Leverage measures how much of the collateral’s value or cost is financed by the loan. It is the most direct expression of the cushion beneath a lender: the borrower’s equity absorbs losses first, so the lower the leverage, the further value can fall before principal is at risk. Our published limits are up to 75% loan-to-cost and up to 65% loan-to-value. This entry explains what those ratios mean, how they are measured and how they interact.
The core ratios
| Ratio | Formula | Typical use |
|---|---|---|
| Loan-to-value (LTV) | Loan ÷ appraised or underwritten value | Real estate, equipment, portfolios |
| Loan-to-cost (LTC) | Loan ÷ total project cost | Acquisitions with renovation, construction |
| Advance rate | Loan ÷ eligible collateral, by asset class | Receivables, inventory, loan pools |
| Debt ÷ EBITDA | Total debt ÷ trailing or adjusted EBITDA | Cash-flow lending to operating companies |
| Loan-to-NAV | Loan ÷ net asset value of a portfolio | NAV lending |
Loan-to-value
LTV compares the loan to what the collateral is worth. The difficult part is the denominator. Real estate lenders commonly distinguish as-is value (today, in current condition), as-complete value (once construction or renovation is done) and as-stabilized value (once the asset is leased and operating as planned). A loan can look conservative on a stabilized value and aggressive on today’s value. We pay most attention to the value we could realize today, because that is what protects us if the plan stalls.
Loan-to-cost
LTC compares the loan to the total cost of the project: purchase price, closing costs, capital expenditure, reserves and, where relevant, carry. It answers a different question from LTV: how much of their own money has the sponsor put in? A sponsor who buys well can show a low LTV and a high LTC at the same time, or the reverse if they paid a premium.
Why both matter
We apply both tests and the tighter one generally governs. LTC protects against a sponsor who has little equity in a deal; LTV protects against a basis that has drifted above what the asset is worth.
Worked example (illustrative arithmetic)
A sponsor buys a building and plans a renovation. All figures are illustrative.
| Item | Amount |
|---|---|
| Purchase price | $20.0M |
| Renovation budget | $4.0M |
| Closing costs and reserves | $1.0M |
| Total cost | $25.0M |
| As-is appraised value | $22.0M |
| As-stabilized value | $30.0M |
- At 75% loan-to-cost, the maximum loan would be $18.75M.
- At 65% of as-is value, the maximum loan would be $14.3M.
- At 65% of as-stabilized value, the figure would be $19.5M, but we do not size a transitional loan to value that does not yet exist.
The as-is test governs, so the loan in this illustration would be sized nearer $14.3M at closing. A common structure would then fund part of the renovation as future advances, released only as work is completed and verified, so that the loan grows as value is created. Construction draw control is the mechanism; real estate bridge and construction loans explains it further.
Advance rates
For assets that turn over, such as receivables, inventory and loans in a pool, leverage is set as an advance rate against each class of eligible collateral rather than a single ratio. In the asset-based market, advance rates against eligible receivables are commonly higher than against inventory, and inventory is often advanced against its appraised net orderly liquidation value rather than cost. Equipment is typically advanced against an appraised liquidation value. Ineligible items, such as old or disputed receivables or obsolete inventory, receive nothing. The borrowing base explained sets out the mechanics.
Debt multiples
Lenders to operating companies without hard collateral usually size against EBITDA: total debt as a multiple of earnings. Multiples depend heavily on the quality of earnings and the adjustments made to them, and they can move quickly in a downturn. We look at cash-flow leverage for corporate borrowers, but we underwrite to the value of what secures the loan rather than to EBITDA multiples alone. Cash flow versus asset-based underwriting compares the two approaches.
Loan-to-NAV
NAV loans are typically sized at low loan-to-NAV ratios, because the collateral is a portfolio of private investments whose values are marks rather than prices. Diversification, concentration limits and stress cases matter as much as the headline ratio. See NAV lending explained and the Keystone case study.
Leverage through the life of a loan
Leverage is not fixed at closing. It changes as the loan funds future advances, as interest accrues (especially if part of it is paid in kind), as the borrower amortizes and as the collateral changes in value. Loan documents often address this with:
- LTV maintenance tests or rebalancing rights, requiring a paydown if value falls below a threshold.
- Extension conditions, under which an extension is available only if leverage and coverage tests are met at that point.
- Release prices, requiring a paydown above the allocated loan amount when an individual property or asset is sold from a pool.
Red flags in leverage
- A value that relies on a plan rather than on today’s condition.
- A cost basis that includes fees, developer profit or related-party charges without disclosure.
- Equity that is really borrowed elsewhere, or contributed as land at a stepped-up value.
- Advance requests against collateral that would be ineligible on inspection.
How this connects to our criteria
Our limits of up to 75% loan-to-cost and up to 65% loan-to-value appear on our criteria page, where you can check a request against them. They are ceilings. Coverage, the liquidity of the exit and the quality of the valuation frequently argue for less, and the overview of how we underwrite explains how the tests fit together.
This entry is general information as of November 2026, not investment, legal or tax advice, and not an offer of securities.