Film producers have a number of options when it comes to selling their State Film/Digital Media production tax credits.  They can market their tax credits anytime along the continuum of pre-production, production or post-production, or once they have their tax credit certificates in hand, issued by the state Film Office.  As national brokers of such credits, Clocktower has tried all of these approaches, feeling at times like Goldilocks tasting the porridge.  We have found that the best time to market the credits is during pre-production, but after the producer has the cast and crew in place, most or all of the financing committed, and a pre-qualification from the Film Office.

If you try to market your tax credits too soon, there’s a chance that the production may not complete, and the credits may not be available to sell.  In a typical purchase agreement, an investor agrees to buy a producer’s tax credits if and when the tax credits are available to transfer.  No money changes hands until the transfer occurs.  There is usually no penalty incurred by the producer if he or she fails to generate any credits at all.   However, there is a loss of goodwill between the parties.  The investor may have been anticipating its receipt of the tax credits, and reduced its estimated tax payments accordingly.  So the investor may incur interest and penalty charges from the state Treasury Department if it under-paid its taxes.  Bottom line, it’s best to be sure the tax credits will materialize before contracting for their sale.

Conversely, selling the tax credits too late may have financial consequences as well.  Once a producer has his or her tax credits in hand, there is a rush and a need to sell them quickly to bring in much-needed cash.  This may not leave enough time to widely market the tax credits to ensure the best price, or the best terms of sale.  At certain times of the year (usually related to quarterly or annual tax filings) it is more difficult to get an investor’s attention, so frustration can build as time passes.  Finally, depending on an investor’s fiscal year, the credits may appear after the investor has paid its tax in full for the year through quarterly tax payments, and thus the tax credits are less attractive to the investor at that time.

So the solution is to market the tax credits once there is 90% certainty that the production will film and the credits will be issued.  This would mean cast and crew are in place, all financing committed, and the production pre-qualified by the state film office.  At that point, Clocktower will have ample time (30-60 days) to market the tax credits to qualified purchasers.  There is time to negotiate price and draft, review, and execute a purchase agreement for the credits.  This agreement will then provide for the purely administrative step of wiring funds to a pre-determined bank account when the tax credits are transferred to the purchaser.  Best terms, highest price, fastest payment are all “just right” – the Goldilocks solution!

The Venture Will Bring Guaranteed Energy Savings to Mass. Affordable Housing Owners

Maynard, MA: Today, Clocktower Tax Credits, LLC announced a venture with LodeStar Energy, LLC to offer Solar Net Metering Credits to affordable housing sponsors in Massachusetts. The Net Metering program provides significant, guaranteed savings to owners and managers of affordable housing on their electricity bill. Housing owners contract with LodeStar to purchase the solar energy generated by Lodestar at a substantial discount to the price paid to the utility for conventional electricity. Participation in the program requires no upfront cost, no ownership of the solar development and no change in the way electricity is delivered to the housing development. The initial phase of the venture is for UNITIL and NGRID-WCMA customers, and may expand to other electricity service territories.

Clocktower President Jeff Jacobson said of the announcement, “I’ve worked in the affordable housing community for over 20 years and know the vital role it plays in the state. We’re excited to offer the Net Metering program and associated cost savings to the housing developments which need it most.” Jeff Macel, President of LodeStar, added, “The Net Metering program offers affordable housing sponsors the opportunity to promote environmental protection and save money while doing so. It’s a no-brainer. ”

Any for-profit or non-profit organization in the UNITIL or NGRID-WCMA service area which has received state or federal support for an affordable housing project is eligible to participate in the first phase of the Clocktower-LodeStar venture. The Net Metering program provides a state subsidy authorized under M.G.L. Chapter 25, Section 11F. All renewable energy installations are done offsite from the housing development and within the housing development’s utility provider’s footprint. For more information, please contact Jeff Jacobson at (978) 823-0200 or jjacobson@clocktowertc.com.

When real estate developers learn that their rehabilitation project may be eligible for the Federal Historic Tax Credit (FHTC), the first question they typically have is “how much are these credits worth?” It’s an important question to answer, but developers inexperienced with the credit tend to ignore the other issue, which is “what is this going to cost me?” The 20% federal credit is not for everyone, and project owners must be comfortable with what they’re giving up to utilize the credit.

There are obvious costs, such as application fees and consulting fees to historic preservationists, but the more significant costs are less familiar to developers new to the credit. Assuming the developer chooses to syndicate the tax credit and not keep the credit to use him or herself, the first cost is the loss of 99% of project ownership for five years or more. This can be structured around with the Master-Lease concept (a blog entry unto itself; contact the author for more information), but in any scenario a developer will give up some project ownership. A developer’s 1% interest always provides for general partner or manager control over the developer and operations. When syndicating the tax benefits to maximize the financial efficiency of the transaction, most investors prefer to maintain the role of silent partner, which they’ll do unless problems arise. Syndication means losing some rights to the property and potentially deprecation benefits for at least five years after the project is placed into service. This time period can extend beyond five years, especially in today’s investor marketplace with the IRS Revenue Procedure 2014-12 (“Rev Proc”) disallowing the use of a call option to guarantee a timely investor exit.

Additionally, the tax credit investor will likely require a cash return for the duration of its interest in the project ownership. This was traditionally a fixed return of 2-3% of the investor’s capital contribution, but the requirements of the Rev Proc has increased this requirement in the eyes of several investors. Developers will sometimes receive very little cash flow while their tax credit investor is still in the project ownership.

There are also the costs of using the credit which are more difficult to quantify. The National Park Service (NPS) has design review over projects utilizing the credit, which often requires restoration beyond what a developer not using the tax credit would undertake. This adds costs and headaches to projects, especially when there is a disagreement with NPS over a historic element of a project, such as windows. Developers unfamiliar with the credit application process can also face timing delays while waiting for approvals from NPS.

The FHTC is a wonderful economic development tool, but project owners expecting to utilize the credit must make sure they understand the costs along with the benefits. To find out more information about the FHTC or marketing the credit to investors, please contact us for more information.