Although there is ready agreement that FF&E is tangible personal property, in practice there is no universal agreement about the particular items which fall within this category of property.
The Dictionary of Real Estate Appraisal, 4th ed. ¹ provides the following definition:
furniture, fixtures and equipment (FF&E). The movable property of a business enterprise not classified as stock or inventory or leasehold improvements; frequently found in the ownership of hotels or motels, restaurants, assisted-living facilities . . . and other service-intensive properties. Furniture, fixtures, and equipment frequently wear out much more rapidly than other components of those properties. |
In Hotels & Motels: Valuations and Market Studies ², FF&E is described as follows:
Furniture, fixtures and equipment. This category includes guestroom, dining room, and lounge furnishings; kitchen equipment; front office and administrative equipment; and decorative items. Together these items can account for up to 25% of total property value. |
FF&E is generally considered to be those items of a personal nature, not permanently fixed to or forming part of the real property. This definition is a good fit for assessment purposes though it hides more than it reveals. Examples of FF&E in a hotel/motel property are:
- guestroom case and soft goods
- furnishings and decorative items in public areas such as restaurants, meeting rooms, lobby
- kitchen and dining equipment
- office, administrative and service area (laundry) equipment etc.
Though not accepted by the entire valuation/assessment community, items not considered to be FF&E include:
- bathroom plumbing fixtures
- wall to wall flooring and tiling (not including moveable area rugs)
- wall coverings
- hard wired electrical fixtures
- items which are routinely expensed and shown as a deduction on the annual financial statement such as cutlery, linen, glasses, dishes, etc.
Assessors should be careful when reviewing actual reported costs for individual properties or generic reported costs in industry publications, to ensure that the above definitions are followed. Reported costs for similar properties can vary significantly due to different definitions of what constitutes FF&E.
Items of FF&E are depreciating assets with much shorter life cycles than building components, from both a physical and economic perspective. They require ongoing replacement in the range of 8 to 12 years depending on the item. Funds to replace FF&E items are notionally or actually set aside, generally through a reserve for replacement expense contained in the financial statement.
A distinction needs to be made between FF&E and capitalized expense (“CapEx”) which is inclusive of all capital expenditures in hotels and motels. The International Society of Hospitality Consultants in its CapEx 2007: A Study of Capital Expenditures in the Hotel Industry refers to CapEx in Appendix IV at page 97 as follows:
Capital or Capitalized Expense (CapEx) - Capital expenditures for this study are broadly defined as all improvements made to the physical plant of a hotel that would be capitalized as opposed to expensed for accounting purposes.
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The Dictionary of Real Estate Appraisal, 4th ed. ¹ defines “plant” as:
plant. In real estate, land, buildings, machinery, equipment, furniture, etc; |
The definitions of CapEx and plant suggest that FF&E is a subset of CapEx.
In addition to the issue of what should be included under the category of FF&E, practitioners dispute the methodology to isolate the value of FF&E. Consideration will be given to methodology under Part 9 - Isolating and Valuing Tangible Non-Realty Assets. Suffice it to say at this juncture that FF&E is a capital investment and an investor’s expectation is to first recapture the invested capital, referred to as “return of” capital and second to obtain a profit or yield on the invested capital, referred to as “return on” capital. The Appraisal of Real Estate, Second Canadian Edition ² states the following:
The notion that an investor anticipates a complete recovery of invested capital - plus a payment for the use of capital - prevails in the real estate market just as it does in other markets. The term return of capital refers to the recovery of invested capital; the term return on capital refers to the additional amount received as compensation for the use of the investor’s capital until it is recaptured. Investors are concerned with both types of return. The rate of return on capital is analogous to the yield rate or the interest rate earned or expected.
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There is little dispute with regard to the theory of “return of” and return on” as being a two-part consideration in the isolation of the value of the FF&E. However, there is considerable dispute when a third consideration, namely the inclusion of a deduction for a reserve for replacement is advocated. Some practitioners believe that FF&E is properly captured and removed from the going concern value by a deduction for “return of” and “return on” the FF&E. These practitioners believe the “return of” capital and the provision of a reserve for replacement to be one and the same. Others take the position that “return of” capital and the reserve for replacement are not the same and that in addition to deductions for “return of” and “return on” the FF&E, there must be a third deduction to account for the reserve for replacement. This will be discussed further in Part 9 - Isolating and Valuing Tangible Non-Realty Assets.
¹ The Dictionary of Real Estate Appraisal, Fourth Edition, (Chicago: Appraisal Institute, 2002), p. 123
² Stephen Rushmore MAI and Erich Baum, Hotels & Motels: Valuations and Market Studies (Chicago: Appraisal Institute, 2001), p. 359
¹ The Appraisal of Real Estate, Second Canadian Edition, p. 20.15
² The Dictionary of Real Estate Appraisal, Fourth Edition, p. 214 | 
