Zachary Tarica is the CEO of The Forest Road Company, a specialty film financing company that lends against U.S. tax credits, providing financing solutions for responsible creators across not just the film industry, but the real estate and renewable energy sectors as well. For more information, please visit their website or Facebook Page.

Having recently attended the Cannes Film Festival and Doc Edge New Zealand, I met with producers of films and series that were in part produced or being produced using tax credit financing (which is so common in the entertainment industry).

Below is an interview with Forest Road, a tax credit financing service company, that explains how tax credits work and some fundamental legal issues related to that type of financing. Incidentally, I learned that New Zealand has as a condition of its tax credits a requirement for the producers or director to post images from New Zealand on social media and promote the filming in NZ (which I saw Ava Duverney do when she made A Wrinkle in Time there).

  1. [Orly Ravid:] What are tax credits?
    [Zach Tarica:] A tax credit is a way in which state governments incentivize people to complete otherwise expensive transactions (like making films). Movie incentive programs entice production companies to spend in their state by offering a percentage of qualified expenditures back to the production company. State governments do this because it builds infrastructure, creates jobs, and boosts tourism. These programs vary by state (and country) in structure and scope, but the end goal is universal: a symbiotic financial relationship between the state/country and the production company.
  2. [OR:] How do they work?
    [ZT:] Each state has different requirements for qualifying for a tax credit, but in most states, you must submit an initial application, spend at least a specific amount on qualifying expenditures, and go through an audit or AUP. The audit/AUP is conducted after you’ve completed spend. You then submit your audit along with a final application to the film office. After the film office reviews and approves, they send it to the state-level department of revenue. This department issues your credit. You can receive it in the form of a credit, which is a certificate that must be bought by an entity that has tax liability in that state, or a check, which is payable directly to the production entity and its owners. Many states offer additional incentives for certain categories. For instance, there is a 10% increase in Louisiana if your screenplay was written by a Louisiana resident. New Jersey offers a 2% increase if your crew meets a certain diversity threshold. Forest Road offers detailed information on the programs in each state to help you determine what works best for your production and budget.
  3. [OR:] Which states and countries offer them?
    [ZT:] We’ve funded projects in the following states:

    • Alabama
    • Georgia
    • Louisiana
    • Nevada
    • New Mexico
    • New York

    There are plenty more states that offer competitive incentives. For more info on each state, please visit our site below:

    They are also offered in the following countries:

