Definition
An FF&E reserve is a percentage of hotel revenue set aside for replacing furniture, fixtures and equipment — deducted before the owner sees any profit and spent on items the owner may not have chosen.
Also called: FFE reserve · Furniture Fixtures and Equipment reserve · Reserve for replacement
In practice
In management contract negotiations, enormous energy goes into the fee structure and comparatively little into the reserve. That is the wrong allocation of attention. The fee is a known, visible percentage; the reserve is a deduction taken ahead of owner profit, under definitions that are often left loose, and over a twenty-year term it is one of the largest sums in the whole arrangement.
The reserve also sits next to two other spending categories — the owner's capital expenditure and routine repairs and maintenance — and the boundaries between the three are exactly where owner-operator relationships go wrong. A contract that does not draw those lines clearly produces years of low-grade dispute about who pays for what.
The questions worth settling in writing are which items the reserve funds, who decides how it is spent, whether unspent balances accumulate, and what happens to the fund on a sale or a change of operator.
Why it matters to an owner
The reserve is money that leaves the owner's return before the owner ever sees it. Defining it precisely is worth more than shaving a fraction off the base fee.
Frequently Asked Questions
The reserve funds the replacement of furniture, fixtures and equipment from a set share of revenue. Owner capital expenditure covers larger structural and improvement spending, and routine repairs and maintenance is an operating cost. Where the contract leaves the boundaries vague is where disputes start.
Because it is deducted before owner profit, spent on items the owner may not choose, and over a twenty-year term adds up to one of the largest sums in the agreement.