Tax credit lending in future industries, with Zachary Tarica
“If you look at the things we do as a company, whether it's in digital assets, renewable energy, or media and entertainment, we are always looking at how to structure financial products to push disruptive industries forward. We are banking on, and betting on the future.”
Let's fund a movie. Truth be told, I don’t watch a lot of movies these days. There was a time I could use long flights to catch up, but even those days are gone for now. Maybe that’s why I’ve never spent much energy thinking about how they’re funded. I guess I always just assumed that they were exclusively funded by a small group of risk-hungry Hollywood types with incredibly deep pockets, winning big on some rolls and losing big on others.
Well, as it turns out, there’s a lending model there. And more than that, it’s a lending model that connects movies to green energy to digital assets. Join me and Zachary Tarica, founder and CEO of The Forest Road Company as he talks me through tax credits and tax credit lending, and how TFRC is putting “money in the hands of people that are pushing transformative industries forward?”
As Zach mentions on the show, you’re free to start a conversation by emailing them at info@forestroadco.com or by reading the extensive content on their homepage www.forestroadco.com
On Twitter they’re @forestroadco and on LinkedIn they’re @theforestroadcompany
You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24
If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.
Oh, and if you’re in need of more banking podcasts, you can find related content at https://blog.feedspot.com/banking_podcasts/
Regards,
Brendan
The full written transcript, with timestamps, is below:
Zach Tarica 0:00
So we put up cash and we do backstopped deals where we're investing in the content, we're then getting that content onto one of these big platforms to get them the distribution and get them the eyeballs that a lot of these titles really deserve.
Everything that we do is constantly changing the way we live and think, our lifestyles, our life choices - we are banking on, and betting on the future.
Brendan Le Grange 0:34
What do independent movie makers, green energy producers and digital asset creators have in common? Well, people like me don't know how to evaluate them for a loan. Luckily, today's guest does.
Zach Tarica co-founded the forest road company as a specialty finance platform to break into the independent film financing space and to redefine tax credit lending... me, I've never heard of a tax credit.
So welcome to How to Lend Money to Strangers with Brendan Le Grange, let's go see what's happening on the exciting edges of the lending universe.
Zack Tarica, founder and CEO of the Forest Road Company, welcome to How to Lend Money to Strangers. I have spoken to some non-traditional lending segments in the past, but your niche is one I'm really excited to explore. Before we get there, before we start talking about indie movies and NFTs and renewable energy, let's take a step back.
What were you doing before you started the Forest Road Company?
Zach Tarica 1:45
So I graduated college in a really interesting time. I think within a month of graduation, Lehman Brothers filed for bankruptcy, Washington Mutual closes its doors, some of the biggest financial institutions in the world were navigating Volcker, Dodd Frank, all these new proposed legislative changes to the banking system.
And working on Wall Street at Deutsche Bank was a really interesting place to start my career. It probably shaped most of how we work at Forest Road today, which is to be predominantly downside oriented and expect the worst, which is an interesting way of both living your life and also as an investor, as someone deploying capital and betting on people.
Main Street, completely smoked and broken, Wall Street bailed out. It definitely was something that shaped both Forest Road and certainly the early innings of my career.
So I started at Deutsche Bank on a distressed desk, which is essentially working with a group of people whose sole job is to take companies into bankruptcy, deal with companies that are in bankruptcy, and then reorganise them and deal with the exit of the bankruptcy process. And so yeah, it's better to be lucky than good. I was really just in the right place at the right time, I came into an investment seat, when everything was at the lows. We began this now, you know, over a decade long process of quantitative easing, a lot of government spending going into the sector, and frankly, anything you bought in 2008, 2009 and 2010, you looked like a genius, right. And shortly thereafter, went to one of the largest private equity institutions in the world and incredible company called Brookfield.
When I had first heard about Brookfield, I didn't even know they had a private equity business, I looked at them as a real estate player, a mall operator. And it's truly one of the most incredible institutions. And I was very fortunate to have spent a large part of my career there working with incredible investors, but even then, right, anything you bought worked. And so when I was at Brookfield, we were in the process of looking at a really interesting company.
And what I found most interesting about that company was the amount of tax credits that were benefiting that company, in its simplest form. What a tax credit is, is a subsidy from either a state or federal entity that accelerates either the breakeven cost of the build out of that product or the injection of capital to make that product exist.
So the reasons tax credits exist is because generally people believe we need to do something to address climate change, or because we want to make making content more achievable because we generally believe in the value of arts as it pertains to culture.
Tax credits do a lot of good and one of those good things that they do is job creation. And so behind all things tax credits is the idea that if you can create a job, it's something worth the government spending money on.
One of the things that I hated most of about my time at Deutsche Bank, and Brookfield was this idea that someone wins and someone loses. If I buy a bond, and that bond goes up, the person that sold it to me loses. If I take a company into bankruptcy, the equity in that company loses. And so I was trying to find parts of the economic system where all parties can win. And in coming across tax credits, I thought there is this model where the state and the federal government when right job creation, the developer, whether it's the movie producer, or the building developer, when because there's access to capital that they need to make their project and the underlying investor in this instance, Forest Road, which at the time did not yet exist, wins, because we're making an exceptional risk adjusted return.
