January 19, 2024

Demystifying Film Tax Credits: A Conversation with Will French

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Welcome to On Production brought to you by Wrapbook. Today we have the privilege of speaking with Will French, a leading figure in the world of film tax credit finance. Since pioneering the trade and finance of film tax credits with the Louisiana transferable tax credit program in 2003, Will has been at the forefront of this industry trading or financing over 500 million of state film credits. His expertise has been instrumental in the growth of companies like the forest road company. And now at Fallbrook financial services. With a rich history in complex credit management and a deep understanding of the film finance landscape. Will brings invaluable insights into a crucial aspect of film production financing. We're here to learn about the inner workings of tax credit financing, and its impact on the film industry. Well, welcome to the show.


Thanks very much for having me, Cameron.


Well, let's start right off, can you tell us about your initial foray into the world of film tax credit finance, particularly with the Louisiana program.


So it was almost by accident, to be honest with you. Go back to 2002. And here I am a young practicing lawyer, maybe six years out of law school. I'm working for the best corporate law firm in the state of Louisiana, the best regional corporate law firm, I'm doing mergers and acquisitions work representing banks and complex commercial lending transactions like oil and gas deals, you know, just my career is going in a great direction, and I'm enjoying practicing law. But one thing that always nagged me about living in Louisiana living in New Orleans in particular, which is that we had a lousy economy, we were sort of at the bottom of every good list. And we were at the top of every bad list. And so in 2003, start to read newspaper articles about how the state passed the tax incentive program to bring film and television production work to the state. And there was a producer that came in move their entire film, as a movie ray from Georgia to Louisiana to be shot in New Orleans, was having a terrible experience because he couldn't figure out how to turn the tax credits that he was getting into dollars. He was told by the state, if you come here, move here, we'll give you this many dollars. He said he got here did what he was supposed to do. And he got tax credits and owed no taxes to the state. And so here I am, having seen most of my high school graduating class leave for greener economic pastures and other cities, other states, other countries. And the first thing that I saw Louisiana as a state doing to really try to bring business back into the state. And now it wasn't working for some little weird reason that you couldn't take a tax credit and turn it into $1. So I started thinking about this. And I thought, well, I deal with complex tax structuring. On a daily basis, I deal with corporate structuring a corporate formation, LLC operating agreements on a daily basis. I know I can allocate tax benefits one way and financial benefits and other way by using an appropriate agreement. Let me see if I can do this. So I started working nights and weekends as a young associate in the law firm, when I wasn't billing hours. And remember, as an associate, you're judged on the hours that you built. So this was, you know, getting in all of my billable hours, and then working in my spare time to figure this out to structure it to put agreements in place to to make it work all without any clients to do this or just on spec. And then I realized that there were some tax nuances to it there was how is the federal government going to treat the use of a tax credit by a taxpayer who might buy it from a film producer. So I had to get revenue rulings and find revenue rulings and other states that were sort of analogous and things like that. And by the end of six months, I had everything nicely packaged and ready to go. And I went to that film producer who was still very angry, you can imagine six months later and said, I can do it, I figured out how to do it. He said great. And so sure enough, put a put a deal together, went out and found some taxpayers to use the tax credits did all the paperwork for it. And it worked. And it sort of relieved the pressure that was building up in the industry. It showed that the Louisiana incentive program could work that the credits could be turned into something valuable for productions. And that sort of just opened the floodgates and production started rushing in and other states were, you know, not long to follow. You


were really the first mover in the state of Louisiana. Did you do any marketing after that happens the other filmmakers would know or word was kind of got around.


That's funny. I went to the Cannes Film Festival in 2004. I'd never been to a film festival. I've never been on the, you know on a film set had no understanding of how films were made or The risks involved with making them. And I set up a little booth in the American Pavilion. And I said it said tax credits will save you money. And I had producer after producer coming up saying what the heck's a tax credit. And so I was literally trying to explain to them what this was and what Louisiana had done and what the Canadian system was like, because that was a pretty good precursor to what Louisiana had done. And that this was going to be the new big thing in film. And I'll tell you, nothing came with it. You know, it's not like people said, Okay, well, hey, I want to come to Louisiana and use you and, and earn tax credits and make my film there, it really took time for it to develop organically and for more and more films to start coming in. For more states to start adopting it, before, it became kind of just a mainstream part of film finance, and the film industry overall. But those were pretty interesting days, in those early days trying to figure out how to get the word out because and it was so complex. And remember, also, on the one hand, I deal with the film producers and the finance community to make the film, but on the other is the end user of a tax credit, the taxpayer, the person who all they want to do is pay their taxes and pay the taxes at a discount. So I had to also go to them and explain what this was. And so I really did that by going to CPA firms around the state. And half the time, the door was slammed in my face, or the phone was hung up. Because this was not long after sort of the tax shelter era of the 80s and the 90s. And everybody thought this was a scam or a scheme or something like that. So ultimately, it involves convincing, showing convincingly to both the taxpayer community and the production community, that this was a real thing, and that it was good for everybody. And at the end of the day, you see what's happened to it in the industry overall,


