This helpful LTV calculator can be used to determine the loan to value ratio in commercial real estate financing.
LTV: Loan To Value Ratio Calculator
The formula for calculating a loan-to-value ratio is:
Loan Amount ÷ Total Property Value = LTV
What Is LTV?
The process of determining the amount a lender is willing to provide for an apartment building purchase (or any other piece of commercial real estate), involves many factors such as property type, property class, location, sponsorship, debt service coverage ratio, and more.
One of the primary components used by multifamily loan underwriters to determine a loan amount is leverage. This is typically expressed by using a loan-to-value or loan-to-cost ratio.
An LTV ratio is used in apartment mortgage finance and commercial property financing to determine the ratio of a particular debt (for example, a first mortgage) in relation to the value of the collateral (the multifamily or commercial property). For example, if a borrower owns a property worth $10 million, and is looking to refinance a first mortgage for $7 million, the LTV of the transaction is 70%. Lenders use this figure to determine their level of risk and borrower leverage in a transaction.
The lower the LTV, the lower the risk. This formula is mainly used in the case of standard purchases and refinances. In the case of a multifamily property rehabilitation, or ground-up construction, LTC ratios become more useful, as they add cost factors into the metric. When LTV is used in the case of a rehab, new construction, or other value-add financing opportunity, it is used as a leverage constraint for the finished, or stabilized, value of the property.
Let’s explore this with an example. The cost to build a property is $10 million, and it will have a projected stabilized value of $12 million once complete. Imagine a lender has constrained you to the lesser of 75% LTC or 60% LTV. In this scenario, the loan would be the lesser of $7.5 million (75% LTC) and $7.2 million (60% LTV).
Apartment Loan Risk Mitigation
After a loan is fully underwritten, the lender will traditionally offer financing that is constrained by the lesser of a predetermined LTC, LTV, and, in many cases, DSCR as well. Many lenders are also increasingly utilizing debt yield ratio requirements as well.