Understanding LVR in Private Credit
Why private lenders look at Loan-to-Value Ratio differently than traditional banks, and how it impacts your deal.
Loan-to-Value Ratio (LVR) is a fundamental concept in property finance, but private lenders often approach it differently than traditional banks. Understanding these nuances is crucial for brokers and developers when structuring a deal.
The Bank Approach vs. Private Credit
Traditional banks typically calculate LVR based on the "as is" value of the property or the purchase price, whichever is lower. They are highly conservative and often require significant equity upfront.
Private lenders, on the other hand, are often more flexible and look at the Gross Realisable Value (GRV) or the "as if complete" value of a project. This allows developers to borrow against the future value of the asset, which is essential for construction and development finance.
Key Factors Influencing Private LVR
- Asset Class: Residential projects typically command higher LVRs (up to 70-75%) compared to commercial or specialized assets (often capped at 60-65%).
- Location: Metropolitan areas with strong liquidity and demand support higher LVRs than regional or specialized locations.
- Sponsor Strength: A developer with a strong track record and solid net asset position can often negotiate better LVR terms.
- Exit Strategy: A clear, viable exit strategy (e.g., strong pre-sales or a solid refinance plan) significantly mitigates risk, allowing for a more favorable LVR.
The Importance of "Loan to Cost" (LTC)
While LVR is critical, private lenders also heavily scrutinize Loan-to-Cost (LTC). Even if a project has a low LVR based on the end value, a lender will rarely fund 100% of the project costs. Developers are generally expected to contribute "hurt money" (equity) to align interests. A typical private credit deal might see an LTC of 75-85%, requiring the developer to fund the remaining 15-25%.
Conclusion
By understanding how private lenders assess LVR and LTC, brokers can better structure deals, manage client expectations, and secure funding more efficiently. At Vía Capital, we pride ourselves on taking a commercial, pragmatic approach to valuation and risk.