Question: Believe it or not, Bob has amassed quite a lot of human capital in the form of his property management expertise. For every 100,000 SF of property Bob manages, he can earn $20,000 per year of net ‘‘wages,'' over and above what he could earn doing anything else with his time. Over Bob's expected remaining active lifetime, these earnings amount to a present value of $200,000 for every 100,000 SF he manages permanently. Bob has the capacity to manage up to 1,000,000 SF of property at any given time. However, Bob likes to work on his own, and so he prefers to manage his own properties rather than hiring himself out as a third party manager. (This is more efficient and allows Bob more freedom and flexibility to use his expertise to the maximum.) The types of properties Bob knows how to manage cost $50/SF and come in buildings of 100,000 SF each. Suppose Bob has access to over $100 million of equity capital, consisting of his own wealth and that of some partners whom he feels comfortable with and that he knows they will not interfere with his property management practices.

a. What is the value to Bob of being able to borrow up to 80% of the value of any properties he buys?

b. Now suppose Bob can access only $10 million of equity without jeopardizing his ability to control management. What is the value to Bob of being able to borrow up to 60% of the value of any properties he buys? What is the value to him of being able to borrow up to 80% of property value?