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

Special Report

EXECUTIVE SUMMARY

This audit of the New York City Department of Finance (DOF) was conducted to determine whether DOF’s procedures ensure that mixed use properties in the borough of Queens classified as Tax Class 1 are correctly classified. In accordance with the New York City 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 Conclusion

DOF’s procedures did not consistently ensure that Queens properties listed as mixed-use within Tax Class 1 on the assessment rolls have been correctly classified.  Based on our inspections of properties listed by DOF as Class 1 mixed-use in January 2016 on the assessment rolls, we identified 154 out of 4,607 that, based on our preliminary review, appeared to be misclassified.  While our audit was in process, DOF requested our preliminary list of the 154 properties with questionable classifications prior to the completion of our analysis.  DOF assessors then inspected the 154 properties and determined that, in fact, 78 had been incorrectly classified by DOF, 19 properties required an interior inspection, and 57 required no change.  After reviewing DOF’s inspection results, we agreed with them.  We appreciate DOF’s efforts to address apparent problems prior to the completion of the audit.  We note, however, that the audit revealed some weaknesses in DOF’s assessment process as evidenced by the fact that several of the properties DOF agreed had been improperly classified had been inspected by the agency not long before our inspections and so already should have had their tax classes changed.

Using DOF’s guidelines, we calculated that changing the tax classification of the 97 properties (78 DOF agreed were incorrectly classified plus the 19 that require an interior inspection) would result in an additional $1.28 million in taxes after increases phase in over the required five-year period.

Audit Recommendations

The audit made the following three recommendations:

• DOF should conduct an interior inspection of the 19 remaining properties and make the necessary adjustments to the assessment rolls for any of the properties that are determined to be misclassified to ensure that the property owner is assessed the proper amount of tax.
• DOF should ensure that assessors are properly trained and able to perform their responsibilities, including conducting inspections of mixed use properties.
• DOF should consider enhancing its oversight and quality assurance functions to ensure that assessors properly inspect properties and recommend re-visiting misclassified properties as required by the Administrative Inspection Project Instruction manual.

Agency Response

We received a written response from DOF officials on May 18, 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 4,607 Tax Class 1 mixed-use  properties  in  Queens,  78  were  improperly  classified  with  an  additional  19  scheduled  for additional  inspections. All of the lots provided by the City Comptroller’s office have been inspected by assessing staff and those requiring a change in tax classification have been reclassified in the Computer Assisted Mass Appraisal application.”  However, the agency contends that the “audit estimate of an additional $1.28 million in tax revenue includes 19 parcels requiring interior inspection.  DOF believes that this estimate is overstated.”