The loan-to-cost ratio (or LTC ratio) is used in commercial real estate financing to determine the ratio of debt relative to the cost of developing the property. It relates to the total cost of the project as a whole, including land acquisition.

The calculation is practically the same as the LTV, or loan-to-value, ratio, but there's one key distinction: A loan-to-cost ratio does not utilize the value of the property at all.

This difference is understandable, as it may be difficult for a lender to assess the risk of a loan based on a potentially inaccurate future value of a property.

Loan to Cost: An Example

You're planning to build an apartment building. You've run the numbers, budgeting $3 million for construction costs. You've paid $800,000 for the land, and your property should have a valuation of approximately $4 million upon completion.

Your lender won't care about the future valuation. Instead, they'll look at the $3 million budget and the $800,000 land purchase. Note that while the underwriting process of differs from lender to lender, all will closely scrutinize your construction budget to ensure its accuracy.

If the lender offers construction financing at a maximum 70% LTC, that means your maximum loan amount can be calculated as seen below:

Maximum loan amount = ($3 million + $800,000) x 70% LTC

In this case, $3.8 million multiplied by 70% gives you just under $2.7 million, the maximum amount available.

Loan-to-Cost Calculator

Calculating your LTC ratio is fairly straightforward as well. Simply take the loan amount and divide it by the total development cost.

LTC Ratio = Loan Amount ÷ Total Cost

Plug your figures into your calculator below to find your LTC ratio.

Why Do Lenders Use LTC Ratios?

The primary function of a loan-to-cost ratio is for a lender to assess its risk in providing the financing. The lower the leverage or ratio, the lower the risk.

For this reason, expect a loan with an LTC of 50% to generally have significantly better interest rates, terms, amortization, and so on, compared to financing at an LTV of 75%.

This isn't always true, especially for financing vehicles like HUD loans, for example. And you may not get great terms at an LTC of 50% if your personal credit history is really subpar. However, it's one of several levers that a lender uses to assess its risk in the deal.

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