In the capitalization process the income being capitalized and the rate selected is reflective of the contributions from the real property as well as non-realty assets including the FF&E.  Hence, the capitalized going concern value includes the value contribution from the FF&E. Just like real property, FF&E is a capital investment and as discussed in section 5.2 “an investor anticipates a complete recovery of invested capital – plus a payment for the use of capital.”

Because FF&E is a capital investment, its contributory value to the hotel/motel’s going concern value is estimated in a two-step process. The first consideration is the investor’s expectation to recapture the invested capital in the FF&E, referred to as the “return of capital”. The second consideration is the expectation of a dividend or yield on the investment in FF&E, referred to as the “return on capital”.

As stated in Section 5.2 there is little dispute with regard to the theory of “return on” and “return of” FF&E as a two-part deduction in the isolation of the value in place of FF&E.  The difficulty is not the concept, but rather the process to properly account for and isolate the return on and of FF&E.  Complicating any process are two factors.  The first is that the overall capitalization rate implicitly allows for both a “return on” and “return of” capital for all of the assets in going concern including the FF&E.  Second, even though an investor has an expectation of achieving a return on and of the FF&E, in fact, the value of the FF&E will rise and fall with the overall going concern value.  Therefore, it is unrealistic to think that the value of the FF&E in place will somehow remain static, or even increase, when the value of the going concern is not static or increasing.

The following discusses the various methods currently being employed in the assessment field and opines on the appropriateness of each.