Facilities operating and capital costs

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The daily operation and continuing improvement of hotel facilities require the investment of substantial amounts of money. The major categories for these investments are in Property Operations and Maintenance, Utilities, and Capital Expenditures.

Property Operation and Maintenance (POM) may be defined as procedures for managing physical assets, e.g., building exteriors and interiors, systems and equipment, to facilitate guest service, prevent problems, ensure safety and accessibility, and reduce non productivity and operational downtime.

The Property Operation & Maintenance Account of the Uniform System of Accounts for The Lodging Industry consists of ‘‘payroll & related expenses’’ for the engineering/facilities department and a category of ‘‘other expenses’’ that consists of purchased supplies and equipment, contract services, waste removal, and other expenses. POM costs typically range from 4 to 6% of total property revenues. Labor and benefits are typically 40 60% of these costs with contract services and supplies being the balance. Typical contract services are waste haulage, elevator maintenance, and items such as window washing on high rise structures.

Initial planning, design, and construction of a facility impact its subsequent operation and maintenance, i.e., the implementation of sound engineering and ecological practices in design and layout, the quality of construction and land scape materials and the choice of systems and equipment.

Utilities comprise the energy sources (electricity, gas, steam, & fuel) and water and waste water services required by hospitality properties in their various mechanical, electrical and plumbing systems. The Utility Cost budget category of the Uniform System of Accounts for the Lodging Industry includes the expenses for these utilities purchases as well as possible recoveries of these costs due to sales to others. There is also a provision in the Uniform System for charge backs of these costs to departments incurring the costs (i.e. a leased restaurant space may be charged utilities related to its operation).

Utility budgets consume close to 3 6% of a property’s revenue and vary with the age and size of the property, maintenance and operating procedures, systems and equipment type and conservation practices. Hotels with extensive food and beverage facilities have almost double the utility costs of a limited service property with equivalent number of rooms. For almost all hotels, electricity is the largest component of the utility budget. For operations that are located in warm climates, water is likely to be the second largest component. Water costs include not only the purchased cost for potable water but also the costs for wastewater disposal.

Capital Expenditures (CapEx) are funds spent to replace FF&E, purchase or improve physical assets such as buildings and fixtures, major equipment, vehicles, machinery or furniture. Examples of improvements include: replacing a roof, planning, designing, and constructing an addition, and renovation. CapEx tends to be a significant cost for companies with facility driven products such as hotels. It increases as a property ages due to the increased investment in renovations and replacements, with significant increases often appearing at 5 7 year intervals of the property lifecycle.

CapExmay also be called capital spending or capital expense. Major assets that will be used in a business for more than a year are known as ‘‘capital assets’’ and are subject to differential depreciation treatment under the tax laws. Ownership structure may impact recorded CapEx rates in that private firms may increase operating budgets to cover major expenditures while public companies may record similar activities as capital expenses. Since CapEx levels impact the value of hotel appraisals as well as financing of new projects, reported CapEx rates do not necessarily coincide with actual expenditures on property renovation and enhancement. In similar fashion, planned and reported replacement reserves are often underfunded in comparison to actual CapEx requirements. Over the lifetime of hotel assets, 5 8% of the total revenue of the property is reinvested in the property via capital spending.

The terms ‘‘renovation’’ and ‘‘capital projects’’ are used interchangeably in the industry. Purists might reserve the term ‘‘renovation’’ to focus on those activities which occur in public spaces of the hotel and are visible to the guests while other ‘‘capital project’’ might include back of house changes such as replacing mechanical systems. In any event, capital expenditures at hotels generally involve the improvement of an existing facility, including major planned refurbishments and replacements of the physical assets, e.g., building exterior and interior and systems to enhance perceived value, extend useful life, upgrade safety features or combat facility obsolescence. The expenditures may be a response to change in use of the facility, legislative mandates, e.g., environmental codes or accessibility, or even changes in chain affiliation requiring brand image modifications or aesthetic improvements to satisfy new ownership. Other reasons for additional investments include to: enhance market position by addressing needs of current or new customers, match or surpass a direct competitor’s features, upgrade the facility to a higher rated category, alter systems to accrue long term savings in operational expenses, and even repair structures damaged by natural phenomena such as hurricanes and earthquakes.

Over the life of a property, significant and regular modifications are made to enhance property appearance and resultant value. Levels of renovation projects range from minor renovation to major restoration projects. Rehabilitation of furnishings, commencing in years 4 or 5 of the property lifecycle, involves such cosmetic enhancements as carpet, flooring, tile and window treatment changes. These retouches seldom alter the space’s use or physical layout. Later renovation comprises major replacement of all furnishings, equipment and finishes within a space and may include alterations in the physical layout of the space and/or upgrading existing systems. Total renovation generally requires demolition of the interior of a building or portion thereof, including the removal and subsequent replacement of electrical, plumbing, heating, ventilating and air conditioning systems, fixed equipment, floor coverings, and interior walls, or a complete new addition on the site. Properties undertaking significant renovation projects must choose between closing and losing customers to the competition or staying open and risking dissatisfaction due to guest exposure to the construction process.

When discussing capital expenditures, the abbreviation FF&E may be used. This stands for furniture, fixtures, and equipment. FF& E may comprise either fixed attachments to a hospitality facility or moveable items. Permanently installed fixtures may be found in public areas: elevators, drinking fountains, signage; guestrooms: built in entertainment centers, bathroom fixtures, track lighting; and back of the house: kitchen counters, dishwashers, cabinets, walk in storage units, plumbing fixtures, building mechanical and electrical systems, fixed electronic equipment, and fixed theater seating, as well as other fixtures and equipment mounted for continued use in that site.

References

deRoos, J. (2002). Renovation & capital projects. In D. M. Stipanuk (Ed.), Hospitality Facilities Management and Design (2nd ed., pp. 509 545). Lansing: Michigan’s Educational Institute of American Hotel & Lodging Association.

Hassanien, A., & Losekoot, E. (2002). The application of facilities management expertise to the hotel renovation process. Facilities, 20(7/8), 230 238.

Loosemore, M., & Hsin, Y. Y. (2001). Customer focused benchmarking for facilities management. Facilities, 19(13/14), 464 475.

Uniform System of Accounts for The Lodging Industry (1996), (pp. 118 123). The property operating & maintenance account of the uniform system of accounts for the lodging industry.

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