how do lenders calculate LTV?

Hi, im new to this forum and its my first post. im a noob and need some help with this question, thanks. I see lenders use LTV to evaluate the commercial property to decide if they will give loans. Now heres my question.

Lets say lender is willing to give loan up to 70%LTV of the property. Now, hypothetically,

  1. property has about 30% vacancy and will have good cash flow with 7 mil purchasing price, 2. that area’s avg vacancy rate is 10%, and with 10% vacancy rate of the property, it will be worth about 9 mil with good cash flow,
  2. this property’s pro formula (0% vacancy, high rent etc…), it will worth about 10mil.
    so, 70% of LTV of this property would be 1. 4.9mil, 2. 6.3mil, 3. 7mil ?

and also when HML calcualte ARV, how do they figure out if property will worth $x after rehab?(guess they just figure out other buildings in that area to figure out avg vacancy rate, rent, expenses etc… to set the estimated price?)

Loan-to-Value (LTV) - The ratio of the size of the loan to the value of the property. If the loan is $80,000 and the value of the property is $100,000 the LTV is 80% ($80,000 / $100,000).

It has nothing to do with income or occupancy.

Maybe you’re asking how they determine the value to apply the LTV to? The lender would initially work off a sales contract if that existed, but would ultimately rely on a commercial appraisal. If you had your act together you would show comparable data to support the purchase price when presenting the deal to your lender before an appraisal was even done.

As far as ARV, it comes down to the appraisal again. Lenders don’t research the market to determine value, they order reports (appraisal, environmental, engineering, etc…) done by professionals and then look at the property as a whole to determine whether the deal makes sense. Of course, all of those reports are ultimately paid for by the borrower and typically rolled into the loan. Also, it’s pro forma, not pro formula.

Generally lenders loan based on the lower of the appraisal or the purchase price. In your example they will loan based on 70% of the 7 million purchase price NOT the 9 million it’s worth when fully rented and stabilized.

Lenders also look at Debt coverage ratios. In other words how much NOI is available to cover the mortgage. It should be at least 1.2. Lenders will also have what they call carve outs. Even if the building is 100% rented they will assume a vacancy rate and subtract that money from the income before calculating the debt coverage ratio.

I know what you were hoping. That you could get 100% financing because you were only paying 7 mil for a building that was arguably worth 10 mill. Sadly it doesn’t work that way.

Ned Carey

As others have said your talking income versus value. LTV is usually set by the banks appraiser. As ncarey mentioned another key requirement is debt service (DSCR). Check out more info here:

Here in socal you can still get a bank to cover about 85% LTV 1.25 DSCR, but even those deals are getting more rare… good luck!