N.Y. Comp. Codes R. & Regs. tit. 14 § 635-6.4

Current through Register Vol. 46, No. 25, June 18, 2024

Section 635-6.4 - Costs of ownership of real property

(a) Unless specifically otherwise provided for in this Title, costs of ownership of real property shall be allowable in the amount of depreciation, interest, costs of alteration, construction, rehabilitation and/or renovation to real property, and costs attributable to the negotiation or settlement of sale or purchase of real property in cases where:

(1) OPWDD and the Division of the Budget first approved the property costs before June 1, 2010; or

(2) OPWDD and the Division of the Budget first approved the property costs on or after June 1, 2010, but the costs were previously funded, in whole or in part, by New York State, any other state or the Federal government.

(b) Unless specifically otherwise provided for in this Title and except as provided in paragraph (a)(2) of this section, costs of ownership of real property shall be allowable in the amount of interest and principal or provider equity (see Subpart 635-99 of this Part), in cases where OPWDD and the Division of the Budget first approved the property costs on or after June 1, 2010.

(c) Notwithstanding the provisions of subdivision (a) or (b) of this section, costs of ownership of real property shall be allowable in the amount of costs related to loans from the Dormitory Authority of the State of New York (see Subpart 635-99 of this Part).

(d) Reimbursement for principal and interest or provider equity and interest is an allowance in lieu of reimbursement of interest and depreciation associated with the property, and in lieu of reimbursement of the underlying allowable costs, which may include allowable start-up costs, for which the mortgage, loan, or other financing is received.

(e) Depreciation is based upon the historical cost and useful life of buildings, fixed equipment and/or capital improvements, alterations, rehabilitation and/or renovations.

(f) Principal shall be the amount which the provider borrows for the purchase, alteration, construction, rehabilitation and/or renovation of real property, for costs attributable to the negotiation or settlement of sale or purchase of the real property and for other reasonable and necessary costs related to such purchase, alteration, construction, rehabilitation and/or renovation, including, but not limited to, design fees and short term interest. Principal shall be allowable in the amount approved by OPWDD and the Division of the Budget, but shall not be greater than the lesser of:

(1) the historical cost; or

(2) the amount the provider actually borrowed.

(g) The commissioner may allow provider equity in an amount not to exceed fair market value if the provider demonstrates that allowing such provider equity:

(1) is necessary in order for the facility or program in question to continue to operate, or is necessary in order for the facility or program to open;

(2) would be an economic and efficient use of resources; and

(3) would be in the best interests of the persons who are receiving or will receive services at the facility or program in question.

(h) Historical cost shall be determined as follows:

(1) 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 OPWDD and the Division of the Budget. In deciding whether to approve any such cost, OPWDD 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 OPWDD or the Division of Budget approve an historical cost which exceeds the lesser of fair market value or the provider's or individual's actual cost.

(2) The historical cost of any real property which is transferred or purchased from a party related to the provider or individual is the lesser of fair market value or the acquisition cost of the real property to the transferor or the seller.

(3) The historical cost of any real property which is altered, constructed, rehabilitated and/ or renovated by a party related to the provider or individual is the lesser of:

(i) the fair market value of such alteration, construction, rehabilitation or renovation; or

(ii) the related party's cost of the alteration, construction, rehabilitation or renovation.

(4) Where the previous owner of the real property had the costs of such property funded, in whole or in part, by OPWDD,

(i) the historical cost of the property shall be the least of:

(a) the acquisition cost of the property to the new owner;

(b) the seller's net book value (see glossary, Subpart 635-99 of this Part); or

(c) fair market value; or

(ii) notwithstanding the provisions of subparagraph (i) of this paragraph, where the previous owner of the real property had its costs of ownership of the real property approved by OPWDD, and a substitute provider is designated to operate the program at the same physical location, the substitute provider may take the place of the previous owner under the terms of OPWDD's approval of the previous owner's costs.

(5) If the previous owner is related to the provider or individual purchasing the property, any amount paid by the State to the provider or individual for rent equal to depreciation on the property shall be counted as paid depreciation and as funding for the costs of such property.

(6) If the seller or transferor of the real property to the provider or individual is not a party related to the provider or individual, but any prior owner of the property in question is a party related to the provider or individual, and the sale or transfer from the prior related party occurs within five years of the sale or transfer to the provider or individual, the transaction shall be deemed to be between the provider or individual and the prior owner related to the provider or individual.

(7) If OPWDD cannot determine the historical cost of real property, OPWDD shall use an appraisal value as the basis for depreciation. The appraisal value shall be based upon an appraisal which is done by OPWDD or by an appraiser approved by OPWDD, which uses an appraisal methodology which is generally accepted within the profession and which is factually correct in all significant matters. OPWDD shall approve an appraiser if one of the following tests is met:

(i) the appraiser is a New York State certified or licensed appraiser; or

(ii) no licensed or certified appraiser is available in the geographic area in which the property is located; the appraiser is recommended by another State agency and, in OPWDD's opinion, the appraiser has the professional experience and qualifications to do the appraisal in question.

(8) The commissioner may allow an alternative historical cost of ownership of real property obtained from a related party.

(i) The commissioner may allow such alternative historical cost if following conditions are met:

(a) the provider or individual demonstrates that allowing such alternative historical cost would make property available to individuals or providers which would not otherwise be available;

(b) such alternative historical cost is substantially less than the cost which would be allowed under this Subpart for property which is obtained from an unrelated party and which is of similar function and value to OPWDD and to the provider or individual;

(c) the seller or transferor has owned the property in question for at least five years; and

(d) the fair market value of such property is greater than the seller's cost.

