Food & Beverage Expense

Definition of Food & Beverage (F&B) Expense

In the context of commercial mortgages—specifically regarding hospitality, resorts, and mixed-use assets—Food & Beverage (F&B) Expense refers to the total operational costs associated with running dining facilities, bars, and catering services within a property. These expenses are categorized as departmental expenses and are subtracted from F&B revenue to help determine the property’s Net Operating Income (NOI).

Detailed Description

F&B expenses represent a significant portion of the outgoing cash flow for hotel and leisure properties. Unlike fixed expenses like insurance or property taxes, F&B expenses are largely variable or semi-variable, meaning they fluctuate based on the volume of guests and sales. For commercial lenders, these expenses are a key metric in assessing the operational efficiency of the borrower.

A detailed breakdown of F&B expenses typically includes:

• Cost of Goods Sold (COGS): The direct cost of the food ingredients and beverages (including liquor, wine, and beer) consumed by guests.
• Labor Costs: This is often the largest component, encompassing wages, salaries, benefits, payroll taxes, and bonuses for kitchen staff, servers, bartenders, and F&B management.
• Operating Supplies: The cost of "smallwares" such as glassware, flatware, china, linens, and cleaning supplies required for daily service.
• Contracted Services: Costs for third-party vendors, such as specialized cleaning crews, laundry services for table linens, or nightly entertainment.
• Waste and Spoilage: The calculated loss of inventory due to expiration, damage, or preparation errors.

Impact on Commercial Mortgages and Underwriting

Lenders scrutinize F&B expenses during the underwriting process because they directly affect the Debt Service Coverage Ratio (DSCR). Because food and beverage operations typically have much thinner profit margins than room rentals (lodging), a spike in F&B expenses can quickly erode the property’s ability to cover its monthly mortgage payments.

When evaluating a loan application, a commercial mortgage underwriter will compare the property’s F&B expense ratios against industry benchmarks. If the expenses are disproportionately high compared to the revenue generated, the lender may view the property as a higher-risk investment, potentially leading to lower loan-to-value (LTV) ratios or higher interest rates. Conversely, a well-managed F&B department with controlled expenses signals strong operational management, which can help secure more favorable financing terms.