Refer to problem 6. Assume that another alternative is a convertible mortgage (instead of a participation loan) that gives the lender the option to convert the mortgage balance into a 60 percent equity position at the end of year 10. That is, instead of receiving the payoff on the mortgage, the lender would own 60 percent of the property. The loan would be for $900,000 with a contract rate of 9 percent, and it would be amortized over 20 years. Assume that the borrower will default if the property value is less than the loan balance in year 10.

a. What is the lender’s IRR if the property sells for the same price in year 10 as the previous example?

b. What is the lender’s IRR if the property sells for only $1 million after 10 years?

c. What is the lender’s IRR if the property sells for only $500,000 after 10 years?