Pearson New International Edition International pcl tp indd 1

FRONT OFFICE SEMANTICS
Return on investment (ROI):
Percentage rate of return achieved on the money invested in a hotel property.
FF&E:
Short for the furniture, fixtures, and equipment used by a hotel to service its guests.
The Hubbart formula continues to survive, probably less for its tangible usefulness
in determining ADR than for its systematic evaluation of the factors important to those
who buy and operate hotels. To illustrate the formula’s use, assume an investor has
decided to pay $8 million for a 200-room hotel and desires a 12 percent return on the
investment. Assume that the owner will incur mortgage repayments of $750,000 per
year and additional fixed costs of $250,000 per year. Assume also that, at a 60 percent
occupancy level, direct operating costs related to providing rooms and food and bever-
age services to the hotel’s guests will be $2 million annually, and indirect expenses re-
lated to operating the hotel will be $1 million annually. Finally, assume that the investor
wants to generate a profit of $125,000 per year from the food and beverage department
and $25,000 from telephone charges and all other non-rooms departments.
The steps required to compute the Hubbart formula in this example are as follows:
1. Calculate the hotel’s target profits. Multiply the required ROI by the owner’s
investment:
2. Calculate all fixed expenses. Include estimates of all fixed costs including leases,
depreciation, interest expense, property taxes, insurance, mortgages, and fixed
management fees. In this example, the total cost of mortgage and other fixed
costs is:
$750,000
+
$250,000
=
$1,000,000
$8,000,000
*
.12
=
$960,000