Audit on the Implementation of 421(A) Incentive Program Tax Benefits for Properties in Manhattan by the Department of Finance

Audit Report In Brief

We performed an audit on the implementation of 421(a) incentive program tax benefits for properties in Manhattan by the Department of Finance.  The Section 421(a) program provides tax exemption benefits to owners of residential real property who construct new multiple dwellings or convert, alter, or improve existing buildings for residential use.  The Department of Housing Preservation and Development (HPD) is responsible for administering the program and issuing a certificate-of-eligibility to property owners it deems eligible and who meet program requirements.  The Department of Finance (Department) is then responsible for calculating and implementing tax benefits granted under the program.

The program was created in 1971 under legislation authorized by Section 421(a) of the New York State Real Property Tax Law as a means of encouraging housing development in the City.  Exemptions are granted for a period of up to three years for construction, and either 10, 15, 20, or 25 additional years on a sliding scale, depending on the property’s location in the City, whether construction is carried out with substantial government assistance, and whether requirements for affordable housing have been met.  In Fiscal Year 2009, 37,485 properties received $607 million in tax benefits.

Audit Findings and Conclusions

The Department is inaccurately calculating tax exemption benefits under the Section 421(a) program. As a result, for our sample of 50 properties, the City has lost more than $15 million in real estate tax revenue from the date that properties were originally granted tax exemptions until Fiscal Year 2008.  Moreover, certain properties overpaid $1.2 million in taxes.  Furthermore, we estimate that the Department could underbill approximately $130.2 million in additional taxes for the sampled properties in future years throughout the remaining terms of the exemption benefits.  The Department also lacked reliable program records and written procedures for calculating tax information.  Finally, certain Department files lacked required documentation.

Audit Recommendations

This report makes a total of 10 recommendations.  The major recommendations are that the Department should:

• Review and adjust the calculations of taxable assessed values and taxes due for the 50 sampled properties, and for all other properties.

• Recoup $9,896,149 in real estate taxes from 37 properties.

• Recoup $4,849,389 in improperly allowed real estate tax benefits for two properties.

• Adjust base year assessed value calculations for four properties as required by program rules and recoup $442,010 in lost real estate taxes.

• Implement adequate internal controls to ensure that all program information is accurately recorded in FAIRTAX and the hardcopy property files (e.g., property cards, etc.).  In that regard, information in FAIRTAX and the property cards should be periodically reconciled.

• Prepare formal written policies and procedures for calculating assessed values and exemptions.  Ensure that appropriate Department staff is instructed in program policies and procedures.