Brendan Le Grange 5:50
Yeah, well, let's talk about Forest Road, then, and it's coming to life. I've worked in lending for 20 years, but tax credits, I think I'd only heard in the context of when Elon Musk is looking to move a factory somewhere or Google was out hunting for another head office location, and everybody was in the market trying to outbid each other to win that, but I didn't understand its reach.
And as you've already described, it, it it acts as a spine that connects so many parts of the economy. So what does the Forest Road Company do? How are you taking on and using these tax credits?
Zach Tarica 6:26
So at our core, Forest Road is a company that invests. We're in the spread business. So what I consider the spread business is, we have limited partners, we have investors, and we need to earn an adequate spread on the capital that they give us and the capital we deploy.
And that's our asset management business, we're investing dollars. Then we have a broker dealer. And so we're an investor of time into how to greatly enhance the enterprise value of the businesses that are hiring us as advisors, or capital solution providers.
The way that we interact with tax credits, is we take a security interest in the tax credit. So what that means in its simplest form, is we give you money, we give the production company money against the value, the perceived value of the tax credit. And so we put capital onto the balance sheet of the borrower. The borrower spends our money and the other money that he or she or the company may have raised.
In exchange for that they earn the dollars that they spend, they earn a tax credit. So you spend a million dollars that's qualified for a state tax credit, there's a credit that's where 30 cents on the dollar, so we lend against that $300,000. For math sake, let's just say we do 50% loan to value so we lend $150,000, and then we earn a return a fixed interest return against that, and then all the excess proceeds and profit goes back to the underlying borrower.
We look at an underlying business and underlying company and underlying borrower, and what we're constantly asking ourselves is how to make that borrower that company better. And in most instances, this is found money. So most of our clients don't even realise they're eligible for a tax credit. That's the best part of our business. The best part of my day is getting to go to someone and say, you're eligible for this thing. And they had absolutely no idea that they had this money coming to them.
Tax credits are an incredible way of supercharging, certainly the domestic economy. Now, at its core, we do very little internationally, so we're predominantly based in the US, and we're predominantly going out to borrowers and lending against tax equity tied to renewable, solar renewable energy credits (SRECs), which are on a state basis, ITC is investment tax credits, tax equity production tax credits (PTCs). So there's this whole host of products tied to renewable energy.
On the film and entertainment side of our business. There's this thing called Movie incentive production (MIPs), these credits are tied to productions, both television and film shot in specific states. I'll give you one example: the state of Georgia issues tax credits to people that shoot movies in the state of Georgia. There's a whole host of reasons - I can give a little plug to Georgia, Georgia could be Vietnam, Georgia could be Manhattan, Georgia could be all these different places given the underlying dynamic and topography of the state and it's really attractive to build soundstages there and to shoot content there.
And so in this instance, Brendan, you decide, you know, I really want to get out of the podcast space. I want to get into making movies. You take your money and you go and make a film in Georgia - every dollar or you spend in Georgia in a specific way, you're eligible to earn a tax credit. The problem with that tax credit that you would earn is that you don't have any tax liability in the state, and so you need to move it to someone. Think of Disney, right, Disney. Unfortunately, for Disney they have no tax offset or liability in the state of Georgia, therefore, they need someone to move that tax credit to.
And so there's three dynamics of our business. There's the business of putting money in the hands of Brendan, there's the business of servicing, Brendan looking at you as a client and saying, here's how to maximise the value of your tax credit. And then the third is brokering it, you can't use it yourself. And so therefore, we're going to move it to Coca Cola or Home Depot or Delta, or one of these big players that want to reduce their tax liability.
The hot take on someone like Elon Musk, is everyone thinks Elon Musk sells cars. Elon Musk is a broker of tax credits. That's it. Tesla is incredible company, but his core business is the spread business of tax credits. This tax credit economy, creates 1,000s of jobs, brings tourism brings art and culture to the state. It does so many positive things to the United States and specifically to these local state economies.
Brendan Le Grange 11:22
Almost like, maybe you inherit a house full of old things, you don't know what's an antique and what's just old junk. So somebody comes in, they walk around the house, they tell you, this painting is worth a million dollars, but you can't sell it because you know nothing about art so they will take it to the auction and ship it off. So you kind of helping them to identify what they've got, and then to turn it into into a loan or into into cash. So yeah, really interesting space.
Zach Tarica 11:49
In our DNA as a company, we are constantly asking ourselves, 'how do we democratise the access to capital? How do we put money in the hands of people that are pushing transformative industries forward?'
If you look at the things we do as a company, whether it's in digital assets, renewable energy, or media and entertainment, we are always looking at how to structure financial products, tax credits, and tax equity is one way for us as a company to continue to push disruptive industries forward and make them more economic.
Brendan Le Grange 12:29
Yeah, and we're not really here to talk about government policy, I suppose. But I mean, you could have a state that is really big on some traditional dirty industry, it's in mining, or it's in power production or something. And it's got people generating revenue there but the