Audit Report on the Calculation and Application of the J-51 Tax Benefits for Properties in Manhattan by the Department of Finance

AUDIT REPORT IN BRIEF

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 Manhattan for Fiscal Year 2007.

Audit Findings and Conclusions

There were weaknesses in the administration of key aspects of the J-51 tax exemption incentive program. While the properties in our sample received tax abatements that were appropriate, we found incorrect tax exemptions for the sampled non-government-funded properties. As a result, based on our calculations, the City did not realize $2,619,577 in real estate tax revenue from the year those properties initially obtained tax benefits through Fiscal Year 2007. The exemptions were incorrect because the amounts were not prorated as required, or were not correctly calculated due to inaccurate TETA (tax exemption-tax abatement) data. In one additional case, a property’s tax exemption was unduly excessive. We also found problems with the maintenance of file documentation.

In addition, we found that the lack of specificity in the J-51 statute permits discretionary interpretation and practices that limit City revenue potential because the exemptions amounts were not calculated on the basis of assessed value when the project was completed. For example, our sampled properties would have resulted in $3.4 million in additional revenue by applying a different methodology to calculating exemptions. The lack of specificity in the J-51 statute that permits discretionary interpretation and practices also appears to allow property owners at a time of rising market values the ability to manipulate the amount of their property tax exemption. This can be accomplished by failing to submit in a timely manner the required documentation to HPD or/and DOF that would result in a reassessment inspection.

Moreover, since the exemptions granted under this program extend up to 32 more years, utilization of this different methodology would bring in an estimated $31,216,572 in additional taxes on the properties in future years.

Audit Recommendations

We make 17 recommendations to the DOF concerning the calculation and application of J-51 tax exemption benefits in the borough of Manhattan. 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 the following, that DOF should:

Seek changes in the J-51 statute and/or City rules to specify the best method for calculating tax exemptions so as to ensure program equity and the greatest revenue potential for the City.

Prorate tax exemptions as required by New York State Real Property Law. In this regard, DOF should ensure that exemption calculations of its computer system are accurate.

Establish procedures to identify properties with large annual variations in market and assessed values.

Review the assessments of any existing properties that show large annual variations in market and assessed values. DOF should adjust any values and associated exemptions that cannot be adequately substantiated.

DOF should ensure that all exemption calculations are based on accurate information in the TETA database and recalculate improperly granted exemptions for the 23 properties cited in this report; ensure that any future taxes are based on the recalculated exemptions.