Loan-to-value is the most quoted number in commercial real estate finance and one of the least precisely used. It is the loan amount divided by value, expressed as a percentage, and it exists to answer one question: how much cushion does the lender have between the debt and what the collateral would fetch. Everything else about the ratio (which value, at what point in time, against what basis) is where the actual money is.
It is also, on most well-performing deals in a normal rate environment, not the binding constraint. Coverage usually is. Borrowers who fixate on leverage percentages and ignore cash flow tend to be surprised at term sheet, because the desk sized the loan on the smaller of three tests and leverage was not the one that bound. This guide covers what LTV means precisely, what moves it, and how to tell whether it is your constraint at all.
Three ratios that get called LTV
Precision here prevents expensive misunderstandings. When a lender says seventy-five percent, ask seventy-five percent of what.
Loan to value
Loan divided by appraised value. On a refinance this is usually straightforward. On a purchase it is subject to the lesser-of rule below.
Loan to cost
Loan divided by total project cost: purchase price plus renovation, soft costs, carrying costs and fees. It governs construction and repositioning deals, where a completed value exists only on paper. A deal can be inside a leverage limit on value and outside it on cost, and the lower proceeds number wins.
Loan to as-is versus as-complete or as-stabilized
On a property being renovated or leased up, the appraisal may state multiple values. Advancing seventy percent of an as-complete value is a much larger loan than seventy percent of as-is, and the two are typically bridged with a holdback released against inspected progress. Confirm which value the quoted percentage applies to.
The lesser-of rule on a purchase
On an acquisition, lenders almost universally size against the lesser of the contract price or the appraised value. This is not negotiable at most institutions and it is the mechanism by which a low appraisal becomes your problem rather than the lender's.
The corollary is useful: buying below appraised value does not usually give you extra proceeds, because the lesser-of rule cuts the other way too. A property under contract at $2,300,000 that appraises at $2,600,000 will generally still be financed against the $2,300,000 price. The equity you created is real, but you access it later, not at closing.
What sets the leverage limit
A lender's maximum leverage on a given deal is a policy output, and it moves with the recoverability of the collateral. The pattern behind every adjustment below is the same: how quickly, and at what discount, could this be sold to somebody else.
| Factor | Direction | Reason |
|---|---|---|
| General-purpose building in an active market | Higher leverage | Wide buyer pool, faster resale |
| Special-purpose improvements | Lower leverage | Narrow buyer pool, costly conversion |
| Owner-occupied with a strong operating business | Higher leverage | Guarantee and business cash flow support the credit |
| Single tenant with short remaining term | Lower leverage | Income can disappear inside the loan term |
| Vacancy or active lease-up | Lower leverage | Value is projected rather than contracted |
| Cash-out proceeds rather than rate-and-term | Lower leverage | Less borrower equity remaining in the deal |
| Older building with deferred maintenance | Lower leverage | Capital need reduces net recovery |
| Secondary or thin submarket | Lower leverage | Fewer comparable sales, slower liquidation |
Property type does more work than borrower strength
Two rows in that table deserve emphasis. Property type is usually the largest single driver, the gap between a general-purpose industrial building and a purpose-built facility is wider than any borrower-strength adjustment, which is why a strong operator cannot leverage a difficult building the way the operator's balance sheet suggests.
And cash-out is treated as a genuinely different transaction from rate-and-term, because taking equity out reduces the borrower's stake in an outcome the lender depends on. Expect lower leverage, more questions about use of proceeds, and occasionally a different program entirely.
Why coverage usually binds before leverage
Run both tests on any deal and the smaller answer is your loan. Coverage tests income against the payment; leverage tests the loan against value. Which one binds depends mostly on where rates sit relative to cap rates.
When borrowing rates are low relative to cap rates, income comfortably covers the payment and leverage limits are what stop you. When borrowing rates rise toward or past cap rates, the payment per dollar borrowed rises and coverage starts binding well below the leverage ceiling. In that environment a lender can offer seventy-five percent leverage in policy and still size your loan at sixty-two percent of value, because that is all your NOI covers.
This is why the productive question at a term sheet is not can you go higher on LTV. It is which test is sizing my loan. If the answer is coverage, more leverage is unavailable at any price and the levers are amortization, NOI and other debt.
Stacking, seconds and combined leverage
Borrowers sometimes try to bridge an equity gap with a second lien, a seller note or preferred equity. Whether that works depends on the first lender's policy, and the relevant test is combined leverage across all debt secured by or dependent on the property.
