LTV vs. LTC in Commercial Real Estate Financing

Why both ratios matter

LTV and LTC measure different forms of leverage. LTV focuses on value; LTC focuses on what the project actually costs. A lender can use either or both depending on the transaction.

Loan-to-value (LTV)

LTV is the loan amount divided by the applicable property value. The relevant value may be purchase price, as-is appraised value or another lender-defined basis. A high appraisal does not always mean a lender will size solely to that value.

Loan-to-cost (LTC)

LTC is the loan amount divided by eligible project cost. For a construction or major renovation transaction, eligible cost can be narrower than the sponsor’s total budget because lender treatment of land basis, interest, fees, reserves and soft costs varies.

Sponsor equity

When a lender limits LTC, the remaining project cost generally has to be covered by sponsor equity, subordinate capital that is acceptable to the lender, or another approved source. Documentation of where the cash came from can matter.

Avoid the common mistake

Do not present only the strongest ratio. A clean sources-and-uses schedule should reconcile purchase or land basis, hard costs, soft costs, financing costs, reserves, existing debt and sponsor cash.

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