Friday, November 1st, 2019 November1st2019

Sell for More Trivia: What are “soft costs”?

Published on November 1st, 2019

Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.

 

Soft costs are most commonly associated with new development projects, tenant improvement projects and capital improvement projects.

What are Soft Costs?

Soft costs are those that are not directly related to the physical construction of the building.

Many of these costs are incurred during the early stages of the project and before the construction phase.

These costs are typically less noticeable than hard costs because they don’t apply to tangible, physical elements of the project. However, without adequately addressing the elements in the soft cost category, there would be no project. Or, commercial development/construction costs may end up much higher. For example, proper design and engineering can help to lower a project’s hard costs.

Here is a list of some common construction soft cost items:

Architectural Fees
These fees typically include feasibility studies, schematic design, design development, construction documents, and construction administration.

Engineering Fees
Most projects will require a number of engineers to adequately plan all of the elements of a project. Engineers such as mechanical, plumbing, electrical, structural, and civil will be hired to identify potential issues and help ensure a properly designed project.

Plan Review Fees
Plan review fees are fees paid when the application for the permit and the project plans are submitted for review.  In many cases, the fee is based on the construction cost estimate.

Permit Fees
You may also be subject to paying fees for any permits issued.  The cost of the permits may be based on several factors including the size and complexity of your project; the value of the work you are doing; and additional permits required for your project.

Impact Fees
Municipalities charge impact fees to contribute to costs associated with infrastructure and public service expansion due to the new development. These are typically put in place in growth areas as defined by a city’s general plan.

Environmental Phase 1, Soils Testing, and Special Inspections
This entails testing and assessing the potential environmental risks associated with the land being developed.

Traffic, Acoustical, Biological, Economic, Archaeological Studies
Depending on the area of planned development, many new projects will require a number of studies to ensure there are no detrimental impacts on the surrounding areas.

Lender and Title Fees
Almost all financial transactions involve some type of fee. The type of fees for construction loans and amounts can vary and may include guarantee fees, processing fees, documentation fees, project review fees, and fund control fees. There will also be legal fees for zoning and lender loan document reviews as needed.

Brokerage Commission
These are fees charged by a broker to execute the leasing or sale of a property. If based on a percentage, these commissions can be up to 6% of a lease or purchase.

In conclusion, soft costs account for roughly 30% of a development project’s budget…so plan accordingly.

 


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About Beau Beach, CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com