Updated · Part of the CRE investment glossary
How loan-to-cost works
Loan-to-value compares a loan with what the property is worth today. That works for a stabilized building, but not for a project whose value depends on work not yet done — a ground-up development or a heavy renovation. Loan-to-cost compares the loan with what the project will cost instead, so the lender knows how much of the spending it funds and how much the sponsor and investors fund.
The equity share is the mirror image: at 70% LTC, equity pays for 30% of the project. Construction and renovation loans are usually funded in draws as work is completed, often after the equity has gone in first, so the LTC ratio describes the finished capital stack rather than the balance on day one.
The formula
Use the lender’s definition of cost — the term sheet sets it:
LTC = loan amount ÷ total project cost Equity required = total project cost − loan amount
- Loan amount: the full commitment, including amounts funded later in draws.
- Total project cost: purchase price or land, hard costs (construction or renovation), soft costs (design, permits, fees), closing costs and, if the lender includes them, contingency and interest reserves.
- Lenders differ on whether a developer fee, a sponsor’s land equity at appraised value, or financing costs count as cost. Ask before you model.
Worked example: a value-add purchase
A sponsor buys an apartment property for $8,000,000, pays $200,000 of closing costs and budgets $1,800,000 to renovate units. Total project cost is $10,000,000. The lender commits $7,000,000, funding part at closing and the renovation budget in draws. The equity raise covers the other $3,000,000.
The same loan reads three ways. Against cost it is 70%. Against the $8,000,000 purchase price it would be 87.5% — which is why the lender holds the renovation money back until the work is done. Against the projected stabilized value of $13,000,000 it is about 54%, the lender’s view of the finished asset.
| Line | Amount | Loan as a share |
|---|---|---|
| Purchase price | $8,000,000 | 87.5% |
| Closing costs | $200,000 | — |
| Renovation budget | $1,800,000 | — |
| Total project cost | $10,000,000 | 70.0% (LTC) |
| Projected stabilized value | $13,000,000 | 53.8% |
| Equity required | $3,000,000 | — |
LTC vs LTV vs loan-to-stabilized value
Loan-to-value divides the loan by the appraised value now. Loan-to-cost divides it by the money going into the project. Loan-to-stabilized value (sometimes "loan-to-ARV", after-repair value) divides it by the value projected once the work is done and the property is leased up. A construction lender often tests both LTC and loan-to-stabilized value and lends the lower result, then checks debt yield or DSCR on the projected NOI.
When a project creates value — stabilized value above cost — LTC is the higher of the two ratios and usually binds. When costs overrun or values fall, the loan-to-stabilized value climbs toward the LTC and the cushion thins.
Common mistakes
LTC errors usually come from the denominator:
- Leaving out soft costs, closing costs or contingency, which makes the loan look smaller than the lender will see it.
- Assuming the lender counts land at today’s appraised value when it counts it at cost, or the reverse.
- Forgetting that cost overruns are usually funded by equity, not by the loan — the LTC on paper does not grow with the budget.
- Quoting LTC without the loan-to-stabilized value; a high LTC on a project that creates little value is a thin cushion.
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.