Hotel CapEx Budgets & Renovations
Preparing for Hotel CapEx Budgets & Hotel Renovations
Every year hotel owners everywhere share a common goal to complete their CapEx budgets or Capital Expenditure budgets.
A CapEx budget for hotels refers to long-term improvement costs that prolong the economic life of the hotel. These “long-term” costs include improvements and purchases for the hotel that will last approximately one to thirty years.
Because the costs factored into a CapEx budget are long-term, they will include improvements and purchases such as repairing EIFS damage, painting the exterior of your hotel, purchasing a photocopier, full-scale renovations, and more along those lines.
As hotel owners prepare their 2023 CapEx budgets it’s important for them to remember what they can and should include in those budgets.
For the purpose of this guide, we will be focusing on why hoteliers can and should include renovation and repair costs into their CapEx budgets.
Why should hotel owners include renovation & repair costs in their CapEx budgets?
As the hospitality industry recovers we are seeing an increase in demand for traveling and with it, an increase in demand for clean, updated, and trendy spaces. This demand comes not only from travelers but also from the brands themselves. It seems that a hiatus of 2 years during the pandemic has motivated hotel brands to reinvigorate themselves to stay in touch with consumer wants and needs.
Hotel brands have gone full steam ahead with this reinvigoration, including and not limited to, developing new marketing strategies, re-brands, re-inforced brand standards (i.e. PIPs), and increased social activity from almost every hotel chain.
Along with all of this?
Fresh and trendy hotel design standards arriving in the form of PIPs.
A PIP or property Improvement Plan is a set of standards set by a hotel brand and given to a hotel under that brand's flag to complete within a given time frame. These standards include improvements to be made to the property and can be anything from updating technology to a full-scale hotel renovation. These improvements are meant to increase the value of the hotel while simultaneously keeping them competitive with other newer, or recently renovated properties.
In addition to the assumed benefit of PIPs, a study done in 2019 by Michael J. Turner and James W. Hesford revealed that capital expenditure on hotel renovations was vital to improving hotel property performance. In this study titled “The Impact of Renovation Capital Expenditure on Hotel Property Performance”, the pair found a significant increase in revenue, profitability, and guest satisfaction 0-3 years after a renovation while R&M expenses decreased. This study shows us that PIPs can lead to increased hotel performance and including renovation and repair costs in your CapEx budgets can help you prepare for them.
If you haven’t received a PIP yet, it’s best to be prepared for when that day comes. We predict that most major hotel brands will be enforcing hotels under their flags to complete PIPs by at least 2025.
With lead times and costs increasing, it’s better to get the PIP fulfillment process started as early as possible. Including renovation and repair costs in your hotel’s CapEx budget can help you be prepared for almost anything.
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What to include in your CapEx budget?
Keeping the focus on long-term renovations and repairs to your hotel, Chief engineers will typically put together a list of fixtures, appliances, etc that may need to be repaired or replaced in the next year.
But if your hotel has received a PIP or is expecting a PIP (property improvement plan) that includes a complete renovation then it would be more prudent to include the FF&E that needs repaired/replaced within the renovation/PIP allocation of your CapEx budget.
This will help hotel general managers and owners better understand how much they should be budgeting for.
How Amerail Systems Helps with CapEx:
As a hotel renovation company, we understand the importance and urgency of budgeting for hotel renovations and repairs. Hotel owners can rely on Amerail Systems to help them budget for renovations and repairs and how to allocate those funds for hotel renovations to their CapEx budget.
With over 35 years of experience in the industry, we’re able to effortlessly examine a PIP and provide hotel owners with costs to figure into their CapEx budgets for the year.
Determine how much to invest in your CapEx budget for hotel renovations.
How much to reinvest in CapEx?
A hotel owner's main concern when preparing their CapEx budget may be wondering how much to reinvest or spend on CapEx.
On average, hotels are re-investing around 7% of their gross revenue each year but studies show that this could increase by about 70% by 2024.
To calculate your hotels capital expenditure you can use the formula below:
CapEx = PP&E (current period) - PP&E (prior period) + Depreciation (current period)
*Your depreciation expense can be found in your income statement*
While this formula can help you discover what to base your CapEx on, it’s important to consider things that could improve your hotel but may not be determined by a formula. For example, increased guest satisfaction from hotel renovations, and increased employee happiness from new equipment.
These additional costs in your CapEx budget must be determined at the owner's discretion. To make this process easier and less ambiguous, Amerail Systems can help hotel owners determine hotel renovation costs to include in their CapEx budgets.
Statement from Amerail Systems
Costs and lead times are increasing all over the world, at Amerail Systems we are committed to providing clients with the best price available and we succeed in this because of our extensive value-engineering abilities.
Being prepared and including renovation costs in your hotel CapEx budgets may be the difference between you and your competition.
We’re here to help your hotel succeed.
We aim for WOW.