What is the 'Loan-To-Cost Ratio - LTC'

The loan-to-cost (LTC) ratio is a metric used in commercial real estate construction used to compare the financing of a project as offered by a loan to the cost of building the project. The LTC ratio allows commercial real estate lenders to determine the risk of offering a construction loan. Similar to the LTC ratio, the loan-to-value (LTV) ratio compares the construction loan amount to the fair-market value of the project.

BREAKING DOWN 'Loan-To-Cost Ratio - LTC'

The LTC ratio is used to calculate the percentage of a loan or the amount that a lender is willing to provide to finance a project based on the hard cost of the construction budget. After the construction has been completed, the entire project will have a new value. For this reason, the LTC ratio and the LTV ratio are used side by side in commercial real estate construction.

Example

Assume that the hard construction cost of a commercial real estate project is $200,000. To ensure that the borrower has some equity at stake in the project, the lender provides a $160,000 loan. This keeps the project slightly more balanced and encourages the borrower to see the project through. The LTC ratio on this project is 80%.

Loan-to-Value Ratio

The LTV ratio compares the total loan given for a project against the value of the project after completion. Considering the above example, assume that the future value of the project, once completed, is double the hard construction costs. If the total loan given for the project, after completion, is $320,000, the LTV ratio for this project is also 80%.

Significance to Lenders

The LTC ratio helps to delineate the risk or risk level of providing financing for a construction project. Ultimately, a higher LTC ratio means that it is a riskier venture for lenders. Most lenders provide loans that finance only a certain percentage of a project. In general, most lenders finance up to 80% of a project. Some lenders finance a greater percentage, but this typically involves a significantly higher interest rate.

While the LTC ratio – as well as the LTV ratio – are both mitigating factors for lenders that are considering the provision of a loan, they must also consider other factors. Lenders take into account the location and value of the property on which the project is being built, the credibility and experience of builders, and the borrowers' credit record and loan history as well.

RELATED TERMS
  1. 125% Loan

    A loan, usually a mortgage, with an initial loan amount equal ...
  2. Loan-To-Value Ratio - LTV Ratio

    A lending risk assessment ratio that financial institutions and ...
  3. Construction Loan

    A short-term loan used to finance the building of a home or another ...
  4. Commercial Real Estate Loan

    definition of a commercial real estate loan
  5. Floor Loan

    In real estate construction, the minimum loan that a lender agrees ...
  6. Hard Money Loan

    A loan of "last resort" or a short-term bridge loan. Hard money ...
Related Articles
  1. Investing

    Commercial Real Estate Loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
  2. Investing

    The Reality of Commercial Real Estate Loans

    It’s corporations and partnerships that most commonly take out commercial real estate loans.
  3. Retirement

    When Are Mortgage Lenders Better Than Banks?

    Individuals seeking a mortgage loan should consider factors or circumstances that may make a mortgage lender a better choice than a traditional bank.
  4. Personal Finance

    Getting A Mortgage When Building Your Own Home

    It's much harder to get a loan when you're building a home, not moving into one. Here's where to look and what to expect.
  5. Investing

    Financing Basics For First-time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  6. Managing Wealth

    Hard Money Loans: Know This Tool for Real Estate Investors

    A hard money loan may be a faster route to financing than a bank loan, but be sure you understand the pluses and minuses before you take one on.
  7. Investing

    How to Get the Money to Flip a House

    If you want to get into house flipping but don't have the cash to invest, read on for options.
  8. Personal Finance

    Project Manager: Job Description & Average Salary

    Discover more about the specific tasks that project managers are responsible for and the average salary that can be expected in such a position.
  9. Investing

    Texas Ratio Rounds Up Bank Failures

    This measure can help investors spot potential trouble in a bank's financials. Find out how.
  10. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
RELATED FAQS
  1. Why does the loan-to-value ratio matter?

    Learn how the loan-to-value (LTV) ratio is calculated, and why this metric is important to lenders when evaluating a home ... Read Answer >>
  2. How do construction loans work?

    Construction loans are obtained either by the prospective home owner or the actual builder. There are two types of construction ... Read Answer >>
  3. What is a combined loan to value ratio?

    Learn what combined loan to value is, why it is important and how lenders use it, along with other ratios, to assess the ... Read Answer >>
  4. How do you use the profitability index rule when scoping out a project?

    Understand the parameters of the profitability index rule and how this rule is used in corporate capital allocation to determine ... Read Answer >>
  5. What industries use the loan to value ratio?

    Find out more about the loan-to-value ratio, what the ratio measures and what industries the loan-to-value ratio is most ... Read Answer >>
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center