Every second week we try to shift our subject matter back to topics that are among the many that new realtors can – and should – familiarize themselves with when aiming to become a more knowledgeable and well-rounded real estate professional. It’s a worthwhile aim for sure, as it goes a long way in being seen as realtor who has more to share with all the different sorts of real estate clients who will have different buying / selling prerogatives.
All of this is of course done in the big picture perspective of building your real estate business. Here at Real Estate Leads, our online real estate lead generation system is an excellent way to get even more out of your client prospecting efforts. Putting the power of the Internet to use and connecting you with people who are genuinely interested and increasingly ready to buy or sell a home should sound good to any realtor, and that’s exactly what you get with Real Estate Leads.
Today’s realtor know-how topic is one that will be very handy and practical when working with commercial or investment real estate buyers; calculating land-to-building ratio. Let’s get started.
Land Parcel Percentages
We can start with understanding that every structure occupies a certain portion or percentage of the land parcel it’s sitting on. This percentage or ratio of the size of the building to the land is referred to as the ‘land-to-building ratio.’ A high ratio indicates that the property isn’t being used to its fullest potential. A low one is indicative of the property already being at full capacity.
The Equation
It’s quite easy to calculate the land-to-building ratio. Here’s the equation:
- Divide the square footage of the land parcel by the square footage of the building
Here’s an example:
188,000 square feet of land divided by 43,500 building square feet. This works out to 4.32
This is a 4.32:1 land to building ratio, and that’s a high one. The average is between 2.5:1 to 3.5:1.
Relevance for Residential Properties?
There can be, but it’s typically not something that factors in as strongly for residential properties. The land to building ratio is rarely seen in residential appraisals. It is helpful to know that the ration can be limited by municipal codes and property restrictions, however. In some instances there is a desire to keep the size of homes to a certain percentage of the lot space available for building.
Land-to-Building Ratio in Commercial Applications
The use of the land to building ratio is obviously of much greater relevance with commercial and industrial applications. For example, building codes usually include very firm requirements for the amount of parking that certain size structures must maintain, and the same goes for setback and green area considerations.
A commercial space with an 11 to 1 land-to-building ratio might not be best utilizing the land, there would definitely be value in the additional space. Another property with a ratio of 2.5 to 1 could be at maximum capacity.
It’s easy to imagine that most considerations around municipal and other regulations occur with commercial, industrial, and institutional real estate. Environmental protection issues often come into play with industrial properties as well, and in particular ones related to hazardous materials.
Let’s look at specific commercial real estate types and the considerations that are added to the Land-to-building ratio for each:
- Retail Shopping Center or Mall
First and foremost here are population demographics considerations. A consistently sufficient flow of consumers to support the shops and businesses is a must. Traffic patterns are also important. Ratios of the tenant retail lease spaces and the overall theme of the center are important as well.
- Office Buildings
The type of offices they’ll house is something to consider. For example, A medical office or dental office complex would have very different space requirements.
- Warehousing and Specialty Operations
Warehouses require a lot of space, as well as large truck loading docks much of the time. They don’t need parking spaces the same way a retail development would. Specialty businesses like car and RV dealerships or any type of consumer service provider will have a whole array of different considerations that are unique to them, and different to land-to-building ratios
Excess Land Value
The decision where you will be more likely be expected to volunteer your expertise is whether paying for excess land and its zoning is a wise investment of capital. As the realtor, you may be asked if it that excess land can be divvied up and sold, either in the short-term or long-term. Is the overall land made up of two or more independent parcels? Do any existing or planned structures infringe upon one of them? Does the unused land have its own access? Can it be subdivided legally?
All of these are questions that your clients may ask of you. Be prepared to answer them.
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