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A Closer Look at Soft Costs in Commercial Development

As part of our “series” breaking down commercial development costs, let’s take a closer look at the soft costs associated with the commercial real estate development process.

 

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 commercial development process and pre-cursors to 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 commercial development 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.

With that in mind, let’s take a closer look at some of the soft costs associated with new commercial developments.

 

A Closer Look at Soft 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 some cases, if the plan reviewer discovers that the calculated construction valuation is higher than the applicant’s declared estimate, a supplemental plan review fee could also be assessed at the time of building permit issuance.

Permit Fees
Commercial developers will also be subject to paying fees for any permits issued for new developments. 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. These test can sometimes lead to subsequent tests that get more in depth.

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 purchase of a property. If based on a percentage, these commissions can be up to six percent of a lease or purchase. They may also be charged as a flat fee in some cases.


How They Impact Your Development

Soft costs account for roughly 30 percent of a development project’s budget.

Unlike hard costs, soft costs can also include expenses that continue even after a project is completed. This includes items like building and property maintenance, insurance, security among other ongoing fees related to the upkeep of an asset.

These costs are not negligible as they comprise a significant part of the construction cost, and as noted previously, are integral to ensuring a construction project is possible.

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