LTC: Borrowing Against Eligible Cost
Loan-to-cost compares financing with eligible project cost. This is common in renovation and construction financing because a project involves more than acquiring an existing asset. Eligible cost might include acquisition and approved improvements, but each program defines inclusions, exclusions and documentation requirements. Your total economic cost can be larger than the lender’s eligible denominator.
Separate hard costs, soft costs, financing charges, interest carry, selling expenses and contingency. Do not assume a cost belongs in LTC just because it is necessary for the investment. The lender may finance some items through a separate reserve or exclude them entirely. Confirm how land equity, prior expenditures and affiliated contractor costs are treated.
Use the same loan definition in every test. If LTC uses the full commitment, include future renovation funding rather than only the closing advance. Show equity contributions as sources and costs as uses. Borrowed money does not become eligible borrower equity merely because it passes through a personal bank account; disclose the source. A high LTC does not mean little cash is needed before draws, because timing and reimbursement rules still apply. Cost-based leverage measures financing relative to an approved budget, while the cash schedule determines whether the project can keep moving.
Worked example
Purchase is $200,000 and eligible rehab $50,000, so eligible cost is $250,000. A $200,000 commitment has 80% LTC. Another $15,000 of excluded fees and carry raises economic uses to $265,000, leaving $65,000 from investor sources even though the simple cost-test equity was $50,000.
Mini glossary
- LTC
- Loan amount divided by lender-eligible project cost.
- Eligible cost
- Documented spending accepted for a loan-sizing test.
- Sources and uses
- Reconciliation of funding with project requirements.
Put it into practice
Create two totals: lender-eligible costs and all economic costs. Label excluded items and calculate LTC using the commitment. Reconcile total uses with debt and equity sources. Then prepare a separate timing forecast for costs paid before the lender releases a renovation draw.
Recommended reading
Use these primary sources for context. Individual lender requirements can change; confirm the current program for your transaction.