Landlords now choke traders with exorbitant goodwill fees

Shops remain closed along Tom Mboya street.

Judge Lord Eldon, in 1810, faced with so many cases touching on business and goodwill, simplified goodwill as “the probability that the old customers will resort to the old place.”

Over two centuries later, accountants and lawyers still find it complex and contentious to value goodwill for businesses.

Thanks to this, landlords and agents are giving goodwill a new definition by slapping businesses with exorbitant and often unexplained costs, arbitrarily decided and clothed as goodwill. It started within town centres but it is now becoming popular in residential areas.

Geoffrey Injeni, a lecturer at Strathmore University’s School of Accountancy, says many commercial space owners use goodwill as hiding ground to charge tenants high costs before renting them space.

“They are using a smart way of charging a higher deposit. If they directly asked for big deposits, probably people would question,” says Dr Injeni.

At the cross-roads of Tom Mboya and Kenyatta Avenue in Nairobi is a heavy footfall as people criss-cross the busy roads that run into and out of closely lying matatu stages. Here, there is a building that previously used to house Tuskys Supermarkets’ Beba Beba branch.

The supermarket had to exit the premise after the new owner bought the property from the Bank of Baroda and opted to convert it into stalls and office space. This is becoming the trend in Nairobi’s Central Business District (CBD) as space owners see more returns in subdividing buildings and renting out.

However, many entrepreneurs say the initial amounts they are asked to pay before being allowed to operate into such premises is getting out of reach.

“With the exit of Beba Beba, I saw an opportunity to get a stall for my business. But when the management told me to pay Sh5 million as goodwill, followed by Sh200,000 rent, I gave up,” says Boniface Ambani, who runs a sports kit, equipment and uniform branding business.

Such money, many of the people doing business in the CBD told Weekend Business, is not accompanied by any receipt. In cases where owners of the building decide to renovate or convert the stalls into a different set up, a tussle ensues between the tenants and the property managers.

And streets are replete with advertisements of ‘Shop on sale’ as those currently doing business in various stalls seek a profitable way out by looking for people who can “buy” the same space.

“If I want to leave this premise, I have to look for someone to buy the space so that I can get back the goodwill I paid at the start. I cannot see the Sh1.6 million go to drain,” says James Maingi, who operates M-Pesa shop and sells mobile phones and accessories in Nairobi.

To get such buyers, businesses also incur costs. Many Kenyans are now finding a new business- that of helping businesses get buyers for the rented commercial space. Joseph Kiragu is one such person.

He left employment at a real estate company in Nairobi’s Westlands to try his hands in helping commercial space owners meet entrepreneurs looking for space to start business. It has been eight years and as the clock ticks away, he only dreams of doing it better every new day.

An active user of social media, Mr Kiragu spends most of his time receiving calls from clients and updating his audience about the profile of available commercial space, location and cost. All these at a fee.

He says that it is common practice to charge goodwill ‘fee’. Businesses which don’t ask for goodwill, he explains, cleverly spread it out in the rent that business pay. 

“By the time the tenant will have stayed in the shop for the period of the lease, he will have paid this goodwill without knowing,” says Mr Kiragu. 

So expensive is the goodwill cost that it forces some business persons to alter their plans. For instance, Ambani, a trained accountant and a household name in Kenya’s football scene, decided to shelve his plans for expansion thanks to goodwill.

Expanding would have seen him part with Sh3 million to get space on ground floor of the building he was eying. According to Ambani, forking out such “outrageous amount” in the name of goodwill would have weakened his ability to stock the shop.

This was not the first time to encounter such hurdle. In 2011, as he hung up his football boots, he wanted to start his business in Nairobi. But he was put off by tenants demanding goodwill “fee” in the range of Sh300,000 to half a million.

“I realised setting up in Nairobi was going to be hard. I had to head to Eldoret first. It took me long before I could establish another shop in Nairobi,” explains Ambani.

Even so, he had to settle on the third floor of a new mall to escape goodwill fee. Most buildings charge goodwill on ground floor as well as first floor where it is believed that walk-in customers are many.

