Jpif 06 2016 0038

Journal of Property Investment & Finance
Evaluation of vacant and redundant public properties and risk control: A model
for the definition of the optimal mix of eligible functions
Francesco Tajani, Pierluigi Morano,
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Optimal mix
Evaluation of vacant and of eligible
redundant public properties functions
and risk control

A model for the definition of the optimal mix 75
of eligible functions Received 1 June 2016
Revised 10 September 2016
Francesco Tajani and Pierluigi Morano Accepted 20 October 2016
Department of Science of Civil Engineering and Architecture,

Politecnico di Bari, Bari, Italy
Abstract
Purpose The purpose of this paper is to propose a decision-support methodology for public and private
subjects involved in the enhancement of public properties. In particular, with reference to cases in which the
disused public property can be sold and the range of functions that define the highest and best use of
the conversion was identified, the developed model allows for the assessment of the financial feasibility of the
initiatives, in relation to the corresponding investment risks.
Design/methodology/approach The proposed model integrates the mathematical logic of goal
programming for the evaluation of the financial conveniences of the parties (public and private) involved in
the enhancement of a public property with statistical approaches (value at risk+exponentially weighted
moving average) so as to determine the investment risk of the private investor. The application of the model
to a real case study highlighted the potentialities of the proposed methodology.
Findings The model allows to determine: the optimal mix of intended uses to be realized in the public
property under analysis; the fair value of the public property for the parties involved in the transaction; and
the Pareto-optimal frontier of the expected profits, as a function of the risk appetite of the private investor.
Practical implications The defined model responds to the growing international interest in the
enhancement of public buildings, satisfies the objectives of the substantial reduction of soil sealing and urban
sustainability, stimulates the urban regeneration of deprived areas of the cities through the reactivation of
large buildings that have been disused or underused for too long.
Originality/value The present research allows to provide effective evaluation tools capable of outlining
the opportunities of redevelopment initiatives and examines the risk factors that often invalidate the initial
forecasts of the private entrepreneur and/or stop the activation of investments.
Keywords Public-private partnership, Evaluation of public buildings, Goal programming, Investment risk,
Property transfer, Risk appetite
Paper type Research paper
1. Introduction
The enhancement of public assets in disuse is among the main topics of the urban policies of
many European countries. Public properties include areas, buildings, entire real estate
portfolios which are different in size, condition of maintenance and preservation, location
and primary intended use. The list of these properties is long and includes military
garrisons, prisons, industrial areas, hospitals, schools, government offices, railways,
religious buildings, electrical substations, warehouses, social housing, etc.
In many cases, they are properties that, initially marginal or even outside the perimeter
of the city, were incorporated and are currently located in strategic positions for conversion
to new functions, characterized by high market values related to the phenomenon of urban
rent. In other cases, the properties are located in central areas, characterized by high Journal of Property Investment &
Finance
historical and architectural quality and have a significant size. Vol. 35 No. 1, 2017
pp. 75-100
Emerald Publishing Limited
1463-578X
The paper is to be attributed in equal parts to the two authors. DOI 10.1108/JPIF-06-2016-0038
JPIF The physical and functional enhancement of public properties and the rationalization of
35,1 their spaces constitute a chance to improve the image and property values of entire urban
areas; correct, with quality interventions, the failures caused by quantitative growth, satisfy
the needs of public spaces and residential units, avoid the soil sealing of new areas; and
reduce, through their selling, the deficit of the budget of the public administration.
Up until 2007 in many European countries, the enhancement of public buildings was
76 conducted primarily in terms of its alienation, i.e. the transfer of the property to another
entity, public or private. The dominant idea was that this enhancement strategy, on the one
hand, would operate as a panacea for reducing the national debt, respecting the constraints
of the European Stability Pact; while on the other, it would transfer to private investors,
provided with financial resources and qualified expertise, the risks related to the
transformation and management operations of the properties.
However, since 2008, mainly due to the economic downturn, the alienation of public
properties has been characterized by a deadlock. The failure of numerous auctions, almost
deserted, has highlighted the difficulties of private investors, related to the sale of complex
properties, characterized by considerable sizes, substantial redevelopment costs, with
long and uncertain administrative procedures for the change of their intended uses.
The worsening of the economic recession, the credit crunch, the current slowdown in the
housing market and the fear of a fire sale of public assets, have lead most investors to
assume a waiting attitude and to develop the idea of public assets as resources to be used to
achieve strategic objectives. In this sense, the enhancement of public buildings even those
of cultural heritage must be a synthesis of the traditional passive protection of these assets
and their productive uses, through modalities compatible with their nature and vocation.
Currently, the tendency in all European countries is to entrust the enhancement of public
buildings in disuse to new special entities, in terms of sales to third parties as well as
rationalization for the economic management of the property.
Therefore, in Germany, in 2005 the central government unified the entities responsible
for the administration of public assets, by establishing a federal central agency,
Bundesanstalt fr Immobilienaufgaben (Bima). In addition to managing a total of about
39,000 public properties, Bima deals with the development and implementation of the
alienation strategies of properties that do not offer high yields or that are difficult to convert
due to their size or intended uses. These properties are mainly former military areas to be
transformed into residential units, public spaces or guest accommodation.
In 2011, Greece set up the Hellenic Republic Asset Development Fund S.A., whose purpose
is to maximize the income from the valorization and sale of public assets. The divestment
program prepared by the government relates to 70,000 public properties, with a total value of
around 25 billion euros. The properties involved in the program are: areas located in tourist
territories, hotels, historical buildings as well as 28 public representative buildings, including
the headquarters of the Ministry of Culture, the Ellenic Statistical Authority and the main
building of the Ministry of Internal Affairs, sold with the sale and leaseback modality.
In 2007 in France, the Service France Domaine was established, which deals with the
management of state properties and their enhancement and sale, through the elaboration of
multi-annual programs. Between 2006 and 2011, the French government handled the sale
of public properties for a total of about 2 billion euros. Currently, there is an alienation plan
that includes 6 percent of public assets, i.e. approximately 2,000 properties. These public
properties are mainly buildings belonging to the Ministry of Defense, offices, lighthouses
and forest refuges.
In the UK, the value of public properties amounted to about 370 billion pounds.
The government has adopted a policy aimed at the rationalization of its assets through an
efficient management and the sale of properties in surplus. In 2010, the Government
Property Unit was created.
In Spain, in 2013, the central government approved the Programa para la puesta en Optimal mix
valor de los activos inmobiliaros of estado, involving more than 15,000 public properties. of eligible
Through this program the Spanish Revenue Agency aimed to optimize the use of public functions
assets, through their enhancement, while also increasing alienations in order to raise
revenues for the State.
In Belgium, the Administration Services patrimoniaux is the organization responsible for
the management and sale of public properties that operates within the Service Public 77
Federal Finances. In particular, properties reported by the authorities as unused are subject
to alienation. The sale transaction is carried out by the Comits dacquisition.
