Interest expense

1. To be allowable, interest expense must meet all of the following criteria: a. Interest expense must be supported by evidence of an agreement that funds were borrowed and that payment of interest and repayment of the funds are required. b. Interest expense must be identifiable in the facility's accounting records. c. Interest expense must be related to the reporting period in which the costs are incurred. d. Interest expense must be necessary and proper for the operation, maintenance, or acquisition of the facility. e. Interest expense must not relate to funds borrowed to finance costs of assets in excess of the depreciable cost basis established at the time of purchase, construction, or renovation, as recognized under the provisions of section 75-02-06-03. f. If associated with borrowing for the purpose of acquiring assets as an ongoing operation in a bona fide sale, interest expense must be limited to the amount of interest associated with borrowing, occurring at the time of the sale, that does not exceed ninety percent of the cost basis, as determined in section 75-02-06-03. g. In a sale not bona fide, interest expense may not exceed the amount that would have been allowable had the sale not occurred. h. If associated with refinancing or refunding debt, interest expense associated with the original borrowing must have been allowable when the debt was initially incurred. 2. In cases where it was necessary to issue bonds for financing, any bond premium or discount must be amortized over the life of the bond issue. 3. Interest paid by the provider to partners, stockholders, or related organizations of the provider is not allowable as a cost. Where the owner loans funds to a facility, the funds are considered capital, rather than borrowed funds. 4. If a facility incurs interest expense because of late payments for resident services and charges a service charge or interest for late payments, the income must be offset against interest expense. If no interest expense is incurred by the facility because of late payments for resident services, interest or service charges paid must be offset against administrative expense. 5. Repayment of working capital debt must be made within three years of the borrowing. 6. For the purposes of this section: a. "Necessary" means that the interest is incurred on debt made to satisfy a financial need of the facility and for a purpose reasonably related to resident care; and b. "Proper" means that the interest is incurred at a rate not in excess of what a prudent borrower would be obliged to pay in an arm's-length transaction and is incurred on debt obtained from a lender not related to the borrower through common ownership or control, except for funds borrowed in accordance with section 75-02-06-04.1. 7. For refinanced or refunded debt, the total net aggregate allowable costs to be incurred for all reporting periods may not exceed the total net aggregate costs that would have been allowed had the refinancing or refunding not occurred. Annual allowable costs must be limited to the lesser of the costs that would have been allowed had the refinancing or refunding not occurred or the costs associated with the refinancing or refunding plus the portion, if any, of adjustments not recognized in prior cost reporting periods. 8. Interest expense must be allocated between allowable and nonallowable expense based on the ratio of the principal balance of allowable debt to the principal balance of nonallowable debt at the time the debt was incurred, except that the ratio may be adjusted to reflect principal payments on nonallowable debt made in excess of scheduled repayments, provided no funded depreciation or borrowed funds are used to make the excess principal payment.