Loan-to-value (LTV) is the ratio of the outstanding loan balance to the current appraised or market value of the property securing the debt, expressed as a percentage. A $15 million loan on a property appraised at $20 million has a 75% LTV. LTV is one of the three primary underwriting constraints in CRE lending — alongside DSCR and debt yield — and is used by lenders to determine maximum loan proceeds, set ongoing covenant thresholds, and assess credit risk. Lower LTV means less leverage and more equity cushion protecting the lender; higher LTV means greater leverage and higher risk. Most CRE lenders cap LTV between 65% and 80% at origination, depending on property type, loan structure, and the lender’s risk appetite.
How It Works in Practice
LTV is uniquely volatile among CRE underwriting metrics because the denominator — property value — is subject to market conditions that neither the borrower nor lender can control. A property purchased at $20 million with a $15 million loan has a 75% LTV at origination, but if cap rates expand by 50 basis points, the value might drop to $18 million, pushing LTV to 83% — a potential covenant violation even though the property’s operating performance hasn’t changed. This is why LTV covenants are particularly dangerous in rising-rate environments: values compress, LTVs rise, and borrowers face covenant breaches despite stable cash flows. Ongoing LTV covenants may require periodic appraisals (annual or upon a trigger event), and breaching an LTV covenant can trigger cash sweeps, additional collateral requirements, or mandatory paydowns. Understanding the interplay between cap rates, property values, and LTV across your portfolio is essential. LoanBoss models LTV sensitivity to cap rate changes and tracks appraisal dates and covenant thresholds across your debt portfolio.
Related Terms
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.