Loan to Cost vs. Loan to Value

Let us see what loan to cost or LTC is:

LTC Meaning

LTC or Loan to cost represents the ratio calculated as the loan’s value divided by the cost of the project. LTC compares the amount of commercial real estate project loans to its cost. A higher LTC percentage (more than 80%) means that the project is riskier for lenders.

Real property investors evaluate the risk of business real estate assets with several measurements. The line of credit ratio is typical for building projects like bottom-up reconstruction or refurbishment of value-added. The loan-to-cost proportion is frequent. Compared to the overall development cost, the mortgage ratio quantifies the debt utilized to invest in a business. Thus, the larger the LTC ratio, the more a developer leverages a project that enhances its risk level. The indebtedness of the industrial immovable (CRE) project is measured by the loan per cost ratio. It analyses the debt that an infrastructure project uses as a fraction of its overall expenses, whether several nutrients or reconstruction of value-added.

The greater the rate, so more borrowing is used to fund building by a contractor to make the whole thing more dangerous. The LTC ratio is an essential indicator of value-added or ground-up buildings for stakeholders in real estate investment projects. For instance, several mutual funds provide the option to participate in producers’ lending and debt financing in construction and redevelopment. The LTC of the node is identified as one method that investors may measure the capital structure of these possibilities. The closer this proportion gets near 80%, the riskier it is because the investor offers less ownership.

The LTC ratio calculates the proportion of credit or the sum a loan borrower is available to fund an evaluation of the actual cost of the building budgeting. As a result, the whole business would have a net worth after the project completion. Therefore, in private equity building, the LTC ratio and the LTV proportions are utilized beside each other.

The LTC ratio helps identify risks or risks of funding for a building project. In the end, a larger LTC ratio implies it’s a more risky lending endeavor. Most creditors give just a fixed proportion of structured finance lending. Most lenders generally fund up to 80% of a transaction. Although the LTC ratio is a component that mitigates the supply of a loan for creditors, other considerations should be considered. Lenders will also affect the design and condition of the assets under construction, the reliability and competence of the developers, the credit records, and the repayment capacity of the debtors.

How can you calculate LTC?

To calculate loan to cost, you need to divide the loan amount  by the construction cost :

LTC = loan amount / construction cost

Compared with the overall cost of a building project, the LTC ratio estimates a loan proportion or the insurer’s willingness to grant finance. The investment will determine the interest on the loan, excluding capital expenditure, by dividing it by the entire value of the system. For illustration, a producer believes that a plan involving purchasing the property, home buyer, allowance, and other expenses and charges for energy consumption will charge $1 million. A bank of investment capital has offered to grant a building loan of $550,000 for this property, implying that the builder must deposit $450,000.

The LTC would be 55% for this construction. The loan-to-cost coefficient is a statistic used to draw comparisons of the funding of a proposal (as provided by loans) with the construction budget of the development in commercial immobilization development. The LTC is those of property investment borrowers to identify the risk of building loans. It also encourages designers to evaluate how much equity a building project retains.

What is LTV?

LTV or loan to value represents the ratio calculated as the loan’s value divided by the expected market value of the completed project.¬† Appraisal property value or expected market value of the completed project is the estimated value of a property/construction/home determined by an impartial inspection of the property and its comparison to recently sold properties/constructions/homes in the area to estimate the current value.

Comparable to the LTC proportion, the LTV figure illustrates the building interest rate with the development after its completion but includes the purchase price. Loan-to-cost (LTC) matches the amount of income for a property investment project with its costs. LTC is computed by dividing the credit limit by the building costs.

However, LTV represents the amount for the loan with the growth rate cost of the property finished. A greater LTC implies that the project is riskier for bankers, as most financial institutions are financing a development having up to 80% LTC. Let us suppose that the hard initial investment for a business immobilization project is $200,000, as a thought experiment. The loan requires a $160,000 mortgage to guarantee that only the debtor has some interest in the business. This ensures that the project is somewhat more equal and motivates the buyer to see the job done. The development’s LTC ratio is estimated to be $50 million / $100 billion = 80 percent.


Loan to Cost vs. Loan to Value

If we compare LTV vs. LTC, the differences are:

  • LTC ratio is calculated as the value of the loan divided by the cost of the project. At the same time, LTV is the ratio calculated as the loan’s value divided by the expected market value of the completed project.
  • LTV measures to leverage on a stabilized property and overall value while LTC measures are projects risky or not.


The loan-to-value, or LTV, is just another significant measure utilized by business real estate agents. In comparison with the estimated or fair price of the property, this statistic estimates the number of borrowing. Like LTC, LTV assists industrial property investors in measuring the credit risk of a project and shows larger risks. Corporate immobilization providers use LTV mainly to measure stress on a stable facility. In a completely rented office block on the street for one million dollars, for instance, if the financiers give an $800,000 secondary title loan, the building does indeed have a TV of 80%. Entrepreneurs can use LTV nevertheless to assess stress if the asset price is higher than the initial costs, which leads to growth or rehabilitation investments.

Another place to invest in value-added multiple properties is by creating a crowdfunded commercial property business. The first monthly payment is 1 million dollars, and the sponsors plan to invest 250,000 dollars in improving the units. A creditor is prepared to offer the home with an $ 800,000-second mortgage. Once refurbishment improvements are completed, the creditor expects rehabilitation will permit higher rentals to raise the net profit of the building (NOI). The loan-to-value proportion is analogous to LTC. It does, however, differ somewhat. The LTV ratio reflects the actual loan provided for a project to the portfolio budget rather than the total building cost. Because of this scenario, it must be assumed that once done, the future worth of the building doubles the expense of initial hard development, or $200,000. If, after conclusion, the project cost loan is $320,000, the construction LTV ratio would indeed be 80 percent or $320,000 but rather $400,000.

Daniel Smith

Daniel Smith

Daniel Smith is an experienced economist and financial analyst from Utah. He has been in finance for nearly two decades, having worked as a senior analyst for Wells Fargo Bank for 19 years. After leaving Wells Fargo Bank in 2014, Daniel began a career as a finance consultant, advising companies and individuals on economic policy, labor relations, and financial management. At, Daniel writes about personal finance topics, value estimation, budgeting strategies, retirement planning, and portfolio diversification. Read more on Daniel Smith's biography page. Contact Daniel:

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