Definitions
Loan-to-cost (LTC) is the loan amount divided by the all-in cost basis of the asset, including purchase price (or land cost for construction), hard and soft costs, financing costs, and reserves. LTC is the dominant sizing metric for construction loans, value-add bridge, and any deal where the asset's stabilized value materially exceeds current cost.
Loan-to-value (LTV) is the loan amount divided by the appraised value of the asset. For acquisitions, LTV is calculated against the purchase price or the appraised as-is value (whichever is lower). For refinances and permanent debt, LTV is calculated against the appraised stabilized value.
Which is binding on different deal types
On stabilized acquisitions and permanent refinances, LTV is typically binding. Lenders cap at 65%-75% LTV depending on asset class and DSCR / debt yield tests.
On value-add and transitional deals, LTC is typically binding initially, with LTV becoming binding as the asset stabilizes. Bridge lenders typically size to the lower of 75%-80% LTC and 65%-75% LTV-stabilized.
On construction loans, both LTC and LTV-stabilized are tested. Lenders cap at the lower of 65%-75% LTC and 55%-65% LTV-stabilized. The LTV-stabilized constraint is often binding on aggressive markets where construction cost has outpaced rent growth.
Frequently asked questions
- Is LTC or LTV higher for the same deal?
- It depends on the asset. For value-add and construction deals where stabilized value materially exceeds current cost, LTC is typically higher than LTV-stabilized for the same loan amount. For stabilized assets purchased near appraised value, LTC and LTV are roughly equivalent.
- Why do construction lenders test both LTC and LTV?
- Testing both LTC and LTV prevents over-leverage in two scenarios: an aggressive cost basis (binding LTC) and an aggressive stabilized value assumption (binding LTV). The binding constraint sets the maximum loan amount, and lenders cap at the lower of the two.
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