In Ireland, the Public Service Reform Plan 2014-2016 was created, which, in the Property
Asset Management section, identifies among the objectives the rationalization of the costs
of the public assets management. The plan, though mainly focusing on the efficient
management of public services, also includes the sale of surplus state-owned assets
among the tools to reduce the costs of public properties.
In Italy, the enhancement of public assets has recently been referred to several entities,
among which the following are worth mentioning: the State Property Agency, which, in
addition to the direct recovery of State properties, also has the role of advertising of public
properties on the homonymous website. Invest in Italy Real Estate, which, through the
homonymous website, presents a selection of public properties to be sold; Cassa Depositi
e Prestiti Investimenti Sgr, that is a company that works to stimulate and optimize the
alienation processes of public assets, through the Investment Fund for Living and the
Investment Fund for the Valorization; Investimenti Immobiliari Italiani SpA, that aims to
take advantage of opportunities arising from the general enhancement and alienation
processes of public assets, through the establishment, organization and management of real
estate investment funds.
Furthermore, in Italy several regulations were issued, aimed at rationalizing the
divestment of public properties. In particular, it is worth mentioning Law No. 98/2011
and 133/2013, and Article 26, Law No. 164/2014. With Articles 33 and 33-bis of Law
No. 98/2011, new financial vehicles to increase the economic and social value of public
properties have been introduced. Article 33 provides for the creation of an integrated
system of real estate funds, with the aim of increasing the efficiency of the redevelopment
processes of properties owned by the State and local authorities. Specifically, through the
decree of the Minister of Economy and Finance, the constitution of an asset management
company has provided for the establishment and management of one or more real estate
investment funds, that pursue strategic objectives, including the reduction of public debt.
In Article 33-bis, the enhancement and management activities of public properties are
defined that, by using the public-private partnership and the institutional consultation,
establish operational models that provide for the direct or indirect involvement of private
investors. In order to facilitate the alienation of public properties, through Law No. 133/2013,
the simplified mechanism of direct sales, already provided for assets owned by the
State, has been extended to properties owned by local authorities. Therefore, the State
Property Agency is authorized to sell by private treaty a series of public properties.
The sale transaction generates the abolition of the government, existing concessions and
any rights of first refusal which could belong to third parties in the event of resale.
With Article 26, par.1, Law No. 164/2014, an important regulation aimed at the reuse of
public buildings in disuse was enacted: in order to promote economic, social and urban
redevelopment initiatives, the negotiated agreement (Decree No. 267/2000) between the
public administration and the private investor, concerning the recovery of public buildings
in disuse, directly constitutes an urban variant. In this way, the administrative procedure for
the change of intended uses of properties to be valorized is simplified, resulting in a
reduction of bureaucratic delays and investment risks.
JPIF 2. Aims
35,1 With reference to cases in which the public property in disuse can be sold and the range of
functions that define the highest and best use of the conversion identified with a market
analysis, a decision-support model for public and private subjects involved in the
enhancement of the property is developed and tested in this paper. Through the model,
the ex ante verification of the financial feasibility in relation to the risks associated to the
78 initiative can be carried out.
The model proposed borrows the mathematical logic of goal programming, and,
depending on the risk of the investment, allows to determine: the fair value of the public
property, i.e. the sale price that reconciles the interests of the parties involved (RICS, 2015),
and the optimal mix of functions to be realized in the compendium in analysis.
A reading of current international literature has highlighted how, in spite of the
interest shown by the main institutional operators (public administrations, private
investors, banks and insurance companies, etc.), there are no studies that systematically
deal with the topic in question.
The model is developed in relation to Italy, where public buildings to be enhanced are
numerous and, in recent years, several regulations as reported above aimed at simplifying
and rationalizing the enhancement of public properties have been enacted. According to the
data published by the State Property Agency (2015), the real estate assets of the Italian state
amounts to about 47,000 properties, of which 70 percent are buildings, and 30 percent are
areas. Currently, the corresponding value is estimated to be equal to 59 billion euros, to be
divided into 54 billion euros for the buildings and 5 billion euros for the areas.
The decision to consider the Italian context for the implementation of the model leads to
developing the reasoning on the typical features of the Italian public assets in disuse, in
particular: their relevant size; their location, usually in central areas and/or in zones
characterized by cultural and environmental values; the identitary and social function
played along the time for the local communities. These characteristics mean that the basic
hypothesis of the model: the form of bilateral monopoly market is normally verified. In this
situation, the exchange price is not defined a priori, but only a range of values of the
equilibrium price can be determined, depending on different variables, that represent the
negotiating skills of the parties involved.
Through the model, the appraisal of the private investors profit expression of the
expected return for the risk incurred is rationalized by defining, for each function included
in the highest and best use of the property, the volatility of the time series of annual
revaluation rates recorded, for each intended use, in the reference market. The basis of the
model is the hypothesis that the highest risks are related to the intended uses characterized
by the highest selling prices: it is evident that, otherwise, the investor would have no interest
in carrying out the riskiest functions. Through the endogenous determination of the
achievable profit with each possible mix of the intended uses that are urbanistically eligible,
economically convenient as well as compatible with the physical and architectural features
of the property, the implementation of the model generates the Pareto-optimal frontier for
the private investor. The most convenient transformation will be the one that, better than
the others, reflects the risk appetite of the specific investor.
The model elaborated constitutes a decision-support tool for both parties (public entity
and private investor) involved in the enhancement of the property. Public administrations
could use it to simulate the costs/revenues balance of the initiative implemented by the
generic private investor, in order to assess the financial feasibility and the selling price of the
property for different combinations of eligible intended uses, as well as to advance to the
private investor requests for additional resources beyond those which may be established
through the law. The public operator may therefore assess the benefits that could be derived
in terms of selling price and missed costs for the commitments that the private investor will
assume about the direct realization of public works (e.g. urbanization works, infrastructures, Optimal mix
social housing, redevelopment of urban areas) and/or the free supply of resources for public of eligible
uses. The public operator therefore may calibrate, without affecting the financial feasibility functions
of the initiative, the amount and typology of requests to be advanced to the private investor,
depending on the type and complexity of the transformation and the propertys
attractiveness in the reference market. On the other hand, the private investor could use the
model to test the costs/revenues balance for different hypotheses of the initiative. Through 79
the model, therefore, the private investor could expand the vision of the issues related to the
initiative, highlighting its strengths and weaknesses, recognizing the investment risks,
analyzing the most appropriate combination of intended uses in relation to the current
economic situation. In addition to working as a support in the analysis that the public
administration and the private investor can independently perform, the model could also
contribute to simplifying the negotiation phases of the parameters or the initiative, to be
reported in the contractual arrangements.

