From Mega-event to Sustainable Urban Regeneration: The Arexpo Real Estate Development Project

A radical transformation of the urban landscape, with an enormous influx of investments and visitors, all concentrated in a narrow window of time: this is very often the impact of mega-events such as the Olympics or World Expos on the host location. But when the curtain goes down, a whole new show begins. Now the spotlight shifts to preventing the sites and the infrastructure from deteriorating, and ensuring that the regeneration process continues, with sustainability remaining center stage. Improvisation is not an option. The public institutions involved have to come up with a plan, and choose reliable partners both for the design and execution of the project, as well as the long-term management of the entire area.

A crucial moment comes when setting up the project, establishing goals, guidelines and the selection process for finding the industrial and financial partners who can best fill the need for project sustainability on various fronts: social, environmental and economic. So the tool and the methods for choosing the right partners (the invitation to tender) must be structured in such a way as to attract the best candidates to work with during the different stages of the project. This is one of the main responsibilities delegated to Arexpo, a State-controlled company founded by the Lombardy Region in 2011.

The mission of Arexpo is:

• to buy the land where the Expo Milano 2015 was to be held;
• to supervise the construction of the infrastructure that would serve the venue;
• to coordinate the post-event urban regeneration plan for the location.

Yet as proof of just how complex post-event management is, simply consider the fact not a single company participated in the first invitation to tender for the project in 2014. The episode obviously generated negative fallout on Italy’s national reputation, but the experience also inspired a clear new vision and a new goal: to create a science and technology park in the area, a hub where research institutes, big business, and startups could come together and share their knowledge.

The roadmap would be drawn up in a Strategic Plan that called for the creation of a Human Technopole, a center of global excellence for research in biomedicine and genetics, where more than 1,500 scientists would work. The area would also house a science campus of the University of Milan, and host top-tier private companies. In sum, the plan envisaged an ecosystem where the co-presence of major public and private institutions could engender synergies in value and innovation.

Once the basic vision materialized, the next imperative was to analyze methods for implementing the project that reflected the inherent technical and economic/financial principles, methods that would get potential partners engaged and committed to very-long-term sustainability. A Master Plan and a Business Plan would serve as documents to share and use as reference material, respecting relevant constraints and conditions.

The purpose of the tender was to identify a single partner with exceptional international standing that would work alongside Arexpo on two different fronts:

• Drawing up a Strategic Plan and a Master Plan for technical aspects of the project, and a Business Plan addressing economic and financial feasibility for the entire area (approximately one million square meters);
• Taking on the concession for post-event management of a significant portion of the area (from 250,000 to 480,000 square meters); the duration of the concession agreement would be variable, with a cap of 99 years.

The decision to combine the two different roles (designing the plans and managing the concession) springs from a specific need: to ensure absolute alignment between the design and execution stages, guaranteeing the highest possible standard of quality within the confines of project feasibility.

The mechanism that describes the invitation to tender calls for a detailed list of assumptions, both industrial and financial, which form the basis for the bids made by tender participants, in line with the minimum requested rent. But what’s the best way to set a minimum threshold for rent, an amount to be paid throughout the lifespan of the concession by the economic operator who wins the contract? Setting this number too high could jeopardize the economic/financial sustainability of any project, even in the eyes of leading international players. But a figure that’s too low would make it impossible for the public partner to earn a reasonable economic return as compensation for its role as promotor, guarantor, and manager for the entire area. In addition, several different strategic development scenarios need to be run to reveal possible financial constraints, which would suggest establishing a specific payment schedule. After lengthy and painstaking economic/financial analysis of alternative industrial scenarios outlined in the Business Plan, Arexpo stipulated a concession rent of no less than 91.5 million euro (present discounted value), and set a minimum threshold for single annual payments.

The procedure for evaluating the proposals was structured in a similar way. To ascertain that the bids were examined independently on technical-qualitative and economic grounds, these two aspects were decoupled and taken up separately. As far as quality, in light of standards and objectives set down in the Strategic Plan, up to 70 percent of the points could be scored. Instead, the remaining 30 percent were based on the economic-financial valuation, paying particular attention to the details of the proposal and applying economic and financial theory. To assign points for the economic offer, a comparison had to be made between heterogeneous structures that were very dissimilar in terms of timelines and capital invested. An innovative move was Arexpo’s decision to use the Equivalent Annual Annuity method, which makes it possible to compare projects with different life spans. They used a new version of the EAA that also takes into account a structure of interest rates where the discount factor is higher on the long-term horizon and lower for the short-term cash flows.

After this step in the evaluation process is complete, the bid that scored the highest total points would have to pass yet another test: long-term sustainability. The analysis here would focus on the alignment between the proposed Master Plan and the Business Plan, the plausibility of the Business Plan and the relative estimated cash flows. For each lot of land in the area (whether or not it’s part of the concession), the plan had to specify what purpose it would be used for, and the corresponding revenues that would be generated, taking into account prices and rents on the space in question, the rate of occupancy, the sales plan, maintenance costs, discount rates, and so forth.

At the conclusion of the tender in November 2017, the winner was a consortium headed by a leading international company based in Australia called Lendlease, with a 671 million euro bid (present value) for a 99-year concession.

• The evaluation of urban regeneration projects that cover vast areas for a medium-to-long period of time must be structured in such a way as to take into account both technical-qualitative factors as well as economic-financial considerations. Entrusting both project design and execution to the same company can be a valid strategy for guaranteeing high standards that are also sustainable over time.

• Tools, methods, and performance indicators can be developed that make it possible to compare projects and bids that differ even quite substantially in terms of time horizons. This ensures greater flexibility, enlarging the pool of actors who would be interested in bidding on a given tender or concession.

• The Business Plan is an essential tool for all stakeholders during every stage of the development process for urban regeneration projects. In a tender for such projects, the Business Plan serves the following purposes: to test the economic potential and actual sustainability, consistent with the project profile, when preparing the tender detailing the structure, the KPIs and the minimum rents; to make an objective comparison, when evaluating proposals, between economic proposals that are deeply divergent in terms of concepts and economic ratios; to analyze the sustainability of the winning proposal as the translation of the strategic vision in economic/financial terms; and to provide an additional means for sharing the economic/financial plan with partners (both public and private) during project development and management; this is vital for monitoring the progress of building work and to get the project back on track if there is any deviation from the plan.