Calculating Loan To Value Ratios for Commercial Real Estate Loans
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). It is used to measure, or determine risk when financing commercial property or making a commercial mortgage. Calculating the LTV is a key component in helping commercial real estate lenders determine both the qualification of a borrower and the proposed terms of the debt being considered.
A simple way to calculate the loan-to-value ratio is:
LTV= Loan Amount / Appraised Value
75% LTV Commercial Mortgage
A lower LTV will result in more competitive commercial loan terms and rates, whereas a high LTV will result in higher risk, and therefore less advantageous loan terms for the borrower.
For example, suppose that a building is worth $10 million and the existing loan is $6 million. That means the LTV is 60%. This would be a lower, risk and more competitively priced loan than perhaps an $8 million loan (80% LTV) on the same property.
Leverage constraints vary by property (type and tenancy), underwriting factors (such as DSCR, debt yield, loan terms, market, etc), sponsorship and recourse.