In what scenario is Loan-to-Cost (LTC) commonly used?

Loan-to-Cost (LTC) is a financial metric primarily used in real estate finance to assess the proportion of the loan amount relative to the total cost of a project. This ratio is often employed in scenarios where significant capital expenditures are planned, such as during the construction or renovation of a property. In these instances, lenders evaluate the expected costs to ensure that the financing aligns with the project's budget and financial projections.

Using LTC allows financial institutions to gauge their risk exposure while providing funding for project developments. By comparing the loan amount against the total costs, including construction, land acquisition, and other associated expenses, lenders can make informed decisions on how much to lend, ensuring that the funding is adequate to cover the projected expenses and that the borrower has a feasible plan for completing the project.

In contrast, scenarios like refinancing existing properties, assessing project market value, or securing long-term fixed rates typically rely on different metrics and considerations, such as Debt-Service Coverage Ratio (DSCR) or Loan-to-Value (LTV) calculations. These metrics focus on different aspects of financing, such as existing cash flows or property valuations, rather than assessing the comprehensive cost associated with new developments or significant improvements.