Loan-to-value ratioLTV

Loan-to-value ratio compares the size of a loan to the appraised value of the property securing it. A lender who caps LTV at a given percentage is insisting that the owner keep a slice of value in the building as equity, so that if the property has to be sold under stress, the lender is likely to be repaid in full.

LTV = loan amount ÷ appraised value

LTV is the usual test on a permanent loan for a finished, leased building, where an appraisal is meaningful. During construction there is no finished building to appraise, so lenders lean instead on the loan-to-cost ratio. Many loans are sized by whichever of LTV, loan-to-cost, and the debt service coverage ratio produces the smallest loan.

The ratio matters for rent because the portion of a project that debt will not cover has to come from equity, and equity expects a higher return than debt. A lower allowable LTV means more equity, a higher blended cost of capital, and therefore more income the building must produce.