What Is Key Money?

[Nawtilus]

whats detergant got to do with key money...crikey.

least you could have thought of a more interesting and sexier anaolgy, but i guess detergant excites you, fair enough.

Bye bubbles.

[Heng]

The goal was simpler, not sexier. I can also do one with legos and toothpicks with jpeg images if you're still not catching on.

[Nawtilus]

please

[~G~]

The house always wins... Owning retail real estate with the key money system is even better than owning a casino - some tenants will stay in the game while a certain percantage will always fail to complete the period of business for which the key money is paid, allowing the landlord to enjoy an extra income. In addition, taking in consideration a couple of months' rent or more in form of Deposits plus Advnaces, the landlords manage to transfer almost all of their business risk to the tenant.

Edited July 31, 2006 by ~G~

[Sunbelt Asia]

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

Why not company's cash? It is a company expense. The receipt has to be in the company's name.

www.sunbeltasiagroup.com

[Sunbelt Asia]

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.

I disagree on the landlord laughing in your face. My companies have receipts from Suk Soi 19, Suk Soi 13, Suk Rd betwen soi 12 and Soi 14, suK Rd 7/1 Suk Rd Soi 33, Suk Rd between Soi 3/1 and Soi 5, Suk Rd Soi 4 and 6 Khao San Rd, Siam Paragon and they all give receipts for all the businesses that I'm involved with. All of our clients have as well gotten receipts in tourist areas.

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 a person is stupid to have only a 3 year contract with no option not granted to them. Then they certainly did not get good advice.

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

Think its more about getting good advice in the first place.

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!

It is an asset on the company's book but it is a time wasting asset which depreciates every month. If the place burns down, then it still depreciates every month. ( You better have fire insurance if you pay key- money)

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.

No lease, no business.

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.

Very stupid if someone enter into any such contract without a maximum increase for the next rental term.

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.

A possible solution. Remember a lease longer than 3 years must be registered at the Land Dept to be valid for more than 3 years.

www.sunbeltasiagroup.com

[~G~]

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

Why not company's cash? It is a company expense. The receipt has to be in the company's name.

www.sunbeltasiagroup.com

Try to read what I wrote in the context I was refering to, and you might understand.

[Sunbelt Asia]

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.

Why would someone ever enter into such a lease agreement? You cannot get a longer 3 year contract with a guarantee maximimum increase for the next three years. Run, don't walk.

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".

This talk has been going on for the last 20 years and will most likely continue for the next 50 years. Three of these properties on the Walking Street have title deed as well. The latest plan is to build another Walking street in the water. So the backdoors become the front doors on these properties.

[Sunbelt Asia]

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.

Try to read what I wrote in the context I was refering to, and you might understand.

?????Please enlighten me why it would be from the tenants own pocket? If it was, wouldn't they get this back from the company? Why just let this expense be a personal expense?

[~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.

Try to read what I wrote in the context I was refering to, and you might understand.

?????Please enlighten me why it would be from the tenants own pocket? If it was, wouldn't they get this back from the company? Why just let this expense be a personal expense?

1. We have started with the assumption that the landlord refuses to give a reciept, because he wants to avoid the tax. This was the context of my post.

2. You have suggested that in this case the tenant should pay the tax of the landlord. Practically, to ask him to increase the asking price for the key money, as long as he provides a receipt.

3. I have pointed out that your suggestion is very similar to the case the tenant just paid from his own pocket, without getting a formal, accountable, receipt. Why it is equivalent? becuase say the tenant finances this by withdrawing a larger salary from the company and uses that to pay the landlord. In this case he pays extra tax on his personal income, and in addition, cannot have the key money as a company expense, which will result in higher corporate tax as well. Those two taxes may be equivalent to the extra payment in your suggestion, depends on the profitability (or lack of) of the company, income level of the person withdrawing the salary, the tax rate the landlord requires to pay, and the amount of the key money he asks.

It is not only in this case, it is the same in every case you pay for the company and don't get a formal receipt. You actually pay the tax for the merchant / service provider.

[simcity]

In australia a blatant way for the owner to get key money is :

When you want to sell the business and the lease is coming to term in said 1 year.

the tenant turn over and agree to renew the lease at of condition of key money !

the sum was 20000 AU dollars !

[~G~]

In this case he pays extra tax on his personal income, and in addition, cannot have the key money as a company expense, which will result in higher corporate tax as well. Those two taxes may be equivalent to the extra payment in your suggestion, depends on the profitability (or lack of) of the company, income level of the person withdrawing the salary, the tax rate the landlord requires to pay, and the amount of the key money he asks.

Correction: only one extra tax - the one on the increased salary. No extra corporate tax - since it doesn't matter whether this payment goes to the landlord as a key money or as an addition to the salary as far as the tenant's company is concerned.

[Sunbelt Asia]

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.

Try to read what I wrote in the context I was refering to, and you might understand.

?????Please enlighten me why it would be from the tenants own pocket? If it was, wouldn't they get this back from the company? Why just let this expense be a personal expense?

1. We have started with the assumption that the landlord refuses to give a reciept, because he wants to avoid the tax. This was the context of my post.

2. You have suggested that in this case the tenant should pay the tax of the landlord. Practically, to ask him to increase the asking price for the key money, as long as he provides a receipt.

