How to Calculate the Land to Building Ratio
A low ratio indicates that the property is being fully used
Every structure occupies a certain portion or percentage of the land parcel on which it sits. This percentage or ratio of the size of the building to the land is called the "land to building ratio." When it's high, the property isn't being used to its fullest potential. When it's low, the property is already at full capacity.
Divide the square footage of the land parcel by the square footage of the building to arrive at the land to building ratio. Here's an example:
- 188,000 land square feet divided by 43,500 building square feet equals 4.32
This is a 4.32:1 land to building ratio, and it's actually on the high side. The average is between 2.5:1 to 3.5:1.
Is It Important for Residential Properties?
The land to building ratio isn't reported in all appraisals. In fact, it's rarely seen in residential appraisals. There are many municipal codes and property restrictions that can limit the ratio, however. There might be a desire to keep the size of homes to a certain percentage of the available lot space.
Land to Building Ratio in Commercial Applications
The use of the land to building ratio is much more prevalent in commercial and industrial applications. There are usually stringent requirements in building codes for the amount of parking that certain size structures must maintain, as well as setback and green area considerations.
A facility with an 11 to 1 land to building ratio might be under-utilizing the land and this would result in some added value for additional space. Another property with a ratio of 2.5 to 1 could be at maximum capacity or in violation of current codes due to grandfather clauses.
The greatest number of considerations with municipal and other regulations occurs when you're working with commercial, industrial, and institutional real estate. There could be EPA issues with industrial properties, and there might be hazardous materials to think about.
The Retail Shopping Center or Mall
You won't find a shopping mall or strip center in the middle of thousands of acres of farmland. Population demographics are the first consideration in siting retail commercial buildings.
There must be enough consumers to support the shops and businesses or there will soon be a shell building sitting empty. Traffic patterns are also important. In suburban situations, it's very important to have easy access to cars and lots of convenient parking. Sometimes it's enough to provide underground parking and rely also on walking traffic in an urban setting.
Ratios of the tenant retail lease spaces and the overall theme of the center are important as well. There's often an "anchor tenant," the largest retailer that will draw the most traffic. Then there will be others who offer related but not necessarily competitive products and services. A major mall might have 20 clothing stores, but they each believe they have their niche customers and will do well. The anchor tenant, in this case, could be Macy's.
These vary by the type of offices they'll house. A building catering to accountants, attorneys, and consultants would have certain space use requirements, and there might be one or more shared conference rooms for larger meetings. They might even share a receptionist to route calls and visitors.
A medical office or dental office complex would have very different space requirements, especially when it comes to electric power and other special concerns related to the equipment being used. Medical office buildings might need more elevators or easier access situations for the aged or ill.
Warehousing and Specialty Operations
Warehouses require a lot of space, and they also require large truck loading docks in some cases. They generally don't need much more in the way of parking spaces, however. Warehouses will usually have one or two areas set up for offices, but they won't have much in the way of amenities—just space, utilities, and phone service.
Specialty businesses include auto repair shops, oil change businesses, and car and RV dealerships. They each have different needs as far as space and parking. Auto repair and oil change businesses have special needs for disposal of waste oil and other chemicals.
Every one of these buildings and business types will have some concern for the land to building ratio.
The Value of Excess Land
The nature of excess land and its zoning determine whether paying for it is a waste of capital. Can it effectively be sliced off and sold? It can if the overall land is comprised of two or more independent parcels, if the structure doesn't infringe upon one of them, and if the unused land has its own access. The same applies if it can be subdivided.
Otherwise, you probably have no choice but to dedicate the excess land to future expansion...even if that's just a parking lot or storage.