Basics: Density, Buildable, Sellable

In any real estate feasibility analysis, there are assumptions, rules, and definitions we need to master to understand and implement a real estate development proforma. While the concepts are the same in any city and jurisdiction, the rules to calculate each concept may be different across jurisdictions.

The first key concept is the density. Density is sometimes represented as a ration of the total floor space divided by the total land area. Different jurisdictions have different abbreviation for this ration. Some jurisdiction call it FSR or Floor Space Ratio, some call it FAR. And, some jurisdiction use Floor Space Index (FSI) which is not a ration but a %. So, FSR of 1.5 is FSI of 150%, for example. Whatever your jurisdiction calls this unit of density, this is generally a number such as 0.35, 0.5, 1, 2, 10, etc. Moving forward, we use the term FSR on this website. Also, we use imperial system, not because metric is not special to us, but because in North America, the imperial system rules! If you have a membership to the site, you'd be able to change the unit system to your desired one.

Every municipality defines the FSR for different land uses. For example, the FSR for a single-family dwelling land-use may be 0.35 in a municipality, while the FSR for a high-rise building in the same municipality may be 7 or even higher. This is done to either allow for a good-size family home on a small-size parcel or to limit how large of a house or mansion you can build on a large agricultural parcel. FSRs for different land uses can be found in the bylaws of a city.

The zoning bylaw of a city X states a FSR of 0.35 for a single-family zone. What is the total building area (in square feet) we can build on a 10,000 SF parcel in the zone?

The total area of the building is generally called the buildable area. Again, some municipalities exclude certain areas from the buildable area calculation. For example, the underground parking area is typically not counted towards the buildable area of a multi-family residential building.

In the above example, the total buildable is 3,500 SF. So, let's write the above formula using the new definition:

In many jurisdictions, land is listed and sold based on the value of each buildable SF. For instance, in many jurisdictions in North America, a parcel of property is advertised at $/BSF (dollar per buildable square foot). So, a 10,000 SF property at $200/BSF is valued $2,000,0000. This type of valuation has the advantage that you can abstract away the differences in construction quality, architectural design, and other variable factors to just compare properties based on their price per buildable area.

Land is often bought and sold based on the price per buildable area of land. However, finished products such as homes, offices, or retail units are typically valued based on both the land and building value. The building value (sometimes called improvement value) is determined based on the total sellable area while the land value is calculated based on the maximum buildable area. The sellable area is the area you can sell in the market. Note that municipalities define their own equivalent concepts with their own rules and regulations around it. For instance, a municipality may have a finished floor area or liveable area concept in a residential dwelling. Also, the way a municipality measures this area may be different from the way architects and real estate market standards such as ANSI in North America measure these areas.

To clarify the concept, lets bring a more specific use-case. In a single-family residential zoning, a municipality may allow the homeowner to build at 0.35 FSR. Lets assume our property parcel is 100 ftx100ft lot Which means:

Furthermore, let's assume that the municipality bylaw exempts the garage area for up to maximum of 400 SF. And, that the zoning also exempts any area that is underground for more than a certain height in the calculation of the allowable finished floor area.

To soften the impact of the design in a single-family dwelling, typically, there are other conditions such as the relationship between the area of the ground-level floor and the second-level floor that will also determine the shape of the building. Let's look at an example

As you can see, under the above simple bylaw rules, the 10,000 SF lot would allow for a total buildable area of 5,900 SF and total sellable area of 5,500 SF.

Sellable area is the part of the buildable area that you cannot sell or rent. In commercial real estate world, the total buildable is not what you sell to the public. You cannot sell the elevator, fire-exit staircases, circulations, amenity room, etc. to the buyers and rent to the renters. These are common areas that need to be deducted to find out how much sellable area there is. Based on the market rate on a unit of sellable area, you can calculate the revenue for the project. Typically, depending on the local regulations, the type of the project, and the design efficiency, the total common area and the project's sellable area can change. For instance, in town-house projects, the outdoor circulation area is typically not counted as part of the buildable area. So, the sellable area is 0 for a town-house project. In multi-story residential or commercial projects, the common area could be 10% to 15% of the total buildable.