What is LTV (Loan-to-Value Ratio)?
The ratio of the loan amount to the appraised value of the collateral property.
Formula
LTV = Loan Amount ÷ Appraised Value
Typical range
Regulatory guidelines: 80% for owner-occupied CRE, 75% for investment properties
LTV (Loan-to-Value Ratio) in commercial lending practice
LTV is a primary measure of loan risk in real estate lending — a 75% LTV means the borrower has 25% equity in the collateral. Regulatory guidelines and bank credit policy typically set maximum LTV thresholds by property type and use. Combined with DSCR and debt yield, LTV gives a complete picture of a CRE credit's collateral cushion and cash flow coverage. Re-appraisals during the loan term can shift LTV materially in declining markets.
Worked example
LTV (Loan-to-Value Ratio) in numbers
Setup
A borrower is acquiring a stabilized retail strip center for $3,200,000. The lender's appraisal comes in at $3,150,000 (slightly below contract). The borrower is requesting a $2,250,000 loan, with the equity check covering the difference plus closing costs.
Calculation
LTV against appraised value = $2,250,000 ÷ $3,150,000 = 71.4%
LTV against purchase price = $2,250,000 ÷ $3,200,000 = 70.3%
Interpretation
Banks always use the lower of appraised value and purchase price in the LTV calculation, so the binding LTV here is 71.4%. That sits comfortably under the 80% supervisory limit for non-owner-occupied CRE under the FFIEC interagency real estate lending standards, and within most bank policies that cap retail at 70%-75%. The credit memo should call out the appraisal coming in below contract and any sensitivity if a future re-appraisal moves further.
Variations by loan type
How LTV (Loan-to-Value Ratio) differs across CRE, C&I, and SBA
Owner-occupied CRE
FFIEC supervisory limit is 85% LTV. Most banks operate at 75% to 80% on owner-occupied with full recourse, and SBA 7(a) and 504 structures can effectively push combined LTV higher because the SBA guaranty reduces lender exposure.
Non-owner-occupied (investment) CRE
FFIEC supervisory limit is 80%. Bank policy typically caps retail and office at 70%-75% LTV in current-cycle underwriting, with multifamily often allowed to 75%-80% on stabilized assets with strong DSCR.
Construction
FFIEC supervisory limit is 80% on construction of commercial, multifamily, and other non-residential property. Most banks measure LTC during the build and convert to LTV against an as-completed/as-stabilized appraisal at conversion. Loans exceeding the supervisory limits must be reported as exceptions and aggregated at 100% of capital.
Raw land
FFIEC supervisory limit is 65%. Banks typically run lower in practice (50%-60%) and require strong sponsor support given the speculative nature and absence of cash flow.
Further reading
Go deeper on LTV (Loan-to-Value Ratio)
Frequently asked
LTV (Loan-to-Value Ratio) FAQ
What is the regulatory maximum LTV?
The FFIEC interagency real estate lending standards set supervisory limits at 65% for raw land, 75% for land development, 80% for construction and non-owner-occupied CRE, 85% for owner-occupied non-residential and improved property, and 90% for owner-occupied 1-4 family with mortgage insurance or guaranty. Loans above these limits are permitted but must be reported and aggregated against capital.
How is LTV different from LTC?
LTV measures the loan against an appraised value. LTC (loan-to-cost) measures it against the total cost of a project — land acquisition, hard construction costs, soft costs, and contingency. Construction lending typically uses LTC during the build and converts to LTV at the as-completed appraisal once the asset stabilizes.
What happens if LTV breaches at re-appraisal?
A re-appraisal that pushes LTV above the policy maximum or supervisory limit usually does not trigger an automatic default unless the loan documents include an LTV covenant (uncommon outside of CMBS and certain large-balance bank deals). It does typically require an exception write-up, may trigger heightened watchlist treatment, and can affect renewal and pricing at maturity.
Can LTV use as-completed or as-stabilized values?
Yes, for construction, value-add, and lease-up loans. The appraisal needs to provide a current as-is value plus an as-completed and/or as-stabilized value. The credit memo should run LTV calculations against each value point and clearly identify which value the loan sizing is based on. Examiners flag inconsistent or undisclosed value bases.
Related terms
Related concepts in commercial underwriting
CRE (Commercial Real Estate)
Real property used for business purposes, including office, retail, industrial, multifamily (5+ units), and hospitality properties.
Read definitionDSCR (Debt Service Coverage Ratio)
The ratio of net operating income (or available cash flow) to total annual debt service, including principal and interest payments.
Read definitionDebt Yield
The ratio of a property's net operating income to the total loan amount, expressed as a percentage.
Read definitionCap Rate (Capitalization Rate)
The ratio of a property's net operating income (NOI) to its current market value or purchase price, expressed as a percentage.
Read definitionLoan-to-Cost (LTC) Ratio
The ratio of the loan amount to the total project cost, commonly used in construction and development lending.
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