Q1 A / B

You are considering leasing an office suite to one of the following two tenants: 1) a hedge fund with a credit rating of BBB-; and a law firm with a credit rating of AAA. The hedge fund has offered to sign a 5-year lease with annual payments of $550,000 at the end of each year, and the law firm has offered to sign a 5-year lease with annual payments of $500,000 at the end of each year. Because of the difference in credit quality, you believe an appropriate discount rate for the hedge fund lease is 11%, while the law firm lease should carry a discount rate of only 5.50%. Based on your estimates of the present values of each of these leases, you have asked the hedge fund to make an additional one-time payment today in order to secure the suite. How much must this additional payment be in order to make you indifferent between leasing to the law firm and hedge fund? You are considering the purchase of a retail property. You expect rents on the property to grow at a rate of 2.86% per year forever. You also believe an appropriate required rate of return on this type of asset is 8.64% per year. When valuing the property using the direct cap method, what going-in cap rate should you use? Answer in percentage points to two decimal places, e.g., 5.81 instead of .0581