# Can someone explain this contract gibberish to me



## Pharmer (Feb 15, 2015)

Hi guys,

I'm getting a commercial loan from a lender and I'm just going over the terms in the contract. It's 2.5 million, 5 year term, amortized over 10 years. 

I'm going over what happens to the loan if you decide to sell your business. It says that you have to pay them back the value of all the payments you owe until the end of the term date "*at the then current yield prevailing for a Government of Canada bond with term remaining most closely approximating the period of time remaining hereunder at such time to the Term Date, and all other accrued and then unpaid interest*"

I just need to figure out what that bolded part means. Any ideas? I'll ask my lawyer eventually but he is away till Wednesday at the moment.

Thanks.


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## bouquets (Dec 1, 2013)

Pharmer said:


> Hi guys,
> 
> I'm getting a commercial loan from a lender and I'm just going over the terms in the contract. It's 2.5 million, 5 year term, amortized over 10 years.
> 
> ...


Off the top of my head, it looks to me like this says that if you try to pay the loan off (say) two years early. They'll make you pay the interest that you would have paid over those two remaining years, but the rate of interest for those two years will be the rate of a GOC bond maturing in two years. If, when this happens, you're behind a payment or two, you still owe the interest for that ('accrued and then unpaid').


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## Xoron (Jun 22, 2010)

No experience with Commercial Loans, but I'd guess it would be the rate, of a GOC bond, with a term to maturity = loan remaining.

So, if the loan has 5 years left, then you'd look at the yield of a 5 year GOC bond.


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## kcowan (Jul 1, 2010)

Looks like an onerous term is the probability of sale within 5 years is high.


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## Just a Guy (Mar 27, 2012)

Basically, you're entering into a loan where you are agreeing to pay out all the interest owing on the loan, even if you decide to pay it out early, unlike a mortgage where you are responsible for only 3 months interest, or the loan differential in most cases. 

This is fairly standard as most lenders are committing their money and expecting a return for that period. It would be like you investing money at a guaranteed rate, you wouldn't be happy if, halfway through ther term, the bank came back and said "I know we promised you 5% return, but they paid it back early so you only get 3%".


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## Rusty O'Toole (Feb 1, 2012)

Looks like a ripoff to me. You pay them back the cash, plus the interest they would earn on a government bond, then they loan the money to someone else and collect interest twice. I have heard of a penalty of 3 months interest but if they expect to be paid for the full term of the loan it is ridiculous.


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## gt_23 (Jan 18, 2014)

Pharmer said:


> Hi guys,
> 
> I'm getting a commercial loan from a lender and I'm just going over the terms in the contract. It's 2.5 million, 5 year term, amortized over 10 years.
> 
> ...


For a transaction like this, you really should be asking a lawyer this question, not an online forum.

The spirit of this phrase is pretty standard in business contracts. If you terminate the contract due to sale (presumably convenience too?) then you have to compensate the other party for the value of the contract as if it had been executed as per the original terms. In this case, you have to pay them all the interest they would have earned to the end of the term + the outstanding balance. It's a bit punitive considering they can reinvest the outstanding balance while collecting the penalty from you, so you might want to try negotiating it to something less punitive, although it's unlikely they will remove this sort of penalty altogether.


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## Pharmer (Feb 15, 2015)

Thanks everyone for the responses. 

Just out of curiosity, since GOC bonds are in the toilet right now (3-5 year bonds are sitting at a 0.6 yield), would I owe them only 60% of my total loan + the interest?! 

The payments till the end of the term (i.e. 5 years) do *not* comprise the whole amount of the loan (i.e 2.5 million) as after the 5 year term there is a balloon amount you can pay out. 

Again, I will get in touch with my lawyer on Wednesday but I'm just trying to wrap my head around it before I talk to him.

Thanks.


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## Just a Guy (Mar 27, 2012)

Rusty O'Toole said:


> Looks like a ripoff to me. You pay them back the cash, plus the interest they would earn on a government bond, then they loan the money to someone else and collect interest twice. I have heard of a penalty of 3 months interest but if they expect to be paid for the full term of the loan it is ridiculous.


If the rates go up, you (as an investor) would want the banks to pay you more interest, but the banks have lent out the money at a set rate, for a set time. As a borrower, you'd be against them changing the terms of the loan just because rates went up.

The same works in reverse, if rates go down, the banks have promised lenders a set rate which can no longer be matched as rates have dropped...lenders wouldn't be happy if you broke the loan just to get lower rates.

That's why the damages are put in...also, as a lender, you can't "call" the loan early without forfeitting a lot of your returns. It's usually a two way street.


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## gt_23 (Jan 18, 2014)

Pharmer said:


> Thanks everyone for the responses.
> 
> Just out of curiosity, since GOC bonds are in the toilet right now (3-5 year bonds are sitting at a 0.6 yield), would I owe them only 60% of my total loan + the interest?!
> 
> ...


You have to pay back the loan + the penalty. Say you sell after 1 year, with 4 years to go on the contract and the 4 Year Canada yields 60 bps, then you'd owe them:

$2.50mm + (2.50mm x 4 years x 60 bps) = $2.56mm


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