Loan to cost and loan to gross development value tested on one illustrative scheme, with the equity solved through the rolled-up interest.
A development lender lends the lower of two limits: a percentage of total cost (LTC) and a percentage of the completed value (LTGDV), both tested on the gross facility including rolled-up interest and fees. On an illustrative scheme with a GDV of 24,000,000 and total costs of 18,501,180, a 60 per cent LTGDV limit binds before an 80 per cent LTC limit, capping the facility at 14,400,000 and requiring 3,935,452 of equity, 21.3 per cent of cost rather than the 20 the LTC headline suggests.
Worked in full in The Real Estate Development Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The 60 flats from the residual land value case: land bought for 2,446,119 plus 166,336 of acquisition costs, a 24-month build of 14,700,000 drawn on an S-curve, and sales over six months after completion. The lender requires equity in first, rolls interest up monthly and adds a 1 per cent arrangement fee to the loan. All figures are illustrative, and so are the two limits, which vary by lender, scheme and market.
| Input | Value |
|---|---|
| GDV | 24,000,000 |
| Land and acquisition costs, month 0 | 2,612,455 |
| Build costs, 24 months, S-curve | 14,700,000 |
| Net sales receipts, months 25 to 30 | 23,520,000 |
| Interest, rolled up monthly / arrangement fee | 7.0% / 1% |
| Maximum LTGDV / maximum LTC | 60% / 80% |
Both limits apply to the gross facility, the money drawn for costs plus the interest and fee added to the balance. Total cost includes that interest. The interest depends on how much is borrowed and when, which depends on how much equity goes in first, which is what you are trying to find. So the equity is solved, not computed: guess an equity amount, run the monthly cash flow, test the peak balance against both limits, and adjust until the binding limit is met exactly. Goal Seek or a short bisection does it.
At the solution the equity pays for the land and the first 1,322,997 of build, and runs out in month 5. From then on every cost is drawn from the facility, and the interest on each draw compounds until the sales receipts arrive after month 24. The order matters for the size of the loan: equity first keeps the balance, and the interest on it, lower than a pro rata draw would, and it puts the developer's money at risk before the lender's.
Find the smallest E such that peak facility ≤ 60% × GDV and peak facility ≤ 80% × total cost(E)
Monthly: balancet = balancet−1 × (1 + 7%/12) + costt not covered by remaining equity
Excel: Goal Seek: set Headroom to 0 by changing Equity, where Headroom =MIN(0.6*GDV,0.8*TotalCost)-MAX(Balance)
| Line | Amount |
|---|---|
| Equity, paid first (land plus build to month 5) | 3,935,452 |
| Facility drawn for costs | 13,377,003 |
| Rolled-up interest to the peak, month 24 | 878,997 |
| Arrangement fee | 144,000 |
| Peak gross facility | 14,400,000 |
| LTGDV limit: 60% × 24,000,000 | 14,400,000 |
| LTC limit: 80% × 18,501,180 | 14,800,944 |
| Further interest during the sales period | 165,728 |
| Developer's profit | 5,018,820 |
The facility reaches 77.8 per cent of cost, short of the 80 per cent the lender would accept on cost, because 60 per cent of value binds first. The reason is the ratio of cost to value: total cost is 77.1 per cent of GDV, and 60 / 77.1 is 77.8 per cent. Whenever a scheme's margin is healthy, value is the tighter test. Here the LTC limit only starts to bind once the LTGDV limit is above 61.9 per cent. On these numbers the developer's 3,935,452 earns a profit of 5,018,820, 27.1 per cent on cost and 2.28 times the equity.
At the peak, 7.1 per cent of the facility is finance cost, not development: a 14,400,000 headline facility funds 13,377,003 of land and build, and the total finance cost of 1,188,725, which is what the LTC test counts in total cost, includes 165,728 of interest that accrues after the peak while the flats sell. Budgets that treat the headline as spending power run out of money in the last months of the build.
| Max LTGDV | LTC 75% | LTC 80% | LTC 85% | LTC 90% |
|---|---|---|---|---|
| 55% | 5,003,987 (GDV) | 5,003,987 (GDV) | 5,003,987 (GDV) | 5,003,987 (GDV) |
| 60% | 4,458,808 (cost) | 3,935,452 (GDV) | 3,935,452 (GDV) | 3,935,452 (GDV) |
| 65% | 4,458,808 (cost) | 3,532,108 (cost) | 2,879,260 (GDV) | 2,879,260 (GDV) |
| 70% | 4,458,808 (cost) | 3,532,108 (cost) | 2,591,341 (cost) | 1,844,789 (GDV) |
Read across the 60 per cent row: once value binds, a lender offering 85 or 90 per cent of cost adds nothing. Read down the 80 per cent column: past 65 per cent of value, a higher LTGDV adds nothing either. Negotiate the limit that binds. At 65 per cent LTGDV and 80 per cent LTC the equity falls to 3,532,108 and the profit as a percentage of equity rises from 127.5 to 140.1 per cent, because 403,344 less equity earns a profit only 68,999 lower.
How the rolled interest itself builds up month by month is in how to calculate interest on a development loan. The quarterly cash flow and peak funding requirement of the appraisal are in the free workbooks for The Real Estate Development Manager.
Loan to cost measures the facility against total development cost, including land, build, fees and finance. Loan to gross development value measures it against the completed scheme's value. A lender applies both and lends the lower. On an illustrative scheme costing 18,501,180 with a GDV of 24,000,000, 80 per cent of cost allows 14,800,944 but 60 per cent of value only 14,400,000, so value binds.
Whatever the binding limit leaves, solved through the interest. On an illustrative 60-flat scheme the developer needs 3,935,452, 21.3 per cent of total cost, because a 60 per cent LTGDV limit binds before an 80 per cent LTC limit. Budgeting 20 per cent of cost, 3,700,236, would leave a 235,216 shortfall.
Usually yes: lenders test the gross facility, including interest and fees added to the loan. On a 14,400,000 facility capped at 60 per cent of a 24,000,000 GDV, 878,997 of interest rolled up to the peak and a 144,000 arrangement fee leave 13,377,003 for land and build costs. A longer programme raises the interest and uses up the headroom.
This article is one calculation from The Real Estate Development Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.