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Housing Unpacked
Glossary

Loan-to-cost ratioLTC

The loan amount divided by the total cost to build a project; the standard sizing test for construction loans and the split that decides how much equity a developer must raise.

Loan-to-cost ratio is the share of a project's total development cost that a lender is willing to fund. If a lender offers 65% loan-to-cost, the developer must find the other 35% as equity from its own funds or from investors.

Loan-to-cost
LTC = loan amount ÷ total development cost

Assume total development cost of $24,000,000 and a 65% loan-to-cost. The construction loan is $15,600,000 and the developer must contribute $8,400,000 of equity.

Loan-to-cost is the natural test for a construction loan, because a building under construction has no operating history and no reliable appraisal. Lenders also treat the equity requirement as a signal: a developer with a large amount of its own money at stake is more likely to finish the job.

Our default rent math assumes 65% loan-to-cost. That single assumption has a large effect on required rent. Equity is more expensive than debt, so every point of the project that debt will not cover raises the blended return the building must generate and, through it, the rent a new unit needs to charge.

Where this comes up

Analysis that uses loan-to-cost ratio in the arithmetic.

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