CBRE recently built a 10 story office building in Chicago. The building was constructed both to house its own corporate offices (on 8 of the floors), and to lease out the other 2 floors to commercial tenants. The building cost $100 million, and CBREs cost of capital is 10% per year. An investment bank has reached out to CBRE to inquire about a long-term lease for the two remaining floors. Since investment banks are notorious for tough bargaining, CBRE has retained you to advise them on the minimum acceptable lease offer. CBRE has three possible choices for utilizing the two remaining floors:

• Continue to leave the two floors unfinished and unoccupied.

• Lease to the investment bank. This requires finishing the space at a (one-time) cost of

  $700,000.

• Use the space as the back office and customer service center for CBRE. Finishing the space for this would be a one-time cost of $450,000. The firms current back office and service center are located in leased space for which CBRE pays $120,000 per year.

  What is the minimum annual lease payment that CBRE should accept from the bank? Explain.