    • Australia
    • New Zealand
    • Canada
    • Ireland
    • Romania
    • Poland
    • Belgium
    • Hungary
  4. [OR:] What does Forest Road do?
    [ZT:] Forest Road is a lender against tax credits. Every US state (and many countries) with a tax incentive program requires a production to be completed before receiving a tax credit, so Forest Road helps by lending a portion of the value of the tax credit to the production company before the project is completed. A loan from Forest Road can be used to help complete production so that the tax credit is received, and the money from the credit is used to repay the loan. Forest Road also offers tax credit administration services to production companies to help ensure they qualify for and maximize the value of the credit.
  5. [OR:] How does it distinguish itself from other similar services/companies?
    [ZT:] Forest Road offers a solution for independent films that don’t have access to the major banks’ lending platform: either the production is too small, the paperwork process is too arduous, or the time it takes for banks to close on deals is too long. Non-bonded films, in particular, do not have access to the banks’ lending platform. Other non-bank lenders are often too expensive for most independent films. Forest Road works with low-budget films to offer a no-fee lending service at a year-one interest rate of 10% (about half the rate of our closest competitors).We can also close on and fund projects within days, not months. This is due to the fact that our diligence process is streamlined, and our agreements are short. We took the opportunity to expand on this below, but we take pride in our docs being easy to read with no hidden agenda or confusing legal language. We keep our lending process as simple as possible, and straightforward paperwork is one of the best ways to maintain simplicity.Furthermore, we are careful to lend only what we are confident production companies will be able to pay back. We provide a conservative estimate of the value of the tax credit, and then lend a percentage of that value — enough so that the production accomplishes its goals, while also having enough money left over to meet the repayment schedule. And because we are lending against the credit, rather than buying it outright, any extra value that comes in from the state goes back into the production company. Therefore, you’re left with extra money from the tax credit, even after repaying the loan and interest.Lastly, Forest Road takes no producer credits on your film. We appreciate that the filmmakers are the storytellers, and we want to help tell stories that are the most authentic to their creators. We call this “letting you make the movie, while we take care of the headache.” We keep 100% of the creative decisions to you and empower you to create unique content by providing unique services.
  6. [OR:] What are some common producer/filmmaker mistakes?
    [ZT:] Producers often receive funds from debt lenders that they can’t afford to use. Most lenders will try to give as much money upfront against an incentive in the hopes that you are not able to pay back principal + interest using only credit proceeds, therefore you default on your loan and the lender can foreclose on your film or other collateral. Production teams also make a number of administrative mistakes. Producers often enter incorrect corporate and tax information on their initial/final application. They also organize their entity incorrectly or choose the wrong type of entity altogether. It’s very important to have the entity earning the incentive set up correctly, otherwise, it may not be possible to obtain financing against the incentive, or even earn the incentive at all.It is extremely important to pay close attention to how purchases are made during production. Remember, governments create incentive programs in order to bring money to the state. So, ordering everything online for your production means none of those expenses will qualify. Take the time to ensure what you’re purchasing, and what you have outlined in your budget that will qualify for the credit, does in fact qualify. It can be the difference between receiving hundreds of thousands of dollars back from the state or much, much less.
  7. [OR:] Feel free to share common FAQs and answers not covered above.
    [ZT:] What’s the best state to shoot in?
    Louisiana has a great base incentive coupled with a number of regional bonuses and bumps based on personnel. They also have a healthy buyback system and solid infrastructure. An often-overlooked state is Massachusetts. The program has no cap, a minimum spend requirement of $50,000, and your above-the-line talent qualifies. Ultimately, producers have to determine whether the production can work in a given incentive jurisdiction, then look to see if the production spend will meet the minimum requirements of the program.At what point do I come to a tax credit lender to receive money?In order to fund your project, Forest Road needs to see that you have your equity raised and your package secure. However, we can get involved even at script stage to advise on which states to shoot in, how to properly create a budget that makes sense for your project, and even how to properly fill out a state application.What should I look out for when I’m financing my project?A key indicator that a lender/financier is taking advantage of you is if there are high fees associated with the funds you’re receiving or sliding closing dates. Upfront legal fees, closing fees, marketing fees, etc. are very quick ways for lenders to take money away from the screen without doing much work. Forest Road charges zero fees. Also, you should look at the length of the agreements that they send over. Film finance is relatively straightforward. If the documentation is extensive, the financier is usually trying to slip something by you. All Forest Road agreements combined are no more than 20 pages. That includes signature pages.When I receive a loan against the tax credit, why am I not receiving the full estimated amount?With any purchase, you never want to buy into something that you cannot afford to pay back. Therefore, we protect the production from this happening by pricing out a loan in such a way that you’ll have excess value in state proceeds after you pay back principal + interest. When you receive the incentive in the form of a credit, you also have to take into consideration brokerage fees as well as at what price the market is trading your credit at. For example, Georgia credits are trading at a very different price point than Nevada credits.
  8. [OR:] Forest Road then spoke to certain legal issues. First, they explained a bit about structural issues with regard to the spending of money:
    [Forest Road:] Productions need to ensure that the entity that applies for and is approved to earn the incentive is actually the production entity that is making qualified expenditures. For example, we’ve seen situations where a production company that owns the intellectual property rights to the film project applies for initial approval with a film office. Then, that production company contracts with a production services company and pays them a lump sum to undertake production in the incentive jurisdiction. Such a scenario can be fatal to a project earning incentives in such a case as the production entity approved to earn the incentive did not make any qualifying expenditures to qualifying vendors.
  9. [OR:] Power of attorney issues when Forest Road steps in and act on behalf of production:
    [FR:] You need to write powers of attorney for your audience, which is likely going to be state officials, accounting professionals and banks. Accordingly, a power of attorney needs to be clear that you have the ability to act without any sort of conditions. Otherwise, we’ve seen state officials not honor the power of attorney because they feel like they have to interpret a contract issue to determine whether or not the conditions have been met for someone to use the power of attorney. In those circumstances, they won’t honor them. Also, if a state department has a power of attorney form, it’s often useful to have that form completed as an exhibit to the power of attorney. Furthermore, you need to try and delineate all contemplated acts. If it’s too general, again, a state official or bank officer may feel like it’s subject to interpretation and may not honor it.
  10. [OR:] Transfer / Monetization of tax credits:
    [FR:] Simply put, in states where you need to transfer tax credits to taxpayer buyers, if you don’t have a lot of experience doing it, then you should consider using the services of a broker or attorney that does. Generally, you’ll see a lot of the rules and regulations for transferring tax credits to taxpayers in regulatory schemes outside of the incentive law itself, which can catch people off-guard. Furthermore, innocent mistakes in the process can cause catastrophic delays or even the loss of the ability to actually transfer credits, which can result in legal action against the production and even the tax credit lender by third-party taxpayers.There are potentially a lot of discrete timing, annual cap and third-party utilization issues associated with the monetization of incentives; accordingly, productions need to make certain that the final step is handled properly.