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An office building in San Francisco is for sale
An office building in San Francisco is for sale. The asking price is $89 million. The building has 150,159 square feet of Class A space. The real estate agency believes the office can generate annual rent of $3,1 15,000. What is the maximum interest rate the buyers can pay and still increase their net worth?
Expert Solution
Answer:
The annual rent is $3,115,000
Let us assume it is for indefinte period.
Let us assume at interest rate r the present value of the future rents will be equal to investment of $89 million.
So, $89,000,000= $3,115,000/r
or , r = $3,115,000/$89,000,000= 0.035
So the required interest rate to recover investment is 3.5%.
Therefore to increase their net worth the interest the buyers can pay will be less than 3.5%
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