How do you calculate loan to cost?

Divide the loan by the total cost of the project. A US$9m facility on a US$15m project is 60%. Total cost normally covers land, construction, professional fees, finance costs and contingency, but definitions vary between lenders, so the first step is to ask what the lender includes. Whether interest is capitalised inside the facility and whether land is counted at its purchase price or current value can each move the ratio by several points.

What is a typical loan to cost for a development?

It varies by lender, market, type of project and the point in the cycle, and non-bank lenders often go higher than banks at a higher price. There is no figure that applies across markets. Australia's APS 112 uses 75% of qualifying development costs as one condition for a lower capital weight on residential development at standardised banks, but that is a capital test and does not set a limit on what can be lent.

Does loan to cost include capitalised interest?

Often, but it depends on the lender. Where interest is added to the loan during the build, it belongs in both the facility and the project cost, and leaving it out of either distorts the ratio. A lender quoting a limit should say whether it is measured on the land and build advance alone or on the whole facility with interest included, because the second gives a smaller advance for the same quoted percentage.

Can land count as the developer's equity?

Commonly yes, since land already paid for is money the developer has at risk. The argument is about the amount. A lender may accept the price paid, or the current value if a valuer supports it, and the difference can be large where land was held for years. Land still carrying its own mortgage counts only to the extent it has been paid for, and vendor finance or a deferred purchase price is not usually treated as equity.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Loan to Cost: a Worked Example

The ratio moves with whatever the budget counts.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A development lender wants to know how much of its borrower's own money will be lost before any of the bank's is. Loan to cost supplies the answer: divide the facility by the project's budget, and what remains is the developer's share. The test is easy to compute and easy to flatter, because the result depends on what the budget counts. In the example here, a 40-lot subdivision shows 70% with the land at its current value and 77.8% with the land at what the developer actually paid, and the US$1.5m between them is not cash.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 08 — Basalt Ridge Developments. A new-to-bank developer, a claimed 28% ROE and two other banks circling. Your bank has a growth target. Your call first, then the senior banker's.

Read the file →

PART OF Property Development Finance

// 01 — WHY A DEVELOPMENT LENDER MEASURES COST

A loan to a trading business can be judged against years of earnings. A development has no earnings, only a plan to spend money and then sell what it built. Until then the lender is exposed to everything that can go wrong on site. The money that protects it is whatever the developer has put in ahead of it, and equity first is the common arrangement: the developer spends its share before the bank advances.

Cost is the measure of that protection because it is the money actually going into the ground. A budget can be checked line by line against contracts and quotes, and an independent quantity surveyor commonly reviews it before the loan is approved and certifies progress during the build. That makes it a firmer footing than a forecast of what the finished project will sell for.

// 02 — WHAT GOES IN THE COST

Total project cost = land + construction + professional fees

+ finance costs + contingency

Loan to cost = facility limit ÷ total project cost

Developer's equity = total project cost − facility limit

The formula is simple and the definition is where lenders differ. Land may go in at the price paid or at current value. Interest that will be capitalised may be included in both the facility and the cost, or left out of both. Some lenders exclude the developer's own management fees and any payment to a related company, because that is money the developer pays to itself. Sales commissions may be left in or left out. A figure quoted without its definition cannot be compared with another.

Australia gives the ratio a regulatory role on one side. Under APS 112, a bank on the standardised approach can give a residential development exposure a 100% risk weight rather than 150% only if, among other conditions, total debt is below 75% of qualifying development costs, and the bank must have a policy defining those costs. That is a capital rule for Australian banks on that approach, not a lending limit.

// 03 — THE EXAMPLE

A developer, constructed for this page like every figure on it, plans a subdivision of 40 residential lots expected to sell for US$0.50m each, US$20.0m in all. It asks for a US$10.5m facility. Figures are US$ millions, and the ratios are the example's, not market norms.

Land, at current valuation 5.0

Civil works 7.2

Professional fees and consents 0.9

Finance costs 1.1

Contingency 0.8

Total project cost 15.0

Loan to cost: 10.5 ÷ 15.0 = 70.0%

Developer's equity: 15.0 − 10.5 = 4.5

Loan to end value: 10.5 ÷ 20.0 = 52.5%

The developer bought the land four years earlier for US$3.5m. The US$1.5m increase in value may be real, but it is not money anyone has spent. On the price paid:

Total cost at price paid: 15.0 − 1.5 = 13.5

Loan to cost: 10.5 ÷ 13.5 = 77.8%

Cash equity: 13.5 − 10.5 = 3.0

Facility at 70% of 13.5: = 9.45

Now suppose civil works run 15% over, adding US$1.08m. The contingency absorbs US$0.8m and US$0.28m is left to fund.

