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 infrastucture, 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 their 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.
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Rules 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) |
$0.50 |
$1.00 |
| 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 |
