The Floor Area Ratio (FAR) is the size of a building in proportion to the land on which the property is located.
In commercial real estate (CRE) development, the floor area ratio (FAR) is a zoning metric that sets an upper parameter (“ceiling”) on the maximum square footage (sq. ft.) that can be developed on a given parcel of land.
The floor area ratio, often abbreviated as “FAR”, compares a building’s size and the land on which the property was built.
Therefore, the floor area ratio (FAR) is the ratio between the gross floor area (GFA) of a building and the total lot size.
The practical use-case of the FAR by real estate property developers is to determine the maximum square footage of a building that could potentially be developed on a specific parcel of land.
The two components in the floor area ratio (FAR) metric are the gross floor area (GFA) and the total lot size.
The zoning laws of a specific area serve as constraints on the floor area ratio (FAR), which is a factor that developers must be cognizant of amid the planning process.
Zoning regulations apply to land and properties, both commercial and residential, to establish boundaries between different property types.
On that note, commercial property developers are obligated to submit formal zoning reports to institutional lenders before obtaining approval for financing for a commercial loan.
Otherwise, there could be penalties for monetary fines and legal risks for breaching compliance regulations, which can negatively impact returns on a property development project.
The floor area ratio (FAR) is calculated by dividing the gross floor area (CFA) of a building by the total lot size.
The FAR is usually expressed in decimal notation, rather than percentage form.
For example, suppose a commercial building with 20k square feet (sq. ft.) is located on a 5k square foot lot.
The floor area ratio (FAR) of the commercial building is 4.0x, which we determined by dividing the gross floor area (GFA) by the total lot size.
However, real estate development firms (or “property developers”) often derive the maximum allowable floor area based on the specific floor area ratio (FAR) of a zoning district.
The maximum allowable floor area can be calculated by multiplying the size of the zoning lot by the maximum FAR.
Therefore, the maximum size of the building that can be developed on a given lot size, or land parcel, can be determined in units of square footage.
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The higher the floor area ratio (FAR) of a given property, the greater the density of the developmental project.
In commercial real estate (CRE), the floor area ratio (FAR) directly impacts property value, particularly in urban areas.
Broadly put, a higher floor area ratio (FAR) implies more potential revenue that can be generated post-development, since there is more leasing space in square feet.
Therefore, in property development, land located in zones with a higher maximum floor area ratio (FAR) tends to be priced at higher rates
High-density urban areas, such as New York City (NYC), have much higher maximum floor area ratios.
In effect, real estate property developers can construct buildings with more leasable space, resulting in greater potential “upside” in profits.
To illustrate the concept, a real estate building with a floor area ratio (FAR) of 5.0x on a 10k square foot lot permits 25.0% more leasable space (50k maximum square feet) than if its FAR were 4.0x instead (40k maximum square feet).
The statement that a higher floor area ratio (FAR) warrants higher pricing is a generalization, rather than a rigid rule.
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Suppose we’re tasked with calculating the floor area ratio (FAR) of a commercial building in New York City (NYC).
The building is situated in the NYC C4-7 districts, and is mapped in densely-built parts of Manhattan, where the maximum floor area ratio (FAR) is 10.0x for commercial properties.
The gross floor area of the commercial building is 12k square feet (sq. ft.), while the total lot size is 1.4k square feet (sq. ft.).
The floor area ratio (FAR) is 8.6x, which we determined by dividing the gross floor area (GFA) by the total lot size.
Since the maximum floor area ratio of 10.0x exceeds the 8.6x floor area ratio (FAR) of the commercial building, the property is in compliance with NYC zoning regulations.
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