Managing Capital Expenditures

Abstract

To offset the expense of capital projects, most hotel contracts require the operating firm to set aside a percentage of revenues each year in a reserve for replacement. While this practice does provide funding for capital projects, it uses capital inefficiently and may not provide adequate reserves for all capital expenses. Instead of setting aside a “standard” percentage of revenues, asset managers can establish a calendar of anticipated capital projects and use the costs of those replacements to create a more accurate schedule of contributions to a reserve account. Basing reserve-account contributions on a calculation of actual anticipated capital requirements frees funds in the early years of a hotel's life, while ensuring that sufficient funds will be available in later years for major rehabilitation projects.