FF&E: Complete Guide to Furniture, Fixtures and Equipment LoansMarch 24, 2019
Furniture, fixtures and equipment, otherwise known as FF&E, is an important part of most construction and rehab projects. In this article, we’ll provide you with an FF&E definition and discuss its procurement. Also, we’ll focus on the important topics of hotel FF&E financing and accounting.
What is FF&E?
The FF&E definition refers to movable furniture, fixtures and equipment not permanently affixing a building or other structure. It is not the largest capital expenditure item in the building construction budget. Nevertheless, these items are important when valuing a property, especially during acquisition or liquidation. Like any long-term assets, FF&E items depreciate over their useful lifetimes.
Video: What is FF&E?
Examples of Hotel Furniture Fixtures & Equipment
The typical examples include:
- Desks and chairs
- Computers and electronic equipment
- Hotel furnishings, including beds, lamps and TVs
- Clock Radios with USB ports, etc.
The list could go on for pages and pages, but you get the gist. To be clear, FF&E is important in all kinds of businesses besides hotels. For example, company vehicles are FF&E, as are portable devices like metal detector wands. In fact, casino slot machines are FF&E, as they usually rotate out every few years for newer models.
Accounting for FF&E
The balance sheet classifies furniture fixtures and equipment as long-term tangible assets. That is, they are assets that a business uses in its daily operations. To clarify, “long-term” simply means assets that you own for at least a year. Furthermore, “tangible” refers to things you can touch, as opposed to intellectual property. Generally, FF&E items have an expected useful life of at least three years. Importantly, a commercial real estate (CRE) construction or renovation project includes the cost of furniture fixtures and equipment in its budget. The category is usually separate line items on the budget. Therefore, furniture fixtures and equipment affects calculations such as loan-to-cost, although often in only a minor way for new construction projects.
Routinely, hotels set up an “FF&E reserve” account, also known as a replacement reserve. To explain, the reserve refers to funds you set aside for periodic replacement of these items. Importantly, even a new hotel construction project should budget for an FF&E reserve for the property’s lifespan. Helpfully, the reserve fund ensures you will have enough liquidity should you suffer unexpected replacement costs. Usually, the FF&E reserve is set to a percentage of gross revenues.
Unsurprisingly, property owners might want a smaller reserve, while property operators and lenders want a larger reserve. Unfortunately, an underfunded FF&E reserve can lead to deteriorating facilities that can hurt the hotel brand. Typically, when the situation gets bad enough, the owner will reinvest in the hotel. This approach is haphazard and might create liquidity issues. Clearly, that’s why a properly funded FF&E reserve is crucial to the success of your hotel.
Depreciation of FF&E
As mentioned above, businesses depreciate FF&E items over their useful lifetimes. Not surprisingly, the IRS provides detailed recommendations for the depreciation period of most assets, including FF&E. However, the depreciation lifetime does not necessarily match the actual useful life of an asset. Rather, many assets continue to function well beyond their depreciation periods. On the other hand, computers, with a depreciation period of five years, might be obsolete in three. In other words, the relationship between depreciation and actual usage periods varies with the asset.
You typically use straight-line depreciation with FF&E. To explain, “straight-line” means that you deduct the value of the asset in equal annual installments. In addition, you assign a salvage value to the asset, and depreciate down to that value. Depreciation lets you recover the cost of the item and accounts for wear and tear. Crucially, depreciation reduces the net book value of assets on the balance sheet.
Example of FF&E Depreciation
Your new pizza parlor purchases a $20,000 car to deliver orders to customers. Factually, the IRS assigns the car a 5-year depreciation period with a 20% ($4,000) salvage value. Consequently, you must depreciate the car by $16,000 (i.e., $20,000 cost minus $4,000 salvage) over five years. Clearly, this works out to a $3,200 ($16,000 ÷ 5 years) depreciation deduction in each of the next five years. Operationally, you add the annual depreciation amount to your “accumulated depreciation” contra-account for FF&E. Net book value equals the FF&E original cost minus accumulated depreciation. Naturally, you take a $3,200 tax deduction for the car in each of the next five years. You might need to adjust your capital gain or loss when you dispose of the car. Frequently, this occurs if you sell the car before it is fully depreciated and/or for a different salvage value.
