May 12, 2008
What in the World is “Key Money”?
Or, why should I have to pay so much for a key…

If you’ve read ads for businesses for sale in the Pattaya area, you’ve no doubt noticed that a typical listing will say “Price is 1.5 million baht plus 200,000 baht key money”, or “Key Money of 500,000 baht is included in the price”. Some ads may neglect to mention “key money”…but don’t imagine for a minute that you’re going to get away without paying it.

Now, that’s a bit of an exaggeration. There is an occasional business sold without any key money involved. But “key money” is so ubiquitous in Pattaya – and so unknown in most of the rest of the world – that we thought an explanation would be helpful.

The key to understanding the mystery of key money is the fact that lease payments or rent are taxable income to the landlord. And nobody likes to pay taxes. So, enterprising landlords in Pattaya devised the “key money” as a way to collect revenues from their properties without sharing the wealth with the tax man. They set a nice low rental rate, which they dutifully report to the revenuers.

They then charge a substantial amount of up-front “key money” which they may or may not report. We don’t know…and neither does the government.

The second (but still very important) appeal of key money to the landlord is that, since it’s collected up front, the income – which might otherwise have trickled in over, say, a 3-year lease period - is all paid in advance. Those familiar with the “time value of money” formula will appreciate that a lump sum of, for instance, 300,000 baht is worth considerably more than 1-36th of that sum paid monthly for 3 years.

It must be admitted that some business owners find it difficult to keep up with monthly bill paying and might get behind schedule with paying the rent. Some will even default. By getting a big chunk of the rent payments in advance, landlords cushion themselves against tenants’ default or late payment by the device of key money.

So, it’s not totally unreasonable, especially from the landlords’ perspective. The business buyer might view “key money” as part of the cost of acquiring the new bar or restaurant, but in fairness it should be understood that it’s the landlord, not the seller of the business, who’s charging it.

Why then, you ask, should the landlord also charge a sometimes hefty “transfer fee” (I’ve seen transfer fees as high as 500,000 baht for a plum location) to let you assume the previous owner’s lease or have a new lease made in your name?

Because they can.

By Phil Helms