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Hard And Soft Costs

Costs related to a construction project are typically divided into hard and soft costs. The costs included in each category are indicative of the moniker. In general, hard costs relate to actual improvements to the real property and include construction costs such as walls, heating, ventilation and air conditioning systems. Soft costs relate to professional fees, furniture and other items that are either intangible, short-lived or movable. Although the allocation between the costs may not be as critical to small projects, it is of critical importance on large interiors projects and of course in new building construction.

A partial list of soft costs include:
Architects fees, engineers fees, project manager fees, lighting consultant fees, other consultant fees, legal fees, moving costs, furniture, signage, interest/financing costs, artwork, building permit, and filing fees.

A partial list of hard construction costs would include:
Concrete costs, electrical infrastructure, telecommunications infrastructure, heating, ventilation, air conditioning systems, dry wall partitions, ceilings, marble and stone, metal and glass partitions, stairwells, elevators and escalators, light fixtures, architecture metal and glass, architectural woodwork, flooring, sprinkler systems, plumbing systems and infrastructure, wood and metal doors, other hardware.

Why is this important to a tenant?
Soft versus hard costs can be particularly important in the allocation of a landlord cash allowance. In offering cash allowances for work, landlords will want to ensure that the bulk of the funds is going to "hard" improvements to its premises. At the end of the term, the improvements (with some exceptions including personal property and pre-agreed upon items) will revert to the landlord. Although the improvements may not have much value at the end of a longer term lease, landlords are interested in the value added to the premises today. Therefore, landlords will often negotiate in the lease to limit so-called soft costs. Limitations of 15% to 20% for soft costs are common. You should carefully plan your budget (if a significant one, preferably with a project manager) to ensure that you get the most value out of your cash allowance.

In a recent transaction, a 15,000 square foot user leased a space with the idea of making only moderate renovations to the space. Therefore, much of the budget was hiring consultants to advise on maximizing the existing build-out without spending a large sum. The user received approximately $14 per square foot from the landlord. Due to the relatively minimal "hard" costs in the overall budget, it was necessary to negotiate a higher "soft" cost percentage to cover the relatively greater consultant fees, in proportion to hard costs. A 40% soft to hard ratio was obtained.

The allocation between soft and hard costs will be less of an issue in building out raw space because the landlord's cash allowance will most likely not cover the entire cost of the build-out. Accordingly, you will likely easily meet a soft cost limitation on the landlord's dollars because you can apply the cash that your company is putting in to make the improvements towards the soft costs. However, it could become a timing issue with the landlord's reimbursement of costs. The landlord will typically reimburse no more frequently than bi-monthly if not monthly. You should plan your cash flow with your vendors to ensure that you have adequate funds to front both the hard and soft costs, if need be.

Rule of Thumb For Costs

*Most costs are indicated on a per square foot basis. Any amount over $100 is an aggregate amount.

  Plain Vanilla* High-end*
Demolition (per sf) $1.00 $2.00
Concrete (floor leveling) (per sf) $0.50 $0.50
Electrical (6 Watts/rsf) $18 $25
Telecom (per rsf) $6-$8 (voice,data,switch) $10-$15 (teleconferencing)
HVAC (per sf) $12 $20 (special rooms)
Plumbing (10,000 sq. ft. space) $5,000 (pantry, sink, coffee) $25,000 to $30,000 (executive bathroom with shower)
Dry Wall (per sf) $6-$8 $6-$8
Partitions - Metal & Glass $0 $3-$4
Hollow Metal (per rsf) $1 $1.50
Lathing & Acoustical Ceiling (per rsf) $5 $7-$8
Elevator and Escalator $0 $20,000 (re-do call buttons)
Sprinkler (per rsf) $3 $3
Hardware (per rsf) $0.50 $1.00
Marble and Stone (per sf) $0 $10-$100
Architectural Woodwork $4,000 (pantry) $10 - $100 psf (for area)
Painting and Wallcover (psf) $1.00 $6.00 (fancy)
Fabric Panels (per rsf) $0 $10
Window Treatment $0.50 $1.50 -$2.00
Appliances $2,000 (refrig., microwave) $6,000 (dishwasher, etc.)
Light Fixtures (per rsf) $4 $8-$10
Flooring-Carpet (per sf) $3 $5.50
Architectural Metal and Glass $0 $3 -$4 (partitions)
Fire Extinguisher/Cabinet (each) $300 $350
Subtotal TBD TBD
Permits (% of subtotal) 1% 1%
General Conditions (% of subtotal) 8% 12%
Fees (% of subtotal + General Conditions) 3% 3%
Insurance (% of above) 1% 1%
Furniture (per rsf) $20-$25 new
$5 - $10 used
$25- $100 new
Moving $2 $4

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