you know, it's almost impossible to imagine today, film, financing, and film production without film tax credits and film incentive structures is really interesting. You know, I'm really curious, you've touched on this a little bit, what were some of the challenges and breakthroughs in pioneering this field in the early 2000s, when this was all kind of emerging?


That really is what I was getting at is, nobody knew what these things were or how to use them. So on the one hand, it was understanding myself and finding a structure that would work and pioneering that, which was a huge challenge in and of itself. And the second was showing the industry taxpayers and producers alike, that it would work. And then thirdly, actually making it work for them, which was to have the transactions go through, have the dollars be transferred, and show them the real benefits of it. hugely challenging, I think I was at exactly the right point in my career to have been the one to do this. Because I was young, I had plenty of energy, I had the legal knowledge, I had the business knowledge for representing business clients, and in the financial knowledge for representing banks in commercial transactions, it just I was the right person at the right place at the right time. And, you know, I've been able to, you know, change the trajectory of my career and do something that I really love doing, which is, you know, being an expert in in tax incentives for the motion picture industry, I never would have thought that I would have gone this direction but I'm so glad that I did. That's


awesome. You know, we'll I'm curious how has the landscape evolved since you started


back then a tax credit. If you got it for your film as a producer, you treated it like it was gravy like it was found money was something that was unexpected that actually brought value into the production almost like you got another sale of a territory or something like that for your film. And so a lot of producers were using it just as gravy as okay, hey, we got some extra money coming in from these incentives. Let's pay back our equity investor or let's pay that deferred producer fee that you know that we built into the budget because now we got this extra revenue that came in. Nobody had specialists in house who were focused on tax credits of all the studios wanted to figure out how to do it because if there was extra gravy out there extra profitability, they wanted to to find a way to to be able to get to it, but nobody really understood the lay of the land and at the same time, state after state when Once it started working started enacting their own programs, which, you know, it was hard enough to figure out how one program would work. It became exponentially harder to figure out how to do this across multiple states with multiple different programs, and none of which talked to each other to figure out what worked and what didn't work. So it was, you often hear the expression, the Wild West, it was the Wild West, back then, state legislatures, these programs are products of state legislative work. And legislatures have no idea how the film industry works, how the finance industry works, or even generally, how taxes work. And so all of these things had to come together to create these programs. And then we had to figure out how to understand them and help them work for productions. You said this a few minutes ago, you'd be hard pressed to find any film and television project anywhere throughout the world these days, that doesn't rely on some type of governmental incentive program. That's amazing. We're 20 years out, we're just two decades into this. And now it is literally the common practice all over the world to incentivize filming with, with these programs, all of the all of the major studios, all of the major independence, a lot of the independent production companies who are in the business of producing generally have somebody or a team of people who specialize in in tax incentives to help them figure out how to navigate this landscape. Netflix, for instance, has three offices around the world with dozens of people strictly focused on incentives. So the industry's focus has gone from in strategy has gone from one of, hey, it's free money, great to, we're going to use this, this incentive program or this incentive concept, to decide where we're going to film, how we're going to film how much we're going to spend filming, and how we're going to shape the rest of the finance plan around the project. So it really has become from just a, you're lucky if you get it kind of a situation to the centerpiece of film production planning. And, you know, to that point, Disney's tax credit group is the production planning group. So they decide where projects go based on tax credits, and then those other factors like setting and scenery and, you know, the the aesthetic and creative side of things. But I think that tells you that it really is one of the first core factors that's considered in film production these days, where as 20 years ago, it was an afterthought. I think


you're touching on this. my follow up question on this is can you explain how the role of tax credits has changed in film financing over the last few years and kind of the relationship for maybe some of our listeners who don't have a lot of experience with, with incentives, how the incentives relate to film financing? Just broadly speaking,


