Updated · Part of the CRE investment glossary
How LTV works
LTV measures how much of a property is financed with debt. The rest is the owner’s equity, and that equity absorbs losses first. At 65% LTV, the property’s value can fall 35% before the lender’s loan is worth more than the collateral.
Lenders set a maximum LTV for each loan program and property type. Agency multifamily programs may allow more leverage than other senior lenders, and land or transitional property usually gets less. The exact limit depends on the lender, the asset and the market.
For banks, the interagency real estate lending guidelines in 12 CFR Part 34 define LTV at origination and set supervisory limits. They also define value for a purchase as the lesser of the acquisition cost and the appraised value, which is why a high appraisal does not raise a purchase loan.
The formula
At origination, or at any later test date:
LTV = loan amount ÷ property value; maximum loan = maximum LTV × value
- Loan amount: the loan commitment. Bank guidelines include all senior liens on the property.
- Value: appraised value; for a purchase, usually the lower of price and appraisal.
- Combined LTV (CLTV) adds any mezzanine or second-lien debt to the loan amount.
Worked example: price, appraisal and the loan
A buyer agrees to pay $12,000,000. The lender’s maximum is 65% LTV on the lower of price and appraisal. The table shows three appraisal outcomes, before closing costs.
A low appraisal costs the buyer $325,000 of loan and needs $325,000 more equity. A high appraisal changes nothing, because the price caps the value.
| Appraisal | Value used | Maximum loan | Equity needed |
|---|---|---|---|
| $11,500,000 | $11,500,000 | $7,475,000 | $4,525,000 |
| $12,000,000 | $12,000,000 | $7,800,000 | $4,200,000 |
| $12,500,000 | $12,000,000 | $7,800,000 | $4,200,000 |
LTV after closing: why values matter at refinance
Loan balances change slowly; values can change quickly. Take the $7,800,000 loan above on a property earning $780,000 of NOI, bought at a 6.5% cap rate. If market cap rates rise to 7.5%, value becomes $780,000 ÷ 7.5% = $10,400,000 and LTV rises from 65% to 75% with no change in the building.
At refinance, a new lender sizes on the new value. Capped at 65% of $10,400,000, the new loan is $6,760,000, so the owner must bring $1,040,000 to repay the old loan. Sponsors track LTV over the hold for this reason, not just at closing.
Supervisory LTV limits and related ratios
The bank guidelines in 12 CFR Part 34, Subpart D, Appendix A set these supervisory maximums. They are ceilings for banks, not typical terms; the OCC handbook says they do not establish a safe harbor:
- Raw land: 65%. Land development: 75%.
- Construction of commercial, multifamily and other nonresidential property: 80%. One- to four-family residential construction: 85%.
- Improved property: 85%.
- LTC (loan-to-cost) divides the loan by total project cost and is used for construction and value-add loans alongside LTV.
- Lenders usually size on LTV, DSCR and debt yield together and lend the lowest result.
Common mistakes
LTV is simple arithmetic, so the errors are in the assumptions behind it:
- Underwriting the loan at the lender’s maximum LTV when DSCR or debt yield will cut it lower.
- Assuming the appraisal will match the contract price. Leave room in the equity raise for a low appraisal.
- Quoting senior LTV to investors when a mezzanine loan or preferred equity sits above it; show combined leverage too.
- Forgetting that an as-stabilized value on a value-add loan depends on the business plan being delivered.
Primary sources
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.