Loan-to-cost ratio (LTC) divides the loan amount by the total project cost (land + hard costs + soft costs) on a construction or renovation project. Lenders use LTC to size construction loans — typical commercial LTC ranges from 65% to 80%, depending on project type and borrower strength. LTC is distinct from LTV, which measures loan against completed appraised value. See fdic.gov/regulations/applications/cre and occ.gov for CRE concentration guidance.
Loan-to-cost ratio (LTC) is the primary sizing metric for construction and renovation loans. It answers: 'How much of the total project cost will the lender finance?' The denominator includes all costs the borrower will incur to complete the project: land acquisition, hard construction costs (labor, materials), and soft costs (architecture, permits, engineering, financing costs, developer fees). LTC = Loan Amount / Total Project Cost Common LTC ranges by product type: - Commercial construction (office, retail, industrial): 65–75% LTC - Multifamily construction: 70–80% LTC - Ground-up SBA 504 construction: up to 90% LTC (because SBA's debenture covers 40% of project cost) - Bridge/renovation loans: 70–85% LTC depending on borrower equity and exit strategy LTC and LTV are both required by most construction lenders — but serve different purposes. LTC measures equity injected at the front end (construction risk). LTV at completed value measures exit risk (can the lender be repaid if the project is sold or refinanced upon completion). A project might have an 80% LTC but only a 65% LTV at completion — meaning the lender is comfortable funding 80% of cost because the completed value supports a conservative LTV. The OCC's CRE concentration guidance (OCC Bulletin 2006-46, updated) sets supervisory expectations for bank CRE lending, including LTC thresholds. See occ.gov for current guidance. The FDIC's joint agency CRE guidance at fdic.gov establishes interagency supervisory standards.
LTC (loan-to-cost) divides the loan by total project cost — it measures how much equity the borrower is injecting into the build. LTV (loan-to-value) divides the loan by appraised value — it measures the lender's cushion relative to what the completed project is worth. Both metrics are used for construction loans: LTC controls equity-in at origination; LTV on completion controls refinance/takeout risk.
Rarely. Lenders require equity injection as a risk-sharing mechanism — the borrower's invested capital gives them 'skin in the game.' 100% LTC financing for commercial construction effectively means the lender bears all project risk. Some programs (HUD Section 221(d)(4) for affordable multifamily, certain USDA rural development programs) reach very high LTC with government guarantees, but these are specialized and have long processing timelines.
For SBA 504 projects, the program structure defines the LTC: bank first mortgage at up to 50% of project cost, SBA debenture at 40%, borrower equity at 10% (or 15% for special-use properties, 20% for startups). For SBA 7(a) construction loans, individual lender LTC requirements apply. The SBA does not impose a single LTC cap on 7(a) projects.