Management Alert: Need for Increased Oversight by FHFA, as Conservator of Fannie Mae, of the Projected Costs Associated with Fannie Mae's Headquarters Consolidation and Relocation Project

Published by the Federal Housing Finance Agency, Office of Inspector General on 2016-06-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                    Federal Housing Finance Agency
                        Office of Inspector General

     Management Alert: Need for
   Increased Oversight by FHFA, as
   Conservator of Fannie Mae, of the
    Projected Costs Associated with
     Fannie Mae’s Headquarters
     Consolidation and Relocation

On July 26, 2016, subsequent to the publication of this report, FHFA provided
information to us indicating that, as of May 16, 2016, the projected cost to develop
Fannie Mae’s new headquarters was $235.35/square foot, rather than $223.35. We
have updated this report accordingly; our findings, conclusions, and recommendations
are unaffected.

  Management Alert  COM-2016-004  June 16, 2016
                                           June 9, 2016

TO:            Melvin L. Watt, Director

FROM:          Laura S. Wertheimer, Inspector General

SUBJECT:       Management Alert—Need for Increased Oversight by FHFA, as Conservator
               of Fannie Mae, of the Projected Costs Associated with Fannie Mae’s
               Headquarters Consolidation and Relocation Project

The Federal Housing Finance Agency (FHFA) Office of Inspector General (OIG) conducted a
review of an anonymous hotline complaint alleging, among other things, excessive spending on
Fannie Mae’s relocation to new headquarters in downtown Washington, D.C. Based on facts
learned during that review, we believe there are significant financial and reputational risks from
the projected costs associated with Fannie Mae’s relocation of its headquarters that warrant
immediate, sustained, and comprehensive oversight from FHFA, the conservator of Fannie Mae.


In 2012, Fannie Mae management faced a challenge in its workspace utilization in the District
of Columbia and surrounding areas. Fannie Mae housed its thousands of employees among
numerous locations in the metro D.C. area, some of which were owned by Fannie Mae and some
of which were leased. The lease on its largest property (4000 Wisconsin) was set to expire in
2018, and that building required significant upgrades to meet Fannie Mae’s operational needs.
In early 2013, Fannie Mae launched an initiative to recommend a strategy for meeting future
requirements for its D.C.-based workforce.

Fannie Mae management created a workplace strategy steering committee at the end of 2012
to develop a long-term solution to the Enterprise’s workspace needs. An employee in FHFA’s
Division of Conservatorship (DOC) attended the steering committee meetings and had access to
materials presented at those meetings.

One of the first decisions to be made was whether Fannie Mae should remain in its existing
facilities and pay to upgrade them or vacate them and find suitable space elsewhere; this was
called the “Go” or “Stay” decision. In 2013, Fannie Mae engaged a commercial real estate
consultant to analyze options provided by management, including: relocating to facilities in
Virginia, Maryland, and D.C.; remaining in the existing locations and incurring the cost

                              OIG  COM-2016-004  June 16, 2016
necessary to upgrade them; and consolidating operations into one facility. Fannie Mae’s Board
of Directors approved the “Go” strategy at its November 2013 meeting.

In 2014, Fannie Mae management engaged several subject matter experts to analyze various
aspects of the “Go” strategy. Following the March 2014 Board meeting, Fannie Mae’s
management concluded that its best option would be to consolidate all operations in the
Washington, D.C. area into a single facility in D.C. Fannie Mae documents reflect that the
Board asked Fannie Mae management to explore the possibility of relocating to one of D.C.’s
economic development zones as one of the relocation options. In May 2014, Fannie Mae’s CEO
briefed FHFA on Fannie Mae’s workplace consolidation and its decision to consolidate its metro
D.C. workforce into one location in downtown D.C.

