Okay.
The first thing is that we had no guidance on what they were using, so we used what we thought was the appropriate rate, which was the borrowing cost to the federal government at the time. So most of the work we did in the first round of our support to the group was actually at 4%. We tried a variety, though, at 4.5%, 5%, and so on.
We then repeated the work after they had released some of their studies, because at one place in there it was stipulated that the lessor was supposed to use 4.7%. So we said, “Let's see what it looks like with that and see if we get the kinds of numbers that they're getting on this.” But then what you observe is that it's used only for discounting the lease amounts that are paid out, and that for other purposes much higher rates are used—in particular, in trying to put a value on the residual value of the property after 25 years.
The Deutsche Bank was suggesting that should be discounted back to the present at 9%, which makes it essentially valueless in the analysis that anyone is doing. They don't justify where that rate comes from, although that is a number that a real estate developer would no doubt like to get on anything that he's doing.
The other term or the other amount that comes in is a 6% discount rate, and this is based on the valuation of the building. This is based on the private sector experience, over a long period of time, of properties where people are not always occupying them on a steady basis, not necessarily always paying, so there is a discount on the value of a building. When you're trying to buy a building, you say, “What's the lease amount that I have and can expect? What is that divided by--let's say, 0.06 versus 0.045 or 0.047?” In that case, it would have the net effect of lowering that residual value or the value of the building more generally.
Again, it's not clear that in this case you should be using that kind of discount rate, for two reasons. One is that if you believe the central bank, we are in a new world of inflation at 2% or less. So much of the experience in the past, going back into the 1980s and early 1990s, of much higher inflation rates would have coloured your view of what would be the appropriate discount rate to use.
The other thing in this whole transaction that is not brought front and centre and we thought should be is that we're talking about the government here. We're talking about a government that can borrow funds more cheaply than anyone else in Canada. So it struck us that this really represents the alternative.
If they're selling this, the purpose of which is to raise some money, to get $1.4 billion, why don't you just go out and borrow $1.4 billion? What does that cost you? Currently, that costs you between 4% and 5% to borrow, depending on the term and the nature of the structure of the deal you have. Why would you want to be selling the stuff off and doing so on the basis of someone else borrowing money at 6% or 9% in order to buy it from you?
The discount rate in transactions of a government strike me as requiring special treatment, because they are special. They are in a position to provide that risk-free financing and borrowing, well beyond the capacities of any of the people on the other side of the transaction.