The paper is divided into four parts. In the first part, studies in current international
literature in which goal programming models are used to support plans and investment
evaluations are discussed. In the second part, the methodologies reported in current
literature to quantify the risk associated with property investments are described. In the
third part, the model is explained: the methodological approach implemented to rationalize
the risk assessment and determine the investors profit is outlined; the variables, the
constraints and the objective function of the model are defined. In the fourth part, the model
is applied to two case studies, both located in the South of Italy: the first concerns the
enhancement of a former military complex in disuse for the realization of several private
functions (residential units, commercial units and offices), social housing and an urban park;
the second case study is a former religious complex, which is already being used for public
offices and residences and the restructuring planned for the realization of new residential
units, new offices and commercial units. Finally, the conclusions of the work are presented.
3. Background of goal programming models

Starting in the 1960s, there has been a growing interest in all areas in the development of
models built on goal programming. This method allows to manage effectively and flexibly
complex problems, characterized by a high number of variables and constraints (Walker,
2001). A review of current international literature has highlighted numerous studies in
which goal programming has been applied to real estate appraisals as well as plans and
investment evaluations.
With reference to planning and urban regeneration, several authors have shown the
usefulness of goal programming models for defining investments on the territory, in order to
pursue the objective of maximizing the social welfare function in the presence of constraints
(Ben-Shahar et al., 1969; Lee, 1973; Lee and Keown, 1979). Courtney et al. (1972) have addressed
the issue of population location in metropolitan areas through a goal programming approach.
Chang et al. (2009) have used goal programming to develop a multi-criteria model to support
revitalization strategies of the historic Alishan Forest Railway in Taiwan.
Other authors have employed techniques of goal programming for the development of
models for property evaluations. Kettani et al. (1998) have defined an estimation model to
describe the behavior of the property market by integrating a multi-criteria method with
mathematical programming. Kettani and Khelifi (2001) have elaborated a decision-support
model to be used for the municipal taxation system that applies goal programming to
estimating the market value of residential properties. Estellita Lins et al. (2005) have developed
a methodology based on a double perspective data envelopment analysis for the assessment
of the value range for residential properties located in several neighborhoods of Rio de Janeiro.
Gomes and Rangel (2009) have applied a specific goal programming method (UTA) to the
JPIF assessment of utility functions of the criteria used in the evaluation of residential properties in
35,1 Volta Redonda (Brazil). A particular application of the goal programming has been carried out
by Adolphson et al. (1989), who defined a data envelopment analysis method to obtain a better
measure of the obsolescence of railroad properties.
Numerous authors have adopted mathematical programming tools to elaborate
optimization models for real estate investments. Wang (2005) has proposed an evaluation
80 model that uses data envelopment analysis to perform the efficiency in real estate
investments. Tan et al. (2008) have defined a goal programming optimal bidding strategy
model in order to generate the best resources allocation solution for an entrepreneur in
bidding for construction contracts. Schniederjans et al. (1995) have developed a goal
programming model to obtain the optimal house selection decision. Bowlin (1987) has
applied the data envelopment analysis method to evaluate possible inefficiencies in the
performance of the US Air Force real-property maintenance activities. Anderson et al. (1998)
and Anderson and Fok (1998) have used goal programming to assess how the decision to
franchise impacts productive efficiency levels for residential real estate brokerage firms.
Goal programming models have been developed to evaluate the performances of listed
real estate companies (Shi and Yang, 2006) to assess the performance of real estate mutual
funds (Anderson et al., 2004), as well as measure the financial efficiency of luxury hotels in
Korea (Min et al., 2009). Byrne and Lee (2011) have used the mean absolute deviation
portfolio optimization method to carry out spatial analysis in order to compare the
performances of the real estate portfolio diversifications in the UK, respectively within a
property type across the region and within a region across the property types.
With reference to investments in urban regeneration and social housing to be
implemented with the involvement of private investors, Tajani and Morano (2015) have
developed a model that, subject to the constraint of financial feasibility, allows to define a
range of possible urban parameters upon which it is possible to carry out the negotiation
between the public and private.
Applications of goal programming for the assessment of real estate investment risks have
been proposed by Findlay et al. (1979), Zhou and Li (2008), Shevchenko et al. (2008). Kroencke
and Schindler (2010) have compared the Markowitz approach, based on the mean-variance
optimization (Markowitz, 1952) and the downside risk framework elaborated by Estrada
(2008) in the definition of optimal securitized real estate portfolios. Hin et al. (2006) have used
the Markowitz mean-variance constrained optimization to obtain an efficient combination of
assets at the lowest level of risk. Byrne and Lee (1994) have analyzed the determination of the
Markowitz efficient frontier for combinations of assets, using data from the Investment
Property Databank long-term index of investment returns. In a later study (Byrne and Lee,
1997), a portfolio selection model based on the mean absolute mediation has been defined, with
it overcoming some problems related to the application of the modern portfolio theory, when
the data present non-normality.
4. Risk assessment in real estate investments

There is a great deal of international literature on risk assessment and procedures proposed
for its evaluation. In particular, academic literature has extensively discussed the distinction
between risk and uncertainty (Byrne, 1995, 1996; Kelliher and Mahoney, 2000).
The definitions generally accepted were proposed by Sloman (1995), which emphasizes
the best operating conditions in situations of risk instead of uncertainty, with reference,
in the first case, to the availability of the probability distributions of the variables that affect
the investment performance. French and Gabrielli (2006) define risk as the measure of the
difference between the actual and the expected outcomes of the analysis, whereas
uncertainty concerns the lack of knowledge and poor or imperfect information about the
inputs required in the model.
In real estate investments, risk depends on the complexity of the initiative to be Optimal mix
developed and involves circumstances that may invalidate the assumptions at the basis of of eligible
the business plan. The main reason of the risk is related to the uncertainty on the cash functions
flows generated from the sale of units to be realized through the initiative. It is therefore
essential to take into account a normal uncertainty as a universal and unsurprising fact of
property evaluation, whose open acknowledgment and transparent management affects
the credibility and reputation of the evaluator (Mallinson and French, 2000). In the 81
definition of the business plan of a real estate transformation, the investor considers the
selling prices characterized by the highest probability of occurring and divides the sales
within a reasonable time period defined on the basis of market analysis: the profit
expected by the investor is an expression of the likelihood (risk) that the ex ante forecasts
will not materialize. In fact, if it is true that the investor can monitor the endogenous
variables of the initiative and implement actions to correct or steer their amounts, it is
equally true that investments are placed in dynamic socio-economic contexts, whose
changes are intended to influence their outcome. In recent years, under the pressure of
globalization, the economic systems and related markets have become more volatile and
interdependent. Therefore, following an episode of a certain market, impacts on distant
and/or apparently disconnected markets can occur or uniform trends positive or
negative of the world economies can be generated. The dramatic fluctuation occurred in
the financial tsunami of 1997 Asian financial crisis and 2007 US subprime mortgage
crisis demonstrated the difficulty of explaining these phenomena by fundamental
economic factors according to the efficient market theory and the standard asset pricing
model as well as the inability to explain the contagion or spillover phenomenon in
different countries and markets (Gai and Vause, 2006; Kim, 2007).
In practice, the investors decisions take place under conditions of risk and/or
uncertainty. This contingence must be especially considered as the exogenous variables of
the initiative, including the selling prices of the units to be realized and the market demand
for them. In addition to these elements, the randomness that is sometimes generated by the
variability of institutional policies must be taken into account, with it possibly affecting the
feasibility of investments through the provision of monetary incentives, fiscal measures, or
the amendment of procurement and contracts rules. Hiang Liow et al. (2006) identify the
main risk macroeconomic variables (GDP growth, INDP growth, unexpected inflation,
money supply, interest rate and exchange rate) that affect the property stock market.
Hui et al. (2010) highlight that, if the risk aversion of investors is usually assumed to be
constant or expected to change infrequently over time, their risk appetite, that depends on
investors willingness to bear uncertainty, is likely to vary over time in terms of investors
responding to the changing levels of uncertainty in the macroeconomic environments
(e.g. interest rate level, production index, price index, inflation rate, etc.).
As part of real estate investments, the most widespread approaches for the assessment of
the entrepreneurial risk are based on the risk adjusted discounted rate method, that
considers the main components which define the investment risk (e.g. business risk,
financial risk, system risk) in determining the discount rate used in the discounted cash flow
analysis for the actualization of the items of income and expense (Chau, 1997; Evans, 1990;
Froland, 1987; Hoag, 1980; Jud and Winkler, 1995; Karolyi and Sanders, 1998; Liu and Mei,
1994; Mei and Lee, 1994; Sivitanides et al., 2001; Swad, 1994). All the proposed procedures
(e.g. build-up approach, capital asset pricing model) provide that the investment risk
premium which can be defined as the extra yield gained for holding a risky asset (Kanli,
2008) is increased by the return that a generic investor would gain if the funds allocated to
the initiative under analysis were used in risk-free assets and by the expected inflation rate
(Damodaran, 2002; Higgins and Ng, 2009; Modigliani and Modigliani, 1997; De Francesco
and Hartigan, 2009; Sharpe, 1964; Lintner, 1965).
JPIF There are numerous applications in the real estate sector of measures of variability
35,1 (mean/variance) for the quantification of risk (Markowitz, 1952; Schindler, 2009; Byrne
and Lee, 2004), confidence intervals and definition of the range of possible outcomes,
hypothesis testing and statistical analysis on the possibility of achieving certain
objectives (Bowles et al., 2001). The determination of the value at risk (VAR) for the
quantification of the reduction in the market value in the assessment of the mortgage
82 lending value is particularly widespread (Banks, 2001; Spremann, 2000; Bienert and
Brunauer, 2007; Werth, 1998; Ruchardt, 2001; Stocker, 2004; Gondring and Lorenz, 2001);
in fact, as part of the mortgage loans, taking into account that the European Mortgage
Federation and the Basel Committee stress the importance of information about
the risks of properties to be loaned on, the mortgage lending value determined through the
VAR is listed as a technique of risk analysis by the RICS (Lambert and Johnson, 2003).
Several authors have proposed the exponentially weighted moving average (EWMA)
method, capable of capturing the dynamic characteristics of the volatility of an investment

