Land-to-building Ratio

Definition of "Land-to-building ratio"

Written by

James Walker

Jim Walker Realty

The land-to-building ratio is a means to calculate in percentage how much a structure occupies the total land parcel on which it is located. It is the total building area as a percentage of the total land area. This calculation is called the land-to-building ratio as it represents the ratio between the occupied area of the land parcel compared to the whole land parcel. When this ratio is high, that means that structures don’t occupy the land to its potential and more land is available for potential new structures. When the ratio is low, it means that the land parcel is occupied at its full capacity.

The Formula for Land-to-Building Ratio:

Land-to-Building Ratio = Land Square Feet (total area of the lot parcel) / Building Square Feet (square feet of the built structure)

The land-to-building ratio is used for any kind of real estate development, whether it’s residential, industrial, or commercial. Below we’ll see just why it is important for each.

Land-to-Building Ratio in Residential Real Estate

When it comes to residential real estate, the discussion always leads to value. But what is bringing value to residential real estate? There is a golden rule of investment that underlines a land-to-building ratio of 40:60, which means that the property bought (land included) must have a least 40% unused land. The reason for this is that a residential property that has a lower land-to-building ratio has a higher chance of being a profitable investment. Why might you ask? It’s simple. You can build more structure on a parcel of land, but you can’t build more land on a lot parcel. The land is a limited resource in residential real estate, especially if you look at urban areas.

A minimum of 40% land-to-building ratio is detrimental to having a profitable investment as the house itself holds less value than the land on which it is built. Take 100,000 square feet of undeveloped land in Manhattan (if there even is such a thing anymore), and think of the value of that land because of its location, population density, the demand for real estate properties, and need. Still, in residential real estate developments, when the land parcel allows it, homebuyers want to purchase a property with undeveloped land available. So the 40:60 golden rule is something that homebuyers might pay attention to, as that area allows further development in the future. It is also important to keep in mind that there are municipal codes and property restrictions that can also impose a limit on the land-to-building ratio, so be sure to check with your local government. 

Land-to-Building Ratio in Commercial Real Estate

This is an industry that takes into account the areas population density, demographics, and demand for the retail sector. A mall, for example, won’t be built in the middle of farmland as the population density of the area will not be able to sustain such a large variety of retail shops. However, in highly populated areas, extensive retail shopping centers draw people in and hardly, if ever, struggle with demand. The flow of customers is important, as well as ensuring parking spaces for those customers.

Land-to Building Ratio in Business Real Estate

Space requirements vary from the different types of businesses that can function in the building. An law office, a dental office, and a fashion studio have different requirements regarding office space, equipment used, aesthetics of the office, and access to the office itself. These requirements are taken into account by the real estate developers of the office space, considering the businesses that are more likely to rent office spaces. This is done so that a business office building isn’t developed with requirements for a private practice in an area where a steel warehouse operates as their requirements are different.

Land-to-Building Ratio in Industrial Real Estate

Industrial real estate, as pointed out above, does have other requirements than office buildings or dental offices. Regarding amenities, the requirements of warehouses and factories are somewhat limited to basic functions like telephones, fax machines, space, and utilities. Auto dealerships require more area for parking, oil changing businesses require a safe way to dispose of oil waste, while some warehouses require truck loading docks. Their needs vary, and their land-to-building ratio will always differ as well.