CRE 101 · deweyluong.realtor

Loan-to-Cost (LTC) Explained: How Much of a Georgia Development Budget a Lender Will Actually Fund

A lender quotes two ceilings on every construction loan, and funds the lower one. Loan-to-cost sounds like the answer to 'how much can I borrow?' — but on a thin-spread deal the loan-to-value cap quietly binds first, and the sponsor discovers the extra equity at the closing table. This page shows both caps on the same project, with the same numbers. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

The worked example uses made-up, rounded numbers to teach the mechanics — the same project used in the yield on cost lesson and its Vietnamese companion on NhaDat Duluth. This page is general education, not financial or lending advice.

LTC in one formula

• The formula: LTC = loan amount ÷ total project cost. Total cost means everything: land, hard costs, soft costs, tenant improvements, leasing commissions, contingency, and interest carry — the same denominator as construction loan underwriting.
• Two caps, lower one wins: the lender tests the loan against LTC (share of cost) AND LTV (share of finished value). The binding cap is whichever produces the smaller loan.
• The denominator is where the flattery lives: quote LTC on hard costs only and the percentage looks generous while the dollars do not change. Always ask: cost of what, exactly?
• LTC links to the spread: when yield on cost beats the market cap rate by a wide margin, value exceeds cost and LTC tends to bind; when the spread is thin, value is close to cost and the LTV cap binds first.

Worked example. The numbers below are made up and rounded to teach the mechanics. This is not a real property.

• Total project cost: $2,965,880 (land, hard and soft costs, TI, commissions, contingency, carry — the yield-on-cost lesson's 12,000 SF Gwinnett retail project).
• Stabilized value: NOI of $237,600 ÷ a 7.0% market cap ≈ $3,394,286.
• Cap 1 — LTC 75%: 75% × $2,965,880 = $2,224,410. Implied equity: $741,470.
• Cap 2 — LTV 65%: 65% × $3,394,286 ≈ $2,206,286. This is the lower number, so this is the loan.
• The real answer: effective LTC ≈ 74.4%, and real equity = $2,965,880 − $2,206,286 = $759,594 — $18,124 more than the headline LTC quote implied.

Four LTC traps

• Hard-costs-only denominators: an '80% LTC' quote on hard costs alone can be a smaller loan than 70% of total cost. Rebuild the denominator before comparing lenders.
• Overruns are 100% equity: add $200,000 of cost overruns to the worked example and the same ~$2,206,286 loan is now about 69.7% of the $3,165,880 total — the lender does not share the overrun.
• Draws in arrears: you spend first and get reimbursed after inspection. The percentage funds the project; the timing still needs your cash in front of every draw.
• Excluded costs: some budgets in the lender's LTC test exclude items yours includes (marketing, permits paid pre-closing, off-site work). An excluded dollar is an equity dollar.

Cho nhà đầu tư người Việt

LTC (tỷ lệ vay trên chi phí) = khoản vay ÷ tổng chi phí dự án, trong đó tổng chi phí gồm đất, chi phí xây dựng, chi phí mềm, TI, hoa hồng thuê, dự phòng và lãi vay trong thời gian xây. Trong ví dụ trên trang này: tổng chi phí $2.965.880, lender báo LTC 75% (vay $2.224.410), nhưng trần LTV 65% trên giá trị hoàn thành khoảng $3.394.286 chỉ cho vay khoảng $2.206.286 — lender lấy con số thấp hơn, nên vốn tự có thật sự là $759.594, nhiều hơn $18.124 so với ước tính từ LTC. Chi phí vượt ngân sách là 100% tiền túi, và tiền vay giải ngân sau khi bạn đã chi. Bài tiếng Việt chi tiết về LTC có trên nhadatduluth.com. Đây là thông tin giáo dục chung, không phải tư vấn tài chính.

Frequently asked questions

What is loan-to-cost (LTC)?

Loan-to-cost is the construction or development loan divided by the project's total cost: land, hard construction costs, soft costs (architecture, permits, legal), tenant improvements, leasing commissions, contingency, and interest carry. An 75% LTC quote on a $2,965,880 project allows a $2,224,410 loan. LTC answers 'how much of the budget will the lender fund?' — but it is only one of two caps. The lender also applies a loan-to-value (LTV) cap against the finished, stabilized value, and funds the LOWER of the two. Quoting only the LTC number is how sponsors under-raise equity.

Which binds first, LTC or LTV? Walk through an example.

Usually the LTV cap binds on a thin-spread deal. Example with made-up numbers: total cost $2,965,880; stabilized NOI $237,600; at a 7.0% market cap the finished value is about $3,394,286. The 75% LTC cap allows $2,224,410; the 65% LTV cap allows only about $2,206,286. The lender funds the lower figure, so the effective LTC is about 74.4% and the equity required is $759,594 — $18,124 more than the $741,470 the headline LTC quote implied. The wider the gap between your yield on cost and the market cap rate, the more likely LTC binds instead; on a marginal deal, LTV almost always binds.

What happens to LTC when the project goes over budget?

Cost overruns are 100% equity. The loan is capped at closing by both tests, so if total cost rises $200,000 — to $3,165,880 on the worked example — while value stays the same, the loan does not rise with it: the same roughly $2,206,286 loan is now only about 69.7% of cost, and the sponsor writes the entire overrun as additional equity, usually at the worst moment in the project. This is why contingency belongs inside the LTC denominator from day one, and why a sponsor who quotes LTC on hard costs only is flattering the number twice.

Why does the draw schedule matter as much as the LTC percentage?

Construction loans fund in arrears: the borrower spends first, submits a draw request with invoices and inspections, and is reimbursed. A 75% LTC loan does not mean the lender wires 75% on day one — land is often funded at a lower advance rate or required as equity first, and retainage (commonly 5-10%) is held back until completion. Cash-flow planning has to model the timing, not just the percentage: the sponsor's cash is out weeks before each reimbursement lands, and the final draw waits on the certificate of occupancy and lien waivers.

Loan-to-cost (LTC) là gì, nhà đầu tư người Việt cần lưu ý gì?

LTC (tỷ lệ vay trên chi phí) = khoản vay ÷ tổng chi phí dự án: đất + chi phí xây dựng + chi phí mềm + TI + hoa hồng thuê + dự phòng + lãi vay trong thời gian xây. Ví dụ trên trang này: tổng chi phí $2.965.880; lender báo LTC 75% tức vay được $2.224.410. Nhưng lender còn áp trần LTV 65% trên giá trị hoàn thành khoảng $3.394.286, tức chỉ khoảng $2.206.286 — và lender cho vay theo con số THẤP hơn. Nên vốn tự có thật sự cần là $759.594, nhiều hơn $18.124 so với con số $741.470 suy từ LTC. Ba lưu ý: (1) chi phí vượt ngân sách là 100% tiền túi — vượt $200.000 thì LTC thực tế rơi xuống khoảng 69,7%; (2) vay xây dựng giải ngân SAU khi bạn đã chi (draw in arrears) nên phải có tiền mặt đệm theo tiến độ; (3) đừng bao giờ tin con số LTC nếu mẫu số chỉ tính chi phí xây dựng cứng. Bản tiếng Việt chi tiết: bài LTC trên nhadatduluth.com. Đây là thông tin giáo dục chung, không phải tư vấn tài chính.

This page is general education, not investment, legal, tax, lending or financial advice. Every figure in the worked example is made up and rounded to teach the mechanics. Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 678-707-2498 · dewey.luong@serhant.com