The Consequences of Depleted FF&E Reserve Balances

By August 17, 2021Press Releases

Posted August 17, 2021

The COVID-19 pandemic clearly triggered havoc across the world, affecting all facets of society, both human and otherwise. Businesses across the globe experienced unprecedented financial distress, with the hospitality industry amongst the most affected.

Within the lodging sector, one of the many difficulties experienced by hoteliers was minimal, if any, cash flow. As a result, during the pandemic, many owners pleaded with their lenders and franchisors to allow the use of furniture, fixture and equipment (FF&E) reserve accounts to pay their debt service obligations to avoid foreclosure. FF&E reserves are typically used to renovate and refurbish hotels as they experience normal wear and tear. Fortunately, the use of these reserve balances is what saved many a hotel and hotel owner from bankruptcy or handing over the keys to their lenders.

While many hotel and resort owners expect the worst of the pandemic to soon be in the rearview mirror, its impact on the lodging industry will be felt for many years. Since FF&E reserve accounts are fully depleted at hundreds and hundreds of hotels across the country, it may be quite some time before guests will be walking walk into fresh new rooms, unless they were renovated prior to the pandemic. Those account balances that had been accumulating 3% to 4% of gross revenues traditionally held back for renovations will now take time to build back up to reasonable levels.

It is inevitable that many branded hotels across North America will fall below their franchisors’ minimum acceptable brand standards as rooms, common areas, restaurants and meeting spaces begin to show their age. While the major hotel brands have been understanding during the pandemic, that patience will begin to wear as guest satisfaction scores decline due to property condition. Clearly, some branded hotels will be dropped by the chains if conditions become intolerable. Unless owners can quickly build up their reserve accounts or pay for renovations out of pocket or by securing additional debt, corporate and leisure travelers can soon expect to arrive at hotel rooms that may leave something to be desired. As the industry gradually comes out of this crisis, it may take another five to seven years for hotels to restore their FF&E reserve account balances to pre-pandemic levels. Whether or not the hotel brands and their loyalty members will continue to be understanding and patient is yet to be determined.

Our Development Management Consulting team continues to oversee significant hotel and resort renovations and repositionings. The talented team of seasoned veterans in lodging design and construction has been creative in getting a lot done with limited renovation dollars. If we may be of assistance to you in addressing your property condition needs or in negotiating PIPs with the brands, please don’t hesitate to reach out.