Even though it bears the name of Ludovico Maria Sforza, called Il Moro, duke of Milan from 1494-1499, the Palazzo was actually commissioned by Antonio Costabili, an important nobleman of the court of duke Ercole I d'Este, secretary and Ambassador for the Este in Milan. The building was projected by Biagio Rossetti , the most distinguished ferrarese architect of the Renaissance, to whom the duke Ercole in 1492 entrusted the grand plan of urbanistic reorganization of the city, the so called "Herculean Addition“. The realisation of the project involved many prominent stonemasons and painters, but the building remained unfinished. A complex restoration to the structure, its decoration, and the gardens, completed in 2010, had the purpose of bringing back its original splendor, and making it completely accessible to the public.
The palace rose on the ancient Via della Ghiara (Gravel street, today Via XX Settembre), named for the gravel deposited by an ancient branch of the river Po that used to flow here.The construction of the building, according to local historians, was suggested by Ludovico il Moro himself, who wanted to have a safe exile, in case he was to lose his duchy. It is also a testimony of historical and political alliances between the two cities, Ferrara and Milano, already strengthened by matrimonial bonds-Lodovico was married with Beatrice, the daughter of Ercole I, and was the uncle of Anna Sforza, married with Alfonso d'Este.
Central point of the palace is the Courtyard of Honour, completed only on two sides and adorned with a double lodge with sculptural decorations in white stone. This work was probably executed by Gabriele Frisoni, to whom the marble monumental staircase that leads the visitor to the noble floor is also attributed.