BRIEFCASE GUIDES / COMMERCIAL REAL ESTATE LENDING
Loan to cost (LTC) is the loan amount divided by the total cost of a project, including land or purchase price, construction, and soft costs. If a project costs $10 million and the lender funds $6.5 million, the LTC is 65%. It is the main sizing test for construction and heavy renovation loans.
EDUCATIONAL NOTE
This page is general information for learning purposes, not lending, tax, legal, or investment advice. Briefcase is a media and marketing company, not a lender, broker, or investment adviser. Terms, ratios, and eligibility vary by lender, sponsor, and deal, so confirm every figure with a licensed professional before you act.
01
FORMULA
LTC = Loan amount ÷ Total project cost
Total project cost usually includes the land or acquisition price, hard costs (materials and labor for construction), soft costs (architecture, engineering, permits, legal, financing fees, insurance during construction, developer fee where allowed), and sometimes an interest reserve and contingency. Lenders decide which items count, so ask for their cost budget template early.
02
Hypothetical round numbers to show the math only:
Land
$2,000,000
Hard costs
$6,500,000
Soft costs
$1,000,000
Contingency and interest reserve
$500,000
Total project cost
$10,000,000
Lender maximum LTC
65%
Maximum loan from the LTC test
$6,500,000
Equity required
$3,500,000
Most construction lenders also cap the loan by loan to value on the completed, stabilized value, and many check the projected debt yield and DSCR at stabilization. If the projected stabilized value is $13 million and the lender also caps LTV at 55%, that test allows $7.15 million, so the 65% LTC test binds at $6.5 million.
03
01
Loan to cost (LTC): loan ÷ total cost. Used when the project is being built or heavily renovated and cost is the best measure of what is at risk.
02
Loan to value (LTV): loan ÷ appraised current value. Used for stabilized properties and most permanent loans.
03
Loan to after-repair value (LTARV), or loan to stabilized value: loan ÷ projected value after the work is done. Common in fix-and-flip and bridge lending.
A project can look conservative on one test and aggressive on another. A developer who bought land cheaply years ago may show a low LTC and a higher LTV on the land value, which is why lenders often check more than one.
04
LTC sets the equity check. In the example above, every five-point drop in the lender's maximum LTC adds $500,000 of required equity. Sponsors fill that gap with their own capital, LP investors, preferred equity, or mezzanine debt, and each layer costs more than senior debt.
LTC also signals risk. Higher LTC means less cushion if costs overrun or the lease-up takes longer than planned. Construction budgets that look precise on paper often grow, and the contingency line is the first thing a careful lender examines.
05
Is a higher LTC better? For the sponsor's equity check, yes, because the lender funds more. For risk, no: higher leverage leaves less room for cost overruns, delays, or a weaker lease-up.
Does LTC apply to fix-and-flip loans? Often, yes. Many flip lenders fund a percentage of the purchase price and a percentage of the renovation budget, then cap the total by a percentage of after-repair value.
How does LTC relate to DSCR? DSCR usually cannot be measured on a building that is not yet producing income, which is why construction lenders lean on LTC during the build and test DSCR or debt yield at stabilization or at conversion to a permanent loan.
06
01
Which costs count toward total project cost, and is a developer fee allowed?
02
Is land counted at purchase price or current appraised value?
03
What is the maximum LTC, and is there also an LTV or debt yield test at stabilization?
04
How are cost overruns funded, and when does the equity need to be in: all upfront, or pari passu with draws?
05
What completion and repayment guarantees are required?
TAKEAWAYS
01
LTC = loan ÷ total project cost, including land, hard costs, and soft costs.
02
It is the key sizing test for construction and heavy value-add loans.
03
Lenders usually pair it with a stabilized LTV, DSCR, or debt yield test.
04
Lower maximum LTC means a larger equity check from the sponsor and investors.
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