What is loan-to-cost?
Loan-to-cost (LTC) is the loan amount divided by the total cost of a project. Construction and heavy value-add lenders use it to decide how much of the project they will fund and how much equity the borrower must put in. If a project costs $20 million and the lender's maximum is 70 percent LTC, the most they will lend is $14 million, and the borrower funds the other $6 million.
LTC = Loan amount ÷ Total project cost
What counts as "total project cost"
Lenders usually include:
- Land or acquisition cost
- Hard costs: construction, materials, site work
- Soft costs: architecture and engineering, permits, legal, insurance, financing fees
- Contingency
- Often interest reserve and other carry costs during construction
What is in and out of the cost stack matters as much as the percentage. Two lenders both quoting "70 percent LTC" can produce different loan amounts if one excludes soft costs or caps the land value at its purchase price.
LTC vs LTV: the difference that decides construction loans
| Loan-to-cost (LTC) | Loan-to-value (LTV) | |
|---|---|---|
| Divides the loan by | What the project costs | What the property is worth (appraised) |
| Used mainly for | Construction, development, heavy value-add | Stabilised acquisitions and refinances |
| Protects the lender by | Making sure the borrower has equity in the project | Making sure the loan is covered by the asset's value |
| Moves when | Budget changes | Appraisal, income or cap rates change |
Construction lenders usually test both: LTC on the budget, and loan-to-value on the appraised value once complete (often called loan-to-completed-value or LTARV for value-add). The smaller answer wins, the same way it does when a lender sizes a stabilised loan with DSCR, LTV and debt yield.
A worked example
The numbers below are illustrative.
| Land | $4,000,000 |
| Hard costs | $12,000,000 |
| Soft costs | $2,500,000 |
| Contingency | $900,000 |
| Interest reserve | $600,000 |
| Total project cost | $20,000,000 |
| Lender maximum LTC | 70% |
| Maximum loan on cost | $14,000,000 |
| Projected value on completion | $24,000,000 |
| Lender maximum loan-to-completed-value | 60% |
| Maximum loan on value | $14,400,000 |
The cost test allows $14.0 million and the value test $14.4 million. LTC binds at $14,000,000, and the borrower needs $6,000,000 of equity.
Now suppose the lender excludes the interest reserve from cost. Total cost becomes $19,400,000, 70 percent of which is $13,580,000. The loan falls by $420,000 without the project changing at all. That is why the cost stack belongs in the first conversation, not the loan documents.
Construction lending right now
Construction capital is active. In the first days of October alone, Apollo provided a $130.5 million construction loan for a 664,859-square-foot logistics center in Rialto, California, and SCALE Lending a $67.5 million, 30-month construction loan with two six-month extensions for a 200-unit phase in Rahway, New Jersey (Commercial Observer, 1 Oct 2026; Commercial Observer, 1 Oct 2026). Takeouts are closing too: Madison Realty Capital provided $127 million to replace an $84.5 million construction loan on a 502-unit Fort Lauderdale property (Commercial Observer, 2 Oct 2026).
The rate backdrop has moved, though. The ten-year Treasury rose from 4.96 percent on 22 September to 5.29 percent on 30 September (Federal Reserve H.15), which raises the interest reserve a lender will want in the budget, and that itself changes the LTC math. Check current commercial loan rates before you finalise a budget.
How to improve your loan-to-cost outcome
- Agree the cost stack early. Ask each lender what counts as cost, especially land value, soft costs and interest reserve.
- Document the budget. A detailed, contractor-backed budget with contingency reads as lower risk than a summary.
- Show the exit. Lenders size against the takeout. A credible permanent loan or sale plan supports the loan-to-completed-value test.
- Compare lenders on loan amount, not percentage. "75 percent LTC" on a narrow cost stack can be less money than "70 percent" on a full one.
- Shop it. Construction appetite varies widely by lender type and asset. Finance Lobby matches the deal to lenders whose criteria fit it and brings competing quotes back side by side.
Start your construction deal on Finance Lobby
FAQ
What does loan-to-cost mean? Loan-to-cost is the loan amount divided by the total project cost. It shows how much of a construction or value-add project the lender is funding.
How do you calculate LTC? Divide the loan amount by the total project cost, including land, hard costs, soft costs, contingency and usually the interest reserve.
What is the difference between LTC and LTV? LTC divides the loan by what the project costs. LTV divides it by what the property is worth. Construction lenders typically test both and lend the smaller amount.
Does loan-to-cost include land? Usually yes, but lenders differ on how they value it, for example at purchase price or appraised value. Ask before you compare quotes.
What is loan-to-completed-value? The loan divided by the projected value of the finished project. Construction lenders use it alongside LTC.