What is a good land to building ratio?

The average is between 2.5:1 to 3.5:1.

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The land-to-building ratio gives analysts a way to quickly gauge how real estate property is currently being used. Learn how to calculate this ratio, what it tells you, and common uses for property. Key Takeaways To calculate the land-to-building ratio, divide the square footage of the land parcel by the square footage of the building. A low ratio suggests that the land has already been fully developed, while a high ratio suggests that there may have untapped potential. Potential uses for undeveloped land include retail shopping centers, office buildings, and warehousing.

What Is the Land-Building Ratio or Lot-Size-to-House-Size Ratio?

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.

Formula and Calculation

To figure out what the land-to-building ratio is for a given piece of property, divide the square footage of the land parcel by the square footage of the building. Note Square Footage of Land / Square Footage of Building = 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. 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. Note 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.

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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.

Office Buildings

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 the disposal of waste oil and other chemicals.

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Note 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.

Frequently Asked Questions (FAQs)

What is a good land-to-building ratio? The average ratio varies by location. Location will influence not only how the property will be used (retail, warehouse, etc.), but it'll also dictate the zoning laws that apply. As an example, the average 7,000 square foot lot in Monterey Park, California develops 3,000 square feet. This comes out to a land-to-building ratio of roughly 2.33. How do you calculate the land-to-building ratio of a multiple story office building? Each story of a building must be accounted for when calculating this ratio. You must add together the square footage of each floor to figure out the total square footage of the building. How do you adjust the land-to-building ratio? You can adjust the land-to-building ratio by recalculating it. A property owner may wish to do this after they build new structures, for example. Appraisers may reevaluate this ratio before a sale. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!

thebalancemoney.com - How To Calculate the Land-to-Building Ratio - The Balance