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The New York City Department of Housing Preservation and Development has deficiencies in its administration of the J-51 Tax Incentive Program, according to an audit released today by Comptroller William C. Thompson, Jr.

“All City agencies need to be vigilant that they are carefully administering their programs and resources,” Thompson said. “In this case, New York City’s Department of Housing Preservation and Development fell short in its vigilance. Unfortunately, our audit found flaws in the Department’s administration of that program which may impact the tax benefits it provides.”

Under the J-51 Tax incentive Program, the New York City Department of Housing Preservation and Development (HPD) 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 for residential use. HPD 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.

To receive a certificate of eligibility, applicants must, within specific time periods, perform eligible construction work for specific project types. Exemptions are granted for a period of either 14 or 34 years, based on the type of the project. Abatements are granted for a period of up to 20 years.

Thompson’s audit analyzed whether HPD was ensuring that properties meet J-51 program requirements; whether improvement work was eligible and completed in a timely manner; and whether all required documentation was submitted. The audit covered projects in the J-51 program for which certificates-of-eligibility were issued by HPD in Fiscal Years 2004 and 2005 as well as projects whose applications were withdrawn or rejected in Fiscal Years 2004 and 2005.

In Fiscal Year 2004, the J-51 program provided $189.1 million in tax benefits and $199.1 million in Fiscal Year 2005.

The audit’s main findings are as follows:

• HPD 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, HPD improperly certified reasonable costs totaling $2,546,300 and improperly awarded certificates-of-eligibility to the 25 of the 56 sampled properties associated with those applications although they were not entitled to receive them.

• HPD did not ensure that required inspections of J-51 work were adequately conducted. HPD files lacked evidence that 7 of the 51 required inspections were conducted. Of the 44 required inspections that were conducted, auditors found problems in 10 cases and in one additional case that was inspected by HPD though it was not required. As a result, HPD improperly certified reasonable costs totaling $310,775 (in addition to the $2,546,300 improperly certified reasonable costs) for 11 cases which HPD inspected.

The Comptroller’s auditors’ inspection of 97-11 Horace Harding Expressway in Queens found that 1,695 new windows were installed and they leaked excessive air through the window seals due to a manufacturing defect, adversely impacting the windows’ energy conservation function. HPD’s inspector, however, validated the installation of 1,698 new windows.

• In 11 percent of the sampled properties (6 of 56 cases), HPD did not issue certificates-of-eligibility in accordance with guidelines set forth in its J-51 Guidebook. In 5 cases, HPD exceeded its required five-month time frame for processing applications and awarding certificates-of-eligibility. In these cases, applications were processed between 12 and 291 days late. Consequently, applicants were not able to obtain benefits on a timely basis. In another case, a certificate-of-eligibility was improperly awarded 38 days before the application was complete.

• HPD incorrectly calculated the certified reasonable cost in 21 percent of the sampled properties (12 of the 56 cases). In five cases, the amount of the certified reasonable cost was $10,836 greater than the $545,564 it should have been; in the remaining seven cases, the amount was $23,614 less than the $443,614 it should have been. As a result of the reasonable costs being incorrectly computed, the fees that applicants were charged were also incorrect.

• HPD also had problems with some of the procedures for auditing J-51 applications. According to HPD’s procedures, HPD is required to audit J-51 applications with certified reasonable costs greater than $100,000 and determine whether applicants paid appropriate filing fees and whether reasonable costs were properly computed. HPD, however, failed to audit any of the 16 (of the sampled 56 cases) whose certified reasonable costs exceed $100,000.

As a result of the findings, Thompson recommended that HPD:

• Ensure that its staff are instructed in program policies and Rules and adhere to procedures for approving certificates of eligibility;
• Process applications and award certificates-of-eligibility within HPD’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, and advise the Department of Finance about any changes that would affect J-51 benefits;
  
• Record and properly maintain all supporting documentation in HPD files; computerize certified reasonable cost calculations;
  
• Develop sufficient procedures for auditing applications and train auditors in their use.

You can view the report at www.comptroller.nyc.gov.