Ron Kaplan and Randy Gunther have one thing in common: they both successfully applied for J-51 tax benefits for their cooperatives. But that’s where the similarities end. For Kaplan – as is the case for many J-51 applicants – the process was a time-consuming and Byzantine affair, a maddening maze of paperwork and procedural problems. For Gunther, however, it was a relatively simple matter. He consulted no experts and did it himself.
“There’s a lot of money there, and for a long time, many co-ops and condos haven’t really had a good grasp of what the J-51 program entails,” says Gunther, controller of Glen Oaks Village Owners Corporation, a sprawling 2,900-unit self-managed cooperative in northeastern Queens. He took up the challenge of applying for J-51 benefits on $3 million in capital improvements that were completed between March 1999 and January 2002, eventually netting about a seventh of that sum – $405,000 – in tax abatements, which will be spread out over ten-and-a-half years. “[The program is] not that complicated,” Gunther observes.
Most would disagree, however, which raises the questions of the moment: are the J-51 rules promulgated by the New York City Department of Housing, Preservation, and Development (HPD) unnecessarily hard to navigate, requiring a professional at the wheel? Or is it possible for a tough-minded co-op board to fill out the myriad of J-51 forms – many in triplicate – and receive the tax benefits?
According to a 2003 report by the Independent Budget Office, the J-51 program of tax abatements and tax exemptions pays out nearly half of New York City’s housing development dollars. In 2002, that amounted to $65.9 million in exemptions, and $96.5 million in abatements, affecting a total of 600,000 apartments citywide. That’s big money for capital improvements – and, by most accounts, it’s money well spent because it increases the value of housing stock and improves the urban environment. (Manhattanites, take note: J-51 is intended for buildings of lower assessed value, which means that most of Manhattan’s buildings are effectively exempt from the program.)
Paul Korngold, a J-51 specialist with the firm of Tuchman, Katz, Schwartz, Gelles, Korngold & Weiss, who has written a clear and easy-to-understand “Q&A” booklet about the process, is forthcoming with a detailed overview of which requirements must be met in order for work to qualify for a tax abatement or exemption. To have your capital improvement work eligible for a J-51 tax abatement or exemption, Korngold notes, you’ve got to remember three rules:
(1) Apply on time. You must put your application in within four years of when the work began;
(2) Respect the time limits. The application can’t include items of work that take place over more than three years. For instance, it’s February 2005. If you started a new boiler installation in March 2001 and completed it in April 2001 you can put that in a J-51 application, but if you also put in a new intercom system in December 2004 – which is also eligible for J-51 – it must go on a separate application.
(3) Beware of documentation deadlines. Once you file a J-51 application, you have two years to get HPD all the documentation required for approval and to clear up any problems, including outstanding violations.
“Co-ops are the worst because they tend to change boards and fire managing agents,” Korngold notes. “If you’ve had three managing agents and two boards over the past four years, and no one knows where the checks are or the name of the boiler company, you’re in trouble.”
Before you get a copy of the J-51 booklet and start figuring your possible tax abatements, make sure you are eligible to participate in the program. This has to do with your assessed valuation, meaning most Manhattan properties are priced out of reach of J-51.
“If the co-op or condo is more than three years old, in order to be eligible for J-51 it must pass a twofold test,” says Korngold. First, the average assessed valuation per apartment – at the time the building starts the work – must be less than $40,000 per apartment.” Korngold notes that co-op evaluations are not based on selling prices but on rental value.
The second test that the co-op must meet is a formula tied to the maximum Fannie Mae federal mortgage. The test spans the three years before the commencement of work, and it goes like this: the average sale price per room cannot be more than $116,000. So, for a one-bedroom apartment of 3.5 rooms, the ceiling is about $400,000. If you started work in June 2004, you have to have a list of all sales in the three prior years and figure out how much each sold for on a per room basis. If there were no sales, than you have to use the assessed value test.
Doing It Yourself
Can you do all this yourself, without the aid of a professional? It depends on whom you ask. The answer is “yes,” according to Randy Gunther, controller of Glen Oaks Village. Gunther recalls trying to obtain the services of a tax professional who would file the J-51 paperwork, then shepherd it through HPD, clearing violations, obtaining copies of permits and records, and the like. He couldn’t find one, he says, because Glen Oaks Village is spread out over 19 block lots and that meant 19 separate J-51 applications. Experts also balked at the scope of the filing necessary: 1,100 different capital improvement jobs in eight different work classifications.
It was a concern to Gunther that hiring a tax professional to do the work would have meant “a negative cash flow” for a couple of years, because of the expert’s upfront fee. He wanted to avoid that. “In 2001, we came to the conclusion that we were wasting potential tax credits while spending over $1 million each year in capital improvements,” he explains. So Gunther began work in the following order:
• Identifying invoices that contained capital work that was eligible for the J-51 tax credit. That in itself is sometimes complicated, since the definitions of repair, replacement, upgrade, and capital improvement sometimes get fuzzy.
