Anonymous Tip Leads OIG to Investigate Fannie Mae's HQ Project Costs

FHFA head Mel Watt

WASHINGTON, DC—In a newly-released report , the Federal Housing Finance Agency’s Office of Inspector General has concluded that the costs associated with Fannie Mae’s headquarters relocation project have become so financially and reputationally risky that its regulator, the Federal Housing and Finance Agency, needs to provide ongoing oversight. FHFA head Melvin Watt ‘s response to the report was, to be blunt, somewhat withering. He took issue with several points and inferences the OIG made — namely the suggestion by the OIG that Fannie Mae didn’t have any incentive to control costs as well as its inference that the original plan to consolidate and build a new headquarters was not a sound business decision. Watt’s tone became arguably downright caustic when he made his observation that the OIG “does not seem to take into account the reality that any construction project is inherently dynamic and that the cost of up-fitting tenant costs almost always involves trade-offs between up-front costs and longer-term operating costs and efficiencies.” That said, Watt ended his rebuttal noting that the recommendations in the report are constructive and warranted. The agency will implement them “to the extent we are not doing so already.” The FHFA declined to comment further to GlobeSt.com beyond its rebuttal in the report. How It Started The OIG launched an investigation into the relocation project after receiving an anonymous hotline tip about excessive spending on the project. The main complaint seemed to focus on  numerous changes to the original project after it received formal approval. Briefly, Carr Properties is developing the headquarters for the GSE’s headquarters, called Midtown Center , on the former Washington Post’s site. A request for comment from Carr Properties was not returned in time for publication. OIG laid out the numbers why it came to its conclusions, providing along the way some competitive data on how Carr Properties won the deal. According to the report, Carr Properties first presented a project proposal that DTZ determined would have a projected 15-year net present value measure of $858,265,531.  Carr then revised the proposal one month later in December 2014. DTZ estimated this revised proposal lowered the NPV from $858,265,531 to $770,481,598. OIG wrote that:

DTZ’s revised NPV was based on a number of assumptions that were identified in its analysis. These included: a 15-year lease for approximately 700,000 square feet at $48.15/square foot in rent (with annual increases of 2.5%); a 4% discount rate; rent abatements by Carr Properties; and build-out costs of $164.32 per square foot to yield turnkey office space. This figure included the design costs, office configurations, and furniture, fixtures, and equipment. Of the $164.32 per square foot, $120 per square foot was to be paid for by Carr Properties through a tenant improvement allowance, and the remaining $44.32 per square foot would be paid for by Fannie Mae.

On January 2, 2015, Fannie Mae’s Board approved the project based on that revised proposal, the OIG said. A 53% Increase In Costs The OIG spent some length discussing alternative proposals, such as leasing space, and whether they should have been considered as well. But its main point was that by March 2016, Fannie Mae’s projected build-out costs had significantly increased. Citing a budget review provided by Hines, the construction management company, OIG wrote that:

Over a 14-month period from January 29, 2015, when FHFA approved Fannie Mae’s proposal to relocate to 700,000 square feet in a new building on the former Washington Post site with a $770,481,598 NPV, to March 1, 2016, the projected build out costs escalated from $164.32/square foot to $252.81 /square foot, an increase of $88/square foot — or 53.35%

It also noted that:

Even though the total square footage in this budget declined by 3%, the NPV for Fannie Mae’s consolidation remained at $770,481,598.

Two months later, the projected build-out costs had decreased by $29.46 per square foot, the OIG said.

As Carr Properties first broke ground for Midtown Center in May 2016, the square footage costs for the turnkey build-out of Fannie Mae’s space have not been finalized by Fannie Mae or approved by FHFA.

It also noted that no one seemed to be aware of the 53% increase in build out costs. Finally, the OIG questioned whether some of the proposed changes to the project were suitable for an agency in conservatorship, including the addition of three enclosed bridges to connect the buildings and spiral staircases. OIG concluded its report by recommending that the FHFA should:

• Have adequate internal staff, outside contractors, or both, who have the professional expertise and experience in commercial construction to oversee the build-out plans and associated budget(s), as Fannie Mae continues to revise and refine them.

• Direct Fannie Mae to provide regular updates and formal budgetary reports for review and for FHFA approval through the design and construction of Fannie Mae’s leased space in Midtown Center.

Watt’s Response In his rebuttal Watt said he would implement both recommendations. But Watt also took the opportunity to point out some factors that he believed the OIG overlooked, such as the flexibility Fannie Mae has with subletting the building if necessary and the financial windfall of selling the properties it owns. He took issue with the assumptions OIG made about the new features, namely that they were lavish, noting that spiral staircases take up less space and the connecting bridges foster collaboration among employees and better productivity — something that is important to an agency in conservatorship and that also increases the appeal of the building should it be subletted or later sold. Watt also said that no one ever represented to him that the cost of uplifting this space would be capped at the $120 per square foot tenant allowance provided by the developer. Watt continued:

Nor, for that matter, have I ever been under the impression that the overall NPV estimate of $770,481,598 was a dollar cap on the project instead of an analytical tool to be used in making choices among the options and a benchmark that all parties in good faith work to achieve. Based on my experience with construction projects, it would simply have been impractical to expect that final design decisions could be made and costs determined so precisely at such an early stage of the project.

“Our Moving Is Saving Taxpayers $340 Million” The bottom line about the relocation, a Fannie Mae spokesperson told GlobeSt.com, is that the move is saving taxpayers around $340 million. “You can line item however you want but our design plans have made everything less expensive and more collaborative.”