through a decay factor, that allows to attribute a greater significance to time series
data closer to the moment of evaluation (Lowry et al., 1992; Lucas and Saccucci,
1990; Winters, 1960).
Econometric (e.g. generalized method of moment, GARCH processes) and heuristic (e.g.
downside risk optimized portfolios, mean-semivariance optimization) models have been
implemented for risk assessment (Estrada, 2008; Foo Sing and Deng, 2007; Liow and Huang,
2006; Hiang Liow et al., 2006), where the inter-temporal instability of the portfolio weights
and the sharp deterioration in performance of the optima portfolios outside the sample
period used to estimate asset mean returns did not allow for the applicability of reliable
measures of variability (Jorion, 1985; Lee and Stevenson, 2005; Finkenzeller et al., 2010;
Kroencke and Schindler, 2010).
Simulative risk analyzes tools (e.g. Monte Carlo simulations) have been applied to private
residential investments ( Johnson et al., 2006), in project development (Hoesli et al., 2006), in
the appraisal of contaminated or developable sites (Weber, 1997, 2001), in the cash flow-
based appraisal of real estate investment decision making (Pyhrr, 1973; MacFarlane, 1995;
Kelliher and Mahoney, 2000; Farragher and Savage, 2008), to evaluate the optimal loan-to-
value ratio in the financing of real estate projects (Van der Spek and Hoorenman, 2011) or to
investigate the return on foreign real estate investments (Cheng et al., 1999), to show that the
uncertain dynamics of real estate operating costs constitute a key factor affecting the return
of investments (Pfnur and Armonat, 2013).
Stochastic processes have been applied to the real estate sector in order to identify the
factors affecting property rental incomes (Hughes, 1995; De Wit and Van Dijk, 2003), to
estimate the mortgage lending value (Kau et al., 2006; Schwartz, 1997; Downs, 2000), to
optimize the timing of a real estate development under uncertainty (Foo Sing, 2001). Finally,
since the 1990s there has been an increasing number of applications to the real estate sector
of the Real Options theory (Williams, 1991, 1997; Capozza and Li, 1994; Quigg, 1993; Foo
Sing and Patel, 2001a, b; Foo Sing, 2001; Yamazaki, 2001; Chiang et al., 2006; Lucius, 2001;
Morano et al., 2014).
5. The model
The developed model borrows the operative logics of goal programming techniques.
In general terms, a goal programming problem can be translated into the definition of the
optimal allocation of scarce resources that can be destined to alternative uses. In this sense,
a goal programming problem is characterized by: resources available in limited quantities;
alternative uses provided for them; constraints to the use of resources; and objective
functions, in order to evaluate the contribution that any possible use of resources provides
for achieving a predetermined objective.
In mathematical terms, for a process which provides n possible uses for the m available Optimal mix
resources, the problem can be summarized as follows: of eligible
maxo minf x1 ; x2 ; ::; xn (1) functions
subject to the constraint system:
a11 x1 a12 x2 a1n xn pb1 83

a21 x1 a22 x2 a2n xn pb2
(2)

am1 x1 am2 x2 amn xn pbm
where f(x1, x2, ..., xn) is the return function to maximize (max) or minimize (min), according
to the purposes of the decision maker; x1, x2, ..., xn are the variables of the problem and
represent the possible uses of the resources; and the generic row aijxibi(i 1, .., m e
j 1, ..., n) defines the ith constraint to achieve the objective, where aij is the absorption
rate of the ith resource in the jth use supposed unified and bi is the amount of the
ith available resource.
Therefore, for the model defined:
(1) Resources available in limited quantity are represented by the surfaces of the
property to be valorized.
(2) The alternative uses are identified by the various functions, public and private, that
can be created on these surfaces through the initiative of reconversion.
(3) The constraints represent, in mathematical terms, the legal regulations and design
decisions on the use of the property and he morphological organization of the spaces
that will be generated by the transformation. Constraints are also obtained from the
costs/revenues balance of the initiative, that allows to evaluate the parties (private
investor and public administration) conveniences.
(4) The objective function is defined in relation to the goals which may be pursued by
the private investor and the public administration.
Ultimately, the problem of the enhancement of public property outlined in the framework
can be set as a constrained optimization problem. However, the optimality of a solution
produced by the model cannot be assessed in absolute terms, but rather in relation to
the system of objectives and constraints considered and their ability to represent the
real situation.
The phases that contribute to the definition of the model developed are specified as
follows: the methodological approach for the rationalization of the assessment of the
entrepreneurial profit estimates is explained; the objectives of the parties (public
administration and private investor) involved in the transformation of a public property are
specified; the constraints and the variables of the problem are identified; the underlying
algorithm of model is finally summarized.
5.1 Appraisal of the entrepreneurial profit

In a real estate initiative, the profit is the remuneration (premium) expected by the investor.
Expressing the expected profit as a percentage of the revenues generated by
the investment, the annual yield (r) expected by an investor that engages in risky activity
can be divided into three components. The first is the minimum rate of return (rmin) that the
investor expects in a theoretical risk-free situation, to compensate for the opportunity cost of
JPIF low-risk investments, the expected inflation and the coordination of the productive factors.
35,1 The second component identifies the premium (rinv) expected by the investor for the risk to
support the investment under analysis. The third component (req) is the compensation for
the equity required for the implementation of the initiative. Therefore:
r r min r inv r eq (3)
84 As mentioned, in current literature there are different methodologies for quantifying the
premium for the investment risk. These procedures, however, are characterized by the limit
connected to the uncertainty of the exogenous definition of the amount to be assigned to
each of the factors involved in the definition of the investment risk of the initiative. The
model developed in this study overcomes this limitation through the endogenous
quantification of the risk.
Assuming that the sums required for the purchase of the public property in disuse and
the implementation of the initiative are fully covered by external sources (e.g. bank loans,
advance sales of future building units), the uncertainty for the private investor related to the
financial structure of the investment is nullified (req 0). Under these conditions, the
investment risk is primarily represented by the volatility associated with the combination of
intended uses to be realized: a mix of riskier functions will result in a higher profit expected
by the investor.
For the purposes of the definition of the model, it is assumed that the risk related to
each intended use is represented by the volatility of the time series of the real (i.e. adjusted
for inflation) annual revaluation rates of the sale prices detected for that intended use,
in a significant time period and in the area in which the property to be valorized is located.
According to the methodology for calculating the VAR, in this study, the annual
revaluation rates are determined by the geometrical method (Bienert and Brunauer, 2007):
Pt
Rt ln (4)
P t1
where Rt is the real annual revaluation rate of the sale prices recorded, relating to the year
t; Pt, the sale price detected in the year t; and Pt1, the sale price detected in the year t1.
Taking into account that in a specific area, the distribution of the real annual revaluation
rates of the sale prices can be reasonably approximated by a Gaussian model (Manganelli
et al., 2014), the risk associated to each intended use can be quantified through the standard
deviation () of the determined rates, calculated with respect to the mean value. In order to
assign higher weights to the revaluation rates closer to the moment of the valuation, the
standard deviation is determined using the EWMA, i.e. by the formula:
v
u
u X T 2
s t1lU lt1 U Rt R (5)
t1
where is the standard deviation of the time series of the real annual revaluation rates; ,
the decay factor, usually set equal to 0.94 (Best, 2000); R, the mean value of the time series of
the real annual revaluation rates; and T, the temporal amplitude time of the time series of the
real annual revaluation rates.
In the hypothesis that a combination of residential, commercial and office functions
identifies the highest and best use of the public property to be valorized, the annual yield
expected from the conversion of the property in disuse related to the investment risk can be
determined by the following equation, as the mean value of the volatilities of the intended
uses detected in the area of the reference market, weighted by the amounts of the
corresponding gross floor surfaces: Optimal mix
of eligible
sres GFS res scomm GFS comm sof f GFS of f functions
r inv (6)
GFS TOT
The meaning of the terms of Equation (6) is clarified in Table I.

