Author:  Robert C. Buckley, Esq. | Smart & Resilient Cities


Recently a delegation from Leading Cities travelled to Rio de Janeiro, Brazil to explore and exchange best practices in public policy including current development and planning trends occurring in this world class city.  One of the most interesting initiatives being undertaken is the redevelopment of the historic Port of Maravilha.  This repositioning is being financed with the assistance of “Certificate for Additional Construction Potential” which are commonly referenced to as “CEPACs”.

Developing or redeveloping any city, a smart city or otherwise, requires significant investment and given the lack of financial resources most cities around the world have sitting by uncommitted, the need for alternative financing becomes an enabling tool for progress. “The Rio case study serves as a model for better understanding the use of CEPACs as well as providing an appreciation for the impact a visionary and action-oriented leader such as Mayor Paes can have on his or her city,” said Michael Lake, President and CEO of Leading Cities.

A CEPAC is an equity security issued by the municipality in order to fund an urban revitalization of a neighborhood or region.  CEPACs which are issued by the municipality, permit higher density in a region of a city then would otherwise be allowed by applicable zoning restrictions.  For example, CEPACs can allow a developer to increase the applicable floor-area-ratio (“FAR”) on a parcel of land.  As a result, the parcel will yield increase profits to the developer.  A CEPAC is sold at public auction or pursuant to a public bid process.  The CEPACs are also treated as marketable securities and are traded on public security markets.  The funds derived from the sale of CEPACs are used by the municipality to fund the construction, renovation or expansion of streets, sidewalks, bridges, water, sewage, energy, public space and other infrastructure and amenities necessary for the successful redevelopment of the region.

In recent decades the City of Rio de Janeiro had experienced steady economic growth.  This growth attracted those looking for a better way of life which in turn created new urban challenges to provide the necessary services and infrastructure to support this quest.  The City, in response to these pressures, undertook the major initiative of the redevelopment of the Port Maravilha neighborhood.  To be successful in this effort, Rio needed to develop a vision, the mechanism to achieve this vision, and the ability to provide the infrastructure to support this vision.  To do so, the City of Rio utilized CEPACs.

The Port of Maravilha had become degraded.  The total land mass exceeded five (5.0) million square meters.  The City planned a revitalization of this area that had a timeline of fifteen (15) years and required approximately $R8 Billion (approx. $2 Billion).  The City of Rio believes that the proceeds of the sale of the CEPACs insulate the City from the expenditure of public moneys to provide the necessary infrastructure to complete the proposed revitalization.

In 2011 the real estate investment fund Port of Maravilha managed by Caixa Economica acquired for $R3.5 Billion all of the CEPACs issued by the City for the port redevelopment and assumed responsibility for the total $R8 Billion of infrastructure investments required for the project.  The differential of $R4.5 Billion will be obtained by bank financing with the CEPACs supporting the financing.  As of recently the original certificates were issued at an equivalent of $R545 per certificate.  Recently the market value of each certificate was listed at $R1,280, an increase of approximately 135 percent. Thus, the assumption of the City as to the enhanced value of the CEPACs over time providing the necessary funds to complete the revitalization to date appears to be correct.

With any market security there are attendant market risks.  The market controls the value of these CEPACs.  CEPACs are considered income assets and their value is directly dependent upon the development of the targeted region.  Therefore, to the extent that the targeted region experiences decline in interests in terms of development opportunities there may be a detrimental impact on the value of the underlying security.  Also, these securities are freely traded although there is a relatively minor market for such securities because in most cases the securities are purchased by real estate developers or associated entities which is a rather limited pool of potential investors.  With a limited investor pool these market risks may be more volatile.  To date the market appears to be supporting Rio’s original projections.

While the experience in the Port of Maravilha demonstrates the vitality of the CEPACs, a number of factors come to mind as potential sources of risk in utilization of CEPACs:

  • Market volatility and currency value fluctuations need to be considered.  The Brazilian currency has recently had a significant decrease in valuation versus the US dollar.  Therefore, the rise in valuation of a CEPAC may in fact be attributable to the devaluation of the Brazilian currency.  In addition, absent fixed price contracts currency fluctuations may cause future construction costs to escalate beyond those originally anticipated.  Furthermore, there is a risk that completion of the project could be adversely impacted by contractors refusing to perform services at the contract sums originally committed to at the inception of the project.  All of these risks need to be studied and watched closely to determine the impact on the completion of this ambitious project.


  • To mitigate development risk there needs to be significant planning undertaken by the municipality prior to the commencement of the project.  The integrity of the planning helps to determine within acceptable risk parameters the cost of infrastructure as well as the desirability of the location from a market standpoint for companies to locate and prosper in this environment.  To the extent that the planners miss the mark on initial planning the overall quality and successful aspects of the project are placed in jeopardy.  Cost overruns, unanticipated site conditions, availability of labor and materials can all have disastrous impacts upon the utilization of CEPACs as a financing tool for a long term project.  This risk is particularly appropriate where there exists a shortfall in the original amounts raised by the issue of CEPACs and the final costs of the entire project.  In such instances the City is dependent upon the enhancement in the value of the CEPACs to support this gap.  Here such a situation exists where the initial issuance named $R3.5 Billion and the final cost is estimated at $R8.0 Billion.  To date, it appears that the City has been successful in ascertaining and managing these risks.  Hopefully, as completion nears this trend will continue.


  • The desirability of the location of the proposed urban revitalization must remain strong.  To the extent that the revitalization encourages economic development and sustainability the value of the CEPACs will be enhanced thereby contributing to the closing of the circle of conception, execution and completion.  Market value of the CEPACs will be enhanced by the desirability and increasing value of underlying property in this area.  To the extent desirability of location is enhanced the value of the certificates is enhanced.  Again, based upon initial perceptions the City of Rio to date is within acceptable margins of predictability.  It will be interesting to see if the recent economic downturn in Brazil has any long term negative impacts on the desirability for growth and development in this area. To further enhance desirability of location the City of Rio has required that a portion of the CEPACs be used for preservation of public assets such as antiquities and providing open space and areas of public amenities such as museums, parks and recreational facilities.  Three percent of the total CEPAC value is required to be devoted towards these public amenities and assets.  In addition tax incentives are provided.  The integration of this public benefit will further enhance the overall desirability of the location for companies to select locations and to grow within the designated area.

In conclusion, the City of Rio through the use of CEPACs to fund infrastructure appears to provide a template for those other cities designed to experiment with this approach.  The City appears to have identified and addressed the major risk factors such as, preplanning, coupled with desirability of location to mitigate unforeseen economic risk.  As the Port opens to its full potential a final assessment of success will be possible.  The economic benefits of CEPACs utilization with respect to the redevelopment of the Port of Maravilha may for generations to come be a shining example of the correct and dedicated use of urban planning to achieve economic and social objectives.

Robert C. Buckley is a delegate of Leading Cities and a Senior Partner in the Boston law firm of Riemer & Braunstein LLP specializing in real estate development law.

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