After three years of negotiations, the New York City Department of Housing Preservation and Development (HPD) has agreed to implement changes suggested by the NYSSCPA’s Real Estate Committee that bring a CPA’s report used in a tax exemption and abatement program known as J-51 into compliance with professional standards.
J-51 is a long-standing incentive program that applies when a property owner renovates a residential apartment building or converts a unit that is subject to HPD requirements into multifamily housing. It allows a property owner to be exempted for a set number of years from certain increases in property taxes resulting from the work, and to be granted an abatement that is related to the cost of the improvements, with the size of the benefit varying, depending on the building’s location and the type of improvements done. A property owner applies for the J-51 credit using, among other forms, HPD Form J-2, an itemized schedule of each area in the building where an improvement was made, along with the cost of that improvement, the date that construction was completed, and the building department application number for each item.
The program’s certification of cost requirements was problematic because the application required the inclusion of a substandard opinion letter from an independent CPA, which certified the property owner’s claimed allowable costs for the rehabilitation of the property. Abraham E. Haspel, a member of the Real Estate Committee Task Force that negotiated with the city, said that this put CPAs in an awkward spot because the letter that the city required contradicted itself and did not conform to professional standards.
Haspel pointed out that one paragraph required CPAs to say that they examined all cancelled checks and original contracts, invoices or bills related to the improvements. But then a second paragraph required CPAs to say that they conducted tests of transactions in accordance with generally accepted auditing standards (GAAS), and to comply with GAAS, which increases the scope of the audit to include risk assessment procedures and would not necessarily require examining all contracts and invoices in support of the improvements stated on the Form J-2.
“Obviously, the two paragraphs cannot exist together,” said Haspel.
He elaborated on the quandary facing CPAs at his firm who were representing a real estate client: “The attorneys retained by our client insisted that no modification be made to the HPD required report because it would be rejected by HPD, causing the application to fail. When the CPAs objected to the use of the substandard report, they were threatened by the client’s attorneys, who stated that they could find another CPA that would sign the unmodified report. The CPAs were faced with a choice of signing the substandard report/certification or possibly losing their client.”
Furthermore, according to Grace G. Singer, a member of the Society’s Peer Review Committee, the letter itself did not conform to GAAS, meaning that if CPAs actually did give their sign-off on the letter, they would not be in compliance with professional standards, which could prevent a CPA from passing New York State Education Department-mandated peer review.
“The report was neither fish nor fowl—it was neither an audit nor an examination,” she said.
Haspel said that the Real Estate Committee had developed an alternative procedure of attaching a GAAS-compliant report to the HPD-required substandard report and signing both as an interim measure, in the hope that an acceptable report could be agreed upon.
But in order to address this dilemma in a more permanent way, a task force consisting of Haspel; Singer; Ahava Z. Goldman; and Real Estate Committee members Evan J. Della Valle, Katelyn N. Kogan and Santa J. Marletta began having regular meetings and conference calls with the city government, particularly with the assistant commissioner of housing incentives at HPD, Miriam Colon, and her staff. Haspel said that at their first meeting, in September, it soon became apparent that the city was not actually looking for an audit opinion as CPAs traditionally understand it, but for more of a set of agreed-upon procedures.
“We said, ‘Oh, you really want an agreed-upon procedures report, and we described what that was, where we state that we looked at the invoices but we don’t opine on the sufficiency of the procedures, and they said, ‘yes,’” he said.
The process resulted in a formal proposal in September, followed by a public hearing in October. In an Oct. 31 comment letter, the Society attached its proposed template for the independent accountant’s report. The principal drafters were Della Valle, Goldman, Haspel, Marletta and Singer.
The measure was approved and went into effect on Nov. 23.
The new letter focuses solely on the mutually agreed-upon procedures and any exceptions noted in the examination. While the Society had pushed for a materiality threshold for what documents the CPA would need to examine, he said that the city would not compromise on that point. Still, the negotiations have resulted in a new letter that CPAs can sign without worrying whether they’re going to fail peer review, as they will no longer be using a substandard report.
“We’re glad to have it behind us,” said Singer. “I’m thrilled to have an [agreed-upon procedures report], that we have something to follow, because [the previous report] did not meet either our needs or [those] of HPD. [HPD was] giving them something that would not comply with professional standards, and now we have something that will comply with peer review standards, and we can service our clients and be in compliance.”