When researching homes and buildings in New York City on building information sites like RealDirect’s Free Property Reports, buyers and investors will often encounter a field called “FAR”. This stands for Floor Area Ratio and is an important yet confusing term, that typical buyers rarely encounter. This relates to the zoning of the property, and how much “floor space” is allowed on a given lot.
For example, a house at 115 Ainslie Street in Williamsburg has a built FAR of .87 and a maximum FAR of 2. The square footage is 1,738, so this lot can support a total of 2,266 additional square feet – for a total of 4,004 square feet of floor area.
There are three main points you should understand about the Floor Area Ratio calculation.
1. It can tell you if the property is “legal”. If the actual floor area ratio exceeds the maximum allowed, it is possible that work was done to the building illegally, and a future owner may not be allowed to do work without fixing this – usually by removing the additional structure or getting a variance of some sort. However just because the FAR exceeds the maximum amount doesn’t mean it is illegal. Often buildings that exceed the maximum FAR are “grandfathered” since the FAR rules were imposed after the construction of the building.
2. The difference between the actual FAR and maximum FAR has value. This additional square footage is essentially a right to build (subject to building and zoning rules), and for savvy buyers who are willing to do some work, there could be great upside to properties with additional, unconstructed floor area and high sale price cost per foot.
For the above property, which has sold for approximately $1,000/ft, an investor or “flipper” would typically evaluate the upside opportunity by looking at the cost per foot and determine what the renovated price would be – and if they can renovate at a significant discount to what the market price is on a cost per foot basis for a renovated property, it is worth the cost of the renovation. Here, a $150/ft renovation budget could probably yield an additional $200/ft of value – which is not typically enough of a return to take a risk on a property like this. However, if one can add another 1,500 square feet at $350/ft, the economics make a lot more sense.
It looks like this:
1,738 x $150 = $260,700 – renovation of existing property
1,500 x $350 = $525,000 – additional living space
Now, after this work has been completed and assuming the property has a value of $1,200/ft, the new value is $3.885M. So the value of the additional floor area is nearly $1M.
Of course it’s rarely that simple, but in some cases increasing the square footage has an even bigger impact. In many neighborhoods, there is a premium for larger homes on a cost per foot basis, so by increasing the square footage, you will get a higher price per foot for the entire property vs. a similar smaller home in the same condition.
3. There can be more than one maximum Floor Area Ratio in a given building. Depending on the building and zoning, it is possible that by using the property for a community or commercial facility, you can have a higher FAR. This is done to encourage community facilities in certain neighborhoods. By doing the FAR calculation, you can determine which use type will provide the most value and highest use for the property.
The key is finding a property with a footprint that is conducive to “adding on” to maximize your FAR. Ideally you would want a lot that is wide enough to allow a comfortable layout, and a yard that will allow for an addition and still have enough outdoor space for the residents to enjoy. And if the building is brick, even better, since you may be able to build up with minimal structural and fire safety modifications. But if you can find a property with a FAR that allows for significant build outs, there is a lot of upside potential if bought at a fair price.
*Caveat – consult with a knowledgeable architect to confirm the viability of any project you are considering prior to purchase.