basement rental amounts.

Surprisingly many people do not simply divide the key money amount by the months of the lease and add it to the rental to find out what their real lease amount is. Sometimes working out more expensive and not such a great deal afterall.

Secondly the key money that you pay up front, usually considerable amounts, is lost if your business fails or for whatever reason you move on without reselling the business. Ten million baht key money up front is lost and a windfall for the owners and you need to understand that this is what the owners are hoping happens, then they can sell it again....oh sorry lease it again.

It seems all you're talking about here is dissatisfaction with market prices (if it's bargain or a cost you can't accept, there is surely something for less further, sometimes much further down the road) and normal business risk (of course if your business fails you'll be out of whatever you invested).

[Nawtilus]

Really, is that what you got....you must have a wow of a time reading comics then.

[Heng]

I'd be happier to explain in simpler terms. Perhaps you had a deeper meaning to what you posted that I am missing.

"Macleod, you are not the only one who thinks this key money idea sucks."

You are not the only one who thinks this detergent idea sucks.

"The actual idea of key money up front is ok if the lease per month is a bargain."

Sometimes it's packaged in one big plastic container. It's okay if it works out more economically than those individually packaged smaller containers.

"The problem is that we have the people that want the key money and the people that sell the businesses with key money and they all believe they are offering you bargain basement rental amounts."

The problem is that we have Unilever and Colgate Palmolive who want to sell us the big container of detergent and sometimes you aren't really getting that bargain basement detergent deal that you think you are getting.

"Surprisingly many people do not simply divide the key money amount by the months of the lease and add it to the rental to find out what their real lease amount is. Sometimes working out more expensive and not such a great deal afterall."

Sometimes people don't divide out the cost per gram of detergent they are buying to find out what their real detergent cost is. Sometimes working out more expensive and not such a great deal afterall.

"Secondly the key money that you pay up front, usually considerable amounts, is lost if your business fails or for whatever reason you move on without reselling the business. Ten million baht key money up front is lost and a windfall for the owners and you need to understand that this is what the owners are hoping happens, then they can sell it again....oh sorry lease it again."

Say if I invest 10 million Baht in a widget machine up front. It's lost if my business fails or say if I move on for whatever reason to some other business, I'll have to sell what remaining/depreciated value of the widget machine remains (I'll have to sublease or sell what remaining time I have left on the key money agreeement). Sometimes no one wants to buy a used widget machine.

Edited July 29, 2006 by Heng