| Detail | Explanation |
|---|---|
| Formula | Loan amount divided by property value |
| Value on a purchase | Lower of acquisition cost or appraised value under federal bank guidelines |
| Combined LTV | Includes senior liens and subordinate debt |
| Related tests | DSCR, debt yield, and loan-to-cost |
How is LTV calculated?
Divide the loan by the value that the lender accepts. For a refinance, value normally comes from a new appraisal. For an acquisition, the Interagency Guidelines for Real Estate Lending Policies that federal bank regulators publish define value as the lesser of the actual acquisition cost or the estimate of value. The same guidelines say the total of all senior liens on the property should be included in the ratio.
LTV = loan amount / property value
Worked example
In this hypothetical example, a buyer agrees to pay $10,000,000 for a property that appraises at $10,500,000 and requests a $6,200,000 senior loan. A $1,000,000 mezzanine loan is added behind it.
| Measure | Value |
|---|---|
| LTV on the purchase price | 62.00% |
| LTV on the appraisal | 59.05% |
| LTV most bank lenders use on a purchase | 62.00% |
| Combined LTV including the mezzanine loan | 72.00% |
What LTV do commercial lenders allow?
Limits come from each lender's credit policy and program, and 2 published sources show how they are set.
- Federal supervisory limits for banks: 12 CFR Part 365, Appendix A lists 85% for improved property, 80% for commercial and multifamily construction, 75% for land development, and 65% for raw land. The guidelines tell institutions to set their own internal limits at or below these
- Freddie Mac Optigo fixed-rate multifamily loans: the term sheet lists a maximum LTV of 80% for amortizing loans with terms of 7 years or more, 75% for terms of 5 to under 7 years, and lower limits of 65% or 70% for full-term interest-only loans, with adjustments possible by property, product, and market
- Private lenders, debt funds, and CMBS programs set their own limits, and those often sit well below the regulatory ceiling once coverage and debt yield are applied
Why maximum LTV is often not the binding limit
A lender tests LTV alongside DSCR and debt yield and funds the smallest result. On low cap rate property, income frequently caps the loan before value does. The loan sizing calculator shows which test binds for a given set of inputs.
Value can also shift during underwriting. An appraisal below the contract price reduces proceeds on an acquisition, and a higher cap rate reduces value on a refinance even when income is unchanged.
When leverage is the question, submit the deal and Capital Partners will compare senior and subordinate structures.
LTV and other leverage measures
- Loan-to-cost measures construction and renovation loans against the project budget
- Combined LTV adds mezzanine debt and any other liens to the senior loan
- Loan-to-stabilized-value measures a bridge or construction loan against projected value after lease-up
Sources
Common questions
What is a good LTV for a commercial property loan?
Lower LTV means more equity and usually better pricing and terms. The right level balances proceeds against cost and risk. Published limits such as Freddie Mac's 80% maximum on some fixed-rate multifamily loans are ceilings that few loans reach once coverage is tested.
Does the lender use the purchase price or the appraisal?
On an acquisition, federal bank guidelines define value as the lesser of acquisition cost and the estimate of value. A buyer who negotiates a discount does not get extra proceeds from a higher appraisal.
Can I get 90% LTV on commercial real estate?
Senior lenders rarely go that high on investment property. Sponsors who need more leverage usually add mezzanine financing or preferred equity, which raises combined leverage without raising the senior loan.
Does LTV include a second loan?
The senior lender's LTV covers its own loan, but most lenders also track combined LTV and many limit or prohibit subordinate debt.
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