Audit Report On The Department Of Housing Preservation And Development’s Administration Of The J-51 Tax Incentive Program

AUDIT REPORT IN BRIEF

We performed an audit of the Department of Housing Preservation and Development’s (Department) Administration of the J-51 Tax Incentive Program. Under the J-51 program, which was created in 1955, the Department provides tax exemption and abatement benefits to owners of residential properties who rehabilitate their buildings and to owners of non-residential buildings who convert their buildings to residential use. The Department is responsible for administering the program, verifying eligibility, determining whether the cost of the work is supported, calculating a “certified reasonable cost,” and issuing certificates-of-eligibility. (The Department of Finance is responsible for implementing benefits granted under the program.) In Fiscal Year 2004, the program provided $189.1 million in tax benefits. The Department issues a certificate-of-eligibility to property owners who meet program requirements.

To obtain an exemption or abatement, applicants must, within specific time periods, perform eligible construction work (such as major capital improvements) for specific project types. Exemptions are granted for a period of either 14 or 34 years, based on the type of project. Abatements are granted for a period of up to 20 years.

While the sampled applications consisted of project types that qualified for inclusion in the J-51 program and applicants performed eligible work, we found deficiencies in the Department’s system of internal controls for administering the program. Specifically, the Department did not ensure that all required documentation was submitted and that applications for final benefits and subsequent submissions were made within required time frames. As a result, the Department improperly certified reasonable costs totaling $2,546,300 and improperly awarded certificates-of-eligibility to 25 of 56 sampled properties associated with those applications. Accordingly— these 25 applicants are obtaining tax benefits to which they are not entitled.

In addition, the Department incorrectly calculated the certified reasonable cost in 21 percent of the sampled properties. As a direct result of the certified reasonable costs being incorrectly computed, the fees that applicants were charged were also incorrect.

Moreover, the Department has not ensured that required inspections of J-51 work are adequately conducted. Department files lacked evidence that 7 of 51 required inspections were conducted. Of the 44 required inspections that were conducted, we found problems in 10 cases (23%) and in one additional property that the Department inspected although an inspection was not required. As a result, the Department improperly certified reasonable costs totaling an additional $310,775.

Finally, we found problems with some of the procedures for auditing J-51 applications and discrepancies between the Rules of the City of New York (Rules) and the Department’s procedures.

This report makes a total of 15 recommendations. The major recommendations are as follows:

The Department should:

• Ensure that appropriate Department staff are instructed in program policies and Rules.
• Process applications, award certificates-of-eligibility within the Department’s five-month time frame, and ensure that work inspections are conducted promptly after applicants submit final applications.
• Implement internal controls to ensure that required inspections are adequately conducted and supervised and instruct inspectors to identify and disqualify improperly installed work.
• Review the applications discussed in this report to ensure their eligibility for J-51 benefits. Adjust the certified reasonable costs for the cases cited in this report section, and advise the Department of Finance about any changes that would affect J-51 benefits.
• Record and properly maintain all supporting documentation in Department files. Computerize certified reasonable cost calculations.
• Develop sufficient procedures for auditing applications and train auditors in their use.