right. And I think here, I need to separate the conversation between studios on the one hand and independence on the other. From a studios perspective. What they want to know is how much net return are they going to get to offset the production budget, they've got all the cash they need to make the film, but they want to know, at the end of the day, the end of the day might be 123 years later, what are they going to have gotten in from the incentives? How can they maximize that and that's all they care about. They don't care about interest costs, or anything like that. The independents are completely different. And this is where finance really comes into the equation. Because if you want to use a credit to offset some of your production costs to take your budget from $10 million of cash needed to $8 million of cash needed, then you've got to figure out how you're going to finance that tax credit. And it all starts with making sure that one you're qualified to earn a tax credit. How does your budget affect the amount of credits that you will get from the laws of that particular state? So there's a whole lot of understanding what limitations that state allows you or what restrictions things like you can't pay your lead actor more than $2 million or $3 million? Well, you're certainly not going to take a Marvel movie to a state like that. If you're paying Tom Cruise $25 million, you're losing out on tax credits on a lot of on a lot of your what would have been qualifying expenditures. So you've got to figure out that side of it. Well What kind of a credit am I going to be eligible for? Now? What's it worth? And to do that, you've got to figure out a number of things. Is it a transferable credit? If it is, it means that I've got to take this credit and sell it to somebody else. So what is that person gonna pay me for? Not what are they going to pay me for today? What are they going to pay me for it a year from now or two years from now when that credit ultimately is certified and available to be transferred to offset that person's taxes? So that's a pretty complex part of the puzzle right there. And you have to factor in, okay, well, I have a piece of collateral in this tax credit that's worth X amount of dollars. How am I going to borrow against that? What are the risks to a lender? When it comes to giving me a loan against my tax credit? Well, in many states, if you don't complete the film, you don't get the tax credit, you can spend as much money as you want. Failure to complete, you end up with nothing, you can't repay that lender. So there's a lot of risk factors that need to be solved for like completion. And in some cases, some states require actual distribution, like Georgia does right now for a portion of their tax here, they want to see you in theaters, or they want to see you streaming, then you have to figure out what's the timeframe for all that to happen? And how do I assume a discount to the value of the credit both for the risks that are involved? What happens if I understand this is one of the biggest risks in tax credits, in general, is I said I'm going to spend $10 million on qualifying expenses in a given state? You know, things changed during production, we only spent 9 million. Well, now your tax credit has gone down by 10%. So how do you solve for that usually is discounting the value of the collateral by the financier to make sure that there is room for errors like that, and then how much interest is going to accrue in the time period between when I take that loan and repay that loan. And so, you know, one of the biggest misconceptions that you see, when it comes to tax credits and tax credits financing by maybe a less experienced producer is that they can do the math, if I go to this state and spend this many dollars, I'll get this many credits, but they think that that's going to be $1 per dollar offset to their production budget, because of the credits that they get. But in reality, there are the discounting for the risk that's associated with it, the loan to value discounting, and the interest carry and potentially also for what it costs to to get that tax credit monetized either by selling it to somebody and having been paid, you know, for the tax credits at a discount, or maybe there are state fees and administrative costs, and audit costs that go into the to the process. So the financing of tax credits has gone from being non existent 20 years go to really developing into a mature system that accounts for a lot of risk and solves for a lot of risk and the competent underwriting consultants and professionals out there to guide the industry. But it is it is very complex. And it's not easy to do tax credit financing. And, you know, I would also look back on the last 20 years and say, for the first 10 the banks didn't want to have anything to do with tax credit lending, tax credit financing, because they were looking at one point 41 different programs throughout the country. And they said, we'd be hard pressed to get our credit people comfortable with lending against one program, because they're going to have to constantly be monitoring the changes to this program, the evolution of rules, regulations and policies, changes of law. And that's a lot of work to be able to do. But say after that first 10 year period, the attitude of financing changed. And the bank said, you know, for the last 10 years, we've watched as tax credit financing caught on in the non banking sector. And I think I was the first person in the country to finance a tax credit. And I did it because there were some competitors who are getting into the trading of the tax credits, which I had been doing. And I used financing of credits as a way to lock up inventory so that I knew that I had enough credits to sell to keep my taxpayers over here happy and coming back year after year. And I learned a lot of lessons the hard way, by the way, which there are some interesting lessons in there that maybe we can talk about in a little bit, but the bank said, Okay, now we've seen this work, and we've almost seen you and others like you commoditize, the tax credit industry, and we've been passing on pieces of tax cred collateral that might be just as sizable as our distribution collateral, you know, we might have a distributors contract that we would typically finance for $10 million on a film. And there might be a $10 million tax credit, we've always passed on that on the $10 million tax credit, we're not going to do that anymore. Now, we want to be lending Morrison's sort of several years after the financial crisis, when the banks were really getting back into the game and looking for more products, 2011 2012 2013 kind of timeframe. And the banks just sort of collectively jumped in and said, This is going to be a bankable product now. And that changed the landscape of tax incentive financing, forever when that transition happened. Prior to that, it was very expensive, very difficult, you had to find your private lenders out there to work with them. It became commoditized and available at commercial bank rates of interest, which helped it really become democratized and adopted more broadly by all types of independent producers that were out there. So that was a big shift, I'd say that's probably the biggest change that we've seen in tax and Senate financing, you know, in this 20 year period.


