Often it may seem that some hotels almost always have more CapEx dollars!!! It could be that these hotels participate in “Capital Reserves” throughout the year, every year! This accounting procedure sets aside a predetermined percentage of money from hotel revenues to cover present and future CapEx. Certainly, this process does give management an effective tool to face the competition. Additionally, it generates some very positive effects as listed below._
1. Staff Attitude – A very important mindset is created among the hotel staff and associates. Systematically creating and contributing to capital reserves fosters an attitude with the hotel associates that the hotel and what its team does for the guest……are important.
2. Guest Attitude – Capital reserves drive hotel improvements, clearly showing to the guest…..that ownership and management are committed to the guest’s needs.
3. Improved Competitiveness – With the capital reserve process in place, a hotelier is able to better strategize projects well into the future. These projects may involve upgrades, new concepts or fresh FF & E that contribute in exceeding guest expectations and elevating guest satisfaction
4. Harmony Between “Available Budget” And “CapEx Cost” – An awareness of how much CapEx money is appropriated through the “reserve account” grants upper management much more success in aligning strategic projects that fall within the budget.
The creation of capital reserve polices are generally the responsibility of upper management. In this process, the financial staff will determine a hotel’s anticipated gross revenue while considering potential capital reserve needs. As a result, an assigned amount of funds will systematically be set aside from gross revenues. It is even common for lenders to place clauses in their loan documents that require a “capital reserve account” be established and maintained.
Often it may be said that Capital Reserve percentages are tied to the age of the hotel. It is true that, younger hotels generally need less capital dollars and as a property ages its inherent appetite for capital spending increases. However, if substantial money is not consistently set aside even when the property is young, there will not be enough funds to cover the very substantial 6 year and 12 year guest room renovation needs. Industry standards have placed Capital Reserves in the range from 4% -7% of gross revenue per year (most properties will consume CapEx closer to the 7% figure than the lower percentage).
Question: What are your experiences in establishing and using Capital Reserve programs? Please post your comments by clicking here.