What is Floor Area Ratio in Commercial Real Estate?
Floor area ratio, or FAR, is the ratio between a building's floor area and the size of the land on which the property is located. The larger a property's FAR ratio, the higher density the project has. FAR is often limited by zoning laws, so it's important for investors and developers looking to build a new project to check out local FAR limits early on in the planning process. While FAR can apply equally to all types of structures, it's typically most relevant in multistory apartment, office, and hotel projects.
Floor Area Ratios In Practice
If a building is 30,000 sq. ft., and is built on 10,000 sq. ft. of land, the building's FAR would be 3 (30,000/10,000). And, if a site is 5,000 sq. ft. and FAR is limited to 2 by local zoning laws, 10,000 sq. ft. is the largest square footage building that could be built on the property. FAR extends vertically as well as horizontally; a 10,000 sq. ft. building could have 2 stories of 5,000 sq. ft. each, or 10 stories of 1,000 sq. ft. each, and the FAR would end up being the same.
Floor Area Ratio and Land Value
In general, when purchasing a lot for a commercial development, the land will be more expensive if the area is zoned for a higher floor area ratio. However, that's not always the case; in some situations, high FAR leads to high density construction projects nearby, which can obstruct views from the property in question, leading to a reduction in property value.