(b) Allowable capital costs may include:

1. (1) the costs of owning or leasing real property;
2. (2) the costs of owning or leasing moveable equipment and personal property; and
3. (3) the cost of up to three months of pre-operational program start-up expenses, and associated interest, for new services, programs, or facilities for which initial reimbursement levels are being established. Pre-operational start-up costs may include, but are not limited to, rent, employee compensation, utilities, staff training and travel, and expensed equipment.

(f) Allowable capital costs shall be determined in accordance with the following:

1. (1) Except where specific rules concerning allowability of costs are stated herein, the office shall use as its major determining factor in deciding on the allowability of costs the most recent edition of the Medicare Provider Reimbursement Manual, commonly referred to as HIM 15, published by the U.S. Department of Health and Human Services' Centers for Medicaid and Medicare Services.
2. (2) Where specific rules stated herein or in HIM 15 are silent concerning the allowability of costs, the commissioner shall determine allowability of costs based on reasonableness and relationship to patient care and generally accepted accounting principles.

(h) Depreciation shall be based upon the historical cost and useful life of buildings, fixed equipment and/or capital improvements.

1. (1) Historical cost shall be determined as follows:

   1. (i) The historical cost of any real property which is transferred, purchased, altered, constructed, rehabilitated and/or renovated shall be equal to the amount approved by the office. In deciding whether to approve any such cost, the office shall consider whether the provider's reimbursement as a whole for the services in question, including the cost of purchase, transfer, construction, alteration, rehabilitation and/or renovation to be approved would result in payment which is consistent with efficiency and economy. In no event shall the office approve an historical cost which exceeds the lesser of fair market value or the provider's actual costs.
   2. (ii) The historical cost of any real property which is transferred or purchased from a party related to the provider is the lesser of fair market value or the acquisition cost of the real property to the transferor or seller.
   3. (iii) Depreciation associated with that portion of the real property financed by capital grants obtained from the office or any other New York State agency is not includable for rate setting purposes. Where the previous owner of real property had the costs of such property funded, in whole or in part, by the State of New York, the historical cost of the property shall be the lesser of the acquisition cost of the property to the new owner, the seller's net book value, or the fair market value.
   4. (iv) Where any real property for which previous Medicaid payment has been made is transferred by sale, purchase, acquisition or merger (other than as a result of a receivership under New York Mental Hygiene Law, section 19.41), the costs (including legal fees, accounting and administrative costs, travel costs and the costs of feasibility studies) attributable to the negotiation or settlement of sale or purchase are not allowable.
   5. (v) Allowable costs for real property will be limited to the amount the provider of services could have been reimbursed if the provider of services had legal title to the property.
   6. (vi) The historical cost of any alteration, construction, rehabilitation and/or renovation by a party related to the provider is the lesser of the fair market value of such alteration, construction, rehabilitation or renovation; or the related party's cost of the alteration, construction, rehabilitation or renovation.
   7. (vii) If the previous owner is a related party to the provider purchasing the property, any amount previously paid by the State to the previous owner as depreciation or as rent in lieu of depreciation on the property shall be counted as paid depreciation and as funding for the costs of such property to the provider purchasing the property.
   8. (viii) If the seller or transferor of the real property to the provider is not a party related to the provider, but any prior owner of the property in question is a party related to the provider, and the sale or transfer from the prior related party occurs within five years of the sale or transfer to the provider, the transaction shall be deemed to be between the provider and the prior owner related to the provider.
   9. (ix) If the office cannot determine the historical cost of real property, the office shall use an appraisal value as the basis for depreciation. The appraisal value shall be based upon an appraisal which is done by the office or by an appraiser approved by the office, which uses an appraisal methodology which is generally accepted within the profession and which is factually correct in all significant matters.

   10. (x) The commissioner may allow an alternative historical cost of ownership of real property obtained from a related party. The commissioner may allow such alternative historical cost if the following conditions are met:

       1. (a) the provider demonstrates that allowing such alternative historical cost would make property available to providers which would not otherwise be available;
       2. (b) such alternative historical cost is substantially less than the cost which would be allowed under this subdivision for property which is obtained from an unrelated party and which is similar function and value to the office and to the provider;
       3. (c) the seller or transferor has owned the property in question for at least five years; and
       4. (d) the fair market value of such property is greater than the sale price.

