PRP obtained a $$10$ million convertible mortgage to finance the aquisition of a $12\mathrm{.}5$ million office building. The mortgage features a fixed interest rate of $9\%$ over $25$ years, with payments due monthly. Additionally, the lender holds the option to convert the mortgage balance into a $50\%$ equity stake in the property at the end of the fifth year, instead of receiving the payoff.

If the property sells for $$15$ million after $5$ years, calculate the lender's IRR $($effective cost of borrowing$)$ on this loan.

Alternatively, if the property sells for $$20$ million after $5$ years, calculate the lender's IRR $($effective cost of borrowing$)$ on this loan.

If the property sells for only $$7\mathrm{.}5$ million, calculate the lender's IRR cost of borrowing on this loan. Assume that the borrower would default if the property value is less than the loan balance in year $5.$

Answer rating: 100% (QA)

Calculating Lenders IRR for PRPs Convertible Mortgage This scenario requires using an Internal Rate of Return IRR calculation to determine the effective cost of borrowing IRR for the lender under diff... View the full answer