FF&E reserve — Furniture, Fixtures & Equipment — is the line in the P&L that says "we are saving money to replace the carpet and the soft goods when they wear out." Most operators treat it as a forgettable line item. The three different ways to calculate it produce three different P&Ls for the same property, and the difference can be €300k a year at a mid-sized resort.
Approach 1: percentage of revenue
The most common method. Set the FF&E reserve at a fixed percentage of total revenue — typically 3% in years 1-2 after a renovation, scaling to 5% in years 7-10 as wear accumulates. A €18M revenue property at 4% reserve = €720k per year set aside.
Strength: simple, scales with revenue, easy to budget. Weakness: pure-revenue scaling doesn't reflect actual replacement schedule — a property that just renovated still accrues reserve as if it needed to replace something.
Approach 2: per-key per-year
Set the reserve at a fixed dollar amount per key per year — typical mid-scale 4-star: €1,800-€2,400 per key per year, escalating with inflation. A 240-key resort at €2,000/key = €480k per year reserve.
Strength: ties the reserve to the physical asset (rooms wear at a rate independent of revenue), more accurate for renovation planning. Weakness: doesn't scale with revenue, can be insufficient during high-revenue years.
Approach 3: replacement-schedule capex plan
Build the actual capex plan: soft goods every 5-7 years, case goods every 8-10 years, bathroom remodel every 10-12 years, HVAC every 15-18 years, public areas every 7-10 years. Cost each line, set reserve = (total capex over rolling 10 years) ÷ 10.
Strength: most accurate, ties to the actual operational reality, can be defended line by line. Weakness: requires real capex planning discipline, must be revisited annually as costs change, fights with finance teams who prefer a single number.
What to actually do
Most sophisticated owners use Approach 3 for internal planning and report Approach 1 or 2 on the P&L for industry comparability. The internal capex plan is the management tool; the % of revenue is the communication tool. Use both — and never let the P&L FF&E reserve fall behind what the real schedule says you need.