2. (2) Useful life of depreciable assets shall be determined as follows:

   1. (i) Unless specifically otherwise provided for in this Part, the useful life of depreciable assets shall be the higher of the reported useful life or the useful life from the most current edition of the Estimated Useful Lives of Depreciable Hospital Assets published by the American Hospital Association. This document is available from the American Hospital Association, 840 Lake Shore Drive, Chicago, IL 60611.
   2. (ii) For construction or acquisition of a new residential service, program, or facility, which was first issued an operating certificate on or after January 1, 2006, the estimated useful life of the building for purposes of determining depreciation reimbursement shall be the greater of the term of the mortgage or 15 years.
   3. (iii) A provider may use a different useful life or amortization period if such different useful life is approved by the office. The office shall base such approval upon historical experience, documentary evidence, loan agreements and need for the services for which the depreciable assets are used.
3. (3) A provider shall use the straight-line method of depreciation.

4. (4) Reasonable and necessary interest on capital indebtedness is an allowable cost if the debt generating the interest is approved by the commissioner and incurred for authorized purposes, and the principal of the debt does not exceed that which is either approved by the commissioner or the cost of the authorized purposes. Capital indebtedness shall mean all debt obligations that are:

   1. (i) evidenced by a mortgage note or bond and secured by a mortgage on the land, building or non-movable equipment, a note payable secured by the non-movable equipment of a facility, or a capital lease;
   2. (ii) incurred and approved for the purpose of financing the acquisition, construction or renovation of land, building, non-movable equipment, or related costs;
   3. (iii) incurred for the purpose of financing approved moveable equipment or approved personal property;
   4. (iv) incurred and approved for the purpose of advance refunding of debt; or
   5. (v) found by the commissioner to be reasonable, necessary and in the public interest.

   6. (vi) For interest on capital indebtedness to be considered an allowable cost:

      1. (a) The interest shall be incurred to satisfy a financial need, and at a rate not in excess of what a prudent borrower would have had to pay at the time the loan was made.
      2. (b) The loan agreement shall be between the provider and a party not related to the provider. The commissioner may waive this provision based on a demonstration of need for the services and cost savings resulting from the transaction.
      3. (c) The capital indebtedness shall represent no more than the current approved value of the property after subtracting any equity contributions such as, but not limited to, grants applied to the property.
      4. (d) Interest resulting from the refinancing of 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 approved indebtedness then being refinanced. However, interest incurred on refinanced debt in excess of the previously unpaid balance of approved indebtedness may be allowable on acceptable demonstration to the commissioner that such refinancing will result in a debt service savings over the life of the indebtedness. In no case shall interest resulting from the refinancing of indebtedness be an approvable cost unless it has the prior approval of the commissioner. Approved losses resulting from the advance refunding of debt shall be treated and reported as deferred charge. This deferred charge is to be amortized on a straight line basis from the time of the refinancing to the scheduled maturity date of the refunding debt.
5. (5) Interest expense resulting from the inclusion of the reasonable closing costs, such as, but not limited to, attorneys’ fees, recording costs and points, is allowable for initial financing and start-up costs, and in the refinancing of the capital indebtedness.
6. (6) Interest on current working capital shall be treated and reported as an administrative operating expense and as such is not considered an allowable capital cost. Working capital interest expense shall be reduced by investment income with the exception of income from funded depreciation, qualified pension funds, deferred compensation funds, secure investments and gifts, grants or endowments, whether restricted or unrestricted.

(i) Costs related to Dormitory Authority loans shall be allowable as follows:

