Posted on July 22nd, 2008 in Daily Mortgage/Housing News - The Real Story
This fine piece of research was done by my buddy Rolfe Winkler at Option Armageddon. It’s a great read – so much so that I am not even going to comment. I’m just going to do a cut and paste. -Best, Mr Mortgage <>
July 17, 2008 – 6:01 pm Like the rest of the real estate universe, the Mortgage Bankers Association is in trouble. Membership is in decline, meeting attendance is down and some of MBA’s largest conference sponsors are either out of business or cutting back. With this in mind, it seems a poorly-timed decision to double-down on real estate. But that’s precisely what CEO Jonathan Kempner did, using MBA’s reserve fund to construct brand new headquarters.
Taking the hit for MBA’s financial difficulties include a “low double-digit” number of staffers that were recently fired as well as a subset of members for whom dues will increase.
Kempner refused comment for this article through MBA’s SVP for Communications and Marketing Cheryl Crispen, but it seems clear he’s not sharing the financial pain. In the year ending September 2006—the latest for which MBA’s tax filing is available—he pocketed $1.15 million in salary, bonus, benefits and expense reimbursements, ranking him among the “top earning” trade association CEOs in the U.S. according to a National Journal article published earlier this year.
And his comments to National Journal suggest he isn’t expecting a pay cut any time soon. One would seem to be in order…..
At the beginning of 2007, as the real estate downturn accelerated, Kempner announced that MBA had signed an agreement to purchase 1331 L St., NW in Washington, D.C.:
“This new building will allow MBA to better meet the needs of its members,” he said in a press release at the time. “We will have a modern, state of the art facility that gives us the space and resources we need to serve our members, as well as the flexibility to adapt our office space as our strategic goals and objectives evolve.”
It’s not clear what “member needs” necessitated the building purchase. Perhaps Kempner thought he’d need more space after merging MBA with the the trade group representing subprime lenders in August 2006.
In any case, MBA closed the new building deal earlier this year and the association now occupies 40% of it. The rest wasto be leased out to help pay the mortgage. Trouble is, Kempner can’t find any tenants to share his new digs. With no tenants and deteriorating lending conditions, MBA was forced to put down “10% more” than planned toward the purchase according to the Washington Post.
Nor has Kempner found tenants to sublet the association’s old lease for 32,000 square feet on the 8th floor at 1919 Pennsylvania Ave. That lease runs through 2011. (Note the leasing contact info immediately to the right of MBA’s old plaque in the photo below.)
In total, MBA is carrying the cost of 200,000 square feet of space, of which the association is using only a third.
All of the above is hitting MBA’s reserve fund hard. According to Crispen, it stands at $57m, off from $77m a year ago. And while the acquisition cost of the building was $79m, according to Commercial Property News, MBA may be on the hook for millions more in tenant improvements.
With membership down 17% from its peak, and big conference sponsors like Countrywide out of business or cutting back, the decision to raid the rainy-day fund to buy an ostentatious, LEED-Silver Certified building seems questionable at best.
The official MBA line on the building remains enthusiastic:
“We came to the inescapable conclusion last year that owning our own building was the smartest long term investment for the Association and…[w]e are, quite frankly, thrilled to be in our own home.”
“We” apparently refers to Kempner and three “member-led” task forces that, according to Crispen, signed off on the purchase. If I were a member, I’d be curious to know those among my ranks that served on those task forces. And to hear their rationale.
Assuming they did their homework, how do they justify the purchase in light of the “dramatic” deterioration in D.C.’s commercial leasing environment? According to a May article in the Washington Post, published three weeks after MBA closed on its new building, “leasing activity dropp[ed] to its lowest level in more than a decade” in the first quarter of this year. Continued construction, coupled with slowing demand, is leading to a supply glut. Incentives such as free rent, which haven’t been seen in years according to the article, are increasingly common.
Crispen disputes the notion that the building wasn’t a good investment. She points to a “13% increase” in the building’s value since the deal closed. That appraisal, she says, comes from a “nationally-rated firm.” But she won’t name the firm and won’t say why.
Considering the difficulty they are having renting space, and the deteriorating financing environment, it’s hard to believe Kempner could flip the building for more than he paid. So the appraisal, like so many residential ones circa 2007, likely isn’t worth the paper it’s written on.
Besides the layoffs, MBA’s deteriorating finances have forced Kempner to cut back other functions important to members. Functions like lobbying. According to Crispen, MBA’s outside lobbying operation is still going strong, but well-connected sources inside and outside MBA say that funding for lobbyists has been cut back.
Members themselves will soon be asked to share MBA’s financial pain more directly. According to an MBA spokesperson, new dues will soon be instituted for a subset of members based on “servicing activities.”
The one person not sharing the pain appears to be Kempner. At $1.2m, his comp sucked up 2.1% of MBA’s total revenue in the year ending Sept ‘06. We’ll know how much he took home in 2007 when MBA releases last year’s tax filing in August. But as the National Journal article makes clear, Kempner isn’t anticipating a pay cut any time soon.
Members should be asking why not.
You too can look up the MBA’s financial info, complete with a revenue breakdown and record of the CEO’s pay, by registering at guidestar.org. It’s a standard, free website registration, with a confirmation e-mail in your inbox. Go through that and then when you’re back at the website search for “mortgage bankers association.” Under that listing you’ll see pdf versions of form 990, which is the annual report MBA files with the IRS.