The Gross Area Standard details procedures for measuring construction gross area and exterior gross area of buildings and provides unequivocal, direct measure of the physical size of a building. Both methods can be applied to new and existing buildings, single or multiple stories, owner-occupied or leased, and for all types of occupancies and uses.
The construction gross area includes the area defined as exterior gross area as well as other areas that have a structural floor, or are covered by a roof or canopy, that are typically unenclosed but within the building perimeter. The exterior gross area is the total floor area contained within the measure line—generally the outside surface of the exterior enclosure of building—including structured parking.
Floor area ratio (FAR) is the ratio of a building’s total floor area (zoning floor area) to the size of the piece of land upon which it is built.
Calculate the FLOOR AREA RATIO: Divide the GROSS FLOOR AREA by the BUILDABLE LAND AREA. The result is the Floor Area Ratio (FAR).
STEP BY STEP:
Determine the total BUILDABLE LAND AREA, in terms of square feet, for the site. The buildable land area is that portion of a development site where construction can legally and reasonably occur – so public streets and rights-of way, wetlands and watercourses, and other constraints would not be included. Buildable Land Area (B) = (Parcel Width x Parcel Depth) – Square feet of undevelopable land (if applicable).
Determine the FLOOR AREA of each story of the building. Calculate the area of each story (floor) of the building, typically measured between the exterior walls. Those portions of each story above the ground surface prior to any manipulation or grading are usually included in the calculation.
Determine the GROSS FLOOR AREA of the Building. Gross floor area is the sum of the floor area of each story. Gross Floor Area (G) = Floor Area of 1st Story + Floor Area of 2nd Story… for all floors above the ground.
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Many times brokers and sellers need to estimate the unit square footage and all they have is the total building square footage. So the question is how much to deduct for the exterior walls. The general rule of thumb is 4% of the total square footage.
Let’s say we have a structure that is 100′ x 100′ for a building totaling 10,000 square feet. A 12″ thick wall x 100 SF x 4 (assume there are 4 walls) equals 400 square feet of exterior wall which translates to 4% of the total square footage.
When a building is constructed an architect or engineer will measure all the space in the building and determine the overall amount of usable square footage and the amount of common area square footage. The percentage difference between the Usable and Rentable space is known as the Loss Factor or Core Factor. For Example: a building is 100,000 SF in total space, 15,000 SF of that space is common area. The Loss or Core factor would be 15%.
Landlords are entitled to get paid for all the space in their buildings including the “common areas”. There are two different methods used to do this calculation, the Add-On Factor and the Loss or Core Factor method.
The Add-On Factor is generally found in use in areas where there is high vacancy and low absorption rates. It is best illustrated by example. A tenant can use and occupy 10,000 SF in a building. The landlord uses an Add-On factor of 15% representing the common area of the building. How much space is the tenant billed for?
To calculate; we consider the usable square footage occupied by the tenant to be 100% of their space and add to that 15%. The percentages are converted to decimals and multiplied by the usable amount of space.
100% + 15% = 115% or 1.15
10,000 SF X 1.15 = 11,500 SF
The tenant must pay for 11,500 SF of space.
Gross Rent Multiplier is the ratio of the price of a real estate investment to its annual rental income before accounting for expenses such as property taxes, insurance, utilities, etc.
It’s a method investors may use to determine market value. The higher the number the more overpriced the property is compared to the comparables in the marketplace. Conversely, the lower the number, the better value.
Example: $200,000 Sale Price / $20,000 gross annual rental income = 10
The GRM, otherwise known as GIM (Gross Income Multiplier) varies drastically by the location. The pros of using the GRM metric is it’s typically a “pure” number in that you can rely on it. Whereas, Cap Rate can be manipulated depending on the legitimacy of the Expenses.
Some people use the GRM to calculate the number of years the property would take to pay for itself in gross received rent. I feel this is meaningless and simple minded because it doesn’t take into account the expenses, consequently making the statement about how long it takes to pay off the sale grossly incorrect.
The amount of inventory or units of a specific commercial property type that become occupied during a specified time period (usually a year) in a given market, typically reported as the absorption rate.
GLA is the Gross Leasable Area of the total floor area designed for tenant occupancy and exclusive use, including basements, mezzanines, and upper floors, and it is measured from the center line of joint partitions and from outside wall faces. GLA is that area on which tenants pay rent; it is the area that produces income.
A lease of the land only. Usually the land is leased for a relatively long period of time to a tenant that constructs a building on the property. A land lease separates ownership of the land from ownership of buildings and improvements constructed on the land.
Fee Simple vs. Leasehold
Most people are only familiar with one type of real estate ownership; fee simple, also known as freehold. It is important to know the difference between fee simple and leasehold, especially if you’re buying real estate in a leasehold state such as Hawaii along with a few other states in the US.The difference in these two types of land tenure is very different and affects the value of the real estate.
FEE SIMPLE: Fee simple is sometimes called fee simple absolute because it is the most complete form of ownership. A fee simple buyer is given title (ownership) of the property, which includes the land and any improvements to the land in perpetuity. Aside from a few exceptions, no one can legally take that real estate from an owner with fee simple title. The fee simple owner has the right to possess, use the land and dispose of the land as he wishes: sell it, give it away, trade it for other things, lease it to others, or pass it to others upon death.
LEASEHOLD: A leasehold interest is created when a fee simple land-owner (Lessor) enters into an agreement or contract called a ground lease with a person or entity (Lessee). A Lessee gives compensation to the Lessor for the rights of use and enjoyment of the land much as one buys fee simple rights; however, the leasehold interest differs from the fee simple interest in several important aspects. First, the buyer of leasehold real estate does not own the land; they only have a right to use the land for a pre-determined amount of time. Second, if leasehold real estate is transferred to a new owner, use of the land is limited to the remaining years covered by the original lease. At the end of the pre-determined period, the land reverts back to the Lessor, and is called reversion. Depending on the provisions of any surrender clause in the lease, the buildings and other improvements on the land may also revert to the lessor. Finally, the use, maintenance, and alteration of the leased premises are subject to any restrictions contained in the lease. During the lease term, typically there is a lease rent to be paidand there may be periodical increases throughout the term.
Important Leasehold terms to know:
- Lease Term – The length of the lease period (usually 55 years or more)
- Lease Rent – The amount of rent paid to the Lessor for use of the land
- Fixed Period – The period in which the lease rent amount is fixed
- Renegotiation Date – Date after the fixed period that the lease rent is renegotiated
- Expiration Date – The date that the lease ends
- Reversion – The act of giving back the property to the Lessor
- Surrender – Terms of the reversion
- Leased Fee Interest – An amount a Lessor will accept to convey fee simple ownership