Budgeting for Mobile Key: Operating Expense or Capital Expenditure?

Mobile keyless entry is becoming a hotel industry standard. Every major hotel brand has a mobile key initiative in place. From REITs to independent portfolios, the internal debate has shifted from whether to implement smartphone room access to when and how to roll it out.

One of the most common questions is where the funds for mobile key should come from. Should mobile key be considered a capital expense (CapEX) or operating expense (OPEX)? Capital expenditures are costs incurred with the purchase and installation of capital assets to maintain and enhance hotels. A property incurs operating expenses through its normal business operations. In the case of mobile keyless entry, the question can be complicated. There is often hardware associated with upgrading guestroom locks to make them capable of communicating with a smartphone as well as a license agreement to provide ongoing mobile key service for guests.

Most brand and independent management company contracts establish a percent of revenue either to be invested in a reserve for capital replacement fund or to be spent in the current year on capital items. A 2018 ISHC study of capital expenditures in the hotel industry showed REIT average annual spend as a percentage of total revenue ranged from 5.6 percent to 8.7 percent. The percentage for non-REIT hotel owners ranged from 5.5 percent to 8 percent.

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Fortunately, there are guidelines in place to help hoteliers determine which budget keyless entry should be attributed to. The largest hotel brands are considering mobile key to be a capital expense. Other CapEX items commonly found alongside keyless entry include: new lobby designs and concepts, including eliminating traditional front desks, creating seating and congregation areas, and adding small retail areas, large-screen televisions, and workstations; increasing high-speed internet capacity; upgrading or replacing RFID locks to BLE (Bluetooth Low Energy) required for mobile key; and new guestroom designs.

As hotel technology continues to evolve in 2020 and beyond, current accounting models will continue to be challenged by attribution benefits that seem to blur the lines between capital and operating expenditures. Large brands will likely continue to be the arbiters by which the hotel industry determines how these new, exciting, and influential hotel technologies are accounted for among and within budgets.

 

 


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