Soft costs

Soft costs are everything a project spends that does not go into the physical building. Architecture and engineering, surveys and environmental studies, building permits and impact fees, legal and accounting, construction-period insurance and property taxes, lender fees and interest during construction, marketing and lease-up, and the developer fee are all soft costs. Some budgets list financing costs separately; the boundary varies.

Soft costs are easy to overlook because they produce no visible result, but they are a substantial share of any budget. In our illustrative 100-unit building, we assume $3,600,000 of soft costs against $16,800,000 of hard costs, with another $1,200,000 for financing and contingency. Those are assumptions, not typical figures, but they show the order of magnitude.

Many soft costs grow with time. Each month of entitlement or review adds consultant hours, interest on money already borrowed, and taxes and insurance on land that is producing nothing. That is why the length of a process, not only the fees it charges, shows up in rent. Every added soft-cost dollar is financed at the same blended cost of capital as a dollar of concrete, and requires the same increment of rent to repay.