MCD Hotel Advisors

Way, way down at the bottom of the Hotel Pro Forma is a line that reads FF&E Reserve. Sometimes it shows zeros but sometimes there is a large amount. So if you are asking yourself what falls in this category and should I be including an amount in this line item, you will find this useful.

What is the FF&E Reserve for and how does it get funded?

Well as the name gives it away. It is a pot of money that is put aside so that when any FF&E (Furniture, Fixtures & Equipment) needs to be replaced, there is already a pool of funds available to cover these expenses. It is often calculated as a percentage of the Gross Revenue and is dictated by the terms of the Hotel Management Agreement. It can range from 3-5%, with 4% being a very common number.

Do I need to include FF&E Reserve in my projections?

If you are building a large project and/or will have a management company running your hotel, then you will most likely need to have this in your projections. As eluded to above, the HMA will call out this reserve with a specific percentage that needs to be contributed. If you are working on an independent and smaller hotel, then you do not need to have this in your projections because in practice you may not actually put the money aside. However, it can be a good practice anyway to put this money aside in good times to have it available in case the hotel financials go through a rough patch. You still have the funds available to make necessary FF&E replacements.