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Commercial Real Estate Glossary
Last updated on Feb 19, 2023
2 min read

LTV: Loan To Value Ratio In 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.

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In this article:
  1. What are Loan To Value Ratios?
  2. Calculating Loan To Value Ratio
  3. 75% LTV Commercial Mortgage
  4. Questions? Fill out the form below to speak with a commercial real estate loan specialist.
  5. Related Questions
  6. Get Financing

What are Loan To Value Ratios?

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.  

Calculating Loan To Value Ratio

A simple way to calculate the loan-to-value ratio is:

LTV= Loan Amount / Appraised Value

75% LTV Commercial Mortgage

In this chart the commercial property loan represents 75% of the value of the property with the owner equity making up the other 25% (thereby addressing 100% of the property value)

A lower LTV results in more competitive commercial loan terms and rates, whereas a high LTV results 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.

Questions? Fill out the form below to speak with a commercial real estate loan specialist.

Related Questions

What is the maximum loan to value ratio for commercial real estate loans?

The maximum loan to value ratio for commercial real estate loans varies by property (type and tenancy), underwriting factors (such as DSCR, debt yield, loan terms, market, etc), sponsorship and recourse. For example, if a property is valued at $1 million and a lender restricts its offer to a 70% LTV, you will be unable to get a loan larger than $700,000.

What factors influence the loan to value ratio for commercial real estate loans?

When a lender is determining the amount it is willing to lend on an apartment building or other piece of commercial real estate, there are many factors that come into play such as property type, property class, location, sponsorship, DSCR (debt service coverage ratio), and more. However, one of the primary components used by commercial real estate underwriters to determine a loan amount is leverage. Leverage is summed up and determined based on the Loan To Cost Ratio (LTC) and the Loan To Value (LTV).

When looking at a commercial property acquisition or refinance, a lender will typically limit the financing options on offer by a loan-to-value or loan-to-cost ratio. Factors that influence the loan to value ratio for commercial real estate loans include the property type, property class, location, sponsorship, and DSCR. The loan to value ratio is easily calculated by dividing the loan amount by the property value.

How does the loan to value ratio affect the interest rate of a commercial real estate loan?

The loan-to-value ratio (LTV) affects the interest rate of a commercial real estate loan because it is one of the factors that lenders consider when determining the risk of the loan. The higher the LTV, the higher the risk to the lender, and the higher the interest rate they will charge. Generally, lenders will offer lower interest rates for loans with lower LTVs, as they are seen as less risky. For example, a loan with an LTV of 70% may have a lower interest rate than a loan with an LTV of 80%.

Sources:

www.sba7a.loans/sba-7a-loans-small-business-blog/how-do-commercial-real-estate-loans-work
www.commercialrealestate.loans/how-to-get-a-commercial-real-estate-loan

What is the difference between a loan to value ratio and a loan to cost ratio?

The difference between a loan to value ratio (LTV) and a loan to cost ratio (LTC) is that LTV is used to assess acquisitions and refinance loans, while LTC is used to assess construction loans. LTV is calculated by dividing the loan amount by the value of the property, while LTC is calculated by dividing the loan amount by the cost of the loan. For example, if a borrower is buying a property for $1 million, and the property is worth $2 million, and the loan requested is $800,000, then the LTV ratio is 40% and the LTC ratio is 80%.

Sources:

  • www.hud232.loan/hud-232-glossary/loan-to-cost
  • apartment.loans/posts/what-is-loan-to-cost-ltc

How does the loan to value ratio affect the amount of money a borrower can borrow?

The loan to value ratio affects the amount of money a borrower can borrow in two ways. First, a lower LTV ratio is seen as lower risk and may result in a lower interest rate or a larger loan amount. Second, a higher LTV ratio is seen as higher risk and may result in a higher interest rate or a smaller loan amount.

For example, if an apartment building has an appraised value of $1 million and the lender is providing a loan for $700,000, the LTV ratio is 70%. This means that the lender is loaning 70% of the value of the property. The maximum LTV ratio will depend on the lender and the type of property. Generally, lenders will offer lower ratios for higher-risk properties and higher ratios for lower-risk properties.

What are the benefits of having a low loan to value ratio for a commercial real estate loan?

Having a low loan to value ratio for a commercial real estate loan can result in more competitive loan terms and rates. For example, if 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.

In this article:
  1. What are Loan To Value Ratios?
  2. Calculating Loan To Value Ratio
  3. 75% LTV Commercial Mortgage
  4. Questions? Fill out the form below to speak with a commercial real estate loan specialist.
  5. Related questions
  6. Get Financing
Categories
  • Commercial Mortgages
  • Commercial Property Loans
Tags
  • LTV
  • Leverage
  • Ratios
  • Underwriting

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