Fannie Mae management narrowed down the universe of possible relocation options to three
D.C. properties. At a meeting of the Fannie Mae Board on November 19, 2014, management
presented a slide deck entitled “Future DC Workplace Strategy,” which compared the cost to
lease appropriate space in each of the three relocation options. One of those options involved
consolidation and relocation to a new building, Midtown Center, to be built by Carr Properties
on the former Washington Post site. To provide an empirically driven economic analysis of
the three options, the consultant used a Net Present Value (NPV) measure for the comparison.1
The slide deck provided to the Fannie Mae Board, and to a DOC employee who attended that
board meeting, set forth the consultant’s NPV comparisons of the three options, including the
assumptions used to develop each NPV. The option to relocate to leased space in the Midtown
Center building to be built on the site of the former Washington Post building had a projected
15-year NPV of $858,265,531.

In late December 2014, Carr Properties provided a revised offer to Fannie Mae, including a
rental abatement early in the lease and a reduced rental rate. In January 2015, DTZ2 reviewed
the revised proposal and concluded that it lowered the NPV for Carr Properties’ Midtown Center
building from $858,265,531 to $770,481,598. 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/square
foot to yield turnkey office space. This figure included the design costs, office configurations,
and furniture, fixtures, and equipment. Of the $164.32/square foot, $120/square foot was to
be paid for by Carr Properties through a tenant improvement allowance, and the remaining
$44.32/square foot would be paid for by Fannie Mae.

  Net Present Values are used to measure the relative financial cost of different properties. NPVs consider future
cash flows associated with leases, and the timing of the lease payments, over a specified period of time. The cash
flows are discounted back to present value using a discount rate that reflects the lease period borrowing cost.
 In 2015, DTZ, which was formerly Cassidy Turley, merged with Cushman & Wakefield. For convenience, we
will continue to refer to the organization as DTZ.

                                    OIG  COM-2016-004  June 16, 2016
On January 22, 2015, the Fannie Mae Board approved the consolidation of Fannie Mae’s
Washington area offices into leased space in the Midtown Center building. The Board’s decision
was based primarily on the fact that Carr Properties’ revised proposal had an estimated NPV of
$111,025,282 lower than the competing relocation proposal.

Subsequent to that approval by the Fannie Mae Board, Fannie Mae submitted the same proposal
to FHFA for its approval. Fannie Mae identified two options to lease approximately 700,000
square feet of space in one of two buildings in downtown Washington, D.C. in which it would
consolidate its workforce in the metro D.C. area. For each of these options, Fannie Mae
provided the projected NPV over the 15-year period of the proposed lease created by DTZ, but
did not include the assumptions used by DTZ to develop the projected NPV estimates. Because
the NPV of $770,481,598 for the Midtown Center building was lower than the NPV of
$881,506,880 for the second option, Fannie Mae recommended approval of the first option
to FHFA.

According to a DTZ employee responsible for developing the NPV estimates, all the NPVs
projected for the final options over the full term of each lease were “all in” numbers: each NPV
included all costs projected to consolidate the Fannie Mae metro D.C. area workforce into one
location, in a turnkey building. That DTZ employee and the Fannie Mae executive charged with
managing the relocation project separately reported to us that Fannie Mae understood that the
NPVs provided for each of the final options were “all in” numbers so that Fannie Mae
management, the Fannie Mae Board, and FHFA could compare the cost of each option head-to-
head and determine which was the most cost-effective.

        Review and Approval by FHFA

On January 26, 2015, DOC provided the FHFA Director with a staff analysis memorandum
recommending approval of Fannie Mae’s proposal to consolidate its separate metro D.C. area
offices into approximately 700,000 square feet of space leased in the Midtown Center building to
be constructed by Carr Properties on the site of the former Washington Post building. According
to that memorandum, the estimated NPV of $770,481,598 over the term of the lease was less
than the alternative relocation proposal of $881,506,880.3

On January 29, 2015, FHFA authorized Fannie Mae to proceed with the relocation project and
execute the lease for space in the Midtown Center building pursuant to the terms of the DOC
analysis memorandum.

 For comparative purposes, the staff analysis memorandum noted that the NPV of the “stay and renovate” option
over the equivalent period was $1,103,686,643.