So well, I'm curious, you know, in your experience for a filmmaker, regardless of how successful they've been with working with these programs before or even if they're new, in your opinion, as somebody that lives and breathes these programs, what are some key strategies for successfully managing and financing film tax credits?


I think the most important strategy that a filmmaker can understand and employ is to recognize the multidisciplinary aspect of tax incentives. I don't mean to be elusive, with that book. But really what it comes down to is there are components of law involved in tax incentives. They're components of production, how am I going to make this film? What vendors am I going to use? What crew am I going to use? How should I prefer this type of crew member versus that type of crew member to maximize my incentive, and there's accounting that's involved. Because if you don't properly account for the expenditures that you have in the jurisdiction, you don't get the tax credit back. So the key strategy for the filmmaker is to understand that there needs to be a whole lot of emphasis on all three of these things. And that, and also, that they need to be dealing with experts in the industry who can help them because, you know, as well as I do, they don't teach this in film school. They don't even teach it in accounting school. They don't teach it in law school. So what that means is, there's not this standard eyes, curriculum or understanding of way to work in the film tax credit space. So a film producer needs to know what they don't know. And they need to make sure that they're dealing with experts, who can help them all along the way. And there are a film producer who's working on a budget can reach out to a tax incentive consultant, and today I'm going to shoot in this state, this is how I would expect to spend my money and that consultant will help them go through and change the tagging on the budget line items to properly align with the laws, rules and guidance of that state. So then the number of the tax credits to be expected can be refined at that early process. That consulting can also help file the applications and assist with answering questions for the production accountants who need to know how to track all these expenditures and how to get things into the hands of an audit in the hands of an auditor. And answer the auditors questions after the production accountant is long since gone. And after the post production accounting might be long gone, to ultimately getting the tax credits certified, I call it carrying the consciousness of the tax credits, all the way through the process from start to finish. You know, you know this film productions have people that come and go, the production account is the number one issue here that I'm talking about. The producer might be there from start to finish, the live producer might be there from start to finish, that production accountant is going to come in, they're going to do their work, they're going to leave. They're the ones who know how the money was spent. They're the ones who know where the records are, you know, understand the importance of making sure that records are retained that after that accountant has gone that you're the line producer knows where the boxes are that everything was saved properly on an online cloud based system, those types of things. So multidisciplinary aspects of it. Working with professionals really focus on record retention and keeping good records. Sorry


for the shameless plug here but like this is also something that we do at rap booked in a certain extent, right, which is we have an in house professional and expert for kind of the first part of that origination of like, give us your budget help, let us help you brainstorm which of the programs across the country maybe works best for your media type. And you're spend, and let us help you kind of tag and think through what the ramifications are of these various programs. And then obviously, then encourage filmmakers to then take that knowledge and then go work with a professional such as yourself to kind of carry it all the way through to the end, which which makes sense. Don't


worry about the shamelessness of the plug. And let me give you a well deserved pat on the back here. Film Production Accounting has not evolved in the last 100 years since it was created production accounts have always been concerned with how much money there is how much goes out how much was spent, and therefore how much is available to be repaid to the finance ears. And how much profit is available to be dispersed to the various groups, never until 20 years ago, was an incentive program really introduced into that process for production accountants to have to understand and deal with, to this very day, even 20 years in, you don't really have production, accountants taking ownership and understanding of the tax incentive process. They have learned from the generation before them how to be production accountants who learned from the generation before them, which is the way the film industry typically works with this sort of generational training that goes on. And everybody does things generally the way that it was done before them. This is a different era, you all are taking a great innovative approach to payroll and to accounting and to helping to integrate the tax instead of aspects of a critical, you know, the most critical piece of the film, financing industry into software, which has never been done before and which is overdue. So I think that your product is great. And as you continue to innovate, you'll make all of these things easier for filmmakers to to work with and to be able to help them finance their films. And


thank you. Well, you know, we're all about building technology solutions for the industry. And this is an important part of it. But back to you. I do want to ask during your tenure with the forest road company and now it's very excitedly with with Fallbrook financial services, what have been your primary focuses in managing film finance and tax credits and kind of evolving the service at fullbrook for your clients? So


