What LTC measures
Loan-to-cost tells you what share of the project budget the lender funds and what share the sponsor and its partners contribute. A $6,000,000 loan on an $8,000,000 budget is 75% LTC, so the equity contribution is 25%.
Total cost should include everything: purchase price, closing costs, hard construction costs, soft costs such as design and permits, financing costs, interest reserve, and contingency. Leaving items out flatters the ratio.
How lenders use it
On a development or heavy renovation, value is a projection but cost is a budget, so lenders anchor on LTC to confirm the sponsor has skin in the game. Many lenders test both LTC and as-stabilized LTV and size the loan to the lower proceeds.
A rising budget lowers the equity share unless the sponsor funds the overrun. That is why construction and bridge loans carry contingency and why cost overruns are a common trigger for rescue capital.
Limitations
LTC ignores whether the finished project will be worth its cost. A project can be modestly levered on cost and still be over-levered on value if the market moves or the plan takes longer than expected.
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