ZOOM ON...Mortgage coverage ratios (LTV, LTC and LTA)

If you have already invested with Raizers you have probably heard of the terms "LTV" (Loan To Value), "LTC" (Loan To Cost) or "LTA" (Loan To Acquisition). What exactly are these ratios? How are they calculated? How can they be interpreted?

What is the rank of my mortgage guarantee?

The first thing to look at before understanding the coverage ratios is the rank of the mortgage collateral.

Themortgage is a guarantee taken on a real estate asset, it is recorded by a notary and registered in the of land advertisements. This implies two significant guarantees:

1. In order to sell the mortgaged asset, the lender(s) must agree to the sale against reimbursement directly by the notary;
2. In the event of default on the loan, the property may be seized. Mortgages can be registered in different ranks which define the prevalence of repayment, the first rank being repaid first and so on for ranks 2 and 3 if applicable.

Therefore, the value of priority ranks must be included in the calculation of coverage ratios.

Let's take a concrete case to explain it: an operation of property dealer on a building which will be resold in 4 lots of a unit value of 250 000 €. The turnover (the value of the operation) is therefore 1 million euros. The building is purchased for €580,000 and the operator carries out €170,000 of work, i.e. a cost price of €750,000.

The mortgage taken may be of a different rank depending on the situation:

Example 1:^1st rank mortgage for a Raizers financing of 600 000 € and an equity contribution of 150 000 €.

Example 2: 2nd rank mortgage for a Raizers financing of €200,000 with a first rank bank lending €350,000 and an equity contribution of €200,000.

Loan-to-value or LTV

LTV is one of the key coverage ratios to look at when considering an investment. It is the value of the loan relative to the value of the asset at term. The lower the ratio, the better the collateral, because it means that the proceeds from the sale will more comfortably pay off the debt.

Example 1: The loan is €600,000 and the expected turnover is €1,000,000.

-> LTV = 600/1000 = 60

This means that if the property is sold for more than €600,000, Raizers will be reimbursed for the entire capital loaned.

Example 2 : Raizers second lien loan is €200,000, the bank lends €350,000 in first lien and the turnover is €1,000,000.

-> LTV = (200+350)/1000=55 %.

Contrary to what we might have imagined, Example 2 has a lower LTV because the overall debt is lower, with the operator putting up more equity. There is better coverage.

Nevertheless, it is necessary to take into account the fact that being in^2nd rank implies to be reimbursed after the bank. Thus, in the example given, it will take 350 000 € of sales to reimburse the bank, that is to say 2 lots which represent a turnover of 500 000 €. The second rank will be disinterested in the remainder of the second lot (500-350=150).

Loan-to-cost or "LTC

The CTA compares the loan amount to the overall cost of the project.

Example 1: the loan is 600 000 € and the cost of acquisition and works (the cost price) is 580 000 € + 170 000 € = 750 000 €.

-> LTC = 600/750 = 80

Example 2: the loan is 200 000 €, the bank lends 350 000 € for the same cost of 750 000 €.

-> LTC = (200+350)/750 = 73 %.

A sale at the cost of an operation represents a zero margin for the contractor. This ratio shows us our coverage in relation to the operation's break-even point.

Loan-to-acquisition or "LTA

The LTV corresponds to the share of the debt on the acquisition price of the asset. It differs from the LTV when a capital gain is made on the property (works, rehabilitation, sale with tax arrangements, sale by cutting, etc.). It corresponds to the risk taken at the time of acquisition.

Indeed, if the actions to increase the value of the asset are not carried out for various reasons, it can be valued at the acquisition price and therefore assumed to be resold at the same amount. Once again, the lower the ratio, the better the guarantee . However, it is common for this ratio to be higher than 100% in the case where the financing covers the acquisition and part of the works.

Example 1: the loan is 600 000 € and the purchase price 580 000 €.

-> LTA = 600/580 = 103 %.

Example 2: The Raizers loan is €200,000, the bank lends €350,000 and the purchase price is €580,000.

-> LTA = (200+350)/580 = 95

Here we can assume that the capital would be preserved even if the contractor did not carry out the planned work.

You now have all the keys to understand these 3 mortgage coverage ratios that you will find regularly in the content of the operations on Raizers.