Leasehold versus Freehold

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. Get financial and legal advice on tenure issues. In certain cities (such as Madrid and Barcelona), you will rarely find freehold business premises. And in locations such as the Costa del Sol you will find quite a few freehold premises.

Freehold businesses

As a business broker providing invaluable consulting services to his clients, Gregor Schellhammer (manager of Crystal Consulting Spain SL) advises that 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, we at Crystal Consulting Spain SL get 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 (whereby you sell your premises but make an arrangement to rent it back for a good rent for a number of years).
• or sell of both the premises and the business to a new business owner.

Advantages:

• Property normally appreciates in value over time and so would show on your balance sheet as an increasing fixed asset.
• When you sell, you may make a considerable capital gain.

Disadvantage:

• Freehold property is usually more expensive than leasehold to buy.
• If you have ample funds to buy a freehold business, you would be 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.

Leasehold businesses

In Spain a leasehold is called a “Traspaso“. The leasehold sum is the amount of money paid to the exisiting 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 paid, this can be from 10% to as high as 25% - different on a case by case basis. Understandably, given that you are not buying property a leasehold business is much cheaper than freehold and more accessible to most investors.

Advantage:

• Leasehold property is usually much cheaper to buy.
• 2 months deposit and a traspaso payment can get you a business (some owners require an aval - bank guarantee).
• 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 owning the property in the future.

Disadvantage:

• 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 the 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. Our Costa Blanca businesses for sale porftolio contains a lot more freehold businesses, whereas our Barcelona businesses for sale porftolio rarely contains anything but leasehold premises.

Article provided by courtesy of Crystal Consulting Spain SL, a company dedicated exclusively to the brokering of businesses for sale in Spain, especially commercial premises with existing licenses such as bars, music bars, cafeterias, beach bars, restaurants, nightclubs and hotels. Crystal Consulting holds its headquarters in Barcelona and has a subsidiary operation on the Costa Blanca.