What is Loan to Cost (LTC) and how is it calculated?
Updated: Jun 10, 2020
Loan to Cost (#LTC) is a ratio used in the construction lending industry to compare the loan amount for a project to the cost to build the project. As an example, if a project costs $1,000,000 to complete and you want to borrow $700,000 then your #loan-to-cost (LTC) ratio would be 70%.
Calculating the Loan to Cost (LTC) is a relatively simple math equation. However, it becomes complex because there may be a lot of variables that constitute the cost on a construction project. Often lenders are ambiguous as to the fees and costs associated with a loan, or they ignore external costs that may impact your loan that are outside of their control. A lack of transparency could leave a builder or investor with a surprise at the closing table. That's why, at Builders Capital, we make a diligent effort with every loan to be transparent and quote or estimate your rates, fees and other costs as closely as we possibly can. In fact, personally speaking, I'd rather tell you up front that your down payment may be higher than expected then watch you deal with a surprise at the closing table.
To put it simple the Loan to Cost (LTC) ratio is:
Despite how simple the LTC math equation appears I often have brokers and borrowers contact me with grossly inaccurate LTC calculations, estimates or assumptions of their own. That's generally because there are so many variables that constitute the cost of the loan, many of which are ignored. Ultimately, it may be difficult to really know all of the costs of a loan until you have a final HUD statement from your title company. However, you can still estimate.
Incidentally, some builders come to me asking how Builders Capital calculates the cost of a loan. This is an important question because some lenders seem to calculate cost differently. For example, one lender I am aware of advertises that they lend 100% of LTC. However, when you review their term sheet it is clear that they don't consider closing costs, soft costs or financing fees as part of the LTC. In actuality, the only thing they consider as part of the loan's cost is the actual hard construction budget excluding soft costs. In other words, they only consider the hard construction costs to be part of the loan and everything else is considered an out of pocket expense for the borrower. In my mind this is a bait and switch that could draw the borrower in and leave them with surprises at the closing table or later in their project.
In contrast, Builders Capital considers ALL of the costs of the loan when calculating the LTC. That includes soft costs like permits and design fees, closing costs and estimated finance fees in addition to the actual construction budget. The goal at Builders Capital is transparency, which is why we make an attempt to figure out the entire cost of your loan thereby avoiding any surprises or unforeseen costs. Knowing the entire cost of the loan also helps us determine a project's anticipated profitability, which we feel is important to know if we are to help builders and investors be successful.
Here is a slightly exaggerated example of part of a Builders Capital term sheet with sample loan amount and fees. I say exaggerated because most loans won't have broker fees, consulting fees and so forth, but I wanted to show them anyway for purposes of the example. Note that some lenders will have other types of fees.
In the example above we utilize all known or estimated fees, whether internal or external, to determine the total cost of the loan and calculate the LTC ratio. The graphic below, which is based on the above sample term sheet, is different format and may help you better understand.
Click HERE to download the Excel File with formulas.