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Introduction

Over the term of the loan, the interest rate is adjusted downward when defined impact outcomes are achieved. In addition to knowing how they will measure success, the parties will need to agree on the amounts of the downward adjustments tied to specified impact outcomes. The investor may want to establish a minimum rate of interest, as shown with the bracketed language in the examples.

In the first example, all of the interest is paid in regular installments over the course of the loan and is subject to adjustment.

In the second example, a portion of the interest is paid in regular installments over the course of the loan and is not subject to adjustment. The remaining interest amount is paid at maturity and is subject to adjustment.

In the third example, it is contemplated that the parties will tie multiple impact outcomes to specific rewards.

Investors will want to carefully consider the tax implications of these kinds of variable rate loans. At least in the U.S., variable rate loans may result in unexpected tax treatment, and investors will want to consider the implications of interest rates that are permitted to fall below the so-called “Applicable Federal Rate.”

Sample language for all interest paid over course of loan and subject to adjustment

Interest: A variable interest rate initially set at X percent (the “Initial Rate”). The interest rate shall be adjusted [quarterly] OR [annually] pursuant to the Impact Performance Adjustment.

Impact Performance Adjustment: [For every] OR [Upon completion of] [specify impact target], the interest rate shall be reduced by X percent [, provided that the rate shall not be reduced below the Initial Rate less Y percent.]

Sample language for a set portion of interest subject to adjustment

Interest at X percent, divided into two portions. Interest at X percent (the “Current Interest”) shall be due and payable [monthly] OR [quarterly]. Interest at X percent (the “Accruing Interest”) shall accrue, and shall be due and payable on the Maturity Date, as adjusted pursuant to the Impact Performance Adjustment.

Impact Performance Adjustment: [For every] OR [Upon completion of] [specify impact target], the rate of the Accruing Interest shall be reduced by X percent. In the aggregate, the interest due on the Maturity Date shall not be reduced by more than the total amount of the Accruing Interest.

Sample language for interest rate adjustments based on multiple metrics

The [interest rate] OR [rate of the Accruing Interest] shall be reduced by the amount shown in the table below when and if the Company achieves the corresponding outcome. In the aggregate, [the interest rate shall not be reduced below the Initial Rate less X percent] OR [the interest due on the Maturity Date shall not be reduced by more than the amount of the Accruing Interest].

Impact Metric Interest Reduction
Social Metric 1 X%
Social Metric 2 Y%

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