Three lenders all say they can lend 75%. They all mean different things.
“We can go up to 75% leverage”.

This sentence has probably been repeated a million times around our industry. It’s unfortunate, because potential commercial mortgage borrowers probably only hear it one way, when the lender relaying this information may actually mean one of three different things.

## What a lender means by their max “leverage”

#### 75% LTV

When a banker tells you he or she can lend up to “75% leverage”, they most likely are referring to Loan to Value (“LTV”). The LTV ratio is a comparison between the loan amount and the **current market value** of the property, usually as supported by an independent appraisal.

#### 75% LTC

When a private lender tells you that they can lend up to “75% leverage”, they most likely are referring to Loan to Cost (“LTC”). The LTC ratio is a comparison between the loan amount and the **total project cost.** Private lenders usually provide short term bridge loans to borrowers aiming to boost the property’s value through improvements to the property, or through the leasing and operations thereof. So the lender provides a percentage of the budget to make that happen.

#### 75% As-stabilized LTV

When a debt fund tells you that they can lend up to “75% leverage”, they may be referring to LTC as with the above, but they could also be referring to As-Stabilized Loan to Value (“As-Stabilized LTV”). Debt funds providing 2–3 year money are seeking a market return and a safe exit plan, which can often be either a sale or a refinance. If the plan is to refinance, then the debt must be in a range that other lenders will be comfortable with after the value-add. Therefore, the initial bridge lender targets an As-Stabilized LTV (and probably also an As-Stabilized Debt Yield) in their loan sizing.

## Clear it up with one question

Next time you ask a lender about their leverage constraints and they give you an answer like “We can provide up to 75% leverage”, you can ask a simple follow-up clarification to avoid wasting time later: “Do you mean 75% LTV or 75% LTC?” It may turn out that they can provide 75% LTV for stabilized properties, *and* 75% LTC for value-add projects. You won’t know until you ask.
[{"id": "gkqjp1w", "text": "Its worth noting too that debt yield and DSCR requirements typically trump LTV commitments", "replies": [{"id": "gkqt3jf", "text": "The lowest of the forgoing criteria typically limits the loan amount. Which one limits your deal will depend on the cap rates in your area and the assumptions of the deal.", "replies": [], "depth": 2}, {"id": "gkr4rq3", "text": "Yes. And in markets like NYC they \\*always\\* are the limiting factor.", "replies": [], "depth": 2}, {"id": "gkr5qaw", "text": "To add onto your comment: **Lenders calculate DSCR using their own underwriting standards, which are always more conservative**. The biggest hiccup I see with CRE investors is not asking what the lender uses for an underwriting interest rate. Could be 5% on a 25 year amortization or 6% on a 30 year amortization, that rate is always higher than the actual interest rate.", "replies": [{"id": "gkr6sfk", "text": "Right, typical of local/regional banks. But most national lenders, CMBS, and debt funds use Debt Yield to avoid this altogether.", "replies": [{"id": "gkr8kk0", "text": "National lenders still use DSCR", "replies": [{"id": "gkrtph7", "text": "And floating rate DSCR can be calculated on an IO or a loan constant basis. Better clarify that too.", "replies": [], "depth": 5}, {"id": "glzps9y", "text": "CMBS originators always use the actual interest rate. The rating agencies and B-piece buyers that re-underwrite loans may increase it, but it still isn't that common, except in the case of a Partial IO loan when of course DSCR will be reduced based on the amortizing debt service. I concur with the other poster's assertion that using inflated loan constants is characteristic of a local lender or community bank.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gkqncxe", "text": "Never be afraid to ask clarifying questions.\n\nI love when everyone is around a table and someone says \"yeah prices are at 120\", and everyone nods their heads and talks away.  Ten minutes later it comes to light that someone meant 120 million, another meant $120 psf, another meant per 120k per unit and someone on the phone is quoting everything if EUR or something!", "replies": [{"id": "gldvm3u", "text": "There\u2019s an army of physics/math/chem teachers spinning in their \u201cwrite your damn units\u201d graves whenever this happens.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gkrnr6k", "text": "You'll often see \"Max 75% LTV up to 80% LTC\" on certain projects as well.", "replies": [], "depth": 1}, {"id": "gkrvn9g", "text": "Commercial Lender here. I usually phrase my term sheets:\n\nUp to the lesser of i) $X million, ii) y% of the net purchase price (excluding closing costs or credits), or iii) y% of MAI as-is appraised value.\n\nI don\u2019t give credit for closing costs. That means nothing... it\u2019s an expense and it\u2019s yours. I also don\u2019t care if you overpaid... my regulator will slap on a capital charge if I exceed MAI.\n\nThe Agencies will go up the lesser of LTV or DSCR constrained. Good for them- get an Agency loan. I can lock rate in a week after you tell me \u201cgo\u201d and you don\u2019t have to close for 90 days afterwards. I also didn\u2019t pull a single commitment during COVID. I\u2019ve won several deals in the last few weeks simply because borrowers were pissed off at their banks who pulled commitments and fucked them.", "replies": [], "depth": 1}]