Tap to get financing
Multifamily Loans
Property Types
MultifamilyHealth Care & Senior LivingStudent HousingAffordable HousingMobile Home ParkOffice, Retail & More
Loan Options
Fannie MaeFreddie MacConstruction LoansLoans Under $1MFreddie Mac SBLFHA/HUD Multifamily LoansForeign National LoansCMBSBank LoansLife CompaniesBridge LoansHard MoneySoft MoneyMezzanine FinancingCrowdfundingSBA 504 LoansMezzanine Construction LoansUSDA 538 LoansFix and Flip LoansFractured Condo LoansDSCR LoansRefinance
Resources
BlogLoan DocsForms and TemplatesRatesLingoVideo LibraryMultifamily For SaleCommercial MortgagesFrequently Asked QuestionsBeginner's Guide
Calculators
Multifamily Mortgage CalculatorCap Rate CalculatorNOI CalculatorDSCR CalculatorLTV CalculatorDebt Yield CalculatorCash on Cash Return CalculatorYield Maintenance CalculatorIRR Calculator
About
About UsLeadershipTeamContactAffiliate Program (Coming Soon)We're Hiring
Get financing
Newly Published
Mar 24 at Multifamily Loans
The Best 3 Multifamily Loans for Affordable Housing in 2023
Mar 20 at Multifamily Loans
Multifamily Minute Reader Reflections: How Will Bank Failures Impact Multifamily?
Mar 14 at Multifamily Loans
Multifamily Minute Reader Reflections: How Big Are We Buying?
Explore the Janover Network
Mar 17 at Commercial Real Estate Loans
Top 10 Commercial Real Estate Lenders of 2023
Mar 15 at Commercial Real Estate Loans
Top 4 Refinancing Loans for Industrial Real Estate in 2023
Feb 20 at Commercial Real Estate Loans
How to Set Rent Rates for Your Commercial Property in 2023
Was This Article Helpful?
Multifamily Finance Blog
Last updated on Feb 24, 2023
5 min read
by Content Team

Understanding Loan Ratios in Multifamily and Commercial Real Estate

One of the primary components used by commercial real estate underwriters to determine a loan amount is leverage. Leverage is summed up and determined based on the loan to cost and loan to value ratios.

Better Financing Starts with More Options Start Your Application and Unlock the Power of Choice. Click Here to Get Quotes →$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get Quotes
In this article:
  1. Loan To Cost Ratio and Loan To Value In Commercial Real Estate Finance
  2. LTC: Loan To Cost Ratio
  3. Loan to Cost (LTC) Calculator
  4. LTV: Loan To Value Ratio
  5. Loan to Value (LTV) Calculator
  6. Mitigating Risk
  7. Related Questions
  8. Get Financing

Loan To Cost Ratio and Loan To Value In Commercial Real Estate Finance

When a lender is determining the amount it is willing to lend on an apartment building or other piece of commercial real estate, there are many factors that come into play such as property type, property class, location, sponsorship, DSCR (debt service coverage ratio), and more.

However, one of the primary components used by commercial real estate underwriters to determine a loan amount is leverage. Leverage is summed up and determined based on the LTC or the LTV.

LTC: Loan To Cost Ratio

LTC stands for loan-to-cost ratio. It is a ratio used in commercial mortgage finance and multifamily financing to determine the ratio of debt relative to the total cost of the project in question.

LTC is most frequently used for value-add acquisitions such as substantial rehabilitation projects or ground-up construction. The "C" refers to the total project cost, in that it is the total cost required to purchase the property, then bring it to stabilization.

For example, if you are building a 100-unit apartment complex, and you are looking to determine your cost, the total cost would be the cost to acquire the land plus the cost to build your community and the cost to bring it to stabilization. So, if your cost to buy the land is $3 million and your cost to build the property is $6.5 million, and your cost to get it fully leased up and stabilized is $500,000, your total cost would be $10 million.

If you were looking for a 75% construction loan, your loan would be $7.5 million (75% of the total cost). It is important to remember that the value of the property has nothing to do with the LTC; the value of the property is a subject matter for LTV.

Commercial mortgage lenders use LTC as a factor to determine risk in a deal. The lower the leverage, the lower the risk. Conversely, higher leverage offers higher risk. If you are buying a distressed property for $1 million, but its actual value is $2 million, and you are looking for a loan to purchase the property, lenders will traditionally look at the LTC (the cost, being $1 million) and not the LTV, or to be more specific, the lender will be looking at the lesser of the two. 

The formula for LTC (the loan to cost ratio) is:
Loan to Cost (LTC) = Loan Amount / Total Cost

Loan to Cost (LTC) Calculator

LTV: Loan To Value Ratio

LTV stands for loan-to-value ratio. This ratio is used in commercial mortgage finance and multifamily property financing to determine the ratio of a particular debt (perhaps a first mortgage) relative to the value of the collateral (in this case a multifamily or other commercial property).

If a borrower owns a property worth $10 million and is looking to refinance the first mortgage for $7 million, the LTV is 70%. Lenders use this figure to determine their level of risk and borrower leverage in a transaction. The lower the LTV, the lower the risk.

This formula is used in the case of standard purchases and refinances. In the cases of multifamily property rehabilitation, or ground-up construction, other factors like LTC also become important. When LTV is used in rehab, construction, or other value-add financing opportunity, it is used as a leverage constraint for the finished, or stabilized value of the property.

For instance, your cost to build a property is $10 million, and when it's complete and stabilized it's worth $20 million, and the lender has constrained you to the lesser of 75% LTC or 70% LTV, your loan would be the lesser of $7.5 million (75% LTC) and $14 million (70% LTV).

