LTC lower than LTV
Hi everyone,
I'm doing a modeling project for my bank, involving real estate. I'm running into a situation where a lot of the borrowers have LTC lower than LTV, which implies that the value of the property is lower than the cost of the project. Could this mean anything other than that the property value declined since origination? (Is there any situation where you would engage in a project where cost is higher than property value?)
Thanks!
Are the banks using FMV or just carrying book/initial appraisal value forward plus depreciation? The value the bank keeps on their books is probably lower than the price the asset would actually sell at
It seems that they're using FMV, but I'm not sure.
What it probably means is that your valuation is more conservative than the Sponsor's. Think about your standard vacancy, OpEx, cap rate, or discount rate. Are you using the Sponsor UW?
This is typical as banks throw in management haircuts given their risk averse nature.
No idea, as I'm on the data modeling team, not underwriting, but that would make sense!
Banks take haircuts to the NOI, yes.
Banks use the APPRAISED value as the value. They don't take a haircut to that.
It doesn't necessarily mean that the value of the property is lower than the cost of the project. LTV and LTC are just measures of leverage, all that means is the developer/borrower took out more debt against the stabilized asset than the original project costs. The key metric in determining value vs cost is the net value creation aka Project Value-Project Costs... obviously, in most cases, you don't this number to be negative.
Someone probably made a mistake with the cost. Banks shouldn't be making loans where the LTC<ltv.></ltv.>
I think that's an extremely general blanket statement. There are plenty of ground-up and value-add plays that I have seen that have an LTV higher than their LTC. For the sake of discussion just look up credit tenant lease financing, these deals typically have a DCR of 1.0 through the life of the loan with an LTV or 90-100%...LTC north of 100%.
I would disagree. While it's not an everyday occurrence I don't think that it's something that a bank would avoid. It simply means that the sponsor is paying more for the property than the bank/appraiser thinks its worth. For example if someone is seeking a 50% LTC loan ($5MM) on a property with a purchase price of $10MM and the bank believes the property is only worth $9MM they will obviously still make the loan for $5MM, they would just record the loan as 55% LTV for their records.
LTC typically only comes into play when the loan amount gets closer to 100% LTC since banks typically want sponsors to have cash equity in new development deals. Outside of unique circumstances that deflate development costs (i.e. long term land ownership, etc.) it is rare to see a lender go above 100%, or even 90% LTC on a construction takeout in my space (Agency MBS).
Why is that? Every loan my firm has done has a lower LTC than LTV. For example, let's say we buy a $100mm building and get a $70mm loan...that is 70% LTV.
Now let's say we add in our transaction costs, improvement capital, etc (call it $10mm)....our total cost is the purchase price ($100mm) + costs stated above ($10mm) = $110mm
$70mm loan / $110mm costs = 63% LTC
LTC should always by lower than LTV.
Rather than downvote my comment, can anyone explain how my math or assumptions are incorrect?
as one of the comments said, it's probably your internal value calc that is causing the difference. MOST often, when banks underwrite, they will use language saying the loan will in no case exceed the lesser of x% LTC, x% LTV and sometimes they'll even throw in a DSCR. The NOI etc required for these metrics is usually derived from the proforma you sent them. However, if you actually run the math out, you'll almost always find the LTC % and LTV % when formulated out to a dollar value, are equal...i.e. say its a 65% LTC loan -- they'll quote you a % LTV that yields the same loan proceeds at the time of underwriting.
I'm not sure what everyone is talking about here, but in my experience, LTC is almost always lower than LTC.
If you buy a building for $50mm, the value is $50mm.
Add in transaction costs, capital improvements, etc.. your cost would be $50+mm.
Am i missing something here?
Makes sense, also simply could be that appraisers often lag the market by 6mo. - 1 yr so if the project is in a hot market you could run into appraisal issues just due to the lagging nature of that industry.
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