LTC eligible costs and borrower equity classification

Loan-to-cost is only meaningful after the lender’s eligible-cost schedule is established. The total project budget can contain real obligations that the lender excludes from its leverage calculation. Conversely, a recognized land contribution can satisfy part of an equity test without supplying cash to pay the next contractor invoice. A complete analysis needs an eligible budget, total uses, and a dated funding plan.

The OCC construction-budget discussion, pages 33–35 distinguishes project costs and equity considerations. Its supervisory context does not make every sponsor budget item financeable. The example here uses explicitly assumed lender eligibility and illustrates how to reconcile excluded costs and existing land debt.

Put eligibility beside each budget line

Start with land, hard construction, soft costs, contingency, financing carry, and other actual uses. Preserve the complete budget even if some items are excluded from the loan test. Removing an obligation from the eligible-cost denominator does not remove the obligation to pay it.

Add columns for amount incurred, amount paid, remaining cost, eligible amount, evidence, funding source, and approval status. Where a developer fee or related-party charge is included, identify the service, payment terms, and lender treatment. Deferred compensation is not automatically cash equity, and an unpaid invoice is not proof of a funded contribution.

Separate contingency from already committed work. When a change order uses contingency, transfer the amount within the budget rather than adding both the old contingency and the new work as if each still remained available. Record cost overruns that exceed contingency as a new source requirement.

Work the eligible-cost bridge

Assume a fictional project has the following total budget. The lender accepts all stated costs except $200,000 of a $700,000 soft-cost category. The exclusion is an invented transaction decision, not a rule about any particular type of fee.

At an illustrative 70% LTC limit, the maximum based on eligible costs is $5,740,000. The remaining total project funding is $2,660,000. That consists of $2,460,000, or 30% of eligible costs, plus all $200,000 of excluded costs.

Applying 70% to the entire $8.4 million budget would produce $5.88 million and overstate the assumed loan by $140,000. The excluded costs require an additional $140,000 of borrower funding compared with that mistaken calculation; their other $60,000 was already inside the incorrectly calculated 30% contribution.

Reconcile land credit to new cash

First suppose the $2 million land is owned free and clear, the lender recognizes that entire amount as contributed equity, and all other budgeted uses remain unpaid. The $2.66 million total borrower contribution includes the existing $2 million land contribution, leaving $660,000 of new cash needed over the project. No land proceeds are assumed distributed to the borrower.

Now suppose the same land carries $800,000 of existing debt that must be paid from the new loan. Recognized net land equity is only $1.2 million under this fictional treatment. Of the $5.74 million new loan, $800,000 repays old land debt, leaving $4.94 million for the $6.4 million remaining non-land uses. New cash must therefore be $1.46 million.

Both views reconcile the same project: $5.74 million new debt plus $1.2 million existing net land equity plus $1.46 million new equity equals $8.4 million. Do not add the old $800,000 payoff to the budget again while also treating the full $2 million land value as a separate cash use; the financing bridge must avoid counting the same acquisition funding twice.

Separate commitment from draw availability

The $5.74 million maximum is not an assertion that the full amount arrives at closing. Determine which costs are paid at settlement, which are funded through later draws, whether equity must be spent first, and whether retainage or other holdbacks apply. A valid final LTC ratio can coexist with a temporary inability to pay invoices.

Track remaining eligible costs against undrawn availability and required borrower funds. If a $200,000 excluded cost falls due before the next loan advance, the owner needs a separate cash source at that date. A land contribution cannot pay that invoice without a transaction that actually releases cash.

Interest carry also changes with draw timing and rates. Confirm whether the budgeted reserve is financed inside the commitment or funded outside it. Do not count an interest reserve as construction money and then assume it separately pays interest without reducing available funds.

Test overruns without assuming the lender follows

If total remaining cost increases, ask whether the commitment can increase, whether the added cost is eligible, and which other constraints apply. A higher denominator does not obligate the lender to advance more. Value, completion risk, loan limits, and approved documentation can constrain the increase.

The finished worksheet should reconcile eligible cost, total cost, recognized prior contribution, new cash, old debt payoff, and future advances. It should also show when each source is available. That gives the investor a realistic equity requirement instead of a percentage applied to an undefined budget.