Are you a commercial real estate investor seeking smarter financing strategies? Start by mastering one of the most crucial metrics lenders use to assess your deal: the Loan-to-Value Ratio (LTV).
Why LTV Is One of the First Things a Lender Looks At
Consider two borrowers seeking to finance the same $10 million office building. Borrower A contributes $3 million in equity, whereas Borrower B only provides $1 million. Despite the property and purchase price being the same, their results will differ.
Borrower A has a loan-to-value (LTV) ratio of 70% ($7M loan / $10M value), while Borrower B’s LTV is 90%. Most commercial mortgage lenders would view Borrower A as a more secure option — and likely to receive more favorable terms. Conversely, Borrower B might be rejected by conventional banks and may need to pursue private commercial loans with higher interest rates.
What accounts for this disparity? A lower LTV indicates that the borrower has a greater stake in the transaction, thereby presenting less risk to the lender. In contrast, a higher LTV implies that the borrower is excessively dependent on financing, which increases the risk for the lender. In the realm of commercial lending, this level of risk significantly affects not only loan approval but also the structure, cost, and timeline of your financing.
If you are venturing into the commercial lending sector, be aware that this is not a guide for residential lending. In the commercial landscape, the loan-to-value ratio is not merely a statistic — it can determine the success or failure of a deal.
What Is Loan-to-Value Ratio (LTV) in Commercial Lending?
In commercial real estate, the Loan-to-Value Ratio (LTV) is a key metric used by lenders to evaluate the risk of a loan. It’s calculated using a simple formula:
LTV = Loan Amount ÷ Appraised Property Value
The result is expressed as a percentage, and it helps determine how much leverage you’re seeking.
For example:
- Property Value: $5 million
- Loan Amount: $3.75 million
- LTV = 3.75M ÷ 5M = 75%
“As-Is” vs. “As-Completed” Value
Lenders may use different valuation bases:
- As-is value: The current appraised value of the property in its present condition
- As-completed value: The projected value once renovations, construction, or improvements are complete
For example, if you are purchasing a dilapidated retail center for $6 million and intend to invest $2 million in renovations, the “as-completed” value could be appraised at $9 million. This is significant because the loan-to-value (LTV) ratio may appear considerably more favorable based on the value of the completed project.
Importance of Third-Party Appraisal
In order to maintain objectivity, lenders generally mandate an independent third-party appraisal. This expert evaluation examines current market conditions, comparable sales, and income potential to ascertain value. The appraisal serves to protect both the lender and the borrower by anchoring the LTV calculation in tangible, verifiable data — rather than mere speculation or estimates provided by the seller.
Why LTV Matters in Commercial Real Estate Lending
Lenders utilize Loan-to-Value (LTV) ratios to evaluate the risk associated with a loan. A high LTV suggests that the borrower has a lower investment in the property, which may indicate an increased risk of default. Conversely, a low LTV reflects a more robust equity position and frequently results in more favorable loan conditions.
LTV influences:
- Loan Approval: Lenders have LTV ceilings based on the property type, deal profile, and borrower strength. If your proposed LTV exceeds that ceiling, you might be declined outright or redirected to a private commercial loan provider.
- Interest Rates: Loans with higher LTVs usually carry higher rates, especially if they exceed bank thresholds. Lenders price risk into their rates — higher risk equals more expensive capital.
- Equity Requirements: With a higher LTV, a lender might require the borrower to inject more cash or offer additional collateral.
- Lender Type: Institutional lenders (banks, life companies) are conservative and prefer lower LTVs. Private lenders, including hard money sources, may tolerate higher LTVs in exchange for higher interest rates and fees.
The bottom line: LTV is one of the quickest ways lenders gauge your deal’s risk profile. The more favorable your ratio, the more leverage and options you have.
Common LTV Benchmarks in CRE Loans
Different types of commercial properties come with different risk profiles, which is why lenders set property-type-specific LTV limits.
| Property Type | Typical Max LTV |
| Multifamily | 70%–80% |
| Office/Retail | 65%–75% |
| Industrial | 70% |
| Land Loans | 50%–60% |
| Bridge Loans | 60%–75% |
Multifamily properties frequently permit higher loan-to-value (LTV) ratios as they produce consistent rental income and generally exhibit reduced vacancy risk.