1. (1) Interest cost accruing from Dormitory Authority mortgage loans pursuant to subdivision 13-d of section 5 of the Facilities Development Corporation Act, net of the portion of such interest cost attributable to operating costs, is an allowable cost. That portion of the interest cost attributable to allowable start-up costs is also allowable. That portion of the loan principal that is attributable to depreciable or amortizable costs, under the rules of HIM 15, is an allowable cost and shall be reimbursed as depreciation or amortization in accordance with the requirements and conditions of subdivision (h) of this section. Any portion of the loan principal that is attributable to costs that are not depreciable or amortizable under the rules of HIM 15 is not allowable for reimbursement.
2. (2) Fees imposed by the office and annual administrative fees imposed by the Dormitory Authority in connection with Dormitory Authority mortgage loans shall be allowable costs.
3. (3) Interest payments on Dormitory Authority loans pursuant to this subdivision for capital indebtedness and start-up costs will be considered allowable where such interest expense results from approved capital indebtedness and/or start-up costs in subdivision (i) of this section.
4. (4) Interest payment on Dormitory Authority loans pursuant to the provisions of this subdivision are allowable in excess of the amount associated with the outstanding principal balance prior to refinancing only if the purpose of the additional debt is to acquire assets to be used for care of the persons served by the program and all other applicable requirements of this Part are met.
5. (5) The office may recoup, in full or in part, the interest and fee reimbursement for Dormitory Authority loans attributable to a particular service. The office may also recoup, in full or in part, the annual depreciation or amortization reimbursement for costs financed through Dormitory Authority mortgage loans. The amount of Dormitory Authority mortgage loan interest, fee, depreciation, and amortization recoupments shall be equal to or less than the provider's actual reimbursement for such costs. In no case shall these recoupments exceed such reimbursement.

(j) Costs of ownership of moveable equipment and personal property shall be allowable in the amount of depreciation and interest if the purchase is made through a multiple bid process. Depreciation shall be based upon the historical cost and useful life.

1. (1) If the equipment or personal property is purchased from a party not related to the provider, the historical cost shall be the lesser of the actual cost of purchasing the equipment or personal property or the fair market value of such equipment or personal property.
2. (2) If the equipment or personal property is purchased from a party related to the provider, the historical cost shall be the lesser of actual acquisition cost, fair market value; or the seller's cost.
3. (3) The useful life is the higher of the reported useful life or the useful life as reported in the most current edition of the Estimated Useful Lives of Depreciable Hospital Assets published by the American Hospital Association. A provider may use a different useful life if such different useful life is approved by the office. The office shall base such approval upon historical experience and documentary evidence.
4. (4) The provider shall use the straight-line depreciation method for moveable equipment and personal property.

5. (5) Costs of leasing moveable equipment and personal property shall be allowable as follows:

   1. (i) If lease payments are made to a party which is not a related party, allowable costs shall be the lesser of the actual lease payments or the fair market rental.

   2. (ii) If lease payments are made to a related party, allowable costs shall be the lesser of:

      1. (a) the actual lease payments;
      2. (b) the fair market rental; or
      3. (c) the allowable depreciation, plus associated interest expense, if any, and other related expenses, including, but not limited to, maintenance costs.

(l) Costs relating to leases for real property are subject to the following conditions:

1. (1) In order for lease costs to be allowable, the provider must submit the lease to the office for approval. In deciding whether to approve a lease, the office shall consider whether the lease is in the best interest of the programs and the persons it serves and whether the lease in any way violates public policy. In deciding whether to approve an amount for rent, the office shall consider whether the provider's fee or rate, as a whole, including the amount of rent to be approved, would result in payment which is consistent with efficiency and economy.
2. (2) If an approved lease is between the provider and a party which is not a related party, allowable lease costs shall be the lesser of contract rent or fair market rental. If an approved lease is between the provider and a related party, allowable lease costs shall be the least of the contract rent; fair market rental; or the landlord's net cost.
3. (3) The office may waive the limitations on allowable costs upon a showing that the limitations would jeopardize the operation of the programs or services, this provision not withstanding the requirements and conditions of paragraph (1) of this subdivision.
4. (4) The office may, upon application from a provider, allow lease costs in an amount equal to contract rent and greater than fair market rent if the provider has shown that it has made diligent efforts to negotiate a lease renewal for fair market rent or less, that the contract rent is necessary to ensure the continued operation of the program, and that the parties to the lease are not related. The commissioner will allow such lease costs only for as long as it is necessary for the provider to relocate the program or services located on the lease property.
5. (5) Contract rent incurred pursuant to an approved lease or approved proprietary lease which is renewed pursuant to an option to renew within the approved lease is allowable.
6. (6) Costs incurred pursuant to an approved lease or approved proprietary lease which is renewed other than pursuant to an option to shall be allowable as determined in accordance with this section. The office shall decide whether to approve any such renewal at least 30 days before the last day the lease may be renewed, if the provider has notified the office.
7. (7) The provider shall submit to the office a request for approval of lease renewals at least 120 days prior to the last date for renewing the lease.