Key Money

[PMK]

What do you guys understand by the term ‘key money’, can it sometimes be annual rather than a one time payment (deposit?) and does it sound something like ‘bray-zee-er’ in Thai or is that something else?

Thanks,

Peter

[Indo-Siam]

Key money is rent paid in advance, and off the books. It is normally associated with nightlife properties, and is normally collected once per year.

So - basically - a landlord determines the desired rent for a property - let's say, 100,000 baht per month. Landlord might then ask the renting party to pay 960,000 baht (=12 x 80,000 baht) as "key money", up-front, and "off the books" (no receipt). The rent collected monthly - "on the books" would be 20,000 baht.

If a renter goes broke, defaults on payment, or is shut down for a violation - and is unable to pay monthly rent, the landlord loses little - because he/she already collected 80% of the rent up-front.

Key money is non-refundable. A normal lease deposit may also be collected - equivalent to perhaps two or three months rent - and you get a receipt for this deposit - and it is at least theoretically refundable.

A complication of the "key money" concept is that - since it is "off the books" - there is no official receipt, and this expense cannot be treated as a deductible business expense of the enterprise.

[Briggsy]

I understand 'key money' to be a term used in the Japanese not the Thai rental market. It is an up-front one-off non-refundable payment to obtain the lease. Never met the concept in Thailand, thank God.

[torrenova]

The easiest way to understand key money is in terms of advance rent.

Often it is collected every 3 years, the reason for this being that leases over 3 years must be registered and thus, the landlord has to declare the amount of rent received and then pay tax on it. Often leases are 3+3+3 which means that key money is effectively a fee to exercise the next portion of the effective 9 year lease. Rent increases would normally be written into this 9 year term, changing every 3 years.

As stated above, it is off the books and thus, is potentially hazardous. It is advisable to have something written into a contract which stipulates that key money can be transferred with the lease as opposed to a new purchaser having to sign a new lease and pay new key money.

Thus, if key money of Bt360,000 was paid every 3 years, then it is an effective amount of Bt10,000 a month and if you sell your business after 1 year, you should be able to transfer the lease and receive Bt240,000 from the new purchaser. If a landlord will not agree to this, and the key money is significant, then I would walk away unless you really know what you are doing and know the landlord in question.

Often you will find businesses for sale when they have been owned into the last 6 months of the 3 year term because the owner does not have the key money and will forfeit the business if they do not have it.