In contrast, retail or office spaces may justify lower LTV thresholds due to market fluctuations or tenant turnover.
Raw land, lacking any income-generating potential, usually has the lowest LTV limits.
Borrowers utilizing bridge loans typically must remain within a 65–75% LTV range to ensure swift qualification.
LTV vs. LTC: What’s the Difference?
Both Loan-to-Value (LTV) and Loan-to-Cost (LTC) ratios are essential underwriting metrics. But they measure different things.
- LTV: Compares the loan amount to the property’s appraised value
- LTC: Compares the loan amount to the total cost of the project (purchase + renovation/construction)
When Each Is Used:
- LTV is prioritized for stabilized, income-producing properties with clear appraised value.
- LTC becomes more important for development projects or value-add scenarios where the appraised value doesn’t yet reflect planned improvements.
For instance, in a construction project initiated from the ground up with a total expenditure of $10 million (including land, permits, and materials), a lender may provide 70% Loan-to-Cost (LTC) — equating to $7 million. However, the finished property might be valued at $12 million, which would result in a lower Loan-to-Value (LTV) ratio, thus providing advantages to both the borrower and the lender.
How LTV Affects Your Commercial Loan Terms
Higher LTV → More Risk → Tighter Loan Terms
Let’s look at two borrowers applying for loans on similar $8 million properties.
- Borrower A: 65% LTV = $5.2M loan
- Approved at 10.75%
- Borrower B: 80% LTV = $6.4M loan
- Declined by the bank
- Funded by private lender at 12.5%
When applying for a commercial real estate loan, your loan-to-value ratio is one of the first factors lenders assess.
Lenders price risk into their loan terms. A lower LTV tells lenders you’re financially invested, which can unlock:
- Lower interest rates
- Higher loan amounts
- Longer amortization periods
- More flexible covenants
Higher LTVs, on the other hand, may lead to:
- Shorter loan terms or interest-only periods
- Higher debt service requirements
- More stringent reporting requirements
Understanding how LTV shapes your loan terms can help you better negotiate your financing package.
How to Improve Your LTV Position as a Borrower
A strong LTV can open doors to better loan terms, faster approvals, and more funding options. Here are practical ways to improve your position:
1. Bring Additional Equity
More cash upfront reduces the lender’s exposure and improves your LTV. Consider raising equity from partners or 1031 exchange proceeds to hit a lower LTV threshold.
2. Buy at a Discount
If you acquire a property below market value, your LTV improves based on appraised value. Sourcing off-market deals or distressed properties can instantly enhance your leverage profile.
3. Get a Strong Appraisal or Value-Add Plan
Investing in a quality appraisal and presenting a detailed renovation or stabilization strategy can raise a property’s valuation, thereby lowering your effective LTV.
4. Consider Cross-Collateralization
Own other properties? You may be able to offer additional collateral to improve the loan’s security profile. This strategy is especially helpful when refinancing high-LTV legacy loans.
For example, we recently funded a 70% LTV multifamily loan in Dallas — see more recent transactions.
FAQs About Loan-to-Value Ratio (LTV) in Commercial Real Estate
What is a good LTV for commercial property?
Generally, a good LTV falls between 65% and 75%. Anything above 80% is considered high risk and often requires private financing.
Does LTV affect my interest rate?
Yes. Lenders typically offer better rates for lower-risk deals — and LTV is one of the top risk indicators.
Is LTV calculated on appraised value or purchase price?
Most lenders use the lower of appraised value or purchase price, especially in acquisitions. In refinancing, the current appraised value is the standard.
Can I get 100% LTV on a commercial loan?
Almost never. However, you might structure a deal with seller financing, mezzanine debt, or cross-collateralization to approach 100% total leverage.
What’s the difference between LTV and LTC?
LTV measures loan amount vs. property value. LTC measures loan amount vs. total project cost. Both are essential for loan structuring.
Unsure About Your LTV? Let’s Structure Your Loan Right
Understanding your LTV is key to navigating commercial real estate loans effectively. At Nelson Funding, we specialize in real estate loan structuring and can help you evaluate your options.
Contact us today for a personalized consultation or submit your deal to get started.
LTV is closely tied to your project budget, especially in construction financing. Make sure you’re set up for success.
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