3. I have pointed out that your suggestion is very similar to the case the tenant just paid from his own pocket, without getting a formal, accountable, receipt. Why it is equivalent? becuase say the tenant finances this by withdrawing a larger salary from the company and uses that to pay the landlord. In this case he pays extra tax on his personal income, and in addition, cannot have the key money as a company expense, which will result in higher corporate tax as well. Those two taxes may be equivalent to the extra payment in your suggestion, depends on the profitability (or lack of) of the company, income level of the person withdrawing the salary, the tax rate the landlord requires to pay, and the amount of the key money he asks.

It is not only in this case, it is the same in every case you pay for the company and don't get a formal receipt. You actually pay the tax for the merchant / service provider.

I see now your point. My point was the receipt should be requested not only as an expense but to avoid association with money laundry or tax evasion. The government could care less what party pays as long as someone does.

[PeaceBlondie]

The goal was simpler, not sexier. I can also do one with legos and toothpicks with jpeg images if you're still not catching on.

That was great, Heng. You've restored my faith in American university Schools of Business. I recall that no accounting or business professor could deliver a lecture without widgets. However, I don't recall taking a course regarding used widget machines. It seems they only talked about the widgets themselves.

[Sunbelt Asia]

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.

It would be rare that a Landlord is selling a business. If anything it would be a lease with assets being the equipment. They would not be buying anything then.

As for bargain basement rentals. I would say the rental mkt is crazy. Any shophouse is 200,000 Baht plus per month in lower Sukhumvit. If you want to do business in the tourist areas, you have to pay this type of money. I just paid 250,000 Baht key money to a company who moved out over the weekend, just leaving a air-conditioning unit and a broom. This company gets 250K plus 90K for the 3 month deposit that he had already with the Landlord. The landlord himself just gets 30K per month. This is for a 12 sq.m. unit( 2,500 Baht a sq.m.) plus then the key money. This seems crazy for air but space on Suk Rd is worth it.

.

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.

Who knows maybe thru the agent you could have gotten it for 2 million Baht or even less. It’s the seller who sets the price, businesses like real estate is negotiable.

It is the agent’s job to find the price that makes both parties happy without making the buyer look bad on a low ball offer. We have had businesses sell for less than 20% of what the original asking price, every case is different. But on average most businesses are acquired at 75-80% of the asking price. 2.5 mil on a 3.5 mill asking price would certainly be the norm for a buyer.

The big advantage of a professional transfer specialist, is most would like assistance to draw up the written conditions on the offer of purchase such as review and acceptance of the financials, review and acceptance of the lease, no competition in a 5 km radius, no solicitation of the employees, no liens, etc.

They also would have had the security of escrow instead of trying to getting it back from the seller if the deal fall apart during due diligence. It worked out ok for you but for a number of folks, it was a life saver having a professional solving problems during the business transfer.

www.sunbeltasiagroup.com

[Heng]

The goal was simpler, not sexier. I can also do one with legos and toothpicks with jpeg images if you're still not catching on.

That was great, Heng. You've restored my faith in American university Schools of Business. I recall that no accounting or business professor could deliver a lecture without widgets. However, I don't recall taking a course regarding used widget machines. It seems they only talked about the widgets themselves.

[Nawtilus]

As for bargain basement rentals. I would say the rental mkt is crazy. Any shophouse is 200,000

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.

Who knows maybe thru the agent you could have gotten it for 2 million Baht or even less. It’s the seller who sets the price, businesses like real estate is negotiable.

It is the agent’s job to find the price that makes both parties happy without making the buyer look bad on a low ball offer. We have had businesses sell for less than 20% of what the original asking price, every case is different. But on average most businesses are acquired at 75-80% of the asking price. 2.5 mil on a 3.5 mill asking price would certainly be the norm for a buyer.

The big advantage of a professional transfer specialist, is most would like assistance to draw up the written conditions on the offer of purchase such as review and acceptance of the financials, review and acceptance of the lease, no competition in a 5 km radius, no solicitation of the employees, no liens, etc.

They also would have had the security of escrow instead of trying to getting it back from the seller if the deal fall apart during due diligence. It worked out ok for you but for a number of folks, it was a life saver having a professional solving problems during the business transfer.

www.sunbeltasiagroup.com

Not quite right. The business owner told the agent 2.5mil, the agent obviously whacked on the further 1 mil for himself. So then the 20 to 30% rule would have come off of the 2.5mil.

Regardless, when you continue to quote key money and rental seperate and praise it as a good deal, you will never get my respect. Why dont you just offer a further great service to your 'transparent' activities and state what the real rental figure works out to be per month inclusive of this key money dealings.

What you guys support at the moment is like advertising a block of land for 5mil and then saying the house is an extra 10mil on top.

[Sunbelt Asia]

Not quite right. The business owner told the agent 2.5mil, the agent obviously whacked on the further 1 mil for himself. So then the 20 to 30% rule would have come off of the 2.5mil.

Any agent that puts money on for himself like that, is worse than scum of the earth.

Why dont you just offer a further great service to your 'transparent' activities and state what the real rental figure works out to be per month inclusive of this key money dealings.

Never been an issue as it is rare to have key money involved with the business transfer. In almost cases we have been involved with it, the seller paid the initial key money and the buyer did not have this cost. The only single exception the buyer and seller split the initial key- money fee to the landlord.

http://www.sunbeltasiagroup.com