Loan-to-cost versus loan-to-value: sizing and drawing development debt

Start with two different denominators

LTC = debt divided by eligible development cost. LTV = debt divided by the lender's accepted property value. The cost definition might exclude recoverable tax, developer profit, land revaluation or particular fees. The valuation might describe today's site, completed construction or a stabilised investment. Comparing ratios without these definitions can make a tighter loan look more generous.

The OCC handbook defines LTC and discusses underwriting, borrower equity and construction-loan controls in the US banking context. It is useful for identifying the questions to ask, but it does not supply universal leverage limits. Use the actual term sheet and valuation basis for your project.

Sources: Office of the Comptroller of the Currency: Commercial Real Estate Lending, version 2.0

Find the binding facility constraint

This hypothetical project has 20 million of eligible cost and an accepted completed value of 28 million. Assume a 65% LTC limit, a 55% LTV limit and an absolute commitment cap of 14 million. The available commitment is the minimum of the three calculations. All amounts use one currency and exclude fees and interest unless stated.

The 13 million result is a ceiling, not an entitlement to borrow 13 million immediately. A reduced eligible-cost base of 18 million would reduce the LTC ceiling to 11.7 million even if the total cash budget remained 20 million.

Apply the draw order to actual expenditure

Assume the lender requires the first 7 million of eligible costs to be funded with equity, then advances the remaining eligible costs. Three end-of-period cost payments are 4, 6 and 10 million. Equity supplies 4 million in period one and 3 million in period two; debt supplies 3 million in period two and 10 million in period three. Cumulative debt finishes at 13 million.

Do not replace that sequence with 65% debt against every invoice. That alternative would advance 2.6 million in the first period and materially reduce early equity, contrary to the assumed equity-first condition. Retentions, monitoring certificates and draw-processing delays can create further temporary equity needs.

Test the limit and the timing separately

If the lender reduces the accepted completed value to 22 million, the LTV ceiling becomes 12.1 million. That is 0.9 million below the original facility. Even with unchanged construction costs, the sponsor needs replacement funding or a revised agreement. A late certificate is a different problem: the commitment may still exist while an invoice falls due before the draw.

Keep a monthly funding test that compares eligible invoices, permitted draws, cash balances and committed equity. Report an unfunded shortfall as an exception. A formula that draws beyond the facility to balance cash hides the very risk the appraisal needs to show.

Resolve these points before relying on the result

Ask whether capitalised interest consumes the same limit, whether an interest reserve counts toward LTC, whether sales must sweep debt and whether repaid debt can be redrawn. Record the covenant testing dates and the treatment of variations. An unused commitment is useful only when its conditions remain satisfiable.

For investment approval, show the original limit, the binding constraint under each downside and the maximum equity contribution by date. This makes the financing assumption independently reviewable without suggesting that a bank has approved the hypothetical terms.