I'm going to kind of give you a surprise, surprise, a long winded answer here about what I've learned the lessons that I've learned and the management practices related to tax credit sort of folding everything in here into into one answer. And I'll start by saying that one company that we left out was enhanced capital, which was a multi disciplinary, a complex tax credit financial company specializing in essentially everything other than film tax credits in the tax credit industry around the country. When I went from first being a lawyer into business on my own, I ran my business like a lawyer would run his business. It was all client facing customer service, legal research and documentation and putting transactions together. I learned over time, slowly, how to deal with corporate level financing with management of teams and things like that. But really, this was the basics of how to run a business that I could transition into as a business as a former lawyer, who was now a businessman with my time at enhanced capital, creating their state tax credit department and at Forest Road really helping them to go from not understanding the first thing about film tax credits to being the market leader and ultimately purchasing the mark the market leader, three point capital in 2020. It was essentially And now and now being with Fallbrook. This was essentially my MBA program. This was business school for me. And I learned some lessons the hard way as I always, you know, had since the moment that I got into the film tax credit business. But I learned about creating enterprise value in companies and how to do that I learned about how you need to treat your employees. I've learned probably most importantly, about how you need to treat your customers and I think I came into it with a pretty unique Ask perspective on it, being a former lawyer who was guided by client, you know, service being Paramount customer service being paramount, and having to abide by a code of ethics to be able to continue to, to practice. So to take those things and go into complex financial markets and work with, with financing companies, with folks who are coming from the top business schools in the in the country, people who are bond traders and hedge fund managers and fund allocators and professional investors, I learned a lot about how all of that works together and what you have to do to create a good viable, long term business that can be scaled and ultimately potentially merged with sold to or taken taken public along the way. I'm incredibly grateful to all the groups that I've worked with who have helped me to understand that and he was sort of a trained a young lawyer into A into figuring out how to, to deal with complex financial markets and transactions. But I really do think that the most important thing that I learned along the way is that the film industry is a relationship business. And if you lose sight of that, and if if all you focus on is how your business is doing, or where your business can make the next dollar, or how you can see somebody out there who's part of a transaction who's making $1 themselves and decide that you want to be doing what they're doing and taking their dollar, you're not going to survive in this industry, there's an ecosystem here, you have to be a good participant, you have to provide good results, you have to take responsibility, if you do something incorrectly, as opposed to just trying to escape out taking responsibility yourself. And you're going to ruin relationships, if you know, if you don't treat people well, and you know, do those things. And if you, if you ruin relationships in the film industry, nobody's going to want to work with you. And I think that some of the groups that I've worked with in the last 10 years or so, have lost sight of that. And, and they thought that it was purely transactional. And as long as, as the company had money to hand out that the industry was lucky that they were there, and that that's the wrong way to look at things. So relationship business, it always has been, it always will be you provide a good service to somebody, they're going to tell their friends, they're going to tell if they're lawyers, they're going to tell their clients, I can't tell you how many lawyers refer their clients to us when they need tax credit work, because they've seen the type of good, capable, competent work that we can provide to our customers. And that really is the key. So relationship management, providing a good service, being responsible, taking responsibility if you do something wrong, and endeavoring to always get it right. Even in a very complex landscape. That's


awesome. Well, there's a lot of wisdom in that. On the ecosystem piece that you were talking about, you know, like the industry is really an ecosystem in one part of the ecosystem. Are these state film credits, the financing of these credits? I'm curious what current trends you're seeing in state film credits, and how do they impact the industry?