                                  OIG  COM-2016-004  June 16, 2016
          As of March 2016, Fannie Mae’s Projected Build-out Costs Had Increased

During the course of our review, we were provided with a March 10, 2016, budget for the build-
out of the building by the construction management firm, Hines, currently working for Fannie
Mae on the project. According to this budget document, the projected cost to build-out the
leased space at that time was $252.81/square foot. 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 10, 2016, the
projected build-out costs escalated from $164.32/square foot to $252.81/square foot, an increase
of $88/square foot—or 53.85%.

That same budget document reported that the estimated square footage for the leased space had
declined from 700,000 square feet to 679,000 square feet. With the reduced square footage,
the increased cost for the build-out exceeded $56 million (from $115 million to $171 million).4
Even though the total square footage in this budget declined by 3%, the NPV for Fannie Mae’s
consolidation remained at $770,481,598.

In separate interviews with a Hines representative and the senior Fannie Mae executive
responsible for management of this relocation project, each reported that they are managing the
overall relocation cost and lease within the FHFA-approved NPV of $770,481,598. According
to the senior Fannie Mae executive, it will be a “challenge” for Fannie Mae to remain within that
approved NPV.

          Two Months Later, Fannie Mae’s Projected Build-out Costs Decreased by
          $17.46/Square Foot

This senior Fannie Mae executive advised us that Hines revised the budget for the project in
May 2016. The revised budget document, dated May 16, 2016, estimated the projected build-out
costs at $235.35/square foot,5 $17.46/square foot lower than the March 10, 2016, estimate of
$252.81/square foot. Assuming that the leased square footage remains constant at 679,000, the
increased cost for the turnkey build-out from $164.32/square foot to $235.35/square foot would
be roughly $45 million (from approximately $115 million to approximately $160 million). As

    The $115 million build-out cost is the amount approved by FHFA on January 29, 2015.
  During our field work, FHFA provided us with a photocopy of a Hines document that appeared to project the cost
to be $223.35/square foot as of May 16, 2016. We included this figure in the draft Management Alert report and,
pursuant to established policy, provided it to FHFA for review and comment on June 9, 2016. FHFA reviewed the
draft report, but did not advise us that the $223.35/square foot figure was inaccurate. On July 26, 2016, five weeks
after the publication of this report, and in connection with another inquiry, FHFA produced a clearer copy of the
same document; it reflected the estimate as of May 16, 2016, to be $235.35/square foot – $12/square foot more than
we reported. For these reasons, we have amended this report to reflect this newly acquired information.

                                    OIG  COM-2016-004  June 16, 2016
Carr Properties first broke ground for Midtown Center in May 2016,6 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.

        DOC’s Oversight of Fannie Mae’s Development of its Leased Space to Date

For the past seven years, Fannie Mae has operated in conservatorship, with FHFA as its
conservator. Congress granted FHFA sweeping conservatorship authority over the Enterprises.7
FHFA administers the conservatorships through: a combination of communications with the
Enterprises’ respective boards of directors and management; a multi-year strategic plan for the
conservatorships that defines general goals and initiatives; annual conservatorship scorecards
that focus the Enterprises on short-term objectives to further the conservator’s strategic goals;
and governance practices and organizational infrastructure that support these activities. The
conservator can revoke delegated authority at any time and can intervene in any issue or matter
at the direction of the FHFA Director.

On January 22 2015, FHFA rescinded authority previously delegated to Fannie Mae to decide
whether and where to consolidate its metro D.C. area offices into one location and the money
to be spent on any such relocation. FHFA’s revocation was consistent with its revocation, in
November 2012, of the Enterprises’ budget approval authority to enable it to review and approve
each annual operating budget “to ensure that the [Enterprises’] budgets [are] properly aligned
with both FHFA’s strategic direction and its safety and soundness priorities.”8 In both instances,
FHFA determined that its review and approval of significant Enterprise expenditures was needed
to protect the U.S. taxpayers’ substantial investment in the Enterprises and to ensure their
continued safety and soundness.

