Understanding Loan-to-Cost (LTC) in Commercial Real Estate Lending

Jun 18, 2024

When seeking financing for a commercial real estate project, developers often consider the Loan-to-Cost (LTC) ratio. The LTC ratio measures the loan amount against the total project cost, including acquisition, construction, and soft costs. Here's a brief overview of how much a developer can typically get on an LTC basis:

### Understanding LTC in Commercial Real Estate Lending

**Loan-to-Cost (LTC) Ratio:**
- **Definition:** The LTC ratio is calculated by dividing the loan amount by the total cost of the project. For instance, if the total cost of a project is $10 million and the loan amount is $7 million, the LTC ratio would be 70%.

### Typical LTC Ratios

**Standard Range:**
- **Conventional Lenders:** Typically offer LTC ratios between 65% and 75%. This means the developer would need to provide 25% to 35% of the project's cost as equity.
- **Aggressive Financing Options:** Some lenders, especially those with more risk tolerance, may offer LTC ratios up to 80% or even 85%, though this is less common and often comes with higher interest rates and stricter terms.

**Specialized Financing:**
- **Hard Money Lenders:** These lenders may provide higher LTC ratios, sometimes up to 90%, but at the cost of higher interest rates and shorter loan terms.
- **Government Programs:** Certain government-backed loan programs, such as those from the Small Business Administration (SBA), can offer favorable LTC ratios, often around 80%.

### Factors Influencing LTC Ratios

**Project Type and Location:**
- Projects in prime locations or those with a proven track record of success may qualify for higher LTC ratios.
- The type of property (e.g., multifamily, office, retail, industrial) also affects the LTC ratio, with multifamily and well-located properties often receiving more favorable terms.

**Developer’s Experience and Financial Strength:**
- Experienced developers with a strong financial background and a history of successful projects can often secure higher LTC ratios.
- Financial stability and liquidity of the developer play a crucial role in the lender’s decision.

**Market Conditions:**
- In a robust market with strong demand, lenders may be more willing to offer higher LTC ratios.
- Conversely, in a downturn or unstable market, lenders may tighten their lending criteria, resulting in lower LTC ratios.

### Conclusion

For developers seeking financing on an LTC basis, the amount they can get typically ranges from 65% to 75% of the total project cost with conventional lenders. However, by leveraging specialized financing options and showcasing a strong project and financial profile, it’s possible to secure higher LTC ratios. Understanding these dynamics and preparing a robust loan application can enhance a developer's chances of obtaining favorable financing terms.

For more personalized advice and tailored insights specific to individual projects and market conditions, please visit Atlantic Commercial Lending's blog or consult directly with our loan officers.