Loan-to-Value (LTV) in Commercial Real Estate: How Lenders Use It

The Short Answer

Loan-to-value (LTV) is the loan amount divided by the property value. Lenders use whichever is lower: the appraised value or the purchase price. A $10,000,000 loan against a $15,000,000 property is a 66.7 percent LTV.

LTV tells you how much cushion the lender has if they have to foreclose and resell. It does not tell you whether the property's cash flow can actually service the debt. That is a separate question, answered by DSCR and debt yield. Most CRE loans are sized by whichever of the three tests is most restrictive, not by LTV alone.

The LTV Formula

The formula is simple:

• LTV = Loan Amount / Property Value
• Lenders use the lower of appraised value or purchase price, not whichever number is more flattering to the borrower.
• If you are buying below appraised value, the lender still sizes off the purchase price. If you are paying above appraisal, the lender sizes off the appraisal, not your price.

That asymmetry matters. It means you cannot inflate proceeds by negotiating a high purchase price if the appraisal does not support it, and it means a bargain purchase does not automatically buy you extra leverage either. The lower-of-two-numbers rule is the lender protecting their own basis, not yours.

A Worked Example

Take a $15,000,000 property and a lender willing to write a $10,000,000 loan.

• LTV = $10,000,000 / $15,000,000
• LTV = 0.667, or about 66.7 percent

That 66.7 percent tells the lender how much equity cushion sits below their loan. If the property had to be sold in a distressed scenario, value would need to fall by roughly a third before the loan itself is impaired. That is the entire story LTV tells: a cushion against a decline in value.

It says nothing yet about whether the property's net operating income actually covers the debt payments at that loan amount. A property can carry a comfortable 66.7 percent LTV and still fail a lender's cash flow tests if the in-place income is thin relative to the debt service the loan requires. You need DSCR and debt yield to answer that part of the question. Run your own numbers with our free LTV calculator.

LTV Is One of Three Loan-Sizing Constraints

Lenders do not size a loan off LTV alone. They run three separate tests and use the smallest resulting loan amount, the most binding constraint wins:

• Maximum LTV, a cap on the loan as a share of value.
• Minimum DSCR, a floor on how much the property's net operating income exceeds the debt payment. See what DSCR is and how it is calculated.
• Minimum debt yield, a floor on net operating income as a percentage of the loan amount, independent of cap rate or valuation assumptions. See how debt yield works.

The final loan amount is the smallest number that satisfies all three tests at once. In a low-cap-rate market, where property values run high relative to the income they produce, debt yield often binds before LTV does. A property can pencil fine on LTV and still get sized down because its income does not clear the debt yield floor.

This is why two deals with the identical 66.7 percent LTV can get very different loan amounts in practice. If one property's NOI comfortably clears the DSCR and debt yield minimums, the LTV cap is the binding constraint and the borrower gets the full proceeds. If the other property's NOI is thinner, DSCR or debt yield kicks in first and the loan gets trimmed below what the LTV cap alone would allow. The lender always underwrites to the worst-case test, never the most generous one.

Where LTV Misleads (LTV vs LTC)

LTV is a useful shorthand, but it misleads if you treat it as the whole underwriting picture.

• It ignores cash flow coverage. LTV says nothing about whether NOI can cover the debt payment. That is what DSCR and debt yield are for.
• It depends entirely on the value basis. Appraised value, purchase price, and stabilized value can all differ, and the number you use changes the LTV you get.
• A high LTV is not automatically risky if coverage is strong. A low LTV is not automatically safe if NOI is thin.

For development and value-add deals, lenders also look at loan-to-cost (LTC), calculated as loan divided by total project cost rather than loan divided by finished value. LTC can bind differently than LTV, since a project's total cost basis and its projected stabilized value are rarely the same number. A deal that looks conservative on LTV against stabilized value can look aggressive on LTC against actual cost to build, and vice versa. Underwriting both, side by side against the same DSCR and debt yield floors, is the only way to know which constraint will actually govern the deal before you are under contract.

The practical takeaway: treat LTV as one input among three or four, not the answer on its own. A term sheet quoting an attractive LTV is not a commitment until it has also cleared DSCR, debt yield, and, on a development deal, LTC. Sellers and borrowers who anchor on LTV alone tend to be surprised later in the process when proceeds come in lower than the headline number implied.

If you are underwriting a lot of deals and want the LTV, DSCR, and debt yield tests run consistently without rebuilding the same spreadsheet every time, that is exactly what our AI underwriting copilot is built for.

Want to check your own deal fast? Run the numbers in our free LTV calculator.