• Grouping that work by each of 19 block lots to enable separate J-51 applications for each block.
• Filling out the forms J-1, J-2, J-4, J-6, J-7A, J-8, J-10A.2, J-10B.2, and J-10C, as well as a host of supporting documents.
• Paying the $100 fee required with each application, as well as a $30 fee to search for any violation on each block.
J-51: Key Steps To A Successful Application
Time Frames. Make sure that you have a firm start date on all projects, backed up by a work order or letter of agreement.
Clear Violations. Be certain there are no outstanding building code violations before applying, and that this is recorded on a certified copy of the record of Department of Buildings violations for the property.
Co-op and Condo Information. Include a tax history from the Department of Finance, showing assessed value at the time of construction for the three years before the start of work, an affidavit showing sale prices of all units sold in that time frame, and a room count.
After the paperwork was in (the “J” forms only go up to 11, but there are subsections – forms within forms), HPD’s clerks at 100 Gold Street in Manhattan needed additional information, primarily copies of receipts, invoices, and checks for each job. It helped, Gunther says, that a CPA’s letter was accepted by HPD as certifying the accuracy of key contracts, cutting down on the sheer number of paper submissions. A visit by an HPD inspector to the property to review the work, Gunther recalls, “was not demanding.” Now, richer by $405,000 in tax credits, Glen Oaks is working on new J-51 applications, which will be filed every three years, at least through 2010.
Ron Kaplan, a real estate attorney and president of the board of the Park Slope Association, a 17-unit cooperative in Sunset Park, Brooklyn, did not share Gunther’s relatively trouble-free experience on a complex job. Kaplan and this writer, who is secretary of the association, slogged through the J-51 process for nearly eight months, putting in days and half-days stolen from their “real jobs” to visit the Department of Buildings, and further-flung locations to locate old building plans and permits. The Park Slope Association qualified for a tax abatement on a roof upgrade, but the work involved in filing made the overall value questionable.
“The one thing that stands out in my mind,” recalls Kaplan, “was when they were denying us a benefit for capping the [roof] parapet wall. After a couple of back-and-forths by mail, I went over to HPD on Gold Street and made an appointment to see the guy who had done the inspection of the work. He called down one of the corporation counsels, and we argued about it. They agreed to give us some benefit, but it was a little like pulling teeth. I said to the corporation counsel: ‘You really put guys through the wringer. It’s an arduous process. Why couldn’t it be more centralized?’ And he said, ‘If it wasn’t difficult, I wouldn’t be doing my job.’
“So, essentially, the city has a program that is ostensibly designed to ensure that housing stock is improving, but then, because they’re afraid of the economic impact on the city, they make the process unnecessarily difficult, in the hope that this will dissuade people who make the improvement from getting the benefit. That was my impression.
“I won’t put myself through that again,” Kaplan adds. “The detriment and the difficulty offset any benefit; you lose out in the long run. The city is being disingenuous. J-51 may have been implemented [for] altruistic [reasons], but there’s another side to it. It looks good on paper – there’s a whole agency devoted to it – but a good part of the process is devoted to making sure you don’t get the benefit you’re entitled to. They make it difficult for people who have invested in their buildings and who hope that there will be offsetting benefits.”
Kaplan reserves a good part of his annoyance for the J-51 application itself, which he called very repetitive and hard to understand. “All of this information is on record with the city to begin with,” he notes. “Since J-51 is just an offset for taxes, you should be able to plug into the system and say to HPD, ‘Here’s our EIN number. You have the multiple dwelling registration, you already know who the president of the corporation is. You know who the managing agent is. Here’s the work that we did. Now give us the credit.’ It shouldn’t be taking more than 15 minutes.”
What do the professionals think? Meir Mishkoff, a principal in Mishkoff Associates in Queens, is an expert who helps boards and managers navigate their way through J-51. He says that he agrees “100 percent” with Kaplan’s criticism that J-51 paperwork is unnecessarily duplicative and represents material that HPD already has in its files.
“The J-51 program has been going on for many, many years, and began way before the city computerized its Department of Buildings records. Now it has computer records for every permanent piece of work, such as a boiler replacement or an elevator renovation. Nevertheless, the city still requires you to file paper copies of all of these documents, while these things are in the Department of Buildings’ computers.
“For example,” Mishkoff explains, “there’s the first permit on a boiler installation. With the Bloomberg Administration, the city is very high-tech. You can see the date of that boiler permit on the Department of Buildings’ website. There’s no reason why I should have to file a piece of paper for a J-51 when it’s already in their database. But that’s the way it’s been done for years.”
