Loan to Cost (LTC) is the ratio of the total development finance loan to the total cost of the project â land plus build costs plus professional and other costs. It is the primary metric used by development finance lenders to size their exposure during the construction phase, alongside Loan to GDV (LTGDV) which caps exposure against projected completed value.
How LTC Is Calculated
LTC = (Total loan amount ÷ Total project cost) à 100
Total project cost typically includes:
– Land acquisition cost (or current site value)
– Construction contract or build cost
– Professional fees (architect, structural engineer, project manager)
– Planning costs
– Finance costs (interest, arrangement fees)
– Contingency (typically 5â10% of construction cost)
– Sales and marketing costs (for residential-for-sale schemes)
Example: A project with total costs of £2,000,000 financed with a £1,400,000 loan = 70% LTC
Why LTC Matters to Lenders
LTC governs how much the lender advances relative to what has been spent. At 75% LTC, the developer contributes 25% of all project costs from their own equity. This equity serves as a buffer â if costs overrun or the project experiences problems, the developer’s equity absorbs the first loss before the lender is affected.
Higher LTC = more lender exposure = higher risk = higher rate. Most senior development finance lenders cap at 70â75% LTC. Stretch senior can reach 80â85% LTC. Beyond 85% LTC, mezzanine finance or equity is typically required.
LTC vs LTGDV: Both Apply Simultaneously
Development finance lending is constrained by two caps simultaneously:
- LTC cap: limits the loan relative to total costs
- LTGDV cap: limits the loan relative to projected completed value
The actual loan advanced is the lower of the two caps. A strong scheme (low costs relative to GDV, i.e. high development margin) may be limited by the LTC cap rather than LTGDV. A weaker-margin scheme may hit the LTGDV cap first.
Example: A scheme with £2m total costs and £3.5m GDV:
– 75% LTC cap = max loan of £1.5m
– 65% LTGDV cap = max loan of £2.275m
– Binding constraint: LTC â max loan is £1.5m
Example 2: A scheme with £3m total costs and £3.5m GDV (thin margin):
– 75% LTC cap = max loan of £2.25m
– 65% LTGDV cap = max loan of £2.275m
– Similar constraints â but a scheme with this margin profile would concern lenders regardless
What Counts as “Cost”?
Lenders are generally consistent on what counts as qualifying project cost, but there are variations:
- Land cost: typically included at current value or acquisition price
- Finance costs: sometimes included (making the calculation circular), sometimes excluded
- Contingency: included in most lender assessments at an agreed percentage
- Developer profit: never included in LTC cost â it is not a cost, it is the return
The specific definition should be confirmed with each lender, as it affects the maximum advance.
LTC and Drawdown
In a development finance facility, the LTC ratio is maintained dynamically through the drawdown process. The lender does not advance the entire loan upfront â it advances in tranches as certified costs are incurred. This means:
- The loan balance grows as the project progresses
- The lender’s LTC ratio is checked at each drawdown request
- If actual costs exceed the budget (cost overrun), the LTC may be breached â potentially triggering additional equity injection requirements or lender consent
Related Pages
- Gross Development Value (GDV) Explained
- Development Finance Costs Explained
- Ground-Up Development Finance
- GDV, LTC and LTV Calculator