Audit Report on the Valuation of Class 2 Properties By the New York City Department of Finance

The New York City Department of Finance (DOF) collects City revenues, values all real property in the City, and maintains property records. Each year, DOF determines the market value of the properties, from which the taxable value is calculated. There are three assessment periods: Tentative, Change by Notice, and Final periods.

The process of determining a property’s assessment for tax purposes in New York City requires a few calculations with some differences in methodology depending on Tax Classification. According to Article 18, Section 1802 of the Real Property Tax Law (RPTL), DOF assigns every property to one of four real property tax classes. Tax Class 1 consists of one-, two-, and three- family residential properties and small condominiums. Tax Class 2 consists of all other residential property, including multi-family cooperatives and condominiums. Tax Class 3 consists of utility real property. Lastly, Tax Class 4 consists of all other real property, such as office buildings, factories, stores, lofts, and vacant land. For Tax Class 2 residential buildings, the focus of this audit, market value is based on current value of the projected future income stream from the building. To calculate the market values of the properties, DOF uses two methods. These methods are Gross Income Multiplier (GIM) and Net Income Capitalization.

DOF uses mass appraisal techniques to determine market value for assessment purposes. Under DOF’s valuation procedure for residential properties, computer-assisted mass appraisal-generated assessments, which have been used since 1989, serve as the initial assessments. These assessments are updated during field inspections for alterations and new construction. DOF upgraded its existing computer applications in 2010 with the implementation of the Computer Assisted Mass Appraisal system (CAMA 2) provided by Vision Appraisal Technology, Inc. (See Comptroller’s Audit #7A11-126A Audit Report on the Development and Implementation of the Computer Assisted Mass Appraisal System by the Department of Finance.) CAMA 2 collects property-related information, selects comparable properties to be used to value cooperatives and condominiums, and performs valuation calculations.

Audit Findings and Conclusions

DOF’s changes in property valuation methodology and the use of inconsistent criteria to determine the market values of Class 2 residential properties resulted in large fluctuations in market values that, in turn, significantly affected some properties’ tax liability in Fiscal Year 2011/2012. Before Fiscal Year 2008/2009, DOF valued Class 2 properties using the Net Income Capitalization methodology.In Fiscal Year 2008/2009, DOF changed this methodology to the Gross Income Multiplier method. In Fiscal Year 2011/2012, DOF reverted to the Net Income Capitalization method. Although both methods are permissible under the RPTL, DOF did not provide a basis for this latest change until after complaints were made regarding the Tentative Assessment Roll. DOF’s change in valuation methodology resulted in significant market fluctuations for Class 2 properties with 11 or more units. Further, changes in the criteria DOF used to develop market values for Class 2 properties with less than 11 units in Fiscal Year 2011/2012 also significantly affected the calculated market value of these properties.

In addition, DOF did not properly follow its own Property Valuation Guidelines when selecting comparable properties. Comparable properties are used to help set market value. We found that for certain cooperatives in all boroughs of New York City, the estimated Gross Income per square foot was significantly lower than the income of any of the selected comparable properties. As a result, these coops were under-valued based on their income. In addition, for some properties, the gross income indicated in the Notice of Property Value was much higher than the Gross Income estimated using the comparable properties’ income. As a result, these properties were over-valued based on their income. Finally, DOF issued its 2011/2012 Tentative Assessment Roll without sufficient review of the calculated market values and adequate assessment adjustments before sending Notices of Property Value to the properties’ owners.

Audit Recommendations

We recommend that DOF:

• Review and evaluate the impact of new methodologies and ensure that the same income factors and criteria are consistently applied.
• Ensure that proper disclosure and notification of upcoming changes is provided to the public.
• Re-evaluate the properties that were over-assessed / under-assessed in Fiscal Year 2011/2012 and ensure that in the following years these properties are valued properly.
• Review and analyze the Cooperatives and Condominiums comparables files and check for the existence of unusually low or high gross income numbers assigned to these properties compared to the selected comparable rental properties.
• Run and review reports produced by CAMA 2 and analyze unusual market value fluctuations.
• Make timely adjustments to the properties before the Tentative Assessment Roll is published and the Notice of Property Value is sent to the property owners.

Agency Response

In its response, DOF discussed the differences and merits of the Net Income Capitalization and the Gross income Multiplier methods. DOF officials acknowledged that “DOF had used a different methodology for large Class Two properties for the three years from FY 08/09 – FY 10/11: the Gross Income Multiplier (GIM) method. The Audit Report focuses only on the one year of change from GIM back to Net Income Capitalization and does not discuss Finance’s change from income cap to GIM. Both changes resulted in volatility. Any methodological change will involve some adjustments, as property values are ‘benchmarked’. The volatility discerned in the audit between FY 10/11 and FY 11/12 generally reflects that the GIM method derived values were too low.”

One of our main points is that when DOF reverted back to Net Income Capitalization in FY2011/2012, it did not conduct an analysis of the impact and inform the public prior to releasing the Tentative Assessment Roll. As stated by DOF, “both changes resulted in volatility”. Therefore, as discussed in this report, the issue is not which method is better but the fact that such a change was made without a clear public discussion of the impact on taxpayers. DOF states that “the rationale was widely discussed.” However, all of the discussion occurred after DOF released its Tentative Assessment Roll and the public outcry occurred. Despite being aware that the change would lead to volatility, there is no evidence that DOF analyzed and disclosed the impact of the change on taxpayers beforehand. Given that DOF acknowledges that there is a significant subjectivity involved in developing these values, it should provide a greater level of transparency and adequate disclosure of these changes to taxpayers.

DOF agreed with four or the six recommendations including reviewing the impact of new methodologies, and ensuring that proper disclosure and notification of upcoming changes is provided to the public (DOF stated that it already provides this information). DOF did not agree to make timely adjustments to the properties before the Tentative Assessment Roll is published and the Notices of Property Value are sent to the property owners, due to the difficulty of doing so within the existing time constraints.