| Detail | Explanation |
|---|---|
| Formula | Loan amount divided by total project cost |
| Total cost includes | Land, hard costs, soft costs, contingency, and financing costs |
| Used for | Ground-up construction, value-add renovation, and land development |
| Paired with | Loan-to-value on the as-completed or as-stabilized value |
How is loan-to-cost calculated?
Total project cost is the full budget a lender approves. It normally includes the land or acquisition price, hard construction costs, soft costs such as architecture, engineering, permits, and legal, a contingency, and financing costs including the interest reserve. Equity covers whatever the loan does not.
LTC = loan amount / total project cost
Worked example
In this hypothetical ground-up project, the lender sizes the loan at 62% of cost and also checks leverage against a projected as-stabilized value of $20,000,000.
| Item | Amount |
|---|---|
| Land | $3,000,000 |
| Hard costs including contingency | $9,000,000 |
| Soft costs | $2,000,000 |
| Interest reserve and financing costs | $1,000,000 |
| Total project cost | $15,000,000 |
| Loan at 62% of cost | $9,300,000 |
| Sponsor equity required | $5,700,000 |
| Loan as a share of as-stabilized value | 46.50% |
How LTC and LTV work together
A construction lender typically applies both tests and lends the lower amount. LTC controls when the project creates a lot of value over cost, as in the example. Loan-to-value controls when costs run high relative to what the finished building will be worth, which is a warning sign lenders take seriously.
Bank regulators frame construction leverage in value terms. The Interagency Guidelines for Real Estate Lending Policies at 12 CFR Part 365, Appendix A set a supervisory loan-to-value limit of 80% for commercial, multifamily, and other nonresidential construction, 75% for land development, and 65% for raw land. They also state that loan disbursements should not exceed actual development or construction outlays, and they direct banks to set minimum requirements for the borrower's initial investment and hard equity. Individual lenders set their LTC limits in their own credit policies.
What counts as equity toward cost?
- Cash spent on land, design, and entitlement work, supported by invoices
- Land already owned, usually credited at cost or a current appraisal depending on the lender and how long it has been held
- Deferred developer fees, which many lenders exclude or limit
- Subordinate capital such as preferred equity, which some senior lenders count toward the sponsor's share and others do not
Why lenders care about the equity position
Equity in front of the loan absorbs cost overruns and delays. Most construction lenders require the sponsor's equity to go in before the first loan draw, and they fund later draws only as inspected work is completed. A budget that looks thin on contingency or soft costs will usually be revised upward in underwriting, which raises total cost and the equity required at the same LTC. Sponsors can test scenarios in the loan sizing calculator by entering a total project cost.
With a budget and schedule in hand, submit the project so Capital Partners can match it to construction lenders whose leverage limits fit.
Sources
Common questions
What is the difference between LTC and LTV?
LTC divides the loan by what the project costs. LTV divides it by what the property is worth. Construction lenders use both and lend the lower result.
Does the interest reserve count in total project cost?
Usually yes. Lenders include the interest reserve and other financing costs in the budget, so they are part of the cost the loan and equity must cover.
Can land I already own count as my equity?
Often it can, but lenders differ on whether they credit the original cost or a current appraised value. Recent purchases are usually credited at cost.
Can I get 100% financing on a construction project?
Senior construction lenders expect sponsor equity. Sponsors who need more leverage usually add mezzanine financing or preferred equity, or bring in a JV equity partner.
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