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Author: Don Obrien

Minnesota tax credits give a financial boost to film producers, historic preservationists … and big insurance companies


When a new Minnesota film production tax credit was passed this year by the state Legislature, it was a big deal to the program’s backers that the credits were “transferable and refundable.”

Melodie Bahan

Photo by Tom Wallace

Melodie Bahan

Unlike the state’s previous “snowbate” incentive program — which reimbursed producers for 25 percent of permissible expenditures after the project ended — the new tax credits are more useful to film producers.

“Because it is transferable, they can sell them to a broker who can sell them to a company that has a tax liability,” Melodie Bahan, executive director of the Minnesota Film and Television Board, said shortly after the credits were approved by the Legislature. 

Since securing financing for films, even high-profile projects, is difficult, having tax credits to sell can be a major part of what is termed the “capital stack” — the different sources of dollars that contribute to a project’s total budget.

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“Allowing for these tax credits to be freely transferable may make a difference in how you’re able to pull together a capital stack,” said Irina Antonache, director for state and local tax with the accounting firm Moss Adams, which specializes in buying and selling state tax credits.

Irina Antonache

Irina Antonache

Minnesota’s newly adopted film credit sheds light on a niche business — the buying and selling of tax credits adopted by state legislatures to encourage everything from film production and solar energy projects to historic preservation projects and low-income housing construction. 

Used by both for-profit firms like Moss Adams and nonprofit entities, the business has even sparked an online marketplace. And while such credits benefit the people and businesses involved in the targeted industries, they also benefit seemingly unrelated companies, including large corporations such as banks and insurance companies, who end up paying less in state and federal taxes. 

Tax credits 101

Tax credits come in different forms with different rules for cashing them in. A business could use a credit it received from a state to reduce its own taxes, for example. But often the value of a credit — be it for producing a film or even doing a large historic reuse project — far exceeds that business’ tax liability in that state.

“You rarely see a developer utilize tax credits themselves,” said Chris Sherman, the president of Sherman Associates, a Minneapolis-based developer that has done major historic renovation work, including on the Canopy Hotel in Minneapolis and the Norshor Theater in Duluth. 

Chris Sherman

Chris Sherman

Credits that are refundable, as is the case with both the Minnesota film credit and the state’s historic renovation credit, mean the business can get a refund of the total value of the credit even if it doesn’t owe that much in taxes. Both those credits are also transferable, meaning they can be sold to another taxpayer that owes a lot in taxes. 

Credits are sold for less than face value, often between 90-95 cents on the dollar. But the difference of a few cents per dollar of credit is enough to attract buyers. The seller gets up-front money to help finance a project, and the buyer gets to reduce their tax liability. A company with a $1 million tax debt that paid $950,000 for $1 million in tax credits, for example, will save $50,000 in taxes owed.

The dollar amounts are often much larger than that, however, and the transactions are rarely that straightforward. But the concept is the same — that the film credit is a financial benefit to both a film production company and a corporation unrelated to the TV and movie business.

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So why not just hold the credits and get the full refund rather than sell them at a discount, even if it is just a few cents?

“The benefit is often timing,” Sherman said. “The end user will provide the capital upon receipt of the certificate whereas if we proceed with the refund option, it can be delayed by three to nine months. The time value of money becomes important.“

Part of how projects get funded

Minnesota’s new film credit has quirks that set it apart. For one, it’s fairly small: $5 million a year. That compares to states like Georgia, which offers $800 million a year in credits. Also, Minnesota’s credits can only be transferred once, something that gives recipients less flexibility in turning them into cash.

With the ability to transfer a credit even two times, for example, a film company or developer could sell them to a broker who could then package them with other credits for a buyer who wants a lot of credits. 

That quirk has led the state’s primary historic preservation nonprofit — Rethos — to create a loan program that helps developers make better use of their state tax credits. Under the program, which Rethos offers in Minnesota, Wisconsin, Iowa, Kansas and Texas, a developer transfers its credits to Rethos in return for a very low-interest loan of a comparable amount. Rethos then claims the refund from the state Department of Revenue. The fees it charges both cover its costs and provide income for its preservation advocacy work.

