Loan-to-cost is the ratio of a loan amount to a project's total cost basis, including land or acquisition price, hard construction costs, soft costs, and any contingency reserve. Expressed as a percentage, it is the primary leverage metric lenders use for construction and heavy value-add loans, where the finished, stabilized value of a property does not yet exist to underwrite against.
Construction lenders typically cap loan-to-cost somewhere between 60 and 75 percent, requiring the borrower to fund the remainder through equity. This structure ensures the developer has meaningful capital at risk in the project, which helps align incentives and gives the lender a buffer if costs run over budget. Loan-to-cost is often discussed alongside loan-to-value, since a lender may size a loan against whichever of the two produces the more conservative, lower dollar amount.
Further reading: Conservative vs. Aggressive Underwriting: 12% IRR to 17% IRR
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