We spoke several times with the DOC employee identified by FHFA as responsible for FHFA’s
ongoing oversight of Fannie Mae’s development of its new office space. The DOC employee
said that he was not aware of anyone else within FHFA who is familiar with the lease and build-
out costs and that the Agency had not been reviewing the finances of the project or related

This 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, the owner of the building and the landlord.
He reported to us that detailed budgetary oversight was unnecessary since Fannie Mae was
operating within the $120/square foot tenant improvement allowance. As he explained, he

  Barbra Murray, New Future for Former Washington Post Site, Commercial Property Executive (May 16, 2016)
(online at www.cpexecutive.com/post/new-future-for-former-washington-post-site/).
 For a discussion of these powers, see OIG, The Continued Profitability of Fannie Mae and Freddie Mac is Not
Assured (Mar. 18, 2015) (WPR-2015-001) and OIG, FHFA’s Conservatorships of Fannie Mae and Freddie Mac: A
Long and Complicated Journey (Mar. 25, 2015) (WPR-2015-002).
 See OIG, FHFA’s Exercise of its Conservatorship Powers to Review and Approve the Enterprises’ Annual
Operating Budgets Has Not Achieved FHFA’s Stated Purpose (Sept. 30, 2015) (EVL-2015-006).

                                 OIG  COM-2016-004  June 16, 2016
had numerous responsibilities competing for his time and “to ride shotgun” on Fannie Mae’s
development of its leased space was not a high priority. That employee also advised us that he
is briefed regularly by a senior Fannie Mae official about Fannie Mae’s evolving plans for its
leased space. He maintained that he expected that the Fannie Mae official would inform him if
the projected costs to customize the space were expected to exceed the $120/square foot tenant
improvement allowance and that this official had never provided such information to him.

The Fannie Mae senior executive referenced earlier reported to us that, since January 29, 2015,
when FHFA approved Fannie Mae’s proposal, he has not briefed any FHFA employee on Fannie
Mae’s budget for developing its leased space. That senior executive advised us that he met with
the Acting Deputy Director of DOC and offered to provide regular updates on the status of the
project, but his offer was declined because the Acting Deputy Director explained that he received
regular updates from DOC staff.

Based on the materials prepared by Fannie Mae and its consultant DTZ, we understood that the
NPV for the total cost of Fannie Mae’s relocation to the new Carr Properties building (Midtown
Center) with a 15-year lease for roughly 700,000 square feet of space was estimated to be
$770,481,598, which included an assumption of $164.32/square foot for build-out of the space.
(Of that $164.32/square foot, $44.32/square foot would be borne by Fannie Mae.) When we
brought these materials to the attention of this DOC employee to refresh his recollection, he
acknowledged the materials showed that Fannie Mae would bear build-out costs beyond the
$120/square foot tenant allowance to be borne by Carr Properties.

We advised this DOC employee that, as of March 2016, Hines had projected Fannie Mae’s
build-out costs had increased to $252.81/square foot. He responded that he had not received a
copy of the March 2016 budget and was unaware of that estimate, but stated that Fannie Mae
should have informed him of the change. From the materials we reviewed and the employees
of Fannie Mae, Hines, and DOC whom we interviewed, it does not appear to us that anyone in
DOC was aware of the projected 53% increase in estimated build-out costs for Fannie Mae’s
new office space.

When we learned that Fannie Mae’s projected build-out costs were reduced from the March 2016
estimate of $252.81/square foot to a lower estimate in May 2016, we reached out to this DOC
employee to determine if he was aware of the revised budget. This employee reported to us that
he had been told about the May 2016 revised budget but had not been provided with a copy of it.

