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

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 Staten Island 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 six percent of market value and Class 2, 3, and 4 properties are assessed at 45 percent.  Real property is also identified by its “building class,” which reflects the property type and primary use, such as one-family, one-story residential property or a mixed-use multifamily residential property with four residential units and a store or office.

Audit Findings and Conclusions

Based on our exterior inspections of properties listed by DOF as Class 1 mixed-use on the May 2016 assessment rolls, we preliminarily identified 28 out of 943 properties listed as Tax Class 1 that appeared to be misclassified.  Following notification of our preliminary findings, DOF requested our list of the 28 properties that appeared to be misclassified.  DOF assessors then performed interior inspections, interviewed tenants and/or employees, and confirmed that 12 of the 28 properties should be reclassified.  DOF determined that the remaining 16 properties do not require reclassification.  While DOF had inspected four of the 12 reclassified properties prior to our inspections, the assessors did not recommend changes in the tax and building classifications of any of the four properties.

Using DOF’s guidelines, we calculated that changing the tax classification of the 12 properties would result in an additional $86,599 in taxes after the increases phase in over the required five-year period.

Audit Recommendations

Based on the audit findings, we make the following three recommendations:

• DOF should ensure that property tax classification changes recommended by their assessors are implemented by the next tax year.
• DOF should determine why their inspectors did not recommend that the classifications of these properties be changed and enhance their training to address any issues identified.
• DOF should consider enhancing its oversight and quality assurance functions to ensure proper classification of properties.

Agency Response

We received a written response from DOF officials on February 17, 2017.  In its response, DOF generally agreed with the audit’s recommendations and indicated that it would address the issues identified.

Further, the agency stated, “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.”