Options to extend a lease

[keestha]

Having a look at the businesses Sunbelt has to offer in Thailand, I noticed that a few of them are in rented premises, with a lease which is due to expire in the foreseeable future, but with an option to extend the lease. I have always wondered how safe these options are. Once I saw an option actually biting the dust, but maybe it was not properly worded in the contract or so. Normally speaking a rent contract in Thailand for more than 3 years must be registered at the Land Office, and I think it also has to be written on the chanot or other land paper in order to be valid. Can one really rely on an option to extend a lease once it expires? Sunbelt please shine your light on this, thanks in advance, and are there maybe any other people who have experience with this?

[Sunbelt]

What the current lease is in the seller’s name… really means nothing, in almost all cases in the end. The old contract with the seller is torn up and a new lease is put in your name or your company’s name by the Landlord of the building. This is almost always the condition the buyer puts in the offer to purchase the business and is given a three year rental term plus the right of renewal for an additional 3 years. This is considered a long term contract in Bangkok.

Right of renewal is better language in the contract for the Lessee than just a option.

If you are looking to obtain a lease in certain prime and famous areas, it may be only 1 year with the option to renew for an additional year. The contract rolls forward every year but you could be out in just 2 years. That’s what the family (Landlord) had asked for and the owners if they want to have a business at that location, have no option but to comply.  In reality if don’t want to, someone else will! There is a big shortage of space in these areas. Have any owners ever had a problem in say Patpong? Not that I know of, I understand they roll over like clockwork. But what has happen in the past is no guarantee it won’t change one day! I know one bar owner where he has a lease since 1964 and the Landlord still refuse to grant anything longer than a one year renewal.

Still 3 years plus 3 years for the right to renew is a good contract and is usually the best you can get. We’ve had clients get up to 15 years with five 3 year terms but they are very rare! With Land, 30 years is no problem.

The reason why three years for retail is considered long term is more than 3 years has to be registered with the Land Bureau then the landlord has to pay 1.5 months out of the year in tax. Hence the 3 year is quite famous for no registration with the Land Bureau. Also the Landlord now has the chance to increase the rent 15- 20% every three years.  Compare this to the Western World where the normal lease length is 5+5+5 and a rent increase of 12-15% every 5 years.  This means in the West the average rent goes up 32% in 15 years while in Asia it can be over 100%. This also does not take account the key money or tea money, Asia is famous for.

So on the surface it looks like the landlord in Thailand is getting quite rich! He however still is not at the 1/100 (rent to selling price of a building) in the West. It’s more like 1/200 so at that ratio, rent is still cheap here.   However many people shopping for land and buildings to own in Bangkok exclaim “It’s cheaper in downtown London” and it is! Real estate in Bangkok and Phuket is quite expensive. It is even expected to increase an additional 25% this year. Its supply and demand at work!

By the way,  the USA rent cost to the fast food gross sales is  9 -11% and here you will be surprised to know many of the food courts in the Malls charge 30% of the gross or even higher for rent! You might with tough negotiations get 22 -25%.

Have any idea anybody makes money in the malls if your rent cost is a high percentage of your gross sales in food?

It’s not Food cost! The raw material is 28% -32% in the West and in Asia its 25% -40% (depending on import food)

The key difference is payroll. In the West, expect labor to be 30- 34% of the gross. Here it’s around 6% -10%.

That’s how the cash flow/ profit on average (profit after all expenses except for depreciation, tax and owners salary) is 20 -30 % in Thailand and in the West its 10- 15 %.

Which locations make the most baht? The retail store in the prime areas usually does better. The locations are hard to come by but if you can get it, don’t fletch, they are worth the Kings Ransom. People won’t walk far in Bangkok to get to you!  

In my opinion, two other ingredients are required to owning a winning business. Good management and also look for a business with a good track record if you have limited experience. These in my opinion are the three ingredients to owning a winning business…. location, management and track record.