Loan-to-Cost Ratio (LTC) is a metric used to understand the amount of debt being used in the construction or purchase of a commercial real estate project. Through this ratio, potential investors can get a better feel for how much of the project’s cost is being financed. When used in tandem with loan-to-value (LTV) ratio, LTC can provide clearer insight into the total amount of financing in a project.

To calculate a project’s LTC, divide the loan requested for a commercial real estate development project by its cost. So, if you request 100 million dollars in financing for a project that costs 200 million dollars to complete, the LTC ratio is 50%.

Most lenders use an LTC ratio as one of many factors when evaluating the risk involved with a potential investment. The higher the LTC ratio, the riskier the deal is for the lender. Generally speaking, most lenders consider an LTC of 80% to be the most conservative and secure loan-to-cost ratio they are willing to accept. In cases where a project has an LTC of more than 80%, it may indicate that the project is not a good fit for the lender’s investment portfolio.

It is important to note that LTC and LTV are not interchangeable. LTV is a measure of the size of the loan compared to the property’s value, rather than the cost of the project. LTV looks at the total amount of money borrowed and the expected value of the property once it is finished.

In conclusion, loan-to-cost (LTC) is a financial metric used to compare the size of a loan requested to the cost of a commercial real estate project. This metric helps lenders evaluate the riskiness of a potential investment. Generally, lenders are willing to finance projects with an LTC no greater than 80% of the cost. While LTC and LTV measure similar values, it is important to understand the difference between them to get a comprehensive idea of the total financing burden associated with a project.