A seller note is the most common version. Many programs permit one, frequently on standby: no payments, or interest only, for a stated period, subordinated to the primary lender by a written agreement. What is not permitted is arranging additional secured debt the primary lender does not know about. That is a default provision in most loan documents and it is discovered routinely at title.
Moving the ratio in your favor
Leverage is largely a property characteristic, but several of the inputs are things you control. In rough order of impact on a specific deal:
Actions that genuinely move available leverage
- Raise durable NOI before the appraisal: signed leases, documented expense reductions, resolved vacancies.
- Extend or renew leases that expire inside the proposed loan term, particularly the largest tenant.
- Cure deferred maintenance that an appraiser or condition assessment would deduct for directly.
- Provide the appraiser a complete package so value is not built on conservative assumptions about missing data.
- Structure as rate-and-term rather than cash-out where the objective can be met without pulling equity.
- Offer additional collateral where the program permits cross-collateralization.
- Strengthen the guarantee package: post-closing liquidity, a clean debt schedule, no short-amortization obligations.
- Choose a program whose policy fits the property type rather than fighting a policy that does not.
- Where permitted, negotiate a standby seller note to bridge a gap, disclosed to the primary lender in advance.
Notice how many of those are really NOI actions. That is not accidental. Value is NOI divided by a cap rate you do not control, so the only reliable way to move value is to move income, and moving income also relieves coverage, which is probably your actual constraint.
What is a typical maximum LTV on commercial property?
There is no single answer and we do not publish ranges, because leverage varies by property type, program, market, tenancy and borrower. What is consistent is the logic: the more general-purpose, better occupied and more liquid the collateral, the more leverage a policy will support. The specific number comes from the file.
Does a bigger down payment get me a better rate?
Lower leverage generally improves the risk profile and can improve pricing and flexibility, but there is no fixed relationship and no promise attached to any number. It reliably does two other things: it makes coverage easier to clear and it gives you room if the appraisal disappoints.
Can I use a home equity line for the down payment?
Sometimes, subject to lender policy, but understand that the payment on that line becomes part of your global debt service and can reduce the coverage that sizes the commercial loan. Borrowed equity solves the cash requirement and can create a coverage problem. Disclose it either way.
How is LTV calculated on a property I already own free and clear?
Against the appraised value, since there is no purchase price to compare against. That makes the appraisal the entire basis for proceeds, which is why the appraisal package matters more on this kind of refinance than on almost any other transaction.
Does a seller note count against my leverage?
Generally yes, in a combined leverage test, and frequently only on standby terms with a written subordination agreement. Some programs count it more favorably than others. Always disclose it up front and confirm the treatment before you build the structure around it.
What happens if my LTV rises after closing because values fall?
Nothing automatically, unless the loan documents contain a loan-to-value covenant with a remargin provision: some commercial loans do. Read that section. Where it exists, a decline in appraised value can require a paydown or additional collateral, and lenders can order a new appraisal during the term.
Is a lower LTV always better for me?
Not necessarily. Equity in a building is capital that could be working elsewhere, and over-equitizing a property has a real opportunity cost. The right leverage is the level at which coverage stays comfortable through a plausible bad year and you retain liquidity outside the deal.
How do I find out which test is sizing my loan?
Ask directly. Any underwriting desk can tell you whether the constraint is coverage, leverage or debt yield, and the answer determines what you should work on. It is the most useful single question you can ask about a term sheet.
Where to start
Compute both numbers on your deal before you talk to anyone: the loan your target leverage supports against a conservative value, and the loan your underwritten NOI supports at a realistic coverage requirement. The smaller one is your working proceeds figure, and the gap between them tells you which lever matters.
Then build the equity plan around the smaller number, with room for an appraisal that comes in under contract. Deals rarely fail because leverage was a few points lower than hoped; they fail because nobody planned for the possibility.
Qualified Commercial Underwriting Desk
Credit and capital markets
The Qualified Commercial underwriting desk reviews commercial real estate, dealer and Main Street files daily. The Academy is written from that work (how files are actually read, priced and declined) rather than from a rate sheet.
Educational content only. Nothing here is a commitment to lend, an offer of credit, or tax, legal or accounting advice. Program terms, timelines and thresholds vary by lender, file and market conditions, and any figures shown are illustrative.