       FHFA Should Determine Whether the Proposed Features in Fannie Mae’s
       Architectural and Engineering Plans Are Appropriate for an Entity in

In May 2016, Carr Properties broke ground on the Midtown Center building that will house the
relocated offices of Fannie Mae. According to Oliver Carr III, the CEO of Carr Properties,
“Midtown Center will be a new hub of activity in the center of the City that will offer a great

                              OIG  COM-2016-004  June 16, 2016
work environment and a tremendous street level dining experience.”9 Carr Properties anticipates
that “Midtown Center will have a transformative impact upon the neighborhood and city.”10
Fannie Mae will be a tenant in the Midtown Center building.

Since FHFA approved the lease in January 2015, Fannie Mae has generated substantial
construction documents and caused architectural and engineering plans to be drafted. As of
May 2016, there are a number of architectural and other features in these plans, including:

          Three enclosed glass bridges to connect different parts of the buildings to be leased by
           Fannie Mae;

          “Town Centers” at the terminus of each bridge;

          Spiral staircases; and

          Rooftop viewing decks.

According to the Fannie Mae executive and a Hines representative, Fannie Mae has agreed to
pay 70% of the costs to construct the glass bridges; the cost to Fannie Mae for these bridges, if
they are built, will be about $15 million. We were not able to determine from Fannie Mae’s
budget documents whether Fannie Mae has agreed to pay all or part of the costs for any of the
other proposed features listed above.

At this juncture, the future of Fannie Mae cannot be predicted. At our meeting on June 8, 2016,
you represented to us that no plans for the build-out of Fannie Mae’s space have been finalized
and that plans will continue to evolve and change until Carr Properties begins work on the
interior of the building. To the best of our knowledge, FHFA has not approved any of the
proposed features in Fannie Mae’s architectural and engineering plans nor has it reviewed or
approved proposed expenditures by Fannie Mae for these features. We do not know—nor,
we believe, does the Agency know—the extent to which proposed features in Fannie Mae’s
architectural and engineering plans can be altered, or what costs may be attendant upon the
removal of proposed architectural features that FHFA does not approve.

Because Fannie Mae is an entity in the conservatorship of the U.S. government and is leasing
space in a building owned by Carr Properties, FHFA, as conservator, will need to assess the
anticipated efficiencies of specific proposed features against the estimated costs of those features
and determine whether the efficiencies warrant the costs. FHFA will also need to determine
whether the proposed features for leased space in a building that is not owned by Fannie Mae
or the U.S. government are appropriate for an entity in conservatorship.

 AZoBuild, Carr Properties Begins Construction of LEED Gold Certified, Trophy Office Building in Northwest
D.C (May 13, 2016) (online at www.azobuild.com/news.aspx?newsID=21382).

                                    OIG  COM-2016-004  June 16, 2016
       OIG Meeting with the FHFA Director

On May 26, 2016, we met with you to present our findings in this matter and our concerns with
the Agency’s oversight of this project, as well as the attendant financial and reputational risks to
the Enterprise. You acknowledged the Agency’s responsibility to monitor the amounts being
spent on this project and agreed to look into the matter.


Since September 2008, Fannie Mae has operated in conservatorship, with FHFA as its
conservator, and its continued operations were made possible by the $116.1 billion investment
by U.S. taxpayers.

Pursuant to the terms of the Third Amendment to the Senior Preferred Stock Purchase
Agreement, Fannie Mae’s net worth less the amount of its capital reserve, is swept into the U.S.
Treasury each quarter. Fannie Mae arguably has little incentive to cabin its costs for the build-
out of its new headquarters because any positive net worth it does not spend on itself will be
swept into the Treasury as a dividend. 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.

For these reasons, we believe there are significant financial and reputational risks from the
projected costs associated with Fannie Mae’s relocation of its headquarters that warrant
immediate, sustained comprehensive oversight from FHFA, the conservator of Fannie Mae.


For these reasons, we recommend that FHFA:

   1. Ensure that FHFA has 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.

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

                               OIG  COM-2016-004  June 16, 2016
FHFA’s Response to OIG’s Alert and Recommendations

                         OIG  COM-2016-004  June 16, 2016
OIG  COM-2016-004  June 16, 2016
OIG  COM-2016-004  June 16, 2016