When a new Minnesota Film Production Tax Credit was passed this year by the state legislature, it was a big problem for program funders that the credits were “transferable and refundable.”
Unlike the previous state incentive program – which reimbursed producers 25% of authorized expenses after the project ended – the new tax credits are more useful to film producers.
“Because it’s transferable, they can sell them to a broker who can sell them to a company that has a tax liability,” said Melodie Bahan, executive director of the Minnesota Film and Television Board, shortly after approval. appropriations by the legislature. .
Since it is difficult to obtain funding for films, even large-scale projects, having tax credits to sell can be a significant part of what is known as the “capital stack” – the different sources of dollars that contribute to a project’s total budget.
“Allowing these tax credits to be freely transferable can make a difference in how well you are able to build capital,” said Irina Antonache, director of state and local taxes at the accounting firm Moss Adams, specializing in buying and selling state tax credits.
Newly Passed Minnesota Film Credit Shines a Spotlight on Niche Business – Buying and Selling Tax Credits Passed by State Legislatures to Encourage Everything From Film Production and Solar Power Projects to Projects preservation and construction of housing for low-income people.
Used by both for-profit companies like Moss Adams and non-profit entities, the company has even sparked an online marketplace. And while these credits benefit individuals and businesses involved in the targeted industries, they also benefit seemingly unrelated businesses, including large businesses such as banks and insurance companies, which end up paying less. state and federal taxes.
Tax credits come in different forms with different rules for collecting them. A business could use a credit it received from a state to reduce its own taxes, for example. But often the value of a loan – whether it’s to produce a movie or even to complete a large historic reuse project – far exceeds that company’s tax liability in this state.
“You rarely see a developer themselves using tax credits,” said Chris Sherman, president of Sherman Associates, a Minneapolis-based developer who has done major historic renovations, including on the Canopy Hotel in Minneapolis and the Norshor Theater in Duluth.
Refundable credits, as is the case with both the Minnesota Film Credit and the State Historic Renovation Credit, mean that the business can get a refund of the full value of the credit even if it does. does not owe so many taxes. These two credits are also transferable, which means they can be sold to another taxpayer who owes a lot of taxes.
Credits are sold for less than face value, often between 90 and 95 cents on the dollar. But the difference of a few cents per dollar of credit is enough to attract buyers. The seller receives money up front to help finance a project, and the buyer can reduce their tax liability. A business with a $ 1 million tax debt that paid $ 950,000 for $ 1 million in tax credits, for example, will save $ 50,000 in taxes owed.
Dollar amounts are often much higher than that, however, and transactions are rarely that straightforward. But the concept is the same – that film credit is a financial benefit for both a film production company and a company unrelated to the television and film industry.
So why not just keep the credits and get the full refund rather than selling them for a discount, even if it’s just pennies?
“The advantage is often the timing,” Sherman said. “The end user will provide the capital upon receipt of the certificate whereas if we proceed with the redemption option it can be delayed for three to nine months. The time value of money becomes important. ”
Part of the way projects are funded
Minnesota’s new movie credit has some quirks that set it apart. On the one hand, it’s quite small: $ 5 million per year. This compares to states like Georgia, which offer $ 800 million in credits per year. Additionally, Minnesota credits can only be transferred once, giving recipients less flexibility to turn them into cash.
With the ability to transfer credit even twice, for example, a film company or developer could sell them to a broker who could then combine them with other credits for a buyer who wants a lot of credits.
This quirk led Rethos, the state’s leading historic preservation nonprofit, to create a loan program that helps developers make better use of their tax credits. As part of the program, which Rethos offers in Minnesota, Wisconsin, Iowa, Kansas and Texas, a developer transfers their credits to Rethos in exchange for a very low interest loan in the amount of comparable. Rethos then claims reimbursement from the State Revenue Department. The fees she charges both cover her costs and provide income for her conservation advocacy work.
Ethan Boote, the real estate program manager at Rethos, said Minnesota’s historic credit must be used over five years, which makes the program he runs a bit more complicated. But because Rethos is a nonprofit, its program also offers federal credit value tax exemptions for developers.
“It’s a very specialized program that we run, and we hope to expand it to more states because it helps us grow as an organization, it helps our mission,” said Boote. “But it also helps these projects get started. “
Sherman, who is also a board member of Rethos, said federal and state tax credits are an important part of how the company funds projects. The combination of historic federal and state tax credits can represent up to 25% of a project’s budget, with the remainder coming from loans and equity from owners and partners.
“This has been a catalyst for the production and preservation of thousands of affordable housing units that otherwise would not have happened,” Sherman said. “It was a catalyst for the conversion of several dozen underutilized office buildings to alternative uses, such as hotels and apartments.”
Sherman has also said he expects it to be a tool when office buildings from mid-century and beyond achieve historic status eligibility. These apartment buildings may not have as many office tenants in a post-pandemic downtown area, but have potential as apartment buildings.
Sherman also said he would like the state to consider making the credits transferable more than once. “One of the barriers to selling to a US bank or commercial bank is that we are only allowed one (tax credit) certificate transfer,” he said.
“If two transfers were allowed, then historic state tax credits would be sold more commonly to investors. We would sell all of our credits to investors so they can use them on their tax returns, ”Sherman said.
An extension of the state’s historic preservation tax credits was passed this year in the same omnibus tax bill that created the film credit program, which was added at the last minute through for the benefit of House Speaker Melissa Hortman. But the historic credit is only a temporary extension, expiring next June, and the preservation community is working to make the extension permanent.
Minnesota is not a big player
Antonache de Moss Adams said all of these incentives stem from states’ desire to spur economic growth and attract business. “You invent some kind of incentive program and then you determine how you distribute it,” she said. “Is this a tax cut? Is this a transferable credit? Is it a refundable credit? Is it a subsidy? There are several ways to do this. “
Timing is the determining factor in how the credits are used, “monetized” in accounting terms, she said. Although selling credits may make less money than waiting for a repayment, if a project has borrowed money to pay for construction or production, having money now to pay off a loan saves money. on interest charges.
The selling price of the credits, she said, depends on the circumstances. Are there a lot of credits available from a given state? Can credits be used to offset more than one tax, such as income tax and insurance premium tax?
“I started working in this world 13 years ago, and the price was maybe high, 80 cents. But it has become much more robust, so prices have been pushed up only by demand, ”said Antonache.
As insurance companies and banks were the first buyers of tax credits, word spread and more companies from different industries entered the market.
Minnesota hasn’t been a big market for credit; the historical preservation credit is refundable and most developers have either used the repayment or used a credit buyer as an investment partner in projects.
Meanwhile, the pending movie credit may be too small to get as much attention or get the best rates. “Would you pay 90 cents for a $ 100,000 loan?” Probably not, ”said Antonache. “Am I paying 95 cents for a million dollars?” Not really worth my time. Or do I pay 95 cents for $ 10 million, which is worth it. Even though it’s more expensive, my return is still worth it.
Boote said the Canopy Hotel Restoration Tax Credits in downtown Minneapolis, a Sherman Project, brought in $ 8 million in historic tax credits alone. “A smaller project that could bring in a few hundred thousand dollars in historic state tax credits is not as successful for the banks,” he said. “They are usually looking for a few million dollars.”
But there are movie projects that could take advantage of Minnesota’s smaller movie credits, Antonache said. “Illinois has a ton of advertisements done there and you could get a few hundred thousand dollars at a time,” she said.