Accounting for Key Money in Commercial Real Estate Under ASC 842

Understanding key money in commercial real estate is essential for finance teams and real estate manager seeking ASC 842 compliance. In this article, we'll explain the meaning of key money, how it works in commercial leases, and what to know about accounting for key money under modern lease accounting standards.

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What is Key Money in Commercial Real Estate?

Key money is a term used in the leasing industry to describe an incentive paid to acquire a lease. And it’s a term that can make auditors a little nervous.

Key money is a term used in the leasing industry to describe an upfront payment made to acquire the right to a lease. In commercial real estate, key money is typically paid to secure a specific location, gain early access to a space, or incentivize an existing tenant to vacate before the end of their lease term. Because these payments often fall outside standard rent structures, key money can raise questions during audits if it is not properly documented and accounted for.

While the concept is most commonly associated with commercial leases, key money can also appear in other contexts. In residential leasing, hospitality, and international markets, similar payments may be referred to as goodwill payments, lease acquisition costs, or tenant buyouts. Regardless of the label, the underlying purpose is the same: to obtain control of a leased space that would otherwise be unavailable or less favorable.

Key money most often occurs in high-demand sectors such as retail, restaurants, and hospitality, where location directly impacts revenue potential. A tenant may pay key money to a landlord or an existing tenant to secure a prime storefront, take over a popular restaurant location, or accelerate access to a high-traffic property. In some cases, landlords may also structure key money arrangements to compensate tenants for early lease termination or to improve the marketability of a space.

It’s important to distinguish key money from other common lease-related payments. Unlike a security deposit, key money is not refundable. Unlike standard lease incentives, such as tenant improvement allowances or rent abatements, key money is typically paid upfront and tied to lease acquisition rather than ongoing occupancy benefits. These differences are what make key money accounting under ASC 842 particularly important for finance and real estate teams.

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Is Key Money Legal?

Key money can have different meanings in different parts of the world. Sometimes it could be used to refer to a bribe or another “under the table” payment.

However key money can also refer to completely legitimate and even common practices in leasing. In fact, some large companies operating under ASC 842 lease accounting standards, audited by well-known accounting firms, even have a key money account on the general ledger.

An Example of Key Money in a Commercial Lease

For example, consider a fictional scenario in which Burger Barn (BB) wanted to occupy a space in Ritzy Mall (RM). BB and RM agree to lease terms, but there is one problem, Pretzel Depot (PD) is in the space that BB wants, and the PD lease is locked in for another two years.

Now, BB may want to choose a less desirable and currently available location in RM. Or BB may decide to offer PD an incentive to move out early. You could refer to that incentive as “key money.”

How ASC 842 Address Key Money Accounting

A payment of key money in a commercial lease context should become a part of the right of use (ROU) asset, which will then be amortized over the term of the lease. It does not impact the lease liability, because the key money has already been paid.

ASC 842 addresses key money payments in these excerpts:

Excerpt 842-10-30-9 | Initial direct costs for a lessee or a lessor may include, for example, either of the following:

1. Commissions
2. Payments made to an existing tenant to incentivize that tenant to terminate its lease.

Excerpt 842-20-30-5 | At the commencement date, the cost of the right-of-use asset shall consist of all of the following:

1. The amount of the initial measurement of the lease liability
2. Any lease payments made to the lessor at or before the commencement date, minus any lease incentives received
3. Any initial direct costs incurred by the lessee (as described in paragraphs 842-10-30-9 through 30-10).

How Lease Accounting Software Simplifies Key Money Tracking

When evaluating lease accounting solutions, make sure ROU asset adjustment functionality is in place and easy to use. Don’t be caught off guard with a lease accounting software provider that does not offer the functionality needed for smooth and efficient ASC 842 compliance.