The only soft costs in a construction budget are architecture/engineering $27,000, construction financing interest $19,000, permits/impact fees $8,500 and construction-period property taxes $6,500. What is the total soft cost?
Correct Answer
D) $61,000
27000+19000+8500+6500 = 61000. Common errors: leaving out the construction financing interest gives $42,000; leaving out the construction-period property taxes gives $54,500; leaving out permits/fees and construction-period taxes gives $46,000.
Why This Is the Correct Answer
Option D is correct because total soft cost is the sum of the four listed items: $27,000 + $19,000 + $8,500 + $6,500 = $61,000.
Why the Other Options Are Wrong
Option A: $42,000
Option A, $42,000, leaves out the $19,000 construction financing interest ($27,000 + $8,500 + $6,500). Financing interest during construction is a soft cost, so the total is $61,000.
Option B: $46,000
Option B, $46,000, includes only architecture/engineering and financing interest ($27,000 + $19,000). It omits the $8,500 permits/fees and $6,500 taxes; the full total is $61,000.
Option C: $54,500
Option C, $54,500, leaves out the $6,500 construction-period property taxes ($27,000 + $19,000 + $8,500). Adding them gives $61,000.
Hard you build, soft you pay
Hard costs go into the physical structure; soft costs are the fees, interest, permits and taxes paid to get it built.
How to use: Use this to sort each budget line into hard or soft before adding.
Exam Tip
When a question lists several items for a subtotal, count them and make sure each one is in your sum. Distractors often drop one item.
Common Mistakes to Avoid
- -Leaving construction loan interest out of soft costs
- -Omitting property taxes paid during construction
- -Treating permits and fees as hard costs
Concept Deep Dive
Analysis
This question tests identifying and summing indirect (soft) costs. All four listed items are stated to be soft costs for this subtotal. Add architecture and engineering, financing interest, permits and fees, and construction-period taxes.
Background Knowledge
Full economic cost includes direct (hard) costs, indirect (soft) costs and market-supported entrepreneurial profit. Hard costs are the on- and off-site construction costs such as labor and materials. Soft costs include items like professional fees, construction financing, permits and fees, and taxes during construction.
Real-World Application
Reviewing a builder's budget for a new home, an appraiser separates the lumber and labor from the design fees, loan interest, permit charges and taxes during construction. The appraiser confirms the soft costs are included so the cost estimate reflects full economic cost.
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Previous Question
The improvements have a cost new of $700,000. A $20,000 cure allowance comes off cost new first, and remaining physical depreciation of 15% applies to the cost left after the cure allowance. These deductions do not overlap. The site value is $160,000. What is the indicated value by the cost approach?
Next Question
The improvement budget has direct costs $365,000, indirect costs $48,000, and an additional supported entrepreneurial incentive $67,000 not already included in either. Land is separate. What full improvement cost new results?