What counts as "cost"
Loan-to-cost measures the loan against everything it takes to get a project finished, rather than against what the finished building will be worth.
LTC = Loan Amount ÷ Total Project Cost
Total project cost is broader than most first-time sponsors expect. A construction or heavy value-add budget normally carries five buckets:
- Acquisition — the land or existing building, plus closing costs.
- Hard costs — everything physical: site work, structure, systems, finishes.
- Soft costs — architecture, engineering, permits, legal, lender fees, insurance during construction.
- Contingency — commonly 5–10% of hard costs, and most lenders require one.
- Interest carry — the interest that accrues while the building produces no income, usually funded out of the loan itself.
If a line item is missing from the budget, it is not missing from the project. It simply becomes your equity later.
Why LTC outranks LTV on a build
On a stabilized purchase there is a price and an appraisal, and loan-to-value does the work. On ground-up construction or a gut renovation there is no stabilized building yet, so the appraiser produces an "as-completed" or "as-stabilized" value — a professional opinion about a property that does not exist. Lenders will lend against that opinion, but not against it alone. LTC anchors the loan to money actually spent, which is verifiable through invoices and draw inspections.
So both tests run at once, and the lower of the two dollar amounts wins. This is the most misunderstood mechanic in construction financing, and it is worth seeing in numbers.
Worked example: two tests, one loan amount
A 22-unit adaptive reuse project. Your term sheet quotes a maximum of 70% LTC and 65% of as-completed value.
- Acquisition — $1,200,000
- Hard costs — $2,100,000
- Soft costs — $350,000
- Contingency and interest carry — $250,000
- Total project cost — $3,900,000
If the as-completed appraisal lands at $5,000,000, the two tests produce:
- 70% LTC — 0.70 × $3,900,000 = $2,730,000
- 65% LTV — 0.65 × $5,000,000 = $3,250,000
The loan is $2,730,000, the lower of the two. LTC binds, and your equity is $3,900,000 − $2,730,000 = $1,170,000. At that loan amount the LTV is only 54.6%, comfortably inside a 65% cap that never came into play.
Now hold the budget still and assume a softer appraisal of $4,000,000:
- 70% LTC — still $2,730,000
- 65% LTV — 0.65 × $4,000,000 = $2,600,000
The loan drops to $2,600,000 and your equity rises to $1,300,000. Same budget, same LTC quote, $130,000 more cash out of pocket — because the other test moved. At that point the loan is 66.7% of cost, so the 70% headline was never the operative number. Running both sides through an LTC calculator next to an LTV calculation takes a minute and tells you which test you are actually solving for.
What it means for you
Once you know which test binds, you know which lever to pull. If LTC binds, the only paths to a bigger loan are more equity or a cheaper build — arguing with the appraiser will not move it. If LTV binds, the fix is on the value side: firmer rent comps, signed leases, a defensible exit assumption. Sponsors who hand the appraiser a supported rent projection before the report is written consistently do better than those who dispute it afterward.
Plan too for the order of funding. Most construction lenders require the borrower's equity to be fully deployed before the first draw, so a 70% LTC loan does not mean the lender covers 30% of each invoice. It usually means you write checks for the first $1,170,000 and the lender starts after that. Our construction loan page goes deeper on draw mechanics, and if you want your budget sized against live terms, start an application and we will run both tests on your actual numbers.
What to watch for
- Cost overruns are almost always 100% your money. If the budget grows from $3,900,000 to $4,100,000, the loan usually stays at the committed $2,730,000 and your equity goes from $1,170,000 to $1,370,000. The 70% does not re-apply to the new total.
- Land basis is treated inconsistently. Some lenders credit land at appraised value, others only at your original purchase price. On land you have held for years, that single definition can be worth hundreds of thousands of dollars of proceeds.
- Interest reserve is a use of proceeds, not free money. Every dollar of carry funded by the loan is a dollar not available for construction.
- A third test is often waiting at the end. Many construction loans also require a minimum debt yield or DSCR at stabilization before they convert or are taken out by permanent financing.
- Read how the term sheet defines cost. Some lenders exclude the developer fee, some haircut soft costs. A 75% LTC on a narrow cost definition can fund fewer dollars than 70% on a full one.
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. On a stabilized purchase the two are usually close, because price and value converge. On construction or heavy value-add they diverge sharply, since the as-completed value is meant to exceed cost — that spread is the developer's profit. Lenders apply both limits and fund the lower result.
What is a typical loan-to-cost ratio for construction loans?
Ground-up construction commonly lands somewhere in the 55–75% LTC range, with experienced sponsors, presold or preleased space and multifamily product at the higher end, and speculative or specialty projects lower. Bridge and value-add loans are often quoted as a percentage of purchase price plus a percentage of the renovation budget, which is the same idea expressed differently.
Does loan-to-cost include soft costs and the interest reserve?
Usually yes on a full-cost definition, but it varies by lender and it is negotiated. Ask specifically whether the developer fee, the interest reserve, the contingency and the land basis are all inside the cost number the percentage is applied to. Two term sheets quoting different LTC percentages can fund identical dollars once the definitions are matched.