Ethan Boote, the real estate program manager for Rethos, said Minnesota’s historic credit must be used over five years, so it makes the program he runs a bit more complicated. But because Rethos is a nonprofit, it’s program also provides federal tax exemptions on the value of the credits for developers.

“It’s a very niche program that we run, and we’re hoping to expand it to more states because it helps us grow as an organization, it helps our mission,” Boote said. “But it also helps these projects get off the ground.”

Sherman, who is also a Rethos board member, said state and federal tax credits are a significant part of how the company funds projects. The combination of federal and state historic tax credits can account for up 25 percent of a project budget, with the rest coming from loans and equity from owners and partners.

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“It’s been a catalyst for the production and preservation of thousands of units of affordable housing that otherwise would have not occurred,” Sherman said. “It’s been a catalyst for converting many dozens of underutilized office buildings to alternative uses, like hotels and apartments.”

Sherman also said he anticipates it being a tool when the mid-century-and-later office buildings reach eligibility for historic status. Those buildings might not have as many office tenants in a post-pandemic downtown but have potential as residential buildings.

Sherman also said he would like the state to consider making credits transferable more than once. “One of the inhibitors of selling to a U.S. Bank or a Commerce Bank is we are only allowed one transfer of a (tax credit) certificate,” he said. 

“If two transfers were allowed, then the state historic tax credits would be sold more commonly to investors. We would sell all of our credits to investors so they could utilize those on their tax returns,” Sherman said. 

An extension of the state’s historic preservation tax credits passed in the same taxes omnibus bill this year that created the film credit program, which was added at the last minute thanks to interest from House Speaker Melissa Hortman. But the historic credit is only a temporary extension, expiring next June, and the preservation community is working to make the extension permanent.

Minnesota not a big player

Moss Adams’ Antonache said all of these incentives grow out of states’ desires to spur economic growth and attract businesses. “You make up some sort of incentive program and then you figure out how you hand it out,” she said. “Is it a reduction of tax? Is it a transferable credit? Is it a refundable credit? Is it a grant? There are various ways to do that.”

Timing is the determining factor with how credits are used, “monetized” in accounting terms, she said. Even though selling credits might bring in less money than waiting for a refund, if a project has borrowed money to pay for construction or production, having money now to pay off a loan saves on interest costs.

How much credits sell for, she said, depends on the circumstances. Are there lots of credits available from a given state? Can the credits be used to offset more than one tax, such as both income taxes and insurance premium taxes? 

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“I started working in this world 13 years ago, and the price was maybe high-80 cents. But it has become much more robust so pricing has been driven up just by demand,” Antonache said. 

While insurance companies and banks were early purchasers of tax credits, word has gotten out and now more companies from different industries have entered the market.

Minnesota has not been a large market for credits; the historic preservation credit is refundable, and most developers have either used the refund or brought in a credit buyer as an investment partner in projects. 

Meanwhile, the pending film credit may be too small to attract as much attention or get the best rates. “Would you pay 90 cents for a $100,000 credit? Probably not,” Antonache said. “Am I paying 95 cents for a million dollars? Not really worth my time. Or am I paying 95 cents for $10 million, which makes it worth my time. Even though it’s more expensive, my return is still worth it.”

Boote said that the tax credits for the Canopy Hotel restoration in downtown Minneapolis, a Sherman project, netted $8 million in state historic tax credits alone. “A smaller project that might accrue a couple hundred thousand dollars in state historic tax credits is not as fruitful for banks,” he said. “They’re usually looking for a couple of million dollars.”

But there are film projects that could take advantage of the smaller Minnesota film credits, Antonache said. “Illinois has a ton of commercials that get done there and you might get a couple hundred thousand dollars at a time,” she said.



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