Lax FHFA Oversight Leads to Cost Overruns on Fannie's New HQ: Watchdog
Lax oversight may have played a part in rising costs to finish the space Fannie Mae will be renting for its new headquarters, a report from the Federal Housing Finance Agency Office of the Inspector claims.
The price tag has increased by $36 million since the Federal Housing Finance Authority approved the relocation proposal in January 2015.
A tip to the OIG's hotline alleged Fannie Mae was spending excessively on the under-construction property, the report said. The original cost to finish the space was $164.32 per square foot, of which $120 was to be paid for by the builder, Carr Properties, through a tenant improvement allowance. By March 2016 it rose to $252.81 per square foot but by May, one month after FHFA Inspector General Laura Wertheimer started her investigation, the cost decreased to $223.35. As it now stands, the total cost to build out the space is $151 million, up from $115 million when the contract was approved.
The report states that certain features of the new space might be inappropriate for a headquarters of a government-sponsored enterprise in conservatorship with an uncertain future. It cited that Fannie Mae is paying $15 million, or 70% of the cost to construct three glass bridges to connect different parts of the property it is renting. Other items the OIG said might not be appropriate are "town centers" at the end of each bridge, spiral staircases and rooftop viewing desks.
The FHFA Division of Conservatorship, which is overseeing the project, was reportedly unaware of the increasing costs, until the OIG made it aware of the problem, the report said.
"The DOC employee insisted to us that Fannie Mae's build-out costs were capped at $120/square foot, all of which would be borne by Carr Properties."
"He reported to us that detailed budgetary oversight was unnecessary since Fannie Mae was operating within the $120/square foot tenant improvement allowance," the report said, adding that he expected Fannie Mae would inform him if the projected costs to customize the space were going to exceed the tenant improvement allowance. The employee also told the OIG for him "to 'ride shotgun' on Fannie Mae's development of its leased space was not a high priority."
The report references an unnamed Fannie Mae senior executive, who said he has not briefed any FHFA employee on the budget for developing the space since the proposal was approved.
The DOC employee later acknowledged that the materials showed Fannie Mae would bear the build-out costs beyond the tenant improvement allowance. The employee stated he was aware of the revised budget of $223.35 per square foot but he did not have a copy of it.
The OIG also noted that the profit sweep gives Fannie Mae "little incentive to cabin its costs for the build-out…because any positive net worth it does not spend on itself will be swept into the Treasury as a dividend."
Among the recommendations the OIG made was for the FHFA to have either adequate staff or outside contractors — or even both — with the expertise and experience in commercial construction to oversee the project's plans and budget as Fannie Mae continues to revise and refine them. It also wants the FHFA to order Fannie Mae to provide regular updates and formal budgetary reports to the Division of Conservatorship for review and FHFA approval.
In FHFA's response attached to the report, Director Mel Watt said he strongly disagreed that Fannie Mae had little incentive to watch its costs on the building because of the sweep.
"To the contrary, the members of the boards and management teams of both enterprises have demonstrated consistent commitments…'to conserve and preserve' the assets of the enterprises," Watt said.
He also said the report does not seem to take into the account the cost of any construction "is inherently dynamic." Watt then went into a discussion weighing up-front costs versus longer-term benefits for property upgrades. And Watt said he told the OIG when it informed him of the findings that he was never under the impression that the cost was capped at either the $120 per square foot the builder was paying or the original total cost of $164.32 per square foot.
However, Watt's response concluded that the FHFA said the OIG's recommendations are "constructive and warranted and that they suggested additional means and provide additional incentive for the FHFA to provide more rigorous and appropriate oversight throughout the construction process. We accept them and will implement them to the extent that we are not already doing so."