Great question. This is still a young industry. It didn't even start out as an industry. It is an industry now. It started out as one state doing something here passing a law that didn't know what was going to what was going to come with it. Another state seeing it that was working, saying we're going to do it to a neighboring state saying, well, if they're doing it, we should do it. And just kind of this growth of tax credit programs around the country without a whole lot of real understanding as to how it should be done, or how even the underlying industry worked. Great example for you is that back in 2010, the person in charge of the newly enacted Michigan program which was going to dole out more than $100 million a year, was the head of the library's department for the state. She was a librarian. She didn't understand complex financial transaction. She didn't understand independent film finance. She didn't understand film production to a to any extent, that was a recipe for disaster. And so I think the first 1015 years of this rollout of incentives for the film industry has been characterized in large part by the Wild West, turning into problems scandals, people going to jail because no Buddy knew how these programs really should be run, or how to regulate them appropriately. What I'm seeing now is that the states are figuring out what works for each individual state. And that's not necessarily the same thing from state to state, one state might want to grow studio infrastructure in that state for major studio productions to be filmed there. And that's where they think they're gonna get the best return on investment. Other states might say, we love television commercials, we want to be the place where television commercials are made. And we've got a little budding industry, you know, for television commercials. So these programs are becoming now that the initial Wild West period is over. And they're getting smarter about what it is that they want, and what works for them, their programs are getting smarter. And the regulations are becoming more detailed about well, we want this, we don't want that. And so we're going to allow one thing to qualify it another thing not to. And that's that, I think, is a very good thing, because it means that the industry, in terms of these programs, is maturing, when you have an immature program, there's more of an opportunity for chaos, people coming in and abusing it, it being done the wrong way. The administrators not knowing what they're administering, and all of that stuff that we've learned in the first, you know, two decades, you know, that is not good. The mature programs, that's what you want. And that's what we're seeing now. But it comes with a caveat. Which is, the more mature these programs are, the more customized they become to the needs of the particular state, the more complex they are, you know, an immature program might be written on two pages of paper, a mature program might have 40 pages of regulations, and 100 pages of frequently asked questions and budget templates and things like that. So it means that there's more to understand, for every particular state more to track, more potential changes, and more overall complexity and less Wild West nature of well, if I just go there and spend money that I'm going to get a credit back. So that's I think one of the most important trends that I am seeing is this maturation, that's resulting in better programs for the long term, but also increasing complexity. The other thing, that trend that I'm seeing is an increase in international incentive programs. There were always internet international programs before the US got into it, Canada obviously had a very good workable production, instead of that was drawing industry up, we called it runaway production back at the time up north. Before that, Germany had a very popular incentive program as well. So it's nothing new that international jurisdictions are getting involved. But the rate at which they're getting involved these days, is rapidly increasing. If you go to any of the major film conferences, like tan or AFM are the locations best, you're gonna see signs everywhere from jurisdictions around the world, Malta and Malta and Morocco and Spain and Italy and France and the UK, all advertising the value of their incentives, and especially in the last year, when you consider that we had a rising interest rate environment and a sort of a rapidly rising interest rate environment here in the US. And we had a series of strikes, which was short of shut down a lot of our industry, not all of it, but a good bit of it. The International jurisdictions who were putting their programs in place, all of a sudden had a lot of interest from US producers, who were not finding the United States to be such a favorable place to be shooting during that time period. So it helped to give them a jolt, and to sort of kickstart their programs. So I think the other trend is this sort of move towards international locations and an understanding of the industry as to how to deal with that and how to finance those credits for the industry and, and regulate them the way that we've been able to in the US. It's


interesting. I've met some really nice people at a trade organization, political advocacy group called film USA, which is actually a consortium of film commissions United States, specifically to kind of counter this thing, which is sure we want the state to be competitive on programs. But if now dollars are leaving the United States, we don't care where you're filming, just keep it in the US. You know, it's an interesting competitive marketplace that's really emerging globally.


I think that there's a lot to unpack in there. And I've had This conversation over the years about why there isn't a national tax incentive in the US why all of the burden is put on the states to fund this. There are some tax deferment mechanisms, section 181 of the code and 168, things like that which people have used with varying degrees of effectiveness. But why not a real tax incentive to shoot in the US and to retain business in the US? And so I'll put the question to you this way. Over the last 100 years, much of the content, the the film and television content that's been out there, has originated in the United States of America, and has showcased our culture, our ideals, our aspirations, our laws around the world, and really has been the defining characteristic of the change in cultural norms and attitudes throughout the world was seeing what's happening in the US on film, television and on the internet. What if in that same time for him? The leading producer of content for television and film had been Communist China, for example? What would that had done to the culture and society and to justice throughout the rest of the world? And how would our thinking be changed, you could apply that same concept to any other, you know, kind of radical belief system that's out there represented in countries around the world, it's been incredibly important that the United States has been the leader in film and television content for the last 100 years, it's gonna be no less important for the United States to be the leader. In the next 100 years, probably the most important thing that we could do is continue to lead in this industry. So the fact that we don't have a good workable federal system, like Canada, does, Canada has a good federal system has a good provincial system to go along with that sharing the burden between the two governmental groups. That's the right way to do it. We should have it. It's the time to do it is now and we should not ignore


it. Absolutely. I think for anybody listening and curious about this film USA is a great resource to get in with other professionals taking this seriously. I have a similar question than my previous one. But instead of trends on state film credits, it's the financing part, which is where do you see the future of film tax credit financing heading,