The second decade of the 21st century saw a steady increase in FF&E procurement. Not surprisingly, the strong demand for FF&E caused higher prices over the period. Hotels bear the brunt of these increased costs, so let’s concentrate on this property type. Logically, hotels budget their “costs per key”, i.e., by each separate bookable room in the hotel. Importantly, hotel accountants must clarify what falls under cost per key for FF&E items. As you’d expect, you need this clearly defined to establish your FF&E budget. For example, you might classify FF&E cost per key as all FF&E behind the guestroom door. Others might exclude the FF&E in bathrooms or include the corridor FF&E.
Hard Costs or Soft?
Another burning question for hotel FF&E is whether to include related soft costs. Explicitly, these include interior design and architecture, project management, interior design, purchasing, transportation, and installation costs. Naturally, this question affects whether you capitalize or expense these costs. That is, if you include them with FF&E, you must capitalize them (add them to book value). Then, you depreciate the soft costs along with the FF&E purchase costs. Alternatively, if you segregate the soft costs, you can immediately expense most or all of them.
FF&E vs OS&E
Confusingly, some hotels distinguish between FF&E and “operating supplies and equipment,” or OS&E. As you can see, “equipment” appears in both categories. Impact-wise, the distinction is important because accountants expense OS&E items rather than depreciating them. Truthfully, business owners prefer expensing because they recover their costs in one year rather than over the depreciation period. That’s why some might classify items like ice machines, beds, TVs and makeup mirrors as OS&E. However, most hoteliers classify these items as FF&E.
Once you’ve worked out the budget details, you most likely will hire an FF&E firm to procure your FF&E items. However, what if you hire different firms for FF&E and OS&E procurement? Ominously, the danger is that you’ll leave off equipment or handle it twice. Therefore, you must clarify the scopes of FF&E and OS&E down to the item level. Otherwise, you might end up with two beds in a one-bedroom suite. The classic way to do this is with a responsibility assignment matrix. Expectedly, the matrix lists each item and who is responsible for specifying, purchasing, receiving and installing it. This way, each party will know exactly who is responsible for procuring equipment like floor coverings, bicycle racks and employee lockers.
The best hotel practice is to set up a model room with one-off samples of FF&E and OS&E items. You then invite several procurement firms to compete on pricing for the entire hotel. Remarkably, this is a high-stakes game. For example, suppose three different FF&E firms suggest three distinct brands of desks. The production-run price from each desk manufacturer can vary wildly from the one-off price. You must decide whether you want to spend money on the fanciest desk. That’s because you might prefer to procure a less high-end desk and use the savings elsewhere.
Your procurement firm must work closely with your procurement manager and accountants, for many reasons. Your accountants will want to know the cost of each furniture, fixture and equipment item, down to the penny. Remember, accounts are the bean counters. They must know the sales tax rules in your state, as well as tax on freight and fees. Confusingly, 5 states do not tax freight while 31 states do. However, 14 states don’t tax freight if it goes through a third-party logistics firm. In addition, your procurement manager must also work closely with the FF&E firm to enforce timely deliveries.
A hotel renovation might take years. Thus, the furniture, fixture and equipment firm must meet its delivery schedule at least 95% of the time. Otherwise, you’ll experience costly delays. For example, you might charge 25% more per night for newly renovated rooms, than non-renovated rooms. Therefore, delays in FF&E procurement can directly impact your bottom line. Obviously, you need good reporting systems to track FF&E procurement and costs. But, you also want to hire an experienced FF&E firm that is professional, time-conscious, friendly and highly communicative.
Assets America’s® Role in FF&E Finance
Assets America® doesn’t offer separate furniture, fixture and equipment loans or separate hotel FF&E financing unless the loan is $5 million or greater. Typically, we finance FF&E when its part of a complete renovation requiring at least $5 million in funding. And of course, we finance FF&E when its part of ground-up hotel construction, and completely new project. Therefore, when you need competitive construction or renovation loans of $5 million or greater, check with Assets America®. We will be more than happy to include your FF&E requirements within the loan package. Remember, we have a deep network of funding sources including private lenders and banks who can compete for your business. So, contact us today at 206-622-3000 to discuss your CRE loan requirements.