What does the Loan-to-Cost (LTC) ratio measure?

The Loan-to-Cost (LTC) ratio is an important metric in real estate finance that specifically measures the relationship between the amount of the loan and the total cost of the project. This ratio provides insight into the degree of leverage being used in the financing of a real estate project.

A high LTC ratio indicates a larger proportion of the project's cost is being financed through debt, implying greater risk for lenders, as a significant portion of the project is reliant on borrowed funds. Conversely, a lower LTC ratio suggests that a significant portion of the project is funded through equity, indicating that the project might be less risky from a lender's perspective.

By assessing the LTC ratio, investors and lenders can evaluate the feasibility of a project and its financial structure. It plays a critical role in determining the funding strategy and the potential for financial returns. This makes the LTC ratio an essential tool for both financial analysis and decision-making in real estate development.