# Loan-to-Cost (LTC) Ratio: Definition, What It Tells You, and Calculation

![Loan-to-Cost Ratio](https://www.investopedia.com/thmb/Ng8Qc6tXY9QRNbK1g5uVJmV_9VY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/LoanCostRatio_final-868418a3086541ebaee40f1bc15a9c91.png)

*— Nez Riaz / Investopedia*

> **Definition**
>
> The loan-to-cost (LTC) ratio is a metric used in commercial real estate to assess the relationship between the amount of financing for a construction project and the total cost of that project.

## What Is the Loan-to-Cost (LTC) Ratio?

The loan-to-cost (LTC) ratio is a metric used in [commercial real estate](https://www.investopedia.com/terms/c/commercialrealestate.asp) construction to compare the financing of a project (as offered by a loan) with the cost of building the project.

The LTC ratio allows commercial real estate lenders to determine the risk of offering a [construction loan](https://www.investopedia.com/terms/c/construction-loan.asp). It also allows developers to understand the amount of equity they retain during a construction project.

### Key Takeaways

*   Loan-to-cost (LTC) compares the financing amount of a commercial real estate project to its cost.
*   LTC is calculated as the loan amount divided by the construction cost.
*   Meanwhile, loan-to-value (LTV) compares the loan amount to the expected market value of the completed project.
*   A higher LTC means the project is riskier for lenders, where most lenders will only finance a project with an LTC of up to 80%.

## What Is the Formula for the LTC Ratio?

To calculate the LTC ratio, you divide the loan amount for the construction project by the total construction cost.  

$\begin{aligned} &\text{Loan to Cost} = \frac{ \text{Loan Amount} }{ \text{Construction Cost} } \\ \end{aligned}$

Similar to the LTC ratio, the [loan-to-value (LTV)](https://www.investopedia.com/terms/l/loantovalue.asp) ratio also compares the construction loan amount but with the fair market value (FMV) of the project after completion.  

## What Does the Loan-to-Cost (LTC) Ratio Tell You?

The LTC ratio is used to calculate the percentage of a loan or the amount that a lender is willing to provide to finance a project based on the hard cost of the construction budget. After the construction has been completed, the entire project will have a new value. For this reason, the LTC ratio and the LTV ratio are used side by side in commercial real estate construction.

The LTC ratio helps to delineate the risk or risk level of providing financing for a construction project. Ultimately, a higher LTC ratio means that it is a riskier venture for lenders. Most lenders provide loans that finance only a certain percentage of a project. In general, most lenders finance up to 80% of a project. Some lenders finance a greater percentage, but this typically involves a significantly higher [interest rate](https://www.investopedia.com/terms/i/interestrate.asp).

While the LTC ratio is a mitigating factor for lenders that are considering the provision of a loan, they must also consider other factors. [Lenders](https://www.investopedia.com/terms/l/lender.asp) will also take into account not only the location and value of the property on which the project is being built, but also the credibility and experience of the builders as well as the borrowers’ credit record and loan history.

## Example of How to Use LTC

As a hypothetical example, let’s assume that the hard construction costs of a commercial real estate project are $200,000. To ensure that the borrower has some [equity](https://www.investopedia.com/terms/e/equity.asp) at stake in the project, the lender provides a $160,000 loan. This keeps the project slightly more balanced and encourages the borrower to see the project through to its completion.

The LTC ratio on this project would be calculated as $160,000 ÷ $200,000 = 80%.

## The Difference Between the Loan-to-Cost (LTC) and Loan-to-Value (LTV) Ratios

The loan-to-value (LTV) ratio is closely related to the LTC ratio, but is slightly different. The LTV ratio compares the total loan given for a project against the _value_ of the project after completion (rather than to its cost of construction).

Considering the above example, let us assume that the future value of the project, once completed, is double the hard construction costs, or $400,000. If the total loan given for the project, after completion, is $320,000, then the LTV ratio for this project would also be 80% or $320,000 ÷ $400,000.

## How Do I Calculate the Loan-to-Cost (LTC) Ratio?

Divide the amount of a loan for a construction project by the cost of the project, and you have the loan-to-cost (LTC) ratio.

## How Is the LTC Ratio Used?

The LTC ratio is used to calculate the percentage of a loan or the amount that a lender is willing to provide to finance a project based on the hard cost of the construction budget.

## How Is the LTC Ratio Different from the LTV Ratio?

The loan-to-cost (LTC) ratio compares the financing amount of a commercial real estate project to its cost. The loan-to-value (LTV) ratio, on the other hand, compares the loan amount to the expected market value of the completed project.

## The Bottom Line

Primarily used in commercial real estate construction, the loan-to-cost (LTC) ratio compares the financing of a project with the cost of the construction budget. The higher the LTC is, the riskier the project is for lenders, who usually will finance projects with an LTC of up to 80%.