Costs to complete Fannie Mae’s new downtown headquarters ballooned 53 percent after the agency inked a lease for the space early last year, according to a watchdog report released Thursday, creating “significant financial and reputational risks” to the housing giant’s oversight agency.
The report cites pricey improvements at the new headquarters, currently under construction, including three enclosed glass bridges connecting the buildings, spiral staircases and rooftop viewing decks. As a result of those and other interior and architectural features, the report said, build-out costs for Fannie Mae increased from $164.32 per square foot in January of last year to $252.81 per square foot by March of this year, a 53 percent jump.
An investigation into the costs began after the Office of Inspector General for the Federal Housing Finance Agency (FHFA) received an anonymous tip, the inspector general’s office said in its nine-page report.
FHFA has served as the conservator for Fannie Mae since 2008, when Fannie received $116.1 billion in taxpayer funds to rescue it during the financial crisis. Since then, the mortgage giant has been mostly a moneymaker, sending the U.S. Treasury $147.6 billion since receiving the bailout funds as of February.
The headquarters budget increases are likely to embolden critics of the agency. Authors of the inspector general’s report were caustic in their criticism of Fannie executives, saying the headquarters costs “warrant immediate, sustained comprehensive oversight from FHFA.”
“Fannie Mae arguably has little incentive to cabin its costs for the buildout of its new headquarters because any positive net worth it does not spend on itself will be swept into the Treasury as a dividend,” they wrote. “Excessive or unnecessary spending by Fannie Mae may be seen as monies that ought to have been swept to the U.S. Treasury as a dividend for the $116.1 billion investment by U.S. taxpayers.”
However Fannie Mae officials have said the organization stands to save around $330 million by moving into the new project, called Midtown Center, than it would have by staying in its current campus along Wisconsin Avenue across from Sidwell Friends High School.
At 679,000 square feet, the mortgage giant’s space in the new project will be more than 30 percent smaller than the nearly 1 million square feet in its existing buildings, some of which have expiring leases and are badly in need of upgrades.
Fannie also took advantage of a downtown office market where rents have been flat for the past five years, due largely to downsizing of office space for government agencies, law firms and other large employers. Fannie’s base rent for a 15-year lease in the brand new project is $48.15 per square foot; in 2008 the average rent for all buildings downtown — new and old — was $51 per square foot.
Indeed Fannie only agreed to move to Midtown Center after the developer, Carr Properties, agreed to slash the rate it offered by $87,783,933 over the course of the lease, a 10 percent discount. Although other government agencies are focused on owning more of their space, leasing provided Fannie flexibility should Congress overhaul Fannie and the other government-sponsored enterprise (GSE), Freddie Mac.
“Fannie Mae negotiated extraordinarily favorable and flexible lease terms with the property’s landlord,” the organization said in a statement addressing questions raised by the report.
In a three-page written response Melvin L. Watt, FHFA director, agreed with recommendations that the project be subject to close scrutiny but strongly disagreed with the report’s assertion that his agency was not carefully overseeing Fannie’s relocation costs. The FHFA took over decision-making for the relocation in January of last year.
“Any inference that may be drawn from the [report], whether such inference was intended or not, that the decision to consolidate and relocate to Midtown Center was anything other than a sound business decision or a decision not fully vetted, evaluated, and supported by the FHFA would be unfounded,” he wrote.
Watt pointed out that many of the upfront investments would save money over the course of the lease, including space-saving open office design and more efficient lighting. He wrote that “upfitting space with more expensive LED lighting instead of less expensive fluorescent lighting would result in significantly cheaper operating costs and decisions about more or less expensive window shades and mechanical systems will certainly impact heating and cooling costs significantly.”
Fannie said the tenant improvement costs “have risen somewhat since the conceptual stage of the project, but these higher up-front costs were chosen in order to achieve even greater reductions in the operating cost of the space over the life of our occupancy.” Fannie put its Wisconsin Avenue buildings up for sale.
Carr Properties, which is building the project on the site of the former Washington Post headquarters, emphasized it won the deal by offering a below-market rent.
U.S. Rep. Ed Royce (R-Calif.), a senior member of the House Financial Services Committee, issued a statement saying the increased budget bolstered the argument for doing away with the GSEs altogether.
“It’s paradoxical that an organization overseeing a huge chunk of the mortgage market can’t get a simple construction project right,” Royce said. “Fannie falling asleep at the wheel in this manner is a perfect representation of the GSEs’ model of private gains and public losses. It’s time to put aside the conversation about releasing this enterprise and instead refocus on how to wind it down.”
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