Loan-To-Value Ratio and Commercial Loans

This training article will teach you what kind of loan-to-value ratio you can expect when you apply for a commercial real estate loan.  

First I need to define the loan-to-value ratio.   If you already know the definition, please just skip down now to the numbered paragraphs below.  Here is the definition of loan-to-value ratio as it pertains to commercial loans:  The loan-to-value ratio is the first mortgage balance divided by value of the commercial property, all multiplied by 100%.  It is customary in commercial real estate finance to calculate the loan-to-value ratio to one digit to the right of the decimal point; e.g., 73.4% or 65.1%.

Loan-To-Value Ratio = (Amount of the First Mortgage) / Value of the Property) x 100%


Steve owns a small strip center.  By the way, a strip center is not a bar with a lot of pretty girls in g-strings.  A strip center is a commercial property with two or more commercial units facing a busy commercial thoroughfare (a strip).  The strip center is worth $1 million.  Steve has a $400,000 balloon payment coming due on a bank loan he used ten years ago to buy the property.  He also wants to pull the maximum amount of cash out in order to pay off some credit cards and to make an investment.  Steve calls four different banks, and each of them tells him that the largest new loan that he can get on a refinance is 75% loan-to-value.  He therefore borrows $750,000.

Loan-To-Value Ratio = ($750,000 / $1,000,000) x 100% = 75.0%

“But George, in your definition you used first mortgage.  What if there is a second mortgage?”

In that case we use the combined loan-to-value ratio.  The combined loan-to-value ratio is the sum of the first mortgage plus the second mortgage, all divided by the value of the commercial property, the result being multiplied by 100%.

Combined Loan-To-Value Ratio = ((First Mortgage + Second Mortgage) / Value of the Property) x 100%


John wants to buy a small apartment building for $1 million.   A prior owner of the building carried back a first mortgage of $525,000 at 6% interest when he sold the building to the current owner, the seller in John’s transaction.  The prior owner really doesn’t want to be paid off.  Six percent is a much higher interest rate than what the prior owner can earn in the bank.  He will allow his loan to be assumed.  John hopes the seller will carry back a second mortgage of $300,000 because John only has $175,000 to put down.  What would be the current seller’s combined loan-to-value ratio (CLTV)?

Combined Loan-To-Value Ratio = (($525,000 + $300,000) / $1,000,000) x 10o% = 82.5% CLTV


Conventional commercial mortgage lenders typically use the same general guidelines.  A conventional commercial mortgage lender is defined as one that makes commercial real estate loans that are not guaranteed, in whole or in part, by any governmental agency, like the SBA, USDA, or FHA, or by any government-sponsored enterprises (GSE’s), like Fannie Mae, Freddie Mac, or Ginnie Mae.  For example, banks, life insurance companies, credit unions, and conduit are all conventional  lenders.  If you need a higher loan-to-value ratio, consider an SBA loan or a USDA loan, described in more detail below.

  1. The highest loan-to-value ratio you can get on an apartment loan from a conventional lender is 80% loan-to-value.  Many, if not most, conventional apartment lenders limit their apartment loans to just 75% LTV.
  2. Government-Sponsored Enterprises (GSE’s) will lend up to 80% loan-to-value on apartments.
  3. The highest loan-to-value ratio you can get on commercial-investment properties from a conventional lender is 75%.  Many conventional commercial lenders limit their LTV’s on commercial-investment properties to just 70%.  A commercial-investment property is a commercial property that is typically just rented out for income.  Commercial-investment properties are not typically management intensive.  Examples of commercial-investment properties include office buildings, retail buildings, strip centers, shopping centers, industrial building and self-storage facilities.
  4. GSE’s do not make commercial loans on commercial-investment properties.
  5. The highest loan-to-value ratio you can get on business properties is 70% LTV, and most conventional commercial lenders limit the LTV’s on business properties to just 65%.  A business property is defined as a commercial property that is management intensive.  This includes hotels, restaurants, bars, car washes, gas stations,  and bowling alleys.
  6. The highest loan-to-value ratio that you can typically get from a hard money commercial lender (allows bad credit) is 70%, and most hard money commercial loans are limited to just 65% LTV or lower.
  7. Conventional commercial lenders and the GSE’s will almost never allow a second mortgage behind their first mortgage.
  8. Hard money commercial lenders will often allow the seller to carry back a second mortgage.
  9. If a property is at least 51% owner-occupied (more precisely used by the owner’s company), the SBA will guarantee loans up to 90% LTV.  SBA loans are not actually made by the Small Business Administration.  Instead they are made by a local bank, who then asks the SBA to guarantee a portion of the loan.  Important note:  If your company is less than three (?) years old, your loan will be limited to just 70% LTV.
  10. Loans on owner-used commercial properties in rural areas will be allowed up to 90% loan-to-value, if they will create a certain amount of new jobs.  These commercial loans are guaranteed by the United States Department of Agriculture (USDA), and they are known as Business and Industry Loans.  What is a rural area?  Generally it is one with 50,000 or fewer residents within a 50 mile radius, but be careful not to rely on this seat-of-the-pants definition.  The USDA actually publishes a map that delineates which areas in the U.S. are considered rural.  Your USDA lender (often a local bank) will have access to this map and can tell you in seconds whether your qualify.
  11. When computing your loan-to-value ratio, commercial lenders almost always use the lower of the actual purchase price or the appraised value of the commercial property.  In other words, you can’t say to a commercial lender that you don’t have to put any money down on a purchase because you are buying the property for much less than its appraised value.  Sorry, guys.  That never works.  As far as commercial lenders are concerned, a property is only worth what a buyer is willing to pay for it and no more.  It is taken for granted that if the seller could have sold the property to someone else for more money that he would have done so.  The one exception to this general rule is when a tenant negotiates a lease-option to buy the property.  The selling price is negotiated at the beginning of the lease contract, and if seven or eight years go by, most lenders will agree to base their new loans on a recent appraisal, rather than the 8-year-old purchase price.  It is very likely that the property has appreciated in the meantime.

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