Loan-to-cost, and the equity gap.
Loan-to-cost sizes construction and value-add loans against what a project actually costs to build, not a projected value. Enter the loan amount and total cost to see the leverage and the equity the sponsor must bring.
Why cost, not value
For a project under construction, value is a projection and cost is concrete. LTC measures the loan against total development cost, which is why construction lenders lean on it more than LTV.
The flip side of LTC is sponsor equity. An 80% LTC loan requires 20% equity, and lenders care where that equity sits and when it goes in.
LTC and LTV together
Construction deals are often sized to the lower of an LTC limit and a loan-to-value limit on the completed, stabilized value. Both constraints get tested, and the tighter one governs.
As value is created, some lenders release additional proceeds, tracked against as-is and stabilized values.
A worked example
A project costs $20,000,000 all in: $4,000,000 of land, $13,000,000 of hard costs, and $3,000,000 of soft and financing costs. A $13,000,000 construction loan is 65 percent loan to cost, so the sponsor funds the other $7,000,000.
Lenders usually also test the loan against the stabilized or as-complete value. If that project is expected to be worth $26,000,000 when leased, the same loan is 50 percent of value, and the gap between the two numbers is the value the development is expected to create.
Questions lenders ask
- What is a typical loan-to-cost?
- Construction LTC commonly runs 60% to 80% depending on risk and sponsor, requiring 20% to 40% equity. Value-add deals vary widely with the business plan.
- What is the difference between LTC and LTV?
- LTC measures the loan against total project cost; LTV measures it against appraised value. Construction lenders use LTC because cost is concrete while completed value is a projection.
- What counts as cost in loan to cost?
- Total project cost: land or acquisition price, hard construction costs, and soft costs such as design, permits, legal, interest reserve and financing fees. Lenders define the budget categories precisely.
- Can land value count as equity?
- Sometimes. Lenders may credit land contributed at cost or at appraised value toward the sponsor's equity, which is a negotiated point that changes the effective loan to cost.
See your deals in real time.
Send us one live deal. We will build the room on your own checklist.