Loan-to-Cost Ratio (LTC)

Definition

The loan-to-cost (LTC) ratio measures the portion of a commercial construction project’s cost that is financed by debt. It compares the loan amount to the total hard construction costs and is commonly used by lenders and developers to assess financing risk and required developer equity.

Formula

LTC = Loan Amount ÷ Construction Cost

Example: If a loan is $160,000 and hard construction costs are $200,000, LTC = $160,000 ÷ $200,000 = 0.80 (80%).

What LTC Tells You

• Indicates how much of the project’s cost is funded by the lender versus the developer’s equity.
• A higher LTC implies more lender exposure and greater perceived risk.
• Lenders often limit LTC (commonly up to about 80%); higher LTCs may require higher interest rates or additional borrower qualifications.

Example

Hard construction costs: $200,000
Loan provided: $160,000
LTC = $160,000 ÷ $200,000 = 80%
This means the lender finances 80% of the construction costs; the developer must provide the remaining 20% as equity.

LTC vs. LTV

• LTC compares the loan to construction cost (pre-completion).
• Loan-to-value (LTV) compares the loan to the project’s market value after completion (post-completion).
  Example: If completed project value = $400,000 and total loan = $320,000, LTV = $320,000 ÷ $400,000 = 80%.

Both ratios are used together: LTC assesses financing during construction; LTV assesses collateral value after completion.

How Lenders Use LTC

Lenders evaluate LTC alongside other factors:
* Property location and market demand
* Developer/builder experience and track record
* Borrower creditworthiness and loan history
* Project feasibility and contingency plans

Lenders may require lower LTCs, higher equity, or higher interest rates for riskier projects.

How to Calculate (Step-by-step)

1. Determine hard construction costs (exclude soft costs if lender specifies).
2. Determine the loan amount committed for construction.
3. Divide loan amount by construction cost.
4. Convert to a percentage (multiply by 100).

Key Takeaways

• LTC = Loan ÷ Construction Cost; it measures how much of a construction project is financed by debt.
• Higher LTC increases lender risk; typical maximums hover around 80%.
• Use LTC with LTV to evaluate both construction financing risk and post-completion value.

Bottom Line

The LTC ratio is a fundamental metric in commercial construction financing. It helps lenders set financing limits and helps developers understand required equity and project financing structure.