Is land cost included in LTC?

If a company already bought the land and is going to develop it, but they want to take out debt to do so, would the lender include that in their LTC when determing proceeds?

Question 2: If construction has already begun and now the developer wants to take out debt to finance the rest of the project, will the LTC only include future costs or the total project cost?

For Example: Project cost is 100M, we have complete 20M of it and now we want debt. If a lender loans at 70% LTC, could we get 70M or would they only be willing to offer 56M (70% of remaining costs ~80M)

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Comments (18)

Jul 13, 2021 - 7:27pm

Understood. Thanks very much.

And if you wouldn't mind:

If construction has already begun and now the developer wants to take out debt to finance the rest of the project, will the LTC only include future costs or the total project cost?

For Example: Project cost is 100M, we have complete 20M of it and now we want debt. If a lender loans at 70% LTC, could we get 70M or would they only be willing to offer 56M (70% of remaining costs ~80M)

  • Investment Analyst in PE - Other
Jul 28, 2021 - 7:39am

Please delete this, this is wrong, I've never seen a lender not factor land value into LTC as it is a piece of the collateral

Jul 13, 2021 - 11:35pm

For the right deal and the right sponsor, you could get a lender to do 70% of total project costs even if you've already spent $20MM. I've seen scenarios where a group has owned the dirt for 20+ years, had massive land value appreciation over those years and the lender (in this case a debt fund) was going to lend 75% LTC and was going to let them value the land at today's valuation.

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  • VP in RE - Comm
Jul 14, 2021 - 12:35pm

100% you will need to include land in "C" part of LTC. In fact, this is what most deals fall apart on at this stage. Developer wants high land valuation to max out their total development costs (ie get more money from their investors), LP Investors in the deal want the land to be less so that their equity invested is worth "more", Lenders want the land to be worth less as well to cover their basis. Often times, it'll be appraised independently, but that all comes down to various parties involved in the deal gaming the appraisal process.

Jul 28, 2021 - 9:05am

That's correct. "Should" is the key word. You're forecasting a go-forward valuation using next-twelve months financials and NOI. If you're capital calling on equity for a refi from construction to perm, either the building budget has blown up or you'll need to vet you stabilized value and your operating assumptions. Maybe you're being conservative on inputs (base rent, rent growth, vacancy factor, opex load) or maybe the development may not be justified based on the market data and forward projections you've made.    

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Jul 29, 2021 - 8:03pm

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