Rio de Janeiro Fire Sale Starts With Governor’s Island Mansion

  • State pulling out all stops to trim $6 billion deficit in 2016
  • Island property has its challenges including landmark status

Luis Claudio Gomes, a pension fund executive, boarded an aluminum launch and headed toward the Rio de Janeiro island he’s looking to sell. Morning sun burning off the fog unveiled a palace amid its tropical forest.

On the eve of hosting the Olympics, Rio state is broke. Its finances are in such ruin the governor is selling his own summer residence and the idyllic Brocoio Island upon which it sits. It could be a bargain for someone with a few million dollars laying around.

View of Ilha de Brocoió.

Photographer: Lianne Milton for Bloomberg Businessweek

The noise of the metropolis doesn’t reach Brocoio, and stunning bay views abound. Before it passed into public possession, Brocoio belonged to the same businessman who founded the Copacabana Palace. The French architect who conceived the five-star hotel also landscaped Brocoio’s grounds where imported peacocks roamed, plus designed its Norman-style mansion. It hosted sumptuous parties for the elite of Rio, which was then Brazil’s capital and flush with cash.

How times have changed. Rio state expects a roughly 19 billion-real ($5.8 billion) deficit this year. On June 17, Acting Governor Francisco Dornelles declared a state of fiscal calamity that he said prevented Rio from honoring its commitments for the Olympics that kick off August 5. In addition to a new round of belt-tightening measures, he said Rio would transfer ten assets including Brocoio to its pension system, which accounts for two-thirds of the deficit. The 50-acre island will be put on sale with a public bid process as soon as possible, likely before year-end, according to Gomes, the pension system’s finance and administration director.

“Welcome to Hell”

Rio has slashed its 2016 security budget by one third and has delayed payments to police and their families. Officers last week greeted those arriving at the international airport with a banner reading: “Welcome to Hell. Police and firefighters don’t get paid, whoever comes to Rio de Janeiro will not be safe.’’ Street crime is rising. Before the federal government deployed emergency funding for security through the Olympics, Dornelles told a local paper he had enough money to fuel police cars only until the weekend.

More than half of state public-school teachers and workers have been on strike since March as salaries for public servants are delayed. Hospitals lack beds, supplies and medications. The national medical council last month expressed concern over health services during the Olympics, particularly urgent and emergency care. The city of Rio de Janeiro has already been forced to take control of two public hospitals. Its finances are in order and, fortunately for Olympic tourists, the arenas for which it is responsible have been completed.

That’s cold comfort for Rio state. Leonardo Espindola, chief of staff to Rio’s governor, told the Supreme Court in April that the state is on the verge of “social collapse.” Finance Secretary Julio Bueno agrees. At the outset of an hour-long interview in May, Bueno claimed to have “the worst job in Rio de Janeiro.”

Living room of the governor’s mansion on Ilha de Brocoió.

Photographer: Lianne Milton for Bloomberg Businessweek

Also contributing to Rio’s budget shortfall is the slump in oil prices, cutting royalties this year to some 3.7 billion reais -- less than half the levels in 2012-2014. Rio state started missing debt payments in May and received a two-notch downgrade from Fitch Ratings to the lowest level for any Brazilian state it rates publicly.

“Fantasy Island”

The sale of the governor’s summer palace will do little to lift the state from its financial hole, but in desperate times every bit helps. The 12,500 square-foot mansion, with its imported marble and splendid salons, would sell for some 30 million reais were it in Rio’s tony south zone, according to Simone Algebaile, the state’s director of conservation and restoration. What it would cost along with a private island is anyone’s guess.

“It’s Fantasy Island,’’ said Algebaile, who gave Gomes his June 30 tour of the residence. “It’s the product of a fertile imagination -- unique and eccentric.’’

The property has its challenges. The jungle has been steadily reclaiming the cricket field. Beaches are covered with litter, which is to say nothing of the bay water that’s contaminated by sewage. Fixing the house’s built-in German organ – which the prior owner used to triumphantly herald his arrival -- would cost 250,000 reais. All together, the state estimated several years ago that it would cost 8 million reais to restore the bygone resplendence, and monthly maintenance ranges from 8,000 reais to 50,000 reais, said Algebaile. As the house has historic landmark status, should a brick in the perimeter wall crumble, for example, replacing it would mean sourcing one of its contemporaries plus chemical testing to prove its authenticity.

All this makes sale of Brocoio to a Brazilian for private residence very unlikely, with the nation mired in a two-year recession and market liquidity especially limited for real estate, Gomes said after his inspection. It could instead become a spa, hotel or rehab clinic, he said.

“All the views are magnificent, they’re nothing less than magnificent. That’s the wow factor,’’ Gomes said. “It seems like you’re not in Rio de Janeiro.’’

These days, that may be a selling point.

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