Loan-to-cost (LTC)
What are they?
The loan-to-cost (LTC) is the ratio between the amount of the loan requested for a real estate project and the total estimated cost of that project. It is an indicator used to evaluate the degree of leverage and the level of risk associated with the financing. A high LTC indicates that a significant portion of the cost is financed with debt, which can increase financial risk. In contrast, a low LTC reflects a higher contribution of equity by the developer.
This ratio is key for both lenders and investors, as it helps assess the project’s feasibility and the financial strength of the developer. Lenders typically use the LTC to ensure that the project has a sufficient level of equity, which is essential to reduce the risk of default.
Key aspects to consider
The calculation of the LTC is obtained by dividing the total loan amount by the total estimated cost of the project. This cost includes not only construction expenses but also land acquisition, permits, professional fees, and other costs associated with real estate development.
Although a high LTC may help developers access financing, it also implies a higher level of risk. The higher the proportion of the project financed with debt, the greater the exposure to potential delays, cost overruns, or declines in real estate market value. For this reason, financial institutions often prefer more moderate LTC levels, as they provide a greater assurance of loan repayment.