Through the budget preparation process hoteliers look at categories such as life safety, brand compliance and replacement of FF&E (Furniture, Fixtures and Equipment) based on their life cycle. Large ticket items that have a life span of over a year or two most likely are considered capital expenditures. Most hotel operators and management companies are responsible and incentivized on the operational budget and delivering the budgeted financials based on the profit and loss statement. Capital expenses do not hit your operational profit and loss statement. When a strategy is in place to allocate capital dollars towards products and technologies that will increase the value of a hotel asset while reducing operational expenses can make a huge impact on the profit and loss statement. Water and energy efficiency technologies such as energy management systems, ozone technologies for laundry and LED Lighting all qualify as a capital expense and can dramatically reduce your utility expenses.
What is a Capital Expense Budget?
A capital expenditure (CAPEX) is the cost of developing a new hotel or purchasing non-consumable assets for an existing property. For example, the purchase of a photocopier involves CAPEX, and the annual paper, toner, power and maintenance costs represent operating expenses (OPEX).
Capital Expenditure Budgets identify the need for replacing long-term assets of the hotel, for renovating the hotel, and for expanding the hotel. These expenditures are long term in nature, and the PP&E (Property, Plant, and Equipment) will last from one to thirty years.
One approach is to establish a priority system for capital projects. For example, mandatory projects to satisfy government requirements and replacement of certain equipment usually take priority, followed by brand requirements. A more detailed breakdown of these categories, in general order of priority, might look like this:
- Requirements to meet legal compliance and personal safety
- Requirements to protect corporate, brand and financial integrity
- Energy and water efficiency projects with high expected ROI
- Maintenance or replacement of worn-out equipment
- Completion of ongoing projects (Example: – replacing 15 PTAC's every year)
- Other projects
Does every hotel have a capital budget?
CAPEX versus OPEX is an acceptable accounting practice for small and large businesses and is a normal practice for most hotels. Even prior to the financial crisis of 2007-2008 we were seeing lending institutions enforcing hotels to commit 3%-5% of top line revenues to be reinvested in capital expenditures. Loans with these contingencies require owners to fund an escrow account monthly and make it mandatory for the hotelier to invest back into the real estate asset on an annual basis.
Many hotels have five, ten and twenty year capital plan strategies in addition to an annual budget derived during budget season.
Identifying water and energy projects that deliver reductions in utility expenses
Energy Benchmarking
Hotels planning to dedicate capital dollars to implement water and energy efficiency technologies should conduct a benchmarking of their utility usage. A proper benchmarking will identify the percentage breakdown of water, natural gas and electricity. Comparing the water and energy load percentages is crucial to identifying where your property should invest into technologies that will reduce loads that are non typical of other buildings in the hotel segment.
The Environmental Protection Agency's, ENERGY STAR Portfolio Manager is the most recognized benchmarking tool. Almost all major brands have now provided additional tools and directives making it mandatory that each hotel is responsible for carbon and energy benchmarking.
Energy Reduction Technologies
In the past 3-5 years there have been amazing advancements in energy solutions including LED Lamps that are guaranteed for 5 years, Ozone Laundry Systems that reduce chemical usage, natural gas and water. There are liquid pool solutions that create a powerful pool cover to lock in humidity and heat. For every proven technology that is priced correctly, installed and serviced by a professional and a guarantee on energy savings projections there are five more vendors that don't understand guest comfort. Be careful to work with a vendor that understands the hospitality industry. A third party energy consultant who understands the hospitality industry can be a huge resource to a green hotel when integrating energy reduction technologies. A good energy consultant will assist in building benchmarking, identifying rebates; administrate technical analysis needed to achieve custom incentives, vendor negotiation of price and inclusion of energy saving guarantees and professional project management.
Rebates and Incentives
Several of local utility providers offer incentives in the form of cash rebates for select energy technologies. Most technologies eligible for local utility rebate programs have been tested and found effective for your geographical area.
Low interest loan programs are available in some areas of the country offering 3%-5% funding for approved energy efficiency technologies. There are also grants available sometimes funded by federal government and sometimes funded by your local county. In Virginia Beach a commercial building owner can save on his property tax if he is operating in a energy efficient manner.
In Tennessee the TVA (Tennessee Valley Authority) offers a custom program for most electricity reducing technologies rebating up to ten cents per kWh while through a state program Pathway Lending offers 3%-5% rates to fund the project over five years allowing for positive cash flow for the property.
About EcoGreenHotel
EcoGreenHotel supports hotels to identify energy efficient strategies that reduce a property's energy usage
and overall environmental impact. As owner's agents and through our vendor neutral approach, we find the right technologies, products and solutions to deliver the best quality and value for all our clients. We specialize in identifying and taking advantage of incentives, grants, rebates and loan programs that are available through federal, state and local agencies.
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