NYC Comptroller Scott Stringer. Image credit: Office of the New York City Comptroller
The audit report finds that the Department of Finance’s incorrect classification of Queens properties as mixed-use properties resulted in lost revenue for the City. On June 10, 2016, the Office of the City Comptroller Scott Stringer released a report of an audit conducted by the Department of Finance. The audit sought to determine whether the Department of Finance used procedures to ensure that properties classified as mixed-use in Queens had been properly classified.
Every parcel of property in New York City is designated as one of four classes for purposes of real estate taxes. Class 1 includes residential properties with a maximum of three units, and commercial and residential mixed-use properties which have not more than three residential units and set aside at least half of the development for residential usage. Primarily residential developments that do not fit within Class 1 fit neatly under Class 2, which is additionally broken down into three subclasses: Class 2a (developments with four to six rental units), Class 2b (developments with seven to ten rental units), and Class 2c (cooperatives and condominiums with two to ten residential units). Class 3 includes real estate belonging to utility corporations and special franchise properties, which are not otherwise specifically excluded from Class 3 by the New York Real Property Tax Law. Class 4 includes all other properties that are not accounted for in Classes 1 to 3, such as commercial properties and vacant land.
In the final report, the Comptroller’s Office found that the Department of Finance incorrectly classified up to 97 commercial properties in Queens as Class 1 partially residential, mixed-use properties. Class 1 properties are assessed at six percent of the full market value. The remaining three classes of properties are assessed at 45 percent of the full market value, which is almost eight times higher than the assessment rate for Class 1 properties. The report provides that the misclassification could cost up to $1.28 million in lost tax revenue over the next five years.
The Comptroller’s Office inspected 4,607 properties in Queens that the DOF had classified as Class 1 mixed-use properties and questioned the status of 154 of those classifications. The DOF admitted that 78 of the properties had been improperly designated as Class 1. Further, the DOF found that 19 other properties may also be misclassified, but that a class designation could not be made without first conducting an interior inspection of each property. If less than 50 percent of an individual property is being used for residential purposes, it is a commercial property that has been improperly designated as Class 1. This misclassification results in the commercial-property owner being assessed only about one-seventh of the full amount of real estate taxes that should be collected from the property.
The Comptroller’s Office recommended that the Department of Finance take several steps in light of this audit. First, it called for the DOF to make the necessary interior inspections of the 19 properties in question to ensure that any misclassifications are corrected. Additionally, the Comptroller’s Office suggested that the DOF take steps to assure that all assessors are properly trained, and that they enhance oversight and quality assurance in order to ensure the accuracy of future property classifications. DOF agreed with these recommendations.
To read the full audit report, click here.
Audit Report on the Tax Classification of Real Property in the Borough of Queens by the New York City Department of Finance. SR16-091A, NYC Comptroller Scott Stringer (June 10, 2016).
By: Jessica Soultanian-Braunstein (Jessica is the CityLaw Fellow and a New York Law School Graduate, Class of 2015)