when the banks got involved in incentive financing, that 2011 2012 2013 timeframe we were talking about earlier, which was sort of that, that major development in finance trends, the way they did it, and it was still kind of the Wild West days, is they said, Well, we're gonna look to somebody who knows something about tax incentives to give us an estimate of the amount of tax credits that this film will get. And then we'll base our loans on that estimate. And they went out to any number of groups who were involved in the incentive industry, and would get opinion letters, whose opinion letters tended to be one page long. And that company would say, we think based on this budget, that that film is going to earn a million dollars of tax credits. Those opinions turned out not really to be worth the paper that they were written on, because they were not well researched. They were based on historical information, the experience of that company working with that program in the past, and not being forward looking to what changes are happening in that jurisdiction. What are the what is the landscape like amongst the taxpayer community? What's the tax credit going to be worth from a tax payer perspective, two years from now versus now, as these programs get more complex, we've talked about that they're becoming more customized. The work that goes into understanding the value of that incentive, and when it can be turned into cash is going to be multitudes more difficult than it has been in the past. So there's going to have to be more of a reliance upon real consultants, and real experts, real professionals, who understand all the changing nature of these programs throughout the country and throughout the world. Even as we begin to branch out into international markets, and be able to give really good advice to the banks, you want the banks to be out front, because that's the cheapest, lowest cost source of capital. We've got to find a way to make the banks safe, comfortable in doing tax incentive lending and financing and that means having really good independent consultants, professionals on underwriters for the banks to do this, the bank can't rely upon the guy in the credit department, you know, two floors down, to be able to understand all the nuances of the tax credit in Louisiana versus Georgia versus California, you need the industry to have the professionals that can be counted on to do this. And that's exactly what we're doing at Fallbrook. And it's exactly where the industry is, overall, that now 20 years in, it is an industry. It's not just, it's not just a niche, it tax credits are an industry of themselves. They have their own conferences and markets and you know, everything that goes in to what defines an industry. And there are enough people out there with enough experience and expertise to be able to service the financial markets for tax incentives. So I think that's sort of where this is going things becoming more complex, and more of an industry being built up to to support the financiers,


considering that it becomes more complex, more mature across the states. I'm curious, well, what what advice would you give to producers or filmmakers navigating the world of film tax credits for the first time, that is to say, if the theme is that consultants should be and will be required to be relied upon more often to take advantage of these programs, and that these programs are legitimately useful, and in many cases, just essential to the production of great content? You know, when should a filmmaker or producer reach out to for what advice really do producers or filmmakers at any stage in their career? What advice would you give them?


It's never too early to engage a tax credit consultant. And that's not a shameless plug, because I'm a tax credit consultant. It's true. real life example, a producer puts together a budget for a particular state and the budget program spits out you're going to have X number of dollars of tax credits. If that's not done correctly, it starts to form the basis of the finance plan. And then they go to, to their sales agent, they say, Well, I'm getting this much from the tax credits. So I need this much from sales, I'm going to get this much from equity. And that will round out my finance plan before my film. But if the core tax credit calculation wasn't done correctly, if the tagging of the budget wasn't done correctly, if the producer doesn't understand the real value of the credit, and how it's going to get discounted in the financing process for interest, and risk, and all those things that we talked about earlier, then the foundation of the finance plan is shaky, which means that somewhere along the way, something's going to have to give and they're going to have to change course, halfway through raising the funds to sell more territories or raise more equity, we see this on a daily basis, the best thing a producer can do is engage a tax credit consultant. When they've got that script, they've got their first pass at the budget, bring in the consultant to help tag everything appropriately. Work out those numbers, understand how a financial transaction on the tax credits will produce net cash to production. That's what we call it net to production cash from the tax credits, and then go forward on putting together the rest of the equity and the distribution financing from there. That's my best advice. That's


really good advice. I think it pinpoints on a common misconception that, you know, you can kind of do some back of napkin math and figure out where you're landing, when in fact, it's significantly more nuanced. Are there other common misconceptions about tax credits that you encounter? And what are they? That's


the key, that's the one that I've referenced a couple of times now is, is just doing that back of the envelope map or the napkin math, and saying, This is what this state will give me back in tax credits. That's what I'm going to get. I put together my finance plan accordingly. And that turns out to be wrong. So it's getting that number right from the beginning, and being able to carry that consciousness of the tax credits, all the way all the way through and not forgetting how important the production accounting aspect of tax incentives really are. You know, I like to say that receipts in the tax credit business in the film, you know, production accounting, business, and attachments are worth their weight in gold that frankly, they're probably worth more than their weight in gold. Because if you don't have that receipt for that $500,000 payment, you know, that you made to a vendor, you're not going to get $150,000 tax credit back from the state as a result. So receipts, accounting contracts, being organized with your accounting is so critical to this process. If you're a filmmaker, and you're going to go out and hire a production accountant, get one who knows about tax instead of accounting in that state, who knows the steps that they have to do, who knows how to organize the files for the auditor, so that your audit doesn't take a year as opposed to three months, and then you lose all of that, that interest carry cost in the process? Focus on the accounting is I think, really, really good advice here. And don't don't let that just be an afterthought.