Total cost after overrun: 15.0 + 0.28 = 15.28

If the developer pays: 10.5 ÷ 15.28 = 68.7%

If the bank lends more: 10.78 ÷ 15.28 = 70.5%

Who pays changes which way the ratio moves. The cost-to-complete test exists so that the question is settled before the next advance.

// 04 — THE TESTS A LENDER READS BESIDE IT

Cost shows what has gone in, while end value shows what would come out, and a lender usually caps the loan on both and takes the lower. Assume a limit of 60% of end value alongside the 70% on cost. On US$20.0m the value test allows US$12.0m and the cost test US$10.5m, so cost binds. If the valuer lifted the end value to US$24.0m, the value test would allow US$14.4m, which is 96% of the budget and would leave the developer almost nothing at risk. The cost test holds the facility at US$10.5m.

When the developer's expected profit is thin the position reverses and loan to gross development value binds first. Neither test says the units will sell, which is why presales and the contingency are read beside them.

DEFINED IN ONE PARAGRAPH → · LOAN TO GROSS DEVELOPMENT VALUE → · PRESALES →

// 05 — WHERE IT DECIDES A FILE

In a term sheet, loan to cost fixes the size of the cheque the developer must write. A borrower short of its share has limited ways to close the gap: more cash, a partner, a smaller scheme, or a mezzanine lender behind the bank, which fills the equity line with someone else's debt. The senior lender then asks what is really at risk beneath it, and the headline ratio on senior debt alone no longer answers that.

During the build the ratio is what the drawdown schedule protects. Each advance is checked against certified progress and the money left to finish, so an early flattering number cannot be repaired after the site has opened. A lender reading the budget therefore cares less about the total than about each line that could be wrong, and about who pays if it is.

THE DEVELOPMENT LOAN → · DRAWING THE LOAN, MONTH BY MONTH →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Australian Prudential Regulation Authority, Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk — Attachment A, land acquisition, development and construction exposures — A residential ADC exposure may take a 100% risk weight only if conditions are met, including total debt below 75% of qualifying development costs; other ADC exposures take 150% — section 02.

// QUESTIONS PEOPLE ASK

How do you calculate loan to cost?: Divide the loan by the total cost of the project. A US$9m facility on a US$15m project is 60%. Total cost normally covers land, construction, professional fees, finance costs and contingency, but definitions vary between lenders, so the first step is to ask what the lender includes. Whether interest is capitalised inside the facility and whether land is counted at its purchase price or current value can each move the ratio by several points.
What is a typical loan to cost for a development?: It varies by lender, market, type of project and the point in the cycle, and non-bank lenders often go higher than banks at a higher price. There is no figure that applies across markets. Australia's APS 112 uses 75% of qualifying development costs as one condition for a lower capital weight on residential development at standardised banks, but that is a capital test and does not set a limit on what can be lent.
Does loan to cost include capitalised interest?: Often, but it depends on the lender. Where interest is added to the loan during the build, it belongs in both the facility and the project cost, and leaving it out of either distorts the ratio. A lender quoting a limit should say whether it is measured on the land and build advance alone or on the whole facility with interest included, because the second gives a smaller advance for the same quoted percentage.
Can land count as the developer's equity?: Commonly yes, since land already paid for is money the developer has at risk. The argument is about the amount. A lender may accept the price paid, or the current value if a valuer supports it, and the difference can be large where land was held for years. Land still carrying its own mortgage counts only to the extent it has been paid for, and vendor finance or a deferred purchase price is not usually treated as equity.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Workout and recoveries managerTakes the files that have gone wrong and works out how much the bank gets back, and how.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE NUMBER · THE ECONOMY · COLLATERAL MARKETS

An office building earns US$1.0m a year of net operating income. Buyers price such buildings at a 5% yield, so it is valued at US$20m. The loan against it is US$12m.

If the yield buyers want rises to 6%, what is the loan-to-value?

3 MORE ON THE ECONOMY · COLLATERAL MARKETS →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHLoan to cost (LTC) What is loan to cost on a development loan?