The Undeniable Value of an Opinion in Securing Production Financing

In film and television production, content producers often use tax incentives as a source of financing. The effective cost of a project is net of the tax credit available. In the straightforward case of a film or TV show funded by one equity source, the tax credit may be used to repay that investor, thereby reducing his or her net effective cash outlay. In a more structured financing, the tax credit is used as collateral to raise project debt financing.

Lenders, whether commercial banks or private equity funds, are attracted to tax credit collateral for its potential to yield attractive returns on a risk-adjusted basis. Despite the implicit low risk of default from this quasi-investment-grade paper, lenders are subject to specific nuances of a state’s defined tax incentive program which can affect the variability of investment returns (IRRs). Such nuances include, but are not limited, to:

• Qualifying vs. non-qualifying expenditures
• The anticipated timing of receipt of credit proceeds, which can depend on the type of incentive (transferable, refund, cash rebate)
• Length of time to complete required audits (which may be driven by the “cleanliness” of production records maintained by a project’s production accountant)

Like other types of asset-based financing, tax credit lending requires a deep understanding of the specific “facts” of the collateral, which a third-party opinion letter can support. Opinions must be furnished by someone other than the production party requesting the financing, e.g. GreenSlate or professional advisors such as a CPA or law firm.

An opinion, or “comfort,” letter provides a lender with an estimate on the credit’s value and projected timing of the receipt of credit proceeds. The opinion is based on an analysis of the production budget, assumptions based on project expenditures, a thorough understanding of qualifying and non-qualifying costs of a jurisdiction’s incentive program, and other qualitative and quantitative factors. Given potential changes that may occur within an incentive program, additional consultation with the state office overseeing production incentives may be warranted—for example, whether payments to loan-outs require withholding and/or registration in order to qualify for the incentive.

The value of an opinion letter is undeniable. It’s likely that the preparation of such a letter is the first time the collateral is analyzed in fine detail. Opinions solicit questions that may not have been on the radar, such as which pre-production expenses will qualify for the tax credit, whether items such as travel costs count as a qualifying expense, and other specific expenditures.

Commercial banks and institutional private capital sources typically require a third-party opinion for their own internal credit committees. Loan documentation will stipulate receipt of an opinion on its list of condition precedents (CPs) prior to closing and advancing funds. Financiers can determine their level of risk tolerance based on use of the budgeted contingency for qualified costs. Results of the opinion can help financiers tighten or widen the scope of the loan documentation to mitigate potential defaults.

The opinion letter effectively provides a direction for protecting a financier’s collateral - its value cannot be overstated.

Estimate better for a smarter investment with GreenSlate. Our opinion letters are based on years of experience with budgets, locations, and productions, and we go a step further by checking against our database of historical outcomes. GreenSlate’s tax credit management tools also make it easy to compare film tax incentives state by state. Easily search, compare, and calculate production incentives on any device.

For more information about opinion letters, or general tax incentives inquiries, contact Michele Miller, GreenSlate’s Director of Accounting Services.