(ii) Such alternative historical cost may be greater than the cost of the property to the transferor or seller, but shall not be greater than the lesser of:

(a) the acquisition cost of the property to the provider or individual; or

(b) the cost of the property to the seller or transferor, increased by one-half of the percentage increase (as measured from the date of acquisition by the seller to the date of the change of ownership) in the Consumer Price Index for New York - Northeastern New Jersey (all items), as reported by the United States Department of Labor, Bureau of Labor Statistics.

(iii) The commissioner may allow an alternative historical cost only for transfers, purchases, alteration, construction, renovation or rehabilitation, the terms of which were agreed to after July 12, 2000.

(9) Alternative historical cost for a substitute provider. Where the previous owner of the real property had the costs of the property funded, in whole or in part, by OPWDD, and a substitute provider is designated to continue operation of a program at the same physical location, OPWDD may allow an alternative historical cost of the property to exceed the seller's net book value (see glossary, section 635-99.1 of this Part). The alternative historical cost may not exceed the acquisition cost of the property to the new provider as approved and determined to be reasonable by OPWDD. The alternative historical cost allowed under this paragraph is only available if OPWDD determines that allowing such alternative historical cost:

(i) is an economic and efficient use of resources; and

(ii) is necessary to protect the health, safety, or welfare of the persons who are receiving or will receive services at the facility or program in question.

(i)Useful life and amortization period.

(1) The useful life of depreciable assets shall be the higher of the reported useful life or the useful life from the Estimated Useful Lives of Depreciable Hospital Assets (current edition), published by the American Hospital Association. This document is available from:

(i) the American Hospital Association, 840 Lake Shore Drive, Chicago, IL 60611;

(ii) it may also be reviewed in person during regular business hours at the:

(a) NYS Department of State, 99 Washington Avenue, Albany, NY 12231; or

(b) by appointment at the NYS Office for People With Developmental Disabilities, 44 Holland Avenue, Albany, NY 12229.

(2) The amortization period for principal repayment and provider equity shall be the lesser of:

(i) the term of the indebtedness, as approved by OPWDD and Division of the Budget, related to the real property in question; or

(ii) the remaining useful life on the asset.

(3) A provider or an individual receiving services may use a different useful life or amortization period if such different useful life or amortization period is approved by OPWDD. OPWDD shall base such approval upon historical experience, documentary evidence, loan agreements (if any) and need for the services for which the depreciable or financed assets are used.

(j) The provider or individual shall use the straight-line method of depreciation.

(k)Interest costs.

(1) Interest costs shall be allowable if the following criteria are met:

(i) The interest rate is not in excess of the amount a prudent borrower would pay at the time the loan was incurred.

(ii) The loan agreement is entered into between the provider or individual and a party not related to the provider or individual. The commissioner may waive this provision based on a demonstration of need for the services and cost savings resulting from the transaction.

(iii) If the interest expense results from either start-up costs and/or the initial financing of the capital indebtedness, the capital indebtedness shall represent all or part of the current OPWDD and Division of the Budget approved value of the property, after subtracting any equity contributions such as, but not limited to, grants applied to the property.

(iv) In the case of interest expense, or a portion of interest expense, resulting from the refinancing of the capital indebtedness, the refinancing has the prior approval of the commissioner and the Division of the Budget, and the interest is in the amount associated with the outstanding principal balance prior to refinancing.

(2) 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 in the initial financing and start-up costs, and in the refinancing of the capital indebtedness.

(3) Interest income generated from the provider's revenues for the operation of the services shall be used to offset interest expense incurred during the same reporting period. Notwithstanding the foregoing, a provider is not required to use the following to offset interest expense: income earned on qualified pension funds, income from gifts or grants which are donor- restricted, or income earned on secure investments pursuant to section 680.12(d)(10), 681.11(f)(1)(xi), (3)(iii) and (iv), 681.12(c)(10)(xi), (xii), (12), 686.13(i), 690.7(d)(2)(ii) (d), (e) or (e)(9) of this Title.

(l) 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 16.27 ), 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.

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

(1) The cost of principal and interest payments on loans from the Dormitory Authority pursuant to subdivision 13-d of section 5 of the Facilities Development Corporation Act, net of the portion of such payments attributable to operating costs, are allowable; provided that the reimbursement of such costs is an allowance in lieu of reimbursement of interest and depreciation associated with the property, and in lieu of reimbursement of the underlying allowable costs, which may include allowable start-up costs, for which the Dormitory Authority loan is received. A provider which receives a Dormitory Authority loan shall not have the option of having included, in the calculation of its rate, fee or price, the loan's underlying costs instead of the loan principal and interest payments.

(2) Operational period fees imposed by OPWDD and annual administrative fees imposed by the Dormitory Authority in connection with Dormitory Authority mortgage loans shall be allowable costs.

(3) Interest payments on Dormitory Authority loans pursuant to this subdivision for capital indebtedness and start-up costs will be considered allowable where interest expense results from capital indebtedness and start-up costs in an amount equal to the OPWDD and Division of Budget approved value of the loan.

(4) Interest payments 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, if the purpose of the debt is to acquire assets to be used for care of the persons served by the program or services and all other applicable requirements of this Part are met.

N.Y. Comp. Codes R. & Regs. Tit. 14 § 635-6.4

Amended New York State Register August 12, 2015/Volume XXXVII, Issue 32, eff.8/12/2015

Amended New York State Register October 28, 2015/Volume XXXVII, Issue 43, eff.11/1/2015

Amended New York State Register April 20, 2016/Volume XXXVIII, Issue 16, eff.4/20/2016

Amended New York State Register September 21, 2016/Volume XXXVIII, Issue 38, eff. 9/21/2016