Audit Report on the Tax Classification of Real Property in the Borough of Brooklyn by the New York City Department of Finance

EXECUTIVE SUMMARY

This audit of the New York City Department of Finance (DOF) was conducted to determine whether DOF has adequate procedures in place to ensure that properties in the borough of Brooklyn listed as mixed-use properties on the assessment rolls, specifically in Tax Classes 1, 2a, or 2b, are correctly classified.  In accordance with the New York Real Property Tax Law (RPTL), DOF classifies every parcel of property in New York City for real-estate purposes.  These tax classes are as follows:

• Class 1: Consists of residential properties with three or fewer units and “Mixed Commercial/Residential Use” (mixed-use) properties with three or fewer residential and commercial units, where 50 percent or more of the space is used for residential purposes.

• Class 2: Includes all other primarily residential properties that are not designated Class 1.  Class 2 also has three sub-classes:

• Class 2a for a 4-to-6 unit rental building;
• Class 2b for a 7-to-10 unit rental building; and
• Class 2c for a 2-to-10 unit cooperative or condominium.

• Class 3: Includes real estate of utility corporations and special franchise properties, excluding land and certain buildings.

• Class 4: Includes all other properties, such as stores, warehouses, hotels, office buildings, and any vacant land not classified as Class 1.

Properties are assessed at a percentage of their full market value based on their classifications. Class 1 properties are assessed at 6 percent of market value and Class 2, 3, and 4 properties are assessed at 45 percent.

Audit Findings and Conclusions

DOF does not have adequate procedures in place to ensure that properties in Brooklyn listed as mixed-use within Tax Class 1, 2a, or 2b on the assessment rolls have been correctly classified.  Based on our inspections of mixed-use properties in July 2015, we identified 197 out of 15,952 properties listed as Tax Classes 1, 2a, or 2b that appeared to be misclassified.  While DOF inspected 47 of the 197 properties during May and June 2015 just prior to our reviews, assessors only requested that 13 of these 47 properties be re-inspected for a possible change in tax and building classifications.  As of December 16, 2015, DOF had not re-inspected or changed the tax class for any of the 13 properties.

Using DOF guidelines, we calculated that changing the tax classification of the 197 properties would result in an additional $2.09 million in taxes after the increases phase in over the required five-year period.

Audit Recommendations

The audit made the following four recommendations:

• DOF should inspect the 197 properties (including the 47 previously inspected) and determine whether these properties are misclassified.

• DOF should make the necessary adjustments to the assessment rolls for any of the 197 properties that are determined to be misclassified to ensure that the property owner is assessed the proper amount of tax.

• DOF should retrain assessors on what to look for during an inspection of these types of properties.

• DOF should consider enhancing its oversight and quality assurance functions to ensure proper classification of properties.

Agency Response

We received a written response from DOF officials on February 9, 2016.  In its response, DOF agreed with the audit’s recommendations and stated that it would address the issues identified.

Further, the agency stated that it “appreciates the Comptroller’s findings that out of the 15,952 mixed-use Tax Class 1, 2A and 2B properties in Brooklyn, 197 were potentially improperly classified.  All of the lots provided by the City Comptroller’s office have been re-inspected by assessing staff and those clearly requiring a change have been reclassified in the Computer Assisted Mass Appraisal application.”