The Furniture, Fittings and Equipment Reserve (FF&E Reserve) or ‘replacement reserve’ refers to funds set aside for the periodic replacement of building components that wear out more rapidly than the building itself.
At The First Group Asset Management we always discuss the provision of an FF&E Reserve during the early hotel development stage when we stress to owners and operators the importance of thoroughly assessing the needs of a property and creating a detailed FF&E Reserve adequate for the lifespan of the asset
This reserve fund will ensure the property has sufficient liquidity if unexpected replacement costs arise, or a larger sum is required for property maintenance.
The FF&E Reserve has traditionally been assigned as a % of revenues. Operators will always try to increase the percentage allocated to the FF&E Reserve to ensure the property has sufficient funds to maintain the property to their brand standards.
However, owners will push for a lower percentage to improve the property’s short-term profitability.
As the asset manager it is our objective to ensure the property can operate at its maximum capacity while delivering its owners their desired returns.
Although we aim to protect owner interests, we do need to ensure the FF&E fund is large enough to maintain the standards of the property.
In cases where hotels have undervalued their FF&E Reserve it has led to the deterioration of facilities and standards and the owner has been forced to reinvest into the hotel.
Before assigning a percentage of revenue to the FF&E fund, hotel owners should either internally or through a third-party contractor, evaluate the condition of the building and its contents.
The contents of the building must be assigned a life expectancy and a replacement value, providing owners with a detailed yearly cost analysis.
By understanding how much needs to be spent on a yearly basis to maintain the hotel’s contents, an accurate FF&E fund can be assigned.
The analysis can also help ensure the property doesn’t overpay for certain items in the future.
At The First Group Asset Management we advise owners of new properties, as well as those in operation for many years, and we have overseen the successful refurbishment of hotel public spaces and hotel rooms to high standards, which would not have been possible if an FF&E had not been assigned.
Having sufficient funds set aside for renovations is crucial to a hotel’s long-term performance. While it may impact net profits in the short term, the long-term gains are substantial.
Having insufficient funds in place to renovate to the standards expected by guests and to keep pace with market expectations will have a huge impact on the property’s top-line.