Finally, the total profit expected by the private investor, as a percentage () of the total 85
revenues, can be determined by the following equation in which n represents the number of
years needed to realize the entire transformation of the public property to be valorized:
a r n r min r inv n

sres GFS res scomm GFS comm sof f GFS of f
r min n (7)
GFS TOT
5.2 Financial objectives of the parties involved

In the hypothesis that the enhancement of a public building provides for the alienation of the
property to a private investor, aimed at the realization of functions for sale on the free
market, the financial objectives of the public administration can be summarized as follows:
(1) Maximization of the amount to be collected from the sale of the property in disuse
and purchased by the private investor (Kpurchase).
(2) Maximization of the works of collective interest that must be realized by the private
investor, in addition to the minimum public works established by current
regulations. In particular, regarding this second objective, in the first application
developed in this paper (case study 1), it is assumed that the additional works of
collective interest are constituted by green spaces and a portion of the property to be
enhanced that the private investor will be converted at his own expense into social
housing (GFSsh), transferred free to the public administration.
The private investor, for his part, is driven by the hedonistic principle of maximum profit at
minimum cost. Generally, the entrepreneurs profit (P ) is calculated as a percentage () of the
total revenues (R) generated by the sale of the gross floor surfaces realized through the real
estate transformation. In the case of the redevelopment of a public property in disuse, the
total achievable volumes are influenced by the size of the property to be redeveloped, so the
combination of intended uses with which the total gross floor surface of the property can be
divided is the only factor on which the entrepreneur can act to maximize the profit (P ). Since
the functions denoted by the highest selling prices are characterized not only by the highest
rinv Expected annual rate of return for the investment risk (%)
res Standard deviation of the annual revaluation rates for residential intended use, relating to the
homogeneous area of reference (%)
GFSres Gross floor surface for residential intended use (m2)
comm Standard deviation of the real annual revaluation rates for commercial intended use, relating to
the homogeneous area of reference (%) Table I.
GFScomm Gross floor surface for commercial intended use (%) Parameters for
off Standard deviation of the annual revaluation rates for office intended use, relating to the estimating the
homogeneous area of reference (%) expected annual rate
GFSoff Gross floor surface for office intended use (m2) of return for the
GFSTOT Total gross floor surface, obtained by the functional conversion of the public building in disuse (m2) investment risk
JPIF returns, but also by the highest risks, and considering that the investment risk is a cost to
35,1 the investor, the private investor aims at two mutually conflicting objectives:
(1) maximization of total revenues (R), objective pursued realizing the intended uses
characterized by the highest selling prices; and
(2) minimization of the investment risk (rinv), objective viable pointing to the intended
uses which correspond to the lowest volatilities of the returns.
86
In real cases, the private investor pursues complex objectives, resulting from the
combination of the two single goals outlined: in this mix, the objectives are weighted
according to the risk appetite of the investor, thus identifying the priorities that the investor
attributes to each of them. Taking into account that in mathematical programming the
maximization of a goal is equivalent to the minimization of its opposite, the total objective
function of the model, in which both interests of the generic private investor and those of the
public administration are involved, can be written as follows:

max Rr inv K purchase GFS sh (8)
5.3 Constraints
The first constraint of the model is due to the maximum achievable gross floor surfaces,
which are conditioned by the total size (GFSTOT) of the public property to be enhanced. In
the case that the mix of functions to be realized with the redevelopment of the public
property consists of residential, commercial and office units, and taking into account
the hypothesis to allocate a portion of the property to public social housing (GFSsh), the
following equation identifies the first constraint:
GFS res GFS comm GFS of f GFS sh GFS TOT (9)
The second constraint regards the convenience of the initiative for the private investor: the
purchase and conversion of the public property will be advantageous if the difference
between the total revenues (R), the cost for the purchase of the public property (Kpurchase)
and the total transformation costs (Ktransf) the latter calculated as the sum of both costs for
the realization of the private functions and for the public works that are guaranteed by the
private entrepreneur to the public administration is higher than the expected profit
(P R). This constraint is expressed in the following equation in mathematical symbols:

R K transf K purchase Xa R (10)
Equations (11) and (12) explicit the terms that constitute the revenues (R) and the transformation
costs (Ktransf) in Equation (10), taking into account the unit sale prices of the considered intended
uses and the ordinary items that define the costs of the generic private investor.
R V res GFS res V comm GFS comm V of f GFS of f (11)
K transf K res K comm K of f K sh K pub K prof K manage K loan K marketing (12)

The parameters in Equations (11) and (12), unless the terms have been already reported in
Table I, are explained in Table II.
The third constraint relates to the non-negativity of the gross floor surfaces and the
purchase price of the public property to be redeveloped, and is summarized in Equation (13).
However, it must be highlighted that, in specific cases, this constraint could translate into
R Revenues generated by the intervention ()
Optimal mix
Vres Unit sale price of the residential function per the relative gross floor surface (/m2) of eligible
Vcomm Unit sale price of the commercial function per the relative gross floor surface (/m2) functions
Voff Unit sale price of the office function per the relative gross floor surface (/m2)
Ktransf total cost of the transformation of the public building in disuse ()
Kres Cost for the restructuring of the gross floor surfaces intended for residential function ()
Kcomm Cost for the restructuring of the gross floor surfaces intended for commercial function ()
Koff Cost for the restructuring of the gross floor surfaces intended for office function () 87
Ksh Cost for the restructuring of the gross floor surfaces intended for public social housing ()
Kpub cost for the restructuring/construction of the public spaces (public parking, green areas, etc.) ()
Kprof Technical expenses ()
Kmanage Operating expenses for the management of the transformation activities () Table II.
Kloan Financial charges, i.e. the interest on the capital borrowed for the realization of the transformation Items for the
project () assessment of
Kmarketing Commercialization expenses for the marketing activities of the finished product and the brokerage revenues and
of real estate agencies () transformation costs
mathematical terms the condition that some sizes must be equal or not lower than
predetermined amounts, established for design reasons, for reasons due to the technical
characteristics of the property to be enhanced or for agreements between the parties involved:
8
> GFS res X0
>
>
>
> GFS comm X0
>
<
GFS of f X0 (13)
>
>
>
> GFS sh X0
>
>
:K
purchase X0
5.4 The algorithm

According to the defined constraints and the objectives of the parties involved in the
conversion of a public property in disuse, the model can be outlined in Table III.
6. Application of the model: case study 1

The developed model is first applied to the case of reuse of a former military compendium,
located in the town of Nocera Inferiore, in Southern Italy.
Made in the eighteenth century, the building occupies an area of 15,600 m, of which 8,000 m
uncovered and 7,600 m covered, which corresponds to a total gross floor surface equal to
22,800 m. The building was ordered by King of Naples Charles III of Bourbon, who chose
Variables GFSres, GFScomm, GFSoff, GFSsh, Kpurchase

