Leasehold vs Freehold28-10-2009
When buying a business in Spain, the property holding this business will either be freehold or leasehold. This is called tenure. There are advantages and disadvantages to both.
Buying freehold means you acquire ownership of the land and building forever, and are able to do with it as you wish (subject to the law obviously). As specialists in bars, restaurants, nightclubs and hotels, Crystal Consulting Spain SL gets many enquiries from people who wish to buy a business, yet who are unfamiliar with the advantages and disadvantages of the two types of tenure. Many buyers resolutely set their sights on purchasing a freehold, yet because of their limited capital (and restricted market conditions) are unable to find anything they are capable of buying.
Let´s say you buy a freehold bar and after some time decide you no longer fancy working in the bar, you can then:
- Rent the premises by selling the business (and charging a leasehold – traspaso for the license, machinery and business)
- Rent the premises to a manager (keeping ownership of the license and machinery)
- Perform a sale and leaseback (when you sell your premises but make an arrangement to rent it back for a good rent for a number of years)
- Or sell off both the premises and the business to a new business owner.
Property normally appreciates in value over time and so would show on your balance sheet as an increasing fix asset. When you sell, you make a considerable capital gain.
Freehold property is usually more expensive than leasehold to buy. If you have ample funds to buy a freehold business, you would better off investing all those funds into a better leasehold business than to tie a substantial part of your capital in the freehold of the property.
In Spain leasehold is called a “traspaso”. The leasehold sum is the amount of money paid to the existing tenant (business owner), to take over the business. The new owner will then take on the right to re-sell the business
whenever he or she desires. In a leasehold operation, the owner of the premises is entitled to a percentage of the traspaso – leasehold to paid, this can e case basis. Understandably, given that you are not buying property a leasehold business is much cheaper than freehold and more accessible to most investors.
Leasehold property is usually much cheaper to buy. 2 months deposit and a traspaso payment can get you business (some owners reguire an aval – bank quarantee). For the price of one freehold you could buy several leasehold
businesses. Including a purchasing option in the rent agreement could allow you to secure owing the property in the future.
You can only change the use of the building or make alterations, perhaps even decorate, with the prior approval of the leaseholder so operating in a leasehold property can be far more restrictive. Leasehold property is actually written off in the balance sheet over the life of lease and so shows on the balance sheet as a “depreciating asset”.
You do not own the “bricks and mortar”. Generally speaking, both freehold and leasehold premises are viable options and will depend on both the personal situation of a business investor and the market they are looking at.
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