Why Can't We Even Close Our Businesses... The 'Trap' of Key Money [Is Your Dream Well?]

Commercial Lease Premiums Worth Hundreds of Millions Instantly Become 'No Premium' in the Market
If Lease Premiums Are Not Recovered, It Leads to Debt
"At Least Take Over the Used Fixtures" Tears

On the 31st, the last day of 2020, Myeongdong Street in Jung-gu, Seoul, is seen looking quiet. Photo by Jinhyung Kang aymsdream@

[Sejong=Asia Economy Reporter Kim Hyunjung] "I am transferring a commercial space with a floor lease premium of 80 million won as a no-premium deal on the condition of taking over the fixtures."

Mr. Oh, who operated a restaurant in Daegu Dongseong-ro, recently decided to close his store after being unable to pay rent for several months. He lowered the lease premium from 80 million won to 50 million won, then to 30 million won, but no buyer appeared. Eventually, to save on demolition costs, he set the condition to transfer only the fixtures. Mr. Oh explained, "In better commercial areas, lease premiums reach hundreds of millions of won, but leaving as is means falling into debt," adding, "Small business owners who cannot choose either way because of the lease premium they have invested in are shedding tears of blood."

One of the reasons small business owners have difficulty deciding to close even after a year of the COVID-19 pandemic is the initial cost poured into lease premiums. Simply put, a lease premium is a 'seat fee.' It is generally viewed as the monetary value of the 'property value' related to the commercial building, separate from the lease contract between the landlord and tenant. Typically, this includes tangible assets such as business facilities and equipment, as well as intangible assets like client base, credit, business know-how, and crucially, the business advantage based on the 'location of the store.'

The problem is that the law (Article 10-3 of the Lease Protection Act) only specifies its nature but does not protect this investment cost. Even in Seoul's prime tourist and famous commercial areas such as Myeongdong, Jongno, Itaewon, and Hongdae Entrance, there is no possibility of recovering lease premiums after the COVID-19 crisis.

Mr. Ha Mo, who runs a famous franchise coffee shop in Myeongil-dong, Gangdong-gu, Seoul, lamented, "The lease premium was 130 million won when I opened the store, but now it should be considered zero," adding, "Currently, even with no premium, vacancies are overflowing." Mr. Han Mo, who operates a gym in Seogyo-dong, Mapo-gu, explained, "When business was booming, I received many sales calls from commercial brokers, but now it is impossible to find a buyer, let alone recover the lease premium."

From the perspective of supply and demand, the decline in lease premiums due to oversupply is obvious. According to the recent 'KB Real Estate Report (Commercial)' published by KB Financial Group Management Research Institute, the area of commercial building permits in the metropolitan area increased by 19.2% year-on-year up to the third quarter last year, and the area of construction starts increased by 1.3%. The report expressed concern that "with insufficient rental demand due to the recession in small businesses, the increase in supply could lead to more vacancies and rent declines."