Great. Really great advice, you know, shifting a little bit. Well, thank you so much for your time and your insight in this really, honestly. Fascinating industry. You know, the more you dig in on it, the more you realize, like, holy moly, this is really a driver of how stories are made at scale. It's fascinating, but just a couple of questions on your own journey, you know, how has your background in law influenced your approach today to this specialized field? Chef,


I wouldn't be here today, as we've talked about, without the legal background. Without these are all all these programs are creatures of legislative processes. So their laws, their regulations, their policies, having the legal background to be able to do that research, and access those laws, which are they're more accessible today to the general public than they were 20 years ago. But still, you have to know how to be able to access these and how to track them as they change. So the legal part of it incredibly important. Plus, there were changes that had to be made to these programs along the way. For instance, in 2004, we went to the legislature in Louisiana and said, Why not just make these credits transferable by law wide make people go through 100 pages of paperwork, to sell a credit from party a to party B, just make it legally transferable. And that paperwork goes down to five pages. So the the legal experience, knowledge was critical to my being able to get into this line of work and to and to succeed at it. Just as importantly, I say that if you're in the tax credit business, you're in the problem solving business, because there are always problems that creep up. And they're never coming from the direction that you with Nick, it might be that a producer was lying to you to begin with, and they're not going to spend the money the way that they told you that they were, it might be that the state changes its policies halfway through your film, and you've got to figure out how to adjust, adapt, make sure it's not done retroactively, those types of things, it might be your taxpayer has a tax issue that they have to deal with. And that could change the way that they buy the tax credit from the production, there's a never ending source of unique issues that come up. Obviously, there are some that we'll see all the time. But if you're not good at problem solving, and law school, my legal career taught me problem solving, critical thinking, that being able to be skeptical to dig in and do due diligence, you know, as we call it, on every single transaction to to understand what's really happening and how to solve for it and to plan for it. You know, without that, you know, I wouldn't have been able to get get as far as I have in this line of business and for others out there. You know, remember to treat this as, as the problem solving business, if you're if you're dealing with with tax credits. And I would say that the third thing about my legal background, and I alluded to this earlier, is that when you're a lawyer, it's all about your client, and you have professional obligations to your client and ethical obligations to your client. And, you know, not not so much maybe on the litigation side of things. But in business transactions. On the legal side of business transactions. It's all about providing the best service to the client. And I think that really has helped me when it comes to maintaining those relationships in this industry. We talked about the importance of relationships in the film industry to treat every counterparty every borrower have a tax credit, as though they were my legal client, and to give them the best possible service, I think has been kind of a defining treat. of how I do business in this field. And I think that I wouldn't if I didn't have that I wouldn't be where I am today. I'm very grateful for all the people that I've worked with along the way. You know, there have been some lessons learned the hard way, when you're a pioneer, you know, you're a pioneer, because you've got arrows in your back. And I certainly have experienced that. I've had transactions that have gone bad on me. And I've learned my lessons from them. And I consider the losses incurred to be tuition, and that that tuition was well worth it. This is an exciting industry to be working in. It's incredibly rewarding to have started in something that that was not an industry, not even a niche at the time, and to have helped to pioneer it into something that really has truly grown into an industry of its own, and to have been able to evolve along the way to help it transition through the necessary stages to become more efficient, and better run to go from non bank lending to bank lending, to commoditize tax credits for the taxpayer industry, to have just to just be looking back at 20 years of work and seeing how this has unfolded and developed and to know that I've had some small part in, in making it happen from the very early days, is just such an incredibly rewarding.


It is so difficult, you know, in my own entrepreneurial journey in this industry, similar to what you're saying it is so challenging and difficult to build things that are useful for others. And yet, it is the most gratifying and the most rewarding and the most wonderful thing to have a part to play in building, you know, for our civilization, for our communities for each other. And I really want to thank you for your time. Well, thank you for your insights. And joining me here on On Production.


I love working with AI with you and your team in the tax incentive space. I'm a big fan of what you're doing to create software to really make these processes better and more efficient across the film industry and in different aspects like payroll and incentives at accounting. It's been a pleasure working with you and your team and I look forward to many more good years of working together.

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