Brokers question need for online tax credit exchanges
Will French was snubbed often in the early days of selling state tax credits for movie productions and urban development.
Peter and Raelynn Loop plan to launch eTax Credit Exchange in January to allow their clients to trade tax credits online. (photo by Frank Aymami)
Few people knew what film tax credits were in 2003, he said, and even fewer saw the opportunity to buy unused tax credits at a discount to offset their own taxes as a sound investment.
“It’s definitely taken time for the market to mature,” French said. “Believe me, it was much more inefficient when nobody knew what a tax credit was. Usually people would just slam the door on you or hang up the phone.”
French, who now is president of Film Production Capital in New Orleans, has built a base of about 1,000 investors largely by finding and educating new customers one-by-one. The firm has brokered $300 million in tax credit transfers over the past decade.
Today, industry newcomers want to usher in what they see as the next step in the evolution of the Louisiana tax credit market — online trading. The New Orleans-based Online Incentives Exchange opened its marketplace for state and federal tax credits to buyers and sellers in Louisiana this month. Another New Orleans company, eTax Credit Exchange, plans to open its own market in January. Both aim to make credit trading available to more people and inject transparency into the process.
French and other New Orleans brokers see the new exchanges as potential tools rather than competition. But most worry that credits traded through online exchanges won’t be properly vetted, leaving the market vulnerable to fraud. Others wonder if Louisiana and other states have enough trading volume to support an online exchange.
Louisiana has become a hotbed for the tax credit trade largely because of its movie and video production incentive, which grants a 30 percent tax credit to projects that spend more than $300,000 in the state. Companies that receive film credits are also allowed to sell them to other taxpayers.
Danny Bigel, CEO of Online Incentives Exchange, said the online marketplace is an effort to democratize the market, now an “opaque, fragmented, old boys club of tax credit brokers and big business.” More than $1 million in credits have traded on the OIX in the past month.
Bigel said the model does not replace brokers. He noted many brokerage companies provide pre-financing for film productions and other projects, a service the exchange will not provide, and that several Louisiana brokers are already OIX members.
He said brokers are growing more comfortable with the company’s vetting system, which works closely with state regulators to ensure credits posted for sale are valid.
“Brokers are realizing, one, that this a tool to expand their business and, two,
if we don’t do it someone else is going to … that this is the way that credits will be traded in the future,” Bigel said.
Lenny Alsfeld, president and CEO of FBT Investments Inc., the investment advisory affiliate of First Bank and Trust in New Orleans, said local brokers who are known and trusted offer validity an online marketplace can’t. FBT offers film production financing and tax brokerage services, working with a network of CPAs throughout the state and a group of 1,200 tax credit buyers.
FBT is already efficient, typically turning over its credit inventory in about 20 days, Alsfeld said. The investment firm works with each of its productions well before they start filming in the state, meaning it can easily trace and verify the origins of a tax credit for buyers. The Financial Industry Regulatory Authority governs the company, he said, adding to its validity.
On an online exchange, “There is no government regulation, just blind faith in a brand new company that will do it for you,” Alsfeld said.
Peter Loop, who owns Loop Garou Entertainment, a New Orleans brokerage and production services firm with his wife, Raelynn, said the efficiency of an online exchange can be a powerful tool for brokers. Loop Garou started using an online exchange to trade credits among its own clients in 2011 and plans to open the system to the public as the eTax Credit Exchange in January.
Brokers spend a lot of time calling the state and combing through paperwork to vet credits, said Loop, who expects many firms will be interested in farming that work out to an exchange.
“If we can provide access, provide transparency and, at the end of the day, provide an efficient marketplace where the pricing of credits levels off as in a real marketplace, we’re doing our job,” Loop said.
French at Film Production Capital said working through an online exchange could help the firm save money on administrative costs. But he’s not quite ready to be a pioneer in the movement.
“It would be nice to see some volume go through the system before we started to do it,” French said.
Generating that volume could prove to be a challenge for online exchanges. Both the OIX and eTax plan to expand throughout the nation and likely will face a standardization problem.
Alsfeld noted that some of the largest tax credit deals in Louisiana actually are between large Hollywood production companies and the state. The state offers to redeem film tax credits at 85 cents for every dollar issued. He said companies often take the safe bet and use redeemed tax credits to underpin financing. The state has redeemed about $86 million in film tax credits since 2009.
“If we produce a couple million dollars a year in credits and the state is grabbing the lion’s share, is there really enough volume, at least in the state of Louisiana, to support an exchange?” Alsfeld asked.
There are also questions as to whether the state’s transferable film tax credits are generating enough return. An August report from the Louisiana Budget Project noted that the state spent $231 million on film incentives during fiscal 2012, a 29 percent increase over the previous year. Some argue the fiscal impact could be wider since film credits are often applied to tax liability outside the film industry.
But French said two New Orleans-grown online exchanges now vying for trade show the credits are working. A decade ago, doors slammed at the mention of Hollywood production companies and film tax credits. Now his company has offices in Michigan, Georgia and Puerto Rico, and the film industry is turning to New Orleans finance professionals for expertise.
“That’s exactly what these tax credit programs are supposed to be doing,” French said.