INTM579040 - Thin capitalisation: lending against asset values: UK third-party practices - loan to value ratios in property lending

The loan to value (LTV) ratio is the proportion of the value of a property that a lender is prepared to lend. It is most often expressed as a percentage.

The value of a property can vary depending on how it is calculated. For example, property can be valued let or unlet. In the commercial market a let property will generally have a greater value because what is being bought incorporates an income stream. For valuation purposes, it can also make a difference how fast a property might be expected to sell.

Consideration should be given to the nature of any formal independent valuation, in particular:

• Who were the valuers? What is their standing?
• Who instructed the valuer? Who was the valuation addressed to? If not addressed to the lender could the lender rely upon it?
• Are the instructions enclosed with the valuation document, is the Valuation report signed and dated?
• Valuations have a time limit. They are usually valid for three months, after which the valuation lapses and a new one has to be carried out. This is because the Professional Indemnity Insurer will only cover the Valuer for a period of time. In a highly volatile market it maybe that a valuation will only be valid for a month. This frequency of update is very unlikely to occur in an intra group situation, but should be done with reasonable frequency, depending on the state of the market.

A term which is often used is that of yield. This is the rent the property is currently generating expressed as a percentage of its value. Yields vary depending on economic circumstances as well as the security of the property and its income stream. The lower the yield in a stable market generally means the higher the value of the property. Yield can also be influenced by the credit status of a tenant, the terms of a lease and any insurance against default.

Experience has shown that the maximum LTV is around 90%, and then only under the most favourable circumstances, such as prime property and an ample ability to service the debt. The more normal LTV range is much lower than this, though if a specific range was quoted here, it would quickly become dated.

These value ranges presuppose no existing security interest over the property. If the borrower has debt other than that provided by the senior lender (typically holder of a first charge over a property) from another lender, including intra-group loans, the senior lender may reduce the LTV to ensure that the borrower can service its debt. This especially applies if the other lender could or would obtain a charge over the property ranking behind the senior lender.

As might be expected, third-party lenders are more prepared to make a loan if land or buildings are available to put forward as security. They will still, however, look closely at the borrower’s capacity to service debt, and are likely to want financial conditions in the loan agreement (ratios covered extensively in this guidance) to ensure that this capability continues.