Loan-to-Cost (LTC)

Loan-to-cost (LTC) compares the size of a loan to the total cost of a project. Lenders use it mainly for construction loans and renovation loans, where the finished property doesn't exist yet but the budget does.

The formula in words: LTC equals the loan amount divided by total project cost, shown as a percentage.

Total project cost usually includes:

• Land or purchase price. What the borrower paid, or will pay, for the site or building.
• Hard costs. Labor and materials for the construction itself.
• Soft costs. Design, permits, legal fees, insurance, financing fees and interest during construction.
• Contingency. A cushion for cost overruns.

Worked example. A developer plans a small retail building. Land costs $2 million, hard costs are $6 million and soft costs are $2 million, for a total of $10 million. The lender offers $8 million. LTC = $8 million ÷ $10 million = 80%. The developer must bring the other $2 million as equity.

US bank examiners define LTC as the loan divided by the total cost of the property plus all construction costs, measured when the loan is made. They also warn against padding the budget. For example, the developer's general overhead and returns owed to equity partners should not be counted.

Why it matters for lenders

LTC shows how much of the developer's own money is in the deal. The more equity the developer has at risk, the more likely they are to finish the project and keep paying if things go wrong.

LTC and loan-to-value (LTV) work as a pair. LTC guards against a loan that covers too much of the cost. LTV, based on the expected finished value, guards against a project that will cost more than it's worth. Lenders usually set a maximum for each and lend the lower of the two results.

How it works in practice

A private lender funds a ground-up townhome project. Underwriting reviews the line-item budget, checks it against contractor bids, and confirms that the interest reserve and contingency are realistic. The loan closes at the policy LTC limit, and the developer's equity goes in first.

Then the work begins. Each construction draw is checked against the budget line it pays for, after an inspector confirms the work is done. Halfway through, lumber prices jump and the budget grows. The lender recalculates LTC on the new total. The loan amount hasn't changed, so the developer must fund the overrun.

When the budget lives in one spreadsheet and the draws in another, lenders often find overruns late. Keeping the budget, the draws and LTC on the same loan record shows the gap as soon as it opens.