What is Loan to Cost (LTC)?
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Loan to Cost is a ratio used in commercial mortgage financing and multifamily financing to determine the ratio of debt relative to the cost of acquiring the property. Commercial mortgage lenders use the LTC ratio as a factor to determine risk in a deal: the lower the leverage, the lower the risk while higher leverage offers higher risk. LTC can be calculated by dividing the loan amount by the cost of the loan. For example, if a borrower is buying a property for $1 million, and the property is worth $2 million, and the loan requested is $800,000, then the LTC ratio is 80%.
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Related Questions
What is the difference between Loan to Cost (LTC) and Loan to Value (LTV)?
The main difference between Loan to Cost (LTC) and Loan to Value (LTV) is that LTC is used to measure the ratio of debt relative to the cost of acquiring the property, while LTV is used to measure the ratio of debt relative to the value of the property. LTC is mainly used in the case of standard purchases and refinances, while LTV is used in the case of multifamily property rehabilitation, or ground-up construction.
LTC is calculated by dividing the loan amount by the cost of the loan. For example, if a borrower is buying a property for $1 million, and the loan requested is $800,000, then the LTC ratio is 80%.
LTV is calculated by dividing the loan amount by the value of the property. For example, if a borrower is buying a property for $1 million, and the property is worth $2 million, and the loan requested is $800,000, then the LTV ratio is 40%.
Like with leverage, the lower the LTV, the lower the risk. This formula is mainly used in the case of standard purchases and refinances. In the cases of multifamily property rehabilitation, or ground-up construction, other metrics like LTC become more useful factors.
What are the benefits of Loan to Cost (LTC) for commercial real estate investors?
The Loan to Cost (LTC) ratio is an important factor for commercial real estate investors to consider when financing a property. A lower LTC ratio results in lower risk for the lender, and therefore more competitive loan terms such as lower rates and more favorable loan terms. Additionally, a lower LTC ratio can help to qualify for a loan, as lenders pay close attention to other factors such as location, borrower financial strength, pro forma income and expenses, and asset class.
For example, if a borrower is buying a property for $1 million, and the property is worth $2 million, and the loan requested is $800,000, then the LTC ratio is 80%. A lower LTC ratio can help to qualify for a loan, as lenders pay close attention to other factors such as location, borrower financial strength, pro forma income and expenses, and asset class.
What are the most common types of Loan to Cost (LTC) financing?
The most common types of Loan to Cost (LTC) financing are HUD 221(d)(4) loans and HUD 232 loans. HUD 221(d)(4) loans are used for the new construction or substantial rehabilitation of multifamily and healthcare properties, while HUD 232 loans are used for the construction, acquisition, and refinancing of nursing homes, assisted living facilities, and board and care facilities. To learn more about HUD multifamily construction loans, fill out the form on this page.
What are the eligibility requirements for Loan to Cost (LTC) financing?
The eligibility requirements for Loan to Cost (LTC) financing vary depending on the type of loan. For example, HUD 221(d)(4) and HUD 232 loans require a lower LTC ratio than other types of commercial mortgage financing. Generally, the lower the LTC ratio, the lower the risk for the lender. The LTC ratio is calculated by dividing the loan amount by the cost of the loan. For more information on LTC and eligibility requirements, please see the following sources:
What are the risks associated with Loan to Cost (LTC) financing?
Loan to Cost (LTC) financing involves a higher risk for the lender than a lower LTC. Higher leverage loans typically require more conservative pricing and terms, while lower LTC loans command more competitive structures (i.e. lower rates and more favorable loan terms).
Other factors lenders pay close attention to include but are not limited to: location, borrower financial strength, pro forma income and expenses, and asset class.