What Is the Loan-to-Cost (LTC) Ratio?

The loan-to-cost (LTC) ratio is a metric used in commercial real estate co𓄧nstruction to compare the financing of a project (as offered by a loan) with the cost of building the proꦉject.

The LTC ratio allows commercial real estate lenders to determine the risk of offering a 澳洲幸运5开奖号码历史查询:construction loan. It also allows developers to understand tꦆhe amount of equity they retain during a construction project.

What Is the Formula for the LTC Ratio?

To calculate the LTC ratio, you divide the loan amount for the construction project by the total construction cost.

$\begin{aligned} &\text{Loan to Cost} = \frac{ \text{Loan Amount} }{ \text{Construction Cost} } \\ \end{aligned}$​Loan to Cost=Construction CostLoan Amount​​

Similar to the LTC ratio, the 澳洲幸运5开奖号码历史查询:loan-to-value (LTV) ratio also compares the construction loan amount but with the fair market value (FMV) of the project after completion.

What Do✨es the Loan-to-Cost (LTC) Ratio Tell You?

The LTC ratio is used to calculate the percentage of a loan or the amount that a lender is willing to provide to finance a project basedꦦ on the hard cost of the construction budget. After the construction has been completed, the entire project will have a new value. For this reason, the LTC ratio and the LTV ratio are used side by side in commercial real estate construction.

The LTC ratio helps to delineate the risk or risk level of providing financing for a construction project. Ultimately, a higher LTC ratio means that it is a riskier venture for lenders. Most lenders provide loans that finance only a certain percentage of a project. In general, most lenders finance up to 80% of a project. Some lenders finance a greater percentage, but this typically involves a significantly higher 澳洲幸运5开奖号码历史查询:interest rate.

While the LTC ratio is a mitigating factor for lenders that are considering the provision of a loan, they must also consider other factors. Lenders will also take into account not only the location and value of t▨he property on which the project is being built, but also the credibility and experience of the builders as well as the borrowers’ credit record and loan history.

Example of How to Use LTC

As a hypothetical example, let’s assume that the hard construction costs of a commercial real estate project are $200,000. To ensure that the borrower has some equity at stake in the project, the lender provides a $16🌊0,000 loan. This keeps the project slightly more balanced and encourages the borrower to see the project through to its completion.

The LTC ratio on this project would be calculated as $160,000 ÷ $200,000 = 80%.

The Difference Betweenﷺ the Loan-to-Cost (LTC) and Loan-to-🧸Value (LTV) Ratios

The loan-to-value (LTV) ratio is closely related to the LTC ratio, but is slightly different. The LTV ratio compares the total loan given for a project against the value ওof the project after completion (rather than to its cost of construction).

Considering the above example, let us assume that the future value of the project, once completed, is double the hard construction costs, or $400,000. If the total loan ꦦgiven for the project, after completion, is $320,000, then the LTV ratio for this project would also be 80% or $320,000 ÷ $400,000.

The Bottom Line

Primarily used in commercial real estate construction, the loan-to-cost (LTC🔴) ratio compares the financing of a project with the cost of the construction budget. The higher the ౠLTC is, the riskier the project is for lenders, who usually will finance projects with an LTC of up to 80%.