A $14 million loan in this scenario is not possible because that would be 140% of the total cost! There are not many lenders out there that are going to cut you a check for 100% of the project cost and another $4 million on top of that and hope that you take it from there! Leverage constraints keep borrowers committed to their deals and keep banks from having to get into the construction and real estate management business. 

The formula for LTV (the loan to value ratio) is:
LTV = Loan Amount / Total Value

Loan to Value (LTV) Calculator

Mitigating Risk

After a loan is fully underwritten, the lender will traditionally offer financing constrained by the lesser of a pre-determined LTC, LTV, and normally, DSCR as well (lenders also frequently add debt yield as a requirement). The most common terms you will find for multifamily construction financing are structured the following way:

$XXX million (or maximum proceeds), subject to (a) maximum loan to cost ratio of 75%, a maximum loan to value ratio of 70%, and (c) a minimum debt service coverage ratio of 1.25x based on the lender's underwriting.

So, don't get too excited if your loan amount based on your LTC or your LTV looks above and beyond what you expected, because you are going to get the lesser of the two, and quite often the lesser of three or four ratios. Lenders are experts in risk mitigation, and that means they know how to manage leverage and loan amounts.

Related Questions

What is the difference between loan-to-value and loan-to-cost ratios?

The Loan-to-Cost Ratio (LTC) is a metric comparing the amount of a project’s financing to its construction costs. In contrast, the Loan-to-Value Ratio (LTV) is a metric comparing the amount of a loan to the value of the collateral. LTV is primarily used as a risk mitigation metric in standard asset purchase and refinance transactions. For ground-up developments or rehabilitation projects, lenders generally prefer the LTC ratio instead. This calculation swaps out the collateral’s value for the total development cost.

What are the most common loan-to-value ratios for multifamily and commercial real estate?

The most common loan-to-value (LTV) ratio for multifamily and commercial real estate is 70%. This is according to Multifamily.loans, which states that after a loan is fully underwritten, the lender will traditionally offer financing constrained by the lesser of a pre-determined LTC, LTV, and normally, DSCR as well (lenders also frequently add debt yield as a requirement).

What are the most common loan-to-cost ratios for multifamily and commercial real estate?

The most common loan-to-cost (LTC) ratio for multifamily and commercial real estate is 75%. This is according to this article from Multifamily.Loans.

What are the benefits of a higher loan-to-value ratio?

The benefits of a higher loan-to-value ratio (LTV) are that investors and developers can get a sizable loan with less cash down. This allows them to free up their valuable cash for other investment opportunities.

For more information, please see the following sources:

  • LTV: Loan-to-Value Ratio in Relation to HUD 221(d)(4) Loans
  • LTV: Loan to Value in Relation to HUD 223f Loans

What are the benefits of a higher loan-to-cost ratio?

The benefits of a higher loan-to-cost (LTC) ratio are that it allows investors and developers to get a sizable loan with less cash down. A higher LTC results in higher risk for the lender than would a lower LTC, so lenders will often require more conservative pricing and terms. In contrast, commercial property loans with a lower LTC command more competitive structures, such as lower rates and more favorable loan terms.

Sources:

  • Commercial Real Estate Loans: Loan to Cost Ratio
  • HUD 221(d)(4) Loans: Loan-to-Value Ratio

What are the risks associated with a higher loan-to-value or loan-to-cost ratio?

When lenders are deciding whether to approve a loan, one of the most important factors they look at is LTV, or loan to value ratio. The higher a loan's LTV, the riskier it is for the lender. High LTV loans are especially risky because there is little equity in the property that can be recovered if the borrower defaults. This means that lenders may be more likely to suffer a loss if the borrower is unable to make payments. Additionally, high LTV loans often have higher interest rates, which can make them more expensive for the borrower.

Sources:

  • LTV: Loan-to-Value Ratio in Relation to HUD 221(d)(4) Loans
  • LTV: Loan to Value in Relation to HUD 223f Loans
In this article:
  1. Loan To Cost Ratio and Loan To Value In Commercial Real Estate Finance
  2. LTC: Loan To Cost Ratio
  3. Loan to Cost (LTC) Calculator
  4. LTV: Loan To Value Ratio
  5. Loan to Value (LTV) Calculator
  6. Mitigating Risk
  7. Related questions
  8. Get Financing

Getting commercial property financing should be easy.⁠ Now it is.

Click below for a free, no obligation quote and to learn more about your loan options.

Get financing →
Janover logo

Multifamily Loans is a Janover company. Please visit some of our family of sites at: Multifamily Loans, Multifamily Today, Commercial Real Estate Loans, SBA7a Loans, CMBS Loans, Apartment Loans, HUD Loans, HUD 221d4 Loan, HUD 232 Loan, HUD 223f Loan, HUD 223a7 Loan, SBA Express Loans, SBA 504 Loans, and OpportunityZones Help.

Janover Inc.

6401 Congress Ave
Ste 250
Boca Raton FL 33487

hello@multifamily.loans

Multifamily Loans

Beginner's Guide
Multifamily Refinance
Multifamily Mortgage Calculator
Current Rates
Commercial Mortgage Calculator

Site Information

Privacy Policy
Terms of Use

This website is owned by a private company that offers business advice, information and other services related to multifamily, commercial real estate, and business financing. We have no affiliation with any government agency and are not a lender. We are a technology company that uses software and experience to bring lenders and borrowers together. By using this website, you agree to our use of cookies, our Terms of Use and our Privacy Policy. We use cookies to provide you with a great experience and to help our website run effectively.

Freddie Mac® and Optigo® are registered trademarks of Freddie Mac. Fannie Mae® is a registered trademark of Fannie Mae. We are not affiliated with the Department of Housing and Urban Development (HUD), Federal Housing Administration (FHA), Freddie Mac or Fannie Mae.

Copyright © 2022 Janover Inc. All rights reserved.