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FF&E is an important concept to understand if you are interested in investing in commercial property.
FF&E can amount to a large portion of the business’s fair market value.
Investors who understand the concept can have a better grasp of the value of the property when they consider an investment.
That’s why, in this article, we’ll break down everything you need to know about FF&E.
What is FF&E?
FF&E stands for furniture, fixtures, and equipment, all assets in a commercial building.
They are moveable and not a permanently attached component.
FF&E are typically used in the daily operations of the company and have a monetary value. They are easy to take down, have a usable life of at least a year, and are not products that a business generally sells.
Why is FF&E Important in Real Estate?
Now that you understand the FF&E meaning, you may wonder why it is such an important concept in real estate.
The average commercial investor, those who flip commercial properties, and commercial property wholesalers benefit from FF&E because they are viewed as tangible assets that add value to a commercial space.
As a commercial real estate investor, you will benefit from knowing the meaning of FF&E and its tax benefits. You can take FF&E deductions to boost your qualified business expenses and lower your income tax.
For example, according to the IRS, computers have a lifespan of five years. If you have a $1,000 computer you use for your real estate business, you could get $200 in depreciation each year for five years.
What are FF&E Items?
Permanent structures like the sink and toilet belong to the building, but FF&E belongs to the business.
As an investor, you will want to identify FF&E items when you consider investing in a commercial property.
Here are some examples of common FF&E items:
Furniture includes items that you sit on like sofas and chairs, as well as things that hold other objects like desks, bookshelves, filing cabinets, and tables. Lamps are also considered furniture.
Commercial property may include computers, security systems, point-of-sale (POS) terminals, stereo equipment and speakers.
Equipment refers to:
- copy machines
Items that serve a practical purpose like:
- wall objects
Equipment that is not for sale, such as:
- a rotating rack in a dry-cleaning business
- weights in a fitness center
Factors That Determine the Value of FF&E
When you are considering a commercial real estate investment you will want to determine the value of FF&E.
Keep in mind that the true value lies in its economic potential — not book value.
FF&E is vital to the operation of the business and without these items the company’s ability to conduct business would be impaired.
The book value typically has no bearing on the useful life of an FF&E asset.
FF&E is different for different businesses — FF&E is different from inventory a business would sell, like food items for a restaurant business.
FF&E can contribute to the ambiance of a business.
A restaurant may use tables, lighting, and décor items to reinforce the company brand.
A high-end fine dining restaurant might have high-style lighting fixtures and decorative items, while a pub might have low lighting and casual decorative items that add to the cozy, casual atmosphere.
Both restaurants would have tables and chairs, computers, and a security system.
What is Not Covered in the FF& E?
These are some of the items not considered FF&E. This includes:
Items like faucets, toilets, and HVAC equipment that would jeopardize the operation of the building are not considered FF&E.
Non-removable built-ins like bookshelves and desks are not FF&E.
To be considered FF&E an asset must have a lifespan of a year or more, so pens, paper and other office supplies are not included.
To be considered FF&E an item must be a tangible piece of equipment.
Items like food and drink or paper items that are consumable are not included in FF&E.
The Bottom Line: FF&E
FF&E is a tax and accounting concept that strongly affects a company’s value.
To be considered FF&E, a physical asset:
- must be simple to take down
- has a usable life of one year or more
- is not considered inventory that a business would generally sell
As a commercial real estate investor you would benefit by understanding the meaning of the FF&E concept to identify items that fall under the category.
Calculating the value of FF&E has more to do with the economic potential those items have for the business than the actual book value.
When you evaluate a business for investment, remember that FF&E items can be classified as business expenses eligible for tax deductions to lower the amount of your income tax.
Understanding FF&E is one of the many important items to learn on your real estate investing journey. If you're looking to further your education — and in the process minimize your risk and maximize your profit — continue learning with these real estate resources.