Glossary
Loan to Cost (LTC)
Loan to cost (LTC) is the ratio of a loan amount to the total cost of a project, including land or acquisition price, hard construction costs and soft costs. Construction and value-add lenders use it to determine how much of a project they will fund and how much equity the sponsor must contribute.
Formula
Example
A developer plans a project with land at $3,000,000, hard costs of $12,000,000 and soft costs of $3,000,000, for a total cost of $18,000,000. A construction lender offering 65% LTC would fund $11,700,000, leaving $6,300,000 of required equity. If the projected stabilized value is $24,000,000, the same loan is a 48.75% loan to stabilized value, which is why lenders track both measures.
How it is used in underwriting
LTC is the primary leverage test for construction, renovation and repositioning loans because the property's future value is uncertain while the budget is known. Lenders review the budget line by line, including contingency, interest reserve, financing fees and developer fees, and decide which costs count toward the total. The resulting LTC sets the sponsor's equity requirement, and most construction lenders require that equity to be spent first, before loan draws begin. LTC is usually paired with a loan to stabilized value limit and a projected debt yield or DSCR test at stabilization.
Definitions vary, so always confirm what is included in cost. Some lenders exclude developer fees or land appreciation, so a sponsor who bought land years earlier may get credit only for the original price. Underestimating costs is a common failure: a thin contingency means overruns must be funded with new equity, and lenders typically require a completion guaranty for that reason. In acquisitions with planned capital improvements, LTC may combine the purchase price and the renovation budget. Mezzanine or preferred equity layered on top raises the combined LTC and increases risk for every position below the sponsor's equity.
Typical benchmarks
Construction lenders commonly cap LTC around 60% to 75%, depending on property type, sponsor experience, presales or preleasing, and market conditions. Combined LTC including mezzanine debt can run higher.
Run the numbers: LTV Calculator
Frequently asked questions
What is a typical loan to cost for construction loans?
Construction lenders commonly lend 60% to 75% of total project cost, with the sponsor funding the rest as equity. Stronger sponsors, preleased projects and lower risk property types may get the higher end, while speculative or complex projects often see lower leverage.
What costs are included in loan to cost?
Total project cost usually includes land or acquisition price, hard construction costs, soft costs such as architecture, engineering, permits and legal fees, financing costs, an interest reserve and a contingency. Lenders differ on whether developer fees and land value above the original purchase price count toward cost.
Is LTC or LTV more important?
For construction and heavy value-add loans, LTC usually matters more at origination because cost is known and value is projected. LTV, or loan to stabilized value, confirms the finished asset will support the debt. Lenders typically apply both and size the loan to whichever is more restrictive.
Related terms
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