WASHINGTON -- Costs to complete Fannie Mae's new downtown headquarters in the District of Columbia increased 53 percent after the agency signed 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, the Federal National Mortgage Association, increased from $164.32 per square foot in January 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 received an anonymous tip, the inspector general's office said in its nine-page report.
The Federal Housing Finance Agency has served as the conservator for Fannie Mae since 2008, when Fannie Mae received $116.1 billion in taxpayer funds 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 Mae 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.
However, Fannie Mae officials have said the organization stands to save about $330 million by moving into the new project, called Midtown Center.
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 Mae also took advantage of Washington's downtown office market, where rent has been flat for the past five years. Fannie Mae's base rent for a 15-year lease in the 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 Mae agreed to move to Midtown Center only after the developer, Carr Properties, consented to cut the rate it offered by 10 percent. Although other government agencies are focused on owning more of their space, leasing provided Fannie Mae flexibility should Congress overhaul Fannie Mae and the other government-sponsored enterprise, the Federal Home Loan Mortgage Corp., also known as Freddie Mac. Fannie Mae put its other buildings up for sale.
"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 Watt, the finance agency 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 Mae's relocation costs. The agency took over decision-making for the relocation in January 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.
Fannie Mae 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."
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. Edward 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 Fannie Mae and Freddie Mac 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 [government-sponsored enterprise's] model of private gains and public losses."
Business on 06/18/2016