Problem

The owner of an office building is interested in selling the building in order to raise capital for development of a large shopping mall. The building has a 30-year, 7% mortgage with 20 years of remaining payments; the original mortgage principal was $200 million. The building is fully occupied by tenants who have long-term leases of at least 20 years. The owner enjoys net income of $1 million per month after paying all operating expenses and the mortgage payment. The new owner would be able to take over the existing mortgage.

a. What is the minimum offer that the owner would accept, assuming that the owner's discount rate is 20% (reflecting the owner's opportunities to pursue lucrative new developments)?

b. What is the maximum offer that a purchaser would make, assuming that the new purchaser plans to take over the existing mortgage and has a discount rate of 12% (reflecting potential purchasers who are interested in obtaining relatively safe long-term investments)?

c. What is the maximum offer that a purchaser would make, assuming that the new purchaser is able to refinance the remaining amount on the mortgage as a 30-year, 6% loan, and has a discount rate of 10% (reflecting the lower risks associated with securing the new financing).