N.Y. Comp. Codes R. & Regs. tit. 10, § 86-4.24 – Interest.

(a) Necessary interest on both current and capital indebtedness is an allowable cost for all facilities.
(b) To be considered an allowable cost, interest must be incurred to satisfy a financial need, and at a rate not in excess of what a prudent borrower would have had to pay in the money market at the time the loan was made. The interest must be paid to a lender not related through control, ownership, affiliation or personal relationship to the borrower. Financial need for capital indebtedness relating to a specific project shall exist when all available restricted funds designated for capital acquisition of that type have been considered for equity purposes.
(c) Interest expense shall be reduced by investment income with the exception of income from funded depreciation, qualified pension funds, trusteed malpractice insurance funds or in instances where income from gifts or grants is restricted by donors. Interest on funds borrowed from a donor-restricted fund or funded depreciation is an allowable expense. Investment incomeshall be defined as the aggregate net amount realized from dividends, interest, rental income, interest earned on temporary investment of withholding taxes, as well as all gains and losses. If the aggregate net amount realized is a loss, the loss is not allowable. Investment income shall reduce interest expense allowed for reimbursement as follows:
1. (1) for all medical facilities, investment income shall first be used to reduce operating interest expense for that year;
2. (2) any remaining amount of investment income, after application of paragraph (1) of this subdivision, shall be used to reduce capital interest expense reimbursed that year for medical facilities; and
3. (3) any remaining amount of investment income after application of paragraph (2) of this subdivision shall not be considered in the determination of allowable costs.
(d) Interest on current indebtedness shall be treated and reported as an operating, administrative expense and shall be held to operating cost ceilings.
(e) Interest on capital indebtedness shall be an allowable cost if the debt generating the interest is approved by the commissioner, and incurred for authorized purposes, and if the principal of the debt does not exceed either the amount approved by the commissioner or the cost of the authorized purposes. Capital indebtedness shall mean all debt obligations of a facility that are:
1. (1) evidenced by a mortgage note or bond and secured by a mortgage on the land, buildings or nonmovable equipment, a note payable secured by the nonmovable equipment of a facility, or a capital lease;
2. (2) incurred for the purpose of financing the acquisition, construction or renovation of land, building or nonmovable equipment; and
3. (3) found by the commissioner to be reasonable, necessary and in the public interest with respect to the facility; or
4. (4) incurred for the purposes of advance refunding or debt. Gains and losses resulting from the advanced refunding of debt shall be treated as a deferred charge or asset. This deferred charge or asset is to be amortized on a straight-line basis over the period of the scheduled maturity date of the debt being refunded.
(f) Interest related to refinancing indebtedness shall be considered an allowable cost only to the extent that it is payable with respect to an amount equal to the unpaid principal of the indebtedness then being refinanced. However, interest incurred on refinanced debt in excess of the previously unpaid balance of the refinanced indebtedness will be allowable upon demonstration by the operator to the commissioner that such refinancing will result in a debt service savings over the life of the indebtedness.
(g) Where a public finance authority has established a mortgage rate of interest such that sufficient cash flows exist to retire the mortgage prior to the stated maturity, the amount of the mortgage to be forgiven, at the time of such forgiveness, shall be capitalized as a deferred asset and amortized over the remaining mortgage life, as a reduction to the facility's capital expense.
(h) Voluntary facilities shall report mortgage obligations financed by public finance authorities for their benefit and which they are responsible to repay, as liabilities in the general fund when such mortgage obligations are incurred.