Objective function max (R rinv + GFSsh + Kpurchase)
Constraints R(Ktransf + Kpurchase) R
GFSres + GFScomm + GFSoff + GFSsh GFSTOT
8
> GFS res X 0
>
>
>
> GFS comm X0
>
<
GFS of f X0
>
> Table III.
>
> GFS sh X0
>
> Algorithm of
:K X0
purchase the model
JPIF to build the military compendium in Nocera Inferiore due to the strategic location of the city.
35,1 The complex was called the Great Neighborhood, in order to highlight the urban dimension of
the property, which was a military town located in the urban center of Nocera Inferiore.
Divided into three levels, the former military compendium is a square building with
a large courtyard in the middle. The environments of the compendium are distributed on the
outer sides without the solution of continuity, with path elements on the inner side of
88 the large courtyard, covered by barrel and ribbed vaults on four supporting arches,
characterized by a thickness equal to the perimeter wall. Four towers of stairs lead to the
roof terrace. The stables were arranged on the ground floor, capable of accommodating 658
horses. The rooms hosted veterinary dispensaries, warehouses, prisons and laboratories.
The outdoor courtyard was intended for riding stables and sites for gym. The first and
second floors were used as dormitories for a total capacity of 2,560 people.
The Ministry of Heritage and Culture and Tourism has currently provided the realization
of a multifunctional center in the compendium, due to the location of archeological findings

by the Superintendents of the Campania Region.
In order to test its validity, the model is implemented using the elements of one of the first
hypotheses of enhancement of the military compendium, which provided for the sale of the
building and its transformation in private functions (residential, commercial and office
units) and social housing units, for a total of GFSTOT 22,800 m2, and the realization of a
public urban park in the central courtyard (Spub 8,000 m2).
The application of the model allows to determine the fair value of the building (Kpurchase),
taking into account the functional mix of the three intended uses considered and the risk
appetite of the private investor.
Market surveys have allowed to define the amounts of exogenous parameters needed for
the implementation of the model, shown in Table IV. The minimum rate of return expected
by the investor (rmin), fixed at 4 percent, is determined by considering the annual rate of
return of risk-free investments (e.g. Italian Government bonds at June 2016), with a duration
equal to the analysis period of the transformation of the building, increased through the
expected inflation rate and the remuneration of the private investor for the coordination
activity of the productive factors.
The time series of the real annual revaluation rate of sale prices for the different intended
uses, necessary for the assessment of the investment risk in terms of standard deviation, are
obtained by considering the average annual market values for statistically significant
periods published by the Observatory of the Real Estate Agency Market (Italian Revenue
Agency) for the Microzone Nocera Inferiore Center. In fact, the Italian real estate market
n 3
rmin 4.00%
res 3.49%
comm 11.45%
off 7.73%
GFSTOT 22,800 m2
Sst, pub 8,000 m2
Vres 2,500 /m2
Vcomm 2,800 /m2
Voff 2,600 /m2
Table IV. cres 1,100 /m2
Parameter values ccomm 900 /m2
for the implementation coff 900 /m2
of the model csh 1,000 /m2
(case study 1) cpub 70 /m2
has a geographical segmentation in microzones, defined according to Presidential Decree Optimal mix
138/1998 and ensuing the Regulation issued by the Ministry of Economy and Finance. For of eligible
Italian regulations, the microzone is a part of the urban area that must be urbanistically functions
homogeneous and at the same time must constitute a homogeneous real estate market
segment. In a microzone, in other words, the exogenous factors (accessibility, presence of
services, building characteristics, green areas, pedestrian zones, etc.) contribute to the
formation of real estate prices in a uniform manner. 89
In Table IV, the unit costs of construction of gross floor surfaces for the different
intended uses (cres, ccomm, coff, csh) and the unit cost for the construction of the public park
(cpub) are reported, detected through surveys of construction companies operating in the
territory under analysis.
In Table V, the criteria used for the determination of the items that define the
transformation cost and the constraints concerning the minimal surfaces to be allocated to
each function considered in the conversion of the compendium, according to the needs
expressed by the Technical office of the municipality of Nocera Inferiore, are outlined.
Since the maximization of the total revenues (R) and the minimization of the investment
risk (rinv) are two conflicting objectives for the private investor that realizes the
transformation, the model outlined in this study has been implemented in an iterative
manner, by introducing into Equation (8), which identifies the objective function of the
problem, a multiplicative coefficient (W) of revenues, variable in the range [0,1]. Therefore,
Equation (8) is modified as follows:

max W Rr inv K purchase GFS sh (14)
The coefficient W allows to weigh the risk appetite of the generic private investor as well
as define the corresponding Pareto-optimal frontier. In fact, the values of W equal to 0 and
1 indicate a risk appetite of the investor, respectively, null and maximum, whereas the
values of W between these two extremes express an intermediate attitude of the investor.
In Table VI, the results of the model are reported, assuming a percentage change of the
coefficient W equal to 10 percent.
The outputs of the model lend themselves to interesting considerations.
First of all, if the objectives of maximization of revenues and minimization of the risk are
connoted by the same order of importance (W 1, i.e. maximum risk appetite of the
entrepreneur), the model tends to prefer the more risky intended use, which is the commercial
(GFScomm 9,120 m2), characterized by the highest unit selling price. For the gross floor
surfaces of the other intended uses, the model returns the minimum values set by the
constraints (GFSres 11,400 m2; GFSoff 1,140 m2; GFSsh 1,140 m2). This functional mix
Kres 1,100 GFSres

Kcomm 900 GFScomm
Koff 900 GFSoff
Ksh 1,000 GFSsh
Kpub 70 8,000
Table V.
Kprof 6% (Kres + Kcomm + Koff + Ksh + Kst,pub) Criteria for calculating
Kmanage 3% (Kres + Kcomm + Koff + Ksh + Kst, pub) the components of the
Kmarketing 2% R 2% (VresGFSres + VcommGFScomm + VoffGFSoff) cost of transformation
Kloan 5% (Kres + Kcomm + Koff + Ksh + Kst, pub + Kprof + Kmanage + Kmarketing + Kpurchase) (Ktransf) and
GFSres 50% GFSTOT 11,400 constraints on the
GFScomm 20% GFSTOT 4,560 distribution of the
GFSoff 5% GFSTOT 1,140 gross floor surfaces
GFSsh 5% GFSTOT 1,140 (case study 1)
JPIF allows to maximize both the total revenues of the investment ( R 57,000,000) and
35,1 the entrepreneurial profit ( 31.535 percent, that is P 17,974,665), compared with
a purchase price of the compendium equal to Kpurchase 10,440,300.
The results do not change for values of W equal to 0.9, 0.8 and 0.7.
From the values of W between 0.7 and 0.2, i.e. representative of a more significant
importance of the objective minimization of the risk than the objective maximization of
90 revenues, the model prefers the office gross floor surface, at the expense of the
commercial one: for W 0.6, the algorithm minimizes the feasible commercial gross floor
surface (GFScomm 4,560 m2 ), and maximizes the office one (GFSoff 5,700 m2 ). The model
thus tends to prefer a less risky intended use, but characterized by interesting sale prices.
For values of W less than 0.2, the reduced risk appetite of the private investor causes the
model to prefer the intended use characterized by the lowest volatility, the residential one.
In fact, for W 0.1, the model determines the combination: GFSres 15,805 m2,
GFScomm 4,560 m2, GFSoff 1,295 m2, whereas in the case of a null risk appetite of the
investor (W 0), the share of the residential gross floor surface is the maximum allowable,
and the surfaces of the other intended uses are minimized.
It should be noted that, in all cases, the expected profit preserves interesting margins for
the private investor, ranging between 31.535 percent, in the case of maximum risk appetite,
and 26.759 percent, in the case of minimum risk appetite. Furthermore, the public
convenience, evaluated in terms of price (Kpurchase) paid by the private investor for the
purchase of the compendium, it does not suffer significant changes: the purchase price of the
building to be enhanced varies between 10,440,300 and 11,112,100, whereas the surface to
be allocated to social housing units always remains the minimum quantity to be guaranteed
(GFSsh 1,140 m2). In financial terms, the advantage of the public administration, equal to
the sum of the price paid for the purchase of the compendium and the values of social
housing units and the public urban park to be realized by the private investor, varies
between 21.30 (W 1) and 23.03 percent (W 0) of the total revenues of the initiative.
In Figure 1, the Pareto-optimal curve of the generic private investor is represented, which
graphically expresses the variation of profit (P) with a different risk appetite (W ) of the
private investor.
7. Application of the model: case study 2