Mishkoff says that rules allowing such technical shortcuts are often implemented only when they are forced on bureaucracies, such as the amendment to the J-51 law, which was enacted once banks stopped routinely sending check copies back to account holders. Now, the J-51 office can take electronic forms as proof of payment, instead of actual check copies. But other similar innovations may take much longer than they should. “Why should they wait?” he asks. “Why not make it easier? It’s frustrating, unnecessary, time-consuming stuff.”
Ed Friedman, a site manager with Mark Greenberg Real Estate who works at Clinton Hill, a 12-building, 1,221-unit complex in cooperative in Brooklyn’s Fort Greene, used Korngold to handle his co-op’s J-51 application. A $6 million program of capital improvements, overseen by board president John Dew, began in 1999, and includes a $3.7 million electrical upgrade, roof work totaling $137,000, boiler replacements worth nearly half-a-million dollars, and nearly $2 million in facade and parapet work. J-51 forms have been filed.
“Some buildings were not in great shape,” says Friedman, who praises Korngold for his assistance. “But throughout Dew’s presidency they were straightened out. A manager can never accomplish what he may want without an active and knowledgeable board that recognizes the need to bring properties up to speed.”
Dew says that his 17-member board never considered doing J-51 applications in-house because “it’s a very complicated program, and you have to know all of its machinations to maneuver through the paperwork.” Dew adds that the scope of the work being done at Clinton Hill means a new J-51 application each year. The co-op is only 22 years old, having been incorporated in 1984, and Dew has been president since 1997.
“We are pretty large and we’re doing a lot of projects,” he says, “so it would make sense to use a professional who can keep up with each one, so that nothing falls through the cracks.” He notes that Korngold was very helpful in explaining to the board how J-51 requirements relate to HPD violations, and also how J-51 applies to different projects – “because [HPD does] grade certain types of projects at higher levels than others” – meaning that certain jobs will garner a greater rate of return on the tax credit. Annually, Dew says, the J-51 tax abatements are worth about $100,000 to Clinton Hill.
Help! I Need Somebody
Mishkoff echoes other professionals in the business when he says that the HPD staff is helpful. But you don’t get to discuss your case with an actual person until you have done your filing and it is judged complete.
“I can’t tell you that anyone can’t file a J-51 on their own,” Mishkoff says. “The regulations are written in English and there is an office of people who are there to help you. But if you read the rules and regulations – some 40 pages long – you still don’t know the complete picture. There are unwritten rules, more like policies. You’ll think you have given all the information, and you’ll hit a wall. You’ll go back to the rules and say, ‘Where does it say that?’ It’s very difficult to get to someone over the phone, but they have thousands of applications, and it’s a very busy office. They’re understaffed.”
“I’m not saying it’s impossible to file your own J-51,” Korngold adds. “But very few co-ops do it.” He cites some stumbling blocks. “You may have to prove how the work was actually done, how it’s categorized. You may have to prove room count if you’re on the borderline for the valuation test. It may be that some work was done before and after filing deadlines. You may get audited, and they could take the abatement away from you.”
As an example of a pitch that might be hurled by HPD at a J-51 applicant, Mishkoff cites the example of a parapet roof wall, a variation of the problem that Ron Kaplan encountered at HPD. “You’re rebuilding a parapet wall from the roof level up. Brick wall plus coping stone is eligible for J-51. The legal height of a parapet wall must be at least 3.5 feet. I have had co-ops that rebuilt this parapet wall to that height, and then, right after that, they redid their roof. Now, the parapet wall is less than 3.5 feet above the roof level. The J-51 inspector goes out and says, ‘This is not a legal parapet wall,’ and everything hits the fan. The J-51 rules and regulations can’t cover every conceivable case. After 20 years of doing this, I know the ins and outs and the hidden land mines.”
If all of this hasn’t discouraged you, and you still want to try your hand at the J-51 process, here’s a brief checklist of how to get started with your application.
(1)Visit HPD’s J-51 site at http://www.nyc.gov/html/hpd/html/for-developers/j51.html. You can download the J-51 Guidebook (at 18 megabytes, you should have a fast connection), the “List of Required Permits,” and the J-51 Filing Representative’s Handbook.
(2) Get a copy of Paul Korngold’s Q&A from Tuchman, Katz, Schwartz, Gelles, Korngold & Weiss at 212-687-3747.
(3) Categorize your expenses. Your accountant should be keeping separate entries for capital improvements, so by going through your general ledger, you should be able to identify capital improvements as opposed to other expenses.
(4) Survey your board. Do you have anyone willing to put in what might easily be several weeks of full-time work, who tolerates frustration well, and who is a meticulous record-keeper?
If you can do all this, you might just be on your way to tax abatement. Good luck!