I. PRODUCER TAX CREDIT (20% OF ALL FUNDS SPENT IN LOUISIANA)
A. Rates. Producer tax credits are initially issued at the rate of 20% of all funds spent in Louisiana in connection with a qualifying project. If the project takes longer than 2 years to complete, then for years 3 and 4 the rate drops slightly to 15%. For projects of extremely long duration, the rate drops to 10% for years 5 and 6. After 6 years, a project will no longer earn tax credits.
B. Qualifying Projects. The Louisiana Digital Media Act (the "Act") has broad application. It applies both to full production projects and to component parts thereof. There is no minimum spending requirement. A qualifying digital media project (or part thereof) must meet the following criteria:
1. It must involve a product that is intended for commercial use or distribution;
2. The product must be capable of being distributed over electronic media, including file downloads over the internet;
3. The product must involve electronic interactivity which allows users to interact with a computer controlled universe in order to achieve a goal or set of goals; and
4. The product must contain an appreciable quantity of 3 of the following data types: text, sound, fixed images, animated images, and 3-D geometry.
C. Certification. Each project must be certified by the Director of the Louisiana Dept. of Economic Development. In order to obtain certification, the producer must submit an application detailing, among other things, the nature of the project, budget, anticipated employment, production schedule, and the intended distribution plan for the product. No tax credits can be earned on funds spent prior to the certification of a project.
D. Use and Transfer of Tax Credits. Digital media tax credits can be used to offset Louisiana income tax. To the extent that the producer who earns the credits cannot, or prefers not to, use the tax credits to offset its own state income tax liability, such credits can be sold in exchange for cash. Louisiana boasts a mature tax credit market, which allows for ready monetization of tax credits.
E. Recapture of Tax Credits. The Act seeks to encourage producers to continue operations in Louisiana even after the first project is completed. If a producer ceases business operations in Louisiana after it has earned tax credits, then it must repay to the state the face value of all such credits it received within one year of the date it ceases business operations. However, the Act also provides a safe-harbor. As long as the Louisiana spend for any given year is at least 25% of the previous year’s Louisiana spend, the producer is deemed to be continuing business operations in state, and therefore previously earned tax credits are not at risk. Therefore, occasional business slumps and project cycling will not cause undue hardship.
F. Expiration. The Act expires on January 1, 2010. However, projects are certified for 6 year terms. Therefore, a project certified on December 31, 2009 can continue to earn tax credits until December 31, 2015.
G. Use in Conjunction with Other Incentives. The Act cannot be used in conjunction with the Louisiana Motion Picture Incentive Act, though it can be used in conjunction with several other state-sponsored incentives, including programs which reimburse employers for creating new quality jobs, and programs which grant additional tax credits to those who invest in Louisiana companies.
II. FINANCIAL PRODUCTS OFFERED IN CONJUNCTION WITH TAX CREDITS
A. General. Digital media tax credits provide a great source of production funding and an efficient way of recouping expenses associated with a Louisiana-based project. Louisiana Production Capital offers several financial products that digital media producers can utilize in conjunction with the Act and the tax credits they will earn by producing digital media products in Louisiana. In general, these products are offered in exchange for rights to the producer’s tax credits. Louisiana Production Capital makes a market in Louisiana tax credits by purchasing tax credits in bulk throughout the year and then reselling them to Louisiana taxpayers in smaller increments during tax season.
B. Back-end Transaction. The "back-end" transaction is the most common and least complicated. In it, Louisiana Production Capital will agree at the outset to purchase all digital media tax credits earned by a producer at rates agreed upon prior to the producer’s commencement of business operations in Louisiana. This arrangement allows the producer guaranteed cash returns for tax credits, which can be calculated with certainty prior to the investment of production funds in a Louisiana project. Back-end transactions carry the least risk for Louisiana Production Capital and therefore result in the highest cash price for tax credits of all transaction types.
C. Back-end with Commercial Paper. In some cases, the producer may desire tax credit funds on the front-end of a transaction, often in order to fund a portion of the Louisiana production activities. In such cases, a typical back-end model can be employed in conjunction with Louisiana Production Capital providing credit enhancement to the producer along with commercial paper. An agreement will be executed on the front-end whereby Louisiana Production Capital will agree to purchase all tax credits at specified rates, just as in the back-end transaction described above. In addition, Louisiana Production Capital will issue to the producer commercial paper representing its payment obligation for such tax credits. The producer can then borrow against the value of the commercial paper from a Louisiana banking institution. Louisiana Production Capital, when necessary, will also provide a loan guarantee to induce the bank to lend the tax credit funds to the producer. Since more risk is associated with this type of a transaction as opposed to a standard back-end deal, the tax credit purchase rates are slightly lower. In addition, the producer must provide some manner of guarantee that the production dollars will ultimately be spent in order to generate the requisite number of tax credits.
D. Front-end Transaction. Front-end transactions are used when the producer desires to obtain tax credit funds on the front end without the involvement of a bank. In this scenario, Louisiana Production Capital plays the role of a bank and loans the producer a portion of the tax credit funds that would otherwise be paid on the back-end. Like in the foregoing transaction, the producer must effectively guarantee that enough funds will be spent locally to generate the tax credits necessary to pay off the loan. In addition, Louisiana Production Capital will take a security interest in the producer’s assets as collateral. Since this type of transaction carries the most risk, tax credit rates are lower and the producer will be required to pay interest on the outstanding loan balance as well as provide an equity kicker.
III. CONTACT INFORMATION
For more information on the Louisiana Digital Media Incentives and the tax credit financing products available through Louisiana Production Capital, please contact us.
Louisiana Production Capital, L.L.C.
Digital Interactive Media Department
201 St. Charles Ave., Ste. 4600
New Orleans, Louisiana 70170
504-866-5277 (phone)
504-310-0266 (fax)
Attn: Will French
wfrench@laprodcap.com