In order to further highlight the possibilities of the model proposed, the algorithm developed
is applied to a second case study, relating to a former religious complex, located in the town
of Cava de Tirreni, in the south of Italy.
The complex consists of a church with adjoining convent in Baroque style, made in
the fifteenth century, situated on the edge of the historic center of the city. The structure of the
W R () (%) P () Kpurchase () GFSres (m2) GFScomm (m2) GFSoff (m2) GFSsh (m2)
1 57,000,000 31.535 17,974,665 10,440,300 11,400 9,120 1,140 1,140

0.9 57,000,000 31.535 17,974,665 10,440,300 11,400 9,120 1,140 1,140
0.8 57,000,000 31.535 17,974,665 10,440,300 11,400 9,120 1,140 1,140
0.7 57,000,000 31.535 17,974,665 10,440,300 11,400 9,120 1,140 1,140
Table VI. 0.6 56,088,000 29.302 16,435,186 11,056,200 11,400 4,560 5,700 1,140
Results of the 0.5 56,088,000 29.302 16,435,186 11,056,200 11,400 4,560 5,700 1,140
application of the 0.4 56,088,000 29.302 16,435,186 11,056,200 11,400 4,560 5,700 1,140
model for different 0.3 56,088,000 29.302 16,435,186 11,056,200 11,400 4,560 5,700 1,140
risk appetites of the 0.2 56,088,000 29.302 16,435,186 11,056,200 11,400 4,560 5,700 1,140
private investor 0.1 55,647,500 26.845 14,938,557 11,110,500 15,805 4,560 1,295 1,140
(case study 1) 0 55,632,000 26.759 14,886,289 11,112,100 15,960 4,560 1,140 1,140
appetite (case study 1)
a function of risk
private investor as
profit of the generic
Profit ( )
Performance of the
Figure 1.
14,500,000
15,000,000
15,500,000
16,000,000
16,500,000
17,000,000
17,500,000
18,000,000
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
0.22
0.24
0.26
0.28
0.3
0.32
0.34
0.36
0.38
0.4
0.42
0.44
0.46
0.48
0.5
0.52
0.54
0.56
W max (Revenues)
0.58
0.6
0.62
0.64
0.66
0.68
0.7
0.72
0.74
0.76
0.78
0.8
0.82
0.84
0.86
0.88
91 0.9
0.92
0.94
0.96
0.98
1
functions
of eligible
Optimal mix
JPIF convent stands on two levels, has a rectangular plan and a cloister in the inner part, distinguished
35,1 by the presence of a characteristic fountain with typical tiles of the near Amalfi Coast.
The church still retains its religious function, whereas the convent lost its original
intended use over 200 years. It was used for military functions during the Bourbon Kingdom
and then as a prison during the Second World War. After a period of total abandonment, in
recent decades a part of the former convent (about 3,500 m2 of gross floor surface) was used
92 for public offices (the ground and first floors) and accommodation for municipal employees
with residences over 200 kilometers (first floor). The model proposed is implemented on this
part of the compendium, taking into account that the location lends itself to a hypothesis of
transformation into private functions. In particular, given the predominantly commercial
vocation of the historic center of the city, it was assumed that a minimal amount of the total
gross floor surface ( 230 m2) is intended, in any case, to commercial units.
Market surveys have allowed to define the amounts of exogenous parameters reported
in Table VII. The minimum rate of return expected by the investor (rmin) is fixed at
3.5 percent, and it is determined considering the annual rate of return of risk-free investments
(e.g. Italian Government bonds at June 2016), with a duration equal to the analysis period of
the transformation of the building, increased through the expected inflation rate and the
remuneration of the private investor for the coordination activity of the productive factors. The
time series of the real annual revaluation rate of sale prices for the different intended uses,
necessary for the assessment of the investment risk in terms of standard deviation, are
obtained considering the average annual market values for statistically significant periods
published by the Observatory of the Real Estate Agency Market (Italian Revenue Agency) for
the Microzone Cava de Tirreni Center. In Table VIII, the criteria used for determining the
transformation costs and possible constraints are illustrated.
In Table IX, the outputs obtained through the application of the model are reported, whereas
in Figure 2 the Pareto-optimal curve of the generic private investor is represented. In this case
n 2
rmin 3.50%
res 3.22%
comm 9.91%
off 6.88%
GFSTOT 3,500 m2
Vres 2,850 /m2
Table VII. Vcomm 3,200 /m2
Parameter values Voff 3,000 /m2
for the implementation cres 600 /m2
of the model ccomm 700 /m2
(case study 2) coff 550 /m2
Kres 600 GFSres

Kcomm 700 GFScomm
Table VIII.
Criteria for calculating Koff 550 GFSoff
the components of the Kprof 6% (Kres + Kcomm + Koff)
cost of transformation Kmanage 3% (Kres + Kcomm + Koff)
(Ktransf ) and Kmarketing 2% R 2% (Vres GFSres + Vcomm GFScomm + Voff GFSoff)
constraints on the Kloan 5% (Kres + Kcomm + Koff + Kprof + Kmanage + Kmarketing + Kpurchase)
distribution of the GFSres 0
gross floor surfaces GFScomm 6.5% GFSTOT 230
(case study 2) GFSoff 0
study, the fair value of the building (Kpurchase) ranges between 5,311,750 for the maximum risk Optimal mix
appetite of the private investor (W 1) and 5,690,180 for the respective minimum risk appetite of eligible
(W 0). It should be noted that since the highest risky condition up to a low-risk appetite of the functions
private investor (W between 1 and 0.3) the algorithm tends to prefer, among the functions
considered (residential units, commercial units and offices), the compromise use in terms of
risk, values and restructuring costs, i.e. offices; for values of W less than 0.3, that correspond to
a very low-risk appetite of the private investor, the residential function i.e. the least risky 93
intended use is the best solution according to the model.
8. Conclusions
The latest results of enhancement initiatives of public buildings in disuse confirmed, on the
one hand, the need of forms of public-private partnerships as essential drivers for their
implementation, in the current economic situation characterized by the lack of public
resources and the high volatility of the housing market; while on the other hand, they
highlighted the importance of being supported by evaluation methodologies that allow to
outline not only the opportunities of the investment, but also the risks that may invalidate
the initial forecasts, nullifying the success of the initiative.
In this framework, the model developed and tested in this study represents a valuable
decision support for both public entities and private investors involved in the enhancement
of particularly complex public properties, characterized by considerable sizes, central
locations, significant recovery costs, and the ability to host multiple functions which need to
define the respective rate on the total gross floor surface. These circumstances almost
always determine the market form of bilateral monopoly, with the result that the exchange
price cannot be defined a priori, but only a range of values of the equilibrium price can be
estimated, depending on the negotiating skills of the parties involved.
Compared to the procedures currently used in the practical assessment, the model has
different strengths. The current methodologies can be used either to assess the market value
or to perform the verification of financial convenience of the initiative. The assessment must
be carried out with regard to specific valuation assumptions, the terms of which must be
clearly defined. This situation implies that the solution to be evaluated has been identified
and shared by both the public and private operators: when the outcome of the assessment is
excessively different from the expectations of the parties involved, the terms of the solution
should be renegotiated and the assessment repeated.
The model proposed allows to determine simultaneously a large set of outputs: the
financial feasibility of the purchase and the transformation of public properties in disuse;
the entrepreneurial profit of the initiative; the optimal mix of intended uses to be realized in
the public property under analysis; the fair value of the public property for the parties
W R () (%) P () Kpurchase () GFSres (m2) GFScomm (m2) GFSoff (m2)
1 10,812,000 23.461 2,536,606 5,311,750 1,560 1,940

