July 2023 | Calculating LTVs

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Calculating ltvs 

The Loan to Value (LTV) ratio is an important metric in the world of lending. The LTV is calculated by taking the outstanding principal balance divided by the appraised value of the asset. Let’s take a look at a couple examples on how LTV works:



Let’s assume you’re acquiring a property for $50,000,000. You arrived at the price through a competitive marketing process where multiple buyers were involved. As this transaction is between unrelated parties, the final purchase price of $50,000,000 is indicative of the fair market value of the property.

Let’s also assume that you are buying the property by taking on a $35,000,000 loan that is funded at closing. You also plan to spend $5,000,000 renovating the property. However, there is no additional funding from the lender, meaning that any down payment, closing costs, and future renovations expenses, are funded by the owner.

In this scenario, the LTV of the asset is $35,000,000/$50,000,000 = 70%.



Let’s assume the same scenario as above, but the lender agrees to fund future renovations at the property. Your purchase price in this scenario is $50,000,000, your lender will fund $35,000,000 at close of escrow, and agrees to reimburse you $5,000,000 after close of escrow as long as that money is spent upgrading the property through an agreed-upon renovation plan. The additional $5,000,000 will be added to the loan balance and you will be charged interest as you “draw” on the balance.

In this scenario, the LTV of the asset is $35,000,000/$50,000,000 = 70% at inception because the total balance of the loan at inception is $35,000,000, not $40,000,000. The additional $5,000,000 will not be funded by the lender for any purpose other than for future renovations.

The purpose of the future renovations is to increase the value of the property in the future. Lenders and owners typically want to ensure that the future LTV remains the same as the LTV funded at close. In this example, that means that for every $100 that is funded for future renovations, the property value is theoretically increasing by about $143. Ultimately, the value of the property should increase to around $57,000,000 in the future once all of the future funding is deployed so that the LTV ratio does not change ($40,000,000 divided by $57,000,000 = ~70%).  


Bridge debt and rise48:

Bridge debt for value-add multifamily works similar to Example B above. The goal is to force appreciation of the property through upgrades so that both the lender and the owner are incentivized to bring the property to market performance and sell the deal within a given investment horizon. For Rise48 deals, this is the primary business plan that we follow. The lender funds a portion of the fully funded loan about at close of escrow and reimburses us as we spend money upgrading the property and thereby increasing the value of the property.

If the future renovations don’t happen, we don’t receive reimbursements from the lender. It’s that simple.  



Just to cite my sources, see the links below for how to calculate the LTV from various reputable and publicly available sources.

Here is an article from Bank of America explaining how to calculate your loan to value (which states that the LTV is calculated by taking the current loan balance divided by the current appraised value): https://www.bankofamerica.com/mortgage/learn/how-to-calculate-home-equity/

Here’s an article from Moneytips showcasing how to calculate the LTV: https://moneytips.com/how-to-calculate-loan-to-value-ratio/

Here’s a calculator from Fannie Mae that helps individuals calculate the LTV: https://yourhome.fanniemae.com/calculators-tools/loan-value-ratio-calculator

Here’s a calculator from Mortgage Calculator: https://www.mortgagecalculator.org/calcs/ltv.php

Here’s is a calculator from Bankrate: https://www.bankrate.com/mortgages/ltv-loan-to-value-ratio-calculator/

There’s no alternative math here. Facts are facts.

Since 2019, Rise48 Equity has completed over $1.99 Billion+ in Total Transactions, and currently has $1.55 Billion+ of Assets Under Management located in Phoenix and Dallas.