There are generally two kinds of construction expenses that real estate developers take into consideration when planning and budgeting for a project— hard costs and soft costs.
Hard Cost, often referred to as “brick-and-mortar costs”, involve the actual physical construction of a development. These could include grading, excavation of a site, the materials used, landscaping, and carpentry.
Hard costs can vary widely by market and tend to be most expensive in the Northeast and less so in the Southeast, as represented in this chart:
Soft costs are less physically obvious and are fees that aren’t directly related to labor and building materials. Typical soft costs include architecture and engineering fees. Permits and taxes also fall into this category.
Soft costs can also be expenses that continue even after a project is completed, such as building maintenance, insurance, security, maintenance and other ongoing fees needed for an asset’s upkeep.
One soft cost that has become much more prevalent in recent years is LEED Certification for commercial real estate projects, as more municipalities offer incentives for green building and developers acknowledge the long-term savings from owning sustainable assets. LEED certification can affect hard costs, as well, and is usually budgeted at an additional two percent of hard construction costs and $150,000 in soft costs depending on the scale of the project.
Beyond hard and soft costs, must also consider site-work expenses before finalizing a development’s plans. These could include land acquisition, potential demolition of existing buildings, environmental remediation, utility and road extensions.
As an investor, it’s important to have an understanding of anticipated costs and the assumptions they are based on before making an investment. Expense breakdowns are included in a project’s pro forma.
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