0.9 10,546,000 21.16 2,231,347 5,571,940 230 3,270
0.8 10,546,000 21.16 2,231,347 5,571,940 230 3,270
0.7 10,546,000 21.16 2,231,347 5,571,940 230 3,270
0.6 10,546,000 21.16 2,231,347 5,571,940 230 3,270 Table IX.
0.5 10,546,000 21.16 2,231,347 5,571,940 230 3,270 Results of the
0.4 10,546,000 21.16 2,231,347 5,571,940 230 3,270 application of the
0.3 10,522,750 20.83 2,192,316 5,579,000 155 230 3,115 model for different
0.2 10,146,250 15.58 1,581,250 5,676,140 2,665 230 605 risk appetites of
0.1 10,055,500 14.32 1,439,875 5,690,180 3,270 230 the private investor
0 10,055,500 14.32 1,439,875 5,690,180 3,270 230 (case study 2)
appetite (case study 2)
a function of risk
private investor as
Profit ( ) profit of the generic
Performance of the
Figure 2.
1,400,000
1,600,000
1,800,000
2,000,000
2,200,000
2,400,000
2,600,000
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
0.22
0.24
0.26
0.28
0.3
0.32
0.34
0.36
0.38
0.4
0.42
0.44
0.46
0.48
0.5
0.52
0.54
0.56
W max (Revenues)
0.58
0.6
0.62
0.64
0.66
0.68
0.7
0.72
0.74
0.76
0.78
0.8
0.82
0.84
0.86
0.88
0.9
94
0.92
0.94
0.96
0.98
1
35,1
JPIF
involved in the transaction; the Pareto-optimal frontier of the expected profits, as a function Optimal mix
of the risk appetite of the private investor; and the public costs that can be incurred by the of eligible
investor without affecting the financial feasibility of the initiative. Furthermore, the model functions
does not examine a single solution but, generating the Pareto-optimal frontier, it allows to
explore the infinite hypotheses resulting from the combinations of the variables involved,
among which the public entities and the private investors can identify either the best
solution or the solutions to be explored, due to the expected benefits, the requests to 95
advance, the risk appetite, the importance and the urgency attributed to the initiative.
Therefore, the use of the model is particularly suitable in the early stages of the
enhancement, in which the operators are interested in having a widespread framework of
information on which they can set their own strategies.
Another strong point of the model, compared with the canonical methods, is its
flexibility, which allows to be adapted to the specifics of the case study as well as the
changes that may arise over time by the occurrence of regulatory, technical or financial
constraints, or by negotiating agreements between the parties involved.
The applications of the model to the case studies described have highlighted the
weaknesses and strengths of these initiatives. After having determined the exogenous
parameters necessary for the implementation of the model, the results represent a useful
basis to define negotiating agreements between the parties involved. On the one hand, the
public administration can become aware of the range of values, in terms of selling price
and resources that the private investor has undertaken to realize and deliver to the public
entity, that can be obtained by the sale of the public property, taking into account the
restructuring costs, the market values of the gross floor surfaces to be realized, as well as
the risks of the initiative. On the other hand, the private investor can have a range of
combinations of functions that contribute to defining the highest and best use of the
property, among which he can identify the functional mix that is best suited to his risk
appetite and the current market situation. Other advantages may arise to the credit
institutions that in the emergence of the non-performing loans in the banks balance sheet,
can promptly evaluate the initiatives to be financed so as to minimize the risk related to
the loans granted.
The methodology implemented for the assessment of the risk gives significant credibility
to the outputs obtained, although through an instantaneous evaluation approach,
frequently criticized due to the lack of a time factor. In fact, the determination of the
volatility weighted according to the EWMA approach of the time series of the real
annual revaluation rates detected in the homogeneous area of reference allows to assign, to
each considered intended use, a Gaussian probability distribution: this assumption
minimizes the uncertainty inherent in the tout court use of the unit market values estimated
as the most likely, involving in the evaluation the likelihood that these values will not
occur and/or a real estate recessive cycle could happen (mortgage lending values).
Furthermore, in the cases with a very long-time duration of the investment under analysis,
the simple structure of the algorithm elaborated allows that the model can be integrated,
without difficulty, with the introduction of mathematical relationships that represent the
timing of costs and revenues involved in defining the financial balance of the investment.
Finally, it should be noted that the model defined can be particularly useful in Italy
where, in recent years, the fear of a default and the tension related to the reduction of the
public debt have resulted in making decisions about the sale of important public
properties, on the basis of exclusively political reasons and without illustrating the risks
and economic consequences. This condition has led, in some cases, to the failure of poorly
structured initiatives; in other cases, it has resulted in the sell-off of public properties, with
obvious damage to the state coffers and unclear situations where the intervention of the
judiciary was necessary.
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About the authors

Francesco Tajani holds a PhD Degree in Economic Evaluation of Investments and a Masters Degree in
Urban Planning and Real Estate Market. He is an author and a coauthor of published works on various
topics, including the study of innovative algorithms as support to real estate appraisal, the evaluation
of investments on cultural and environmental assets, the elaboration of models for the activation of
regeneration projects on degraded areas and the enhancement of disused buildings, the econometric
analysis of the dynamics of real estate prices generated by macroeconomic variables. He has currently
a Research Grant in Appraisal at the Department of Science of Civil Engineering and Architecture,
Polytechnic of Bari, Italy. Francesco Tajani is the corresponding author and can be contacted at:
francescotajani@yahoo.it
Pierluigi Morano holds a PhD in Economic Evaluation of Investments and a Masters Degree in
Urban Planning and Real Estate Market. He is an author and a coauthor of books, journal papers and
conference papers on various topics, including the themes of the plans and investments valuation, the
valuation of the cost of the public works, the analysis of the real estate market, the real estate appraisal,
the public-private negotiation in urban planning. He is currently a Full Professor in Real Estate Appraisal
at the Department of Science of Civil Engineering and Architecture, Polytechnic of Bari, Italy.
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and risk control

Department of Science of Civil Engineering and Architecture,

reported in the contractual arrangements.

3. Background of goal programming models

4. Risk assessment in real estate investments

method, capable of capturing the dynamic characteristics of the volatility of an investment

subject to the constraint system:

a11 x1 a12 x2 a1n xn pb1 83

5.1 Appraisal of the entrepreneurial profit

The meaning of the terms of Equation (6) is clarified in Table I.

5.2 Financial objectives of the parties involved

public administration are involved, can be written as follows:

K transf K res K comm K of f K sh K pub K prof K manage K loan K marketing (12)

of real estate agencies () transformation costs

5.4 The algorithm

6. Application of the model: case study 1

Variables GFSres, GFScomm, GFSoff, GFSsh, Kpurchase

of a multifunctional center in the compendium, due to the location of archeological findings

Kres 1,100 GFSres

7. Application of the model: case study 2

1 57,000,000 31.535 17,974,665 10,440,300 11,400 9,120 1,140 1,140

Kres 600 GFSres

W R () (%) P () Kpurchase () GFSres (m2) GFScomm (m2) GFSoff (m2)

1 10,812,000 23.461 2,536,606 5,311,750 1,560 1,940

investments using simulations of stochastic processes, Journal of Property Investment and

About the authors

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