Audit Report on the Calculation and Application Of J-51 Tax Benefits For Properties in Brooklyn By the Department of Finance

The J-51 program provides tax exemption and abatement benefits to owners of residential real property who rehabilitate their buildings and to owners of non-residential properties who convert their buildings to residential use. The Department of Finance (DOF) is responsible for implementing and monitoring tax benefits granted under the program.

This audit determined whether DOF is properly calculating and applying J-51 tax exemption and tax abatement benefits. The scope of this audit covered tax assessments for properties in the borough of Brooklyn for Fiscal Year 2010.

Audit Findings and Conclusions

DOF is not appropriately implementing tax exemption benefits under the J-51 program. We identified errors in calculating and applying tax exemption benefits for 50 of the 57 sampled properties. As a result, the City lost more than $4 million of tax revenue for the properties from the first year in which tax benefits were obtained through June 30, 2010. DOF, however, accurately calculated tax abatements and appropriately ceased granting abatements to properties whose benefit periods expired.

Of $4,043,660 in lost revenue, $2,275,606 has been attributed to systematic errors in calculation exemptions for 36 sampled properties. An additional $1,768,054 in tax revenue was forgone for 14 sampled properties because DOF calculated exemptions based on assessed property values long after improvement work was completed. If these problems are not corrected, we estimate that the City will lose an additional $9,568,938 in tax revenue throughout the remaining terms of the exemption benefits. We also found that DOF may have used an inconsistent methodology to calculate exemptions as well as problems with the maintenance of file documentation.

Audit Recommendations

We make 13 recommendations to the DOF concerning the calculation and application of J-51 tax exemption benefits in the borough of Brooklyn. Compliance with these recommendations will ensure that DOF applies the exemption benefits in a consistent manner and collects all the real estate taxes due. Among the major recommendations are that DOF should:

• Review and recalculate tax exemption amounts and taxable values for the properties for which first-year exemption amounts were incorrectly calculated; any future taxes should be based on the recalculated exemptions.

• Ensure that all exemption calculations are based on accurate information in the Real Property Assessment Division (RPAD) database; recalculate improperly granted exemptions and ensure that any future taxes are based on the recalculated exemptions.

• Institute procedures to ensure that J-51 exemptions be based on the properties’ assessed values at the time that the improvement work was completed. Specifically, DOF should calculate the first-year tax exemptions on the basis of a property’s assessed value for the year immediately following the completion of improvements.

• Ensure that properties are inspected and assessed promptly after improvement work is completed.

Agency Response

DOF officials strongly disagreed with the report’s findings. Specifically, DOF stated, “We disagree with almost all of the audit findings because they are based on a misinterpretation of the J-51 law, leading to the draft audit’s mistaken conclusion that DOF has failed to impose taxes of $6.7 million.”

It is our belief that much of our disagreement with DOF stems from DOF’s lack of written policies and procedures regarding the J-51 program. This issue was brought to DOF’s attention in 2008. At that time, they stated they would work to “draft a new Statement of Exemption Procedure to bring further clarity to the J-51 program.” However, two years later, when asked to provide these procedures, DOF stated, “There are no departmental manuals.”

DOF also asserted that “The methodology in this audit raises concerns. The J-51 auditors did not randomly select their sample of properties.” Judgmental sampling by definition does not involve a random sample or the projection of results. It is a well recognized sampling technique used by audit organizations including the Government Accountability Office who promulgates Generally Accepted Government Audit Standards. Further, this methodology was previously used in our prior audit of DOF’s J-51 program (No. FP06-141A issued May 15, 2009) without any concerns raised by DOF.