FAR: Floor Area Ratio in Commercial Real Estate
This metric, particularly important for developers, is the ratio of a building's size compared to the land, and many zoning commissions place limitations on how high a FAR can be for a project.
Better Financing Starts with More Options$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get QuotesWhat Is a Floor Area Ratio in Commercial Real Estate?
Floor area ratio, or FAR, is the ratio between a building's size and the land on which the property is located. The larger a property's floor area ratio, the higher the project density. 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 multi-story apartment, hotel, and office projects.
How to Calculate Floor Area Ratio
Determining a building or development’s floor area is a relatively straightforward calculation, but you do need to have two figures available.
First, you must have your building’s gross floor area. This is not the same thing as rentable or usable square footage, so be careful not to confuse the figures. The gross floor area is the amount of floor space from the outside surface of your building’s exterior walls, and the total from all stories must be included in the figure.
Second, you will need to know the size of your lot or parcel. This figure must also be in square feet. If you only know your land’s size in acres, simply convert the amount into square feet by multiplying the acreage by 43,560.
Floor Area Ratio Formula
Once you have both your gross floor area and parcel size, plug them into the floor area ratio formula below.
FAR = Gross Floor Area ÷ Parcel Size
Floor Area Ratios in Practice
Let’s illustrate this calculation with an example, using a 30,000-square-foot building. If this structure is on a 10,000-square-foot parcel, the property’s FAR would be 3, or 30,000 divided by 10,000.
If your local zoning laws require a lower FAR — let’s say 2, as an example — this may pose a significant challenge in your development’s approval process. While some zoning or planning commissions may offer to permit a higher floor area ratio, local government authorities may ask for other adjustments to the project as a consequence.
Note that the vertical size of a building is not relevant to a FAR calculation. A single-story, 20,000-square-foot building has the same floor area ratio as a four-story, 5,000-square-foot structure on the same land.
Floor Area Ratio and Land Value
When purchasing a lot for a commercial development, land will generally be more expensive if the area is zoned for a higher floor area ratio. However, this is not always the case. In some situations, high FARs lead to high-density construction projects nearby, which can obstruct views from the property in question, leading to a reduction in property value.
Related Questions
What is the definition of Floor Area Ratio (FAR) in commercial real estate?
Floor area ratio, or FAR, is the ratio between a building's size and the land on which the property is located. The larger a property's floor area ratio, the higher the project density. 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 multi-story apartment, hotel, and office projects.
Let’s illustrate this calculation with an example, using a 30,000-square-foot building. If this structure is on a 10,000-square-foot parcel, the property’s FAR would be 3, or 30,000 divided by 10,000. Note that the vertical size of a building is not relevant to a FAR calculation. A single-story, 20,000-square-foot building has the same floor area ratio as a four-story, 5,000-square-foot structure on the same land.
What are the benefits of Floor Area Ratio (FAR) in commercial real estate?
The benefits of Floor Area Ratio (FAR) in commercial real estate are that it allows for higher project density, which can lead to increased property value. FAR is often limited by zoning laws, so it's important for investors and developers to check out local FAR limits early on in the planning process. High FARs can lead to high-density construction projects nearby, which can increase property value.
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How is Floor Area Ratio (FAR) calculated in commercial real estate?
Floor area ratio, or FAR, is the ratio between a building's size and the land on which the property is located. To calculate FAR, you need to know both the gross floor area and parcel size of the property. The formula for calculating FAR is:
FAR = Gross Floor Area ÷ Parcel Size
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 multi-story apartment, hotel, and office projects.
What are the restrictions on Floor Area Ratio (FAR) in commercial real estate?
Floor area ratio (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. FAR restrictions vary by location, so it's important to research the local zoning laws in the area you're looking to develop. For example, some areas may have a maximum FAR of 2.5, while others may have a maximum FAR of 4.5.
When purchasing a lot for a commercial development, land will generally be more expensive if the area is zoned for a higher floor area ratio. However, this is not always the case. In some situations, high FARs lead to high-density construction projects nearby, which can obstruct views from the property in question, leading to a reduction in property value.
What are the implications of Floor Area Ratio (FAR) on small business financing?
The Floor Area Ratio (FAR) can have a significant impact on small business financing. If the FAR is limited by zoning laws, it can limit the size of the project and the amount of financing that can be obtained. This can make it difficult for small businesses to obtain the financing they need to build or expand their business. Additionally, if the FAR is high, it can lead to high-density construction projects nearby, which can reduce the value of the property and make it more difficult to obtain financing.