While Kenya has been acclaimed by World Bank for making progress in the ease of doing business, such unofficial fees, Dr Injeni argues, may be slowing the pace of businesses.

Mr Kiragu, who has helped so many people get rental space in the CBD says that it is almost impossible to get any shop without paying goodwill. However, he admits that there is no regulation around how much money one should pay.

Most of the deals he has brokered have been lease agreements of a maximum of five years. The size of goodwill, Kiragu told Weekend Business, depends with location. His experience is that Tom Mboya Street and Moi Avenue in Nairobi attract the highest goodwill ranging between Sh200,000 and Sh10 million.

“Once five years are over, tenants have to renew their stay by paying another goodwill unless they opt out,” he says.

At Moi Avenue, the cheapest goodwill he has ever brokered for a customer on a front-facing stall is Sh1.5 million. Here, monthly rent ranges between Sh60,000 to Sh200,000 depending on size and location of the stall.

This means that for a business premise that charges goodwill of Sh5 million, the occupant must have made more than Sh10 million within that period of five years or else there may not be a viable business case to continue occupying the space.

According to Dr X N Iraki, a lecturer at University of Nairobi’s School of Business, the argument for goodwill is usually that the former tenant has developed a clientele or regular customers who are likely to continue visiting the shop even under new tenant. However, he sees no case for charging goodwill on new premises.

“The old owner had invested time and money to gain goodwill. The new business owner would be a free rider without paying goodwill. However, it does not make economic sense to charge goodwill on a new property,” says Iraki.

But this is not the case for most space owners. New buildings are also attracting goodwill. Commercial space in the CBD is increasingly getting competitive with tenants booking space in new buildings even before construction is over.

At Kimathi Street, the ground floor of the building which was formerly housing Nakumatt outlet that was razed down by fire in 2009 has already been booked even before construction is over. The management was asking for Sh3 million as goodwill and monthly rent of Sh70,000.

Adjacent to it is another building, HH Plaza that is coming up. The owner is targeting tenants interested in mixed use shops, restaurants and offices. A notice to welcome tenants who may be interested is already up. Here, goodwill is as high as Sh3 million.

Dr Injeni says that sometimes goodwill on new premises comes as a result of the prime location. This also applies when the business line of the incoming tenant is going to be different from the one that is on the way out.

On Moi Avenue are other busy mixed use stalls facing Naivas Supermarket that is now occupying the space that until last year was Barclays Bank of Kenya branch.

This is where James Maingi’s stall is located. He has been here for the last three years. He had to part with Sh1.6 million as goodwill, a sum he says he paid out without getting any receipt. Every month, he pays a rent of Sh63,000 for a space that can hardly fit the size of a standard bed. Next to him is another stall. The tenant paid Sh600,000 goodwill since it is tucked inside other stalls.

According to Maingi, in the next two years, he will have to decide if he wants to move out or pay another goodwill of Sh1.6 million or more depending on what the management will ask. The only other way is to get someone willing to buy the space.

Maingi is not fazed by this huge sum, even though he admits it delays the period taken before one can hit break-even point. 

“You have to be sure what business you want to do considering that you have parted with Sh1.6 million. You have to work hard and break-even by the end of first year, make money for two years and think of exiting or renewal,” says Maingi.

Being smart at business, he says, include building rapport for referrals as well as marketing the goods on social media.

If he decides to exit in the fourth year and sells the shop to someone else to recover the Sh1.6 million goodwill, the new buyer will only take one year before the owner comes knocking for fresh goodwill.

Strathmore’s Dr Injeni advises that before one rents any business space, they should do enough feasibility study to avoid running into losses after incurring such high costs. He opines that the best businesses in such a scenario are those with attractive and consistent cash flows.

“You really have to ensure that your business is so good. Such cost can be a barrier to entry for small businesses even though some tenants use it as one time expense and spare tenants from hiking rent during the lease perod,” Dr Injeni said.

Outside the CBD, the trend is becoming popular. Estates such as Donholm, Dagoretti, Estleigh, Pipeline, Umoja and Githurai are also charging goodwill for businesses to set up. Major towns are also following suit. However, this is not as high as in the Nairobi CBD.