LTC vs. LTV – What’s the difference between the two?

[Justin Goodin]

LTC vs. LTV – What's the difference between the two?

Both of these metrics are used to measure, or determine risk when financing commercial property or making a commercial mortgage loan.

LTV

The loan-to-value ratio, or LTV, is a measure of the relationship between the loan amount and the value of the commercial real estate (collateral).

Calculating the LTV helps commercial real estate lenders determine both the qualification of a borrower and the proposed terms of the debt being considered.

LTV = Loan Amount / Appraised Value

Be sure to understand that the LTV will be calculated off of the appraised (market) value of the asset. Not the purchase price.

As an underwriter, typically you would model a potential acquisition using LTV on stabilized assets or properties that do not require significant improvements.

This is because capital expenditure costs will typically not be financed by the lender. This is most common with GSE products like Freddie Mac and Fannie Mae. Although Fannie/Freddie does have some specialty products for value add real estate but that’s a different topic.

LTV Example:

If you had a stabilized property and your lender offered to finance 75% LTV, you could model something like this. In this example, I didn't include any CapEx costs and the loan is 75% of the value.

LTC

With a LTC structure, the lender is willing to lend funds as a percentage of the underlying asset’s purchase price plus renovation/repair costs (project cost).

LTC financing is generally viewed as favorable for the borrower albeit, riskier, due to higher leverage, less debt service coverage, and renovation risk in the form of underbudgeting.

LTC = Loan Amount / Project Costs

Most often, lenders are willing to offer LTC terms structured as a bridge loans. Bridge loans are typically short-term structures used for properties not stabilized or underperforming assets in order to stabilized them and get them qualified for permanent financing. 

LTC Example:

Bridge loans and LTC structures allow borrowers to include capex and other project costs in their loan.

I hope this helps clarify LTC vs LTV. Let me know if you have any questions!