What LTV is in real estate crowdfunding and why the percentage you see can mislead you
Of all the figures on a project's fact sheet, there is one that tells you how much margin you have if things go wrong. It isn't the return, or the term: it's an unassuming percentage, usually between 50% and 70%, labelled LTV.
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And it is the most misunderstood figure on the whole sheet, because two projects with the same LTV can have completely different safety margins depending on what it has been calculated against.
What it is, in a single division
LTV stands for loan-to-value: the size of the loan relative to the value. It is calculated by dividing the amount lent by the value of the asset backing that loan.
If a developer borrows €600,000 and the mortgaged land is worth €1,000,000, the LTV is 60%. That means that, on paper, the asset could lose up to 40% of its value and the sale would still cover the debt. With an LTV of 80% that cushion shrinks to a fifth of the asset's value, and any dip in the market or any optimistic valuation eats it up entirely.
The lower the LTV, the more margin there is before a problem turns into a loss for whoever has lent the money. It is the idea of a cushion, expressed as a number.
The real margin is narrower than it looks
The 40% cushion in the example is theoretical, and a few things need to be deducted from it.
Recovering the money through the collateral involves a procedure that costs money and time, and those costs come out of whatever is recovered. What's more, an asset that is sold because it has to be sold almost never fetches the price of an unhurried sale, so the final amount usually ends up below the valuation. And while all this is happening, the interest you expected to receive isn't coming in.
None of this cancels out the cushion, but it explains why an LTV of 75% leaves a good deal less breathing room than the subtraction suggests.
The catch is in the denominator
This is why two identical LTVs are not comparable.
The question is which value has been used at the bottom of the division. Some deals calculate it on the asset's current value, which is what the land or the building is worth today, as it stands. Others calculate it on the value of the development once it has been completed and sold, which is a future, estimated value and considerably higher. Sometimes it is labelled LTGDV, or LTV on gross development value, and sometimes it simply says LTV.
The difference isn't academic: a €600,000 loan against land worth €1,000,000 today is an LTV of 60%, and that same loan against a development that will be worth €3,000,000 once it is built and sold is an LTV of 20%. The project is identical, the risk is identical, and the figure on the fact sheet gives a completely different impression.
If the percentage looks surprisingly low, that is the first thing to check.
Who sets the value, and how old it is
An LTV is only as reliable as the valuation behind it.
It is worth knowing whether the valuation was carried out by an independent valuation firm or is an internal estimate by the developer, and above all what date it is from. A report from two years ago describes a market that may have changed, and the value of a plot of land moves a lot depending on the timing and on whether the building permit has been granted or not.
It is also worth checking whether any creditor ranks ahead of you. If a bank already has a mortgage over that same asset, the percentage that affects you is not just that of your loan but that of all the debt stacked on the asset, and you are at the top of that pile.
An LTV is a snapshot, not a film
The percentage you see was calculated on the day the project was published.
From then on, everything moves. If the works progress, the asset is worth more and the real LTV improves. If the market cools or the works stall, the opposite happens. In long deals, that initial snapshot may bear little relation to the situation two years later, which is exactly when it would matter.
That is why LTV should be read alongside everything else: what has to happen for you to be repaid, and what collateral stands behind it if that doesn't happen.
What LTV doesn't tell you
It's worth being clear about its limits, because it is a measure of damage, not of probability.
A low LTV doesn't make a project succeed: it says nothing about whether the developer knows how to build, whether the building permit will arrive on time or whether the flats will sell. All it tells you is how far the value can fall before whoever lent the money starts to lose. A mediocre project with an LTV of 45% is still a mediocre project.
And in equity deals this figure doesn't even apply, because there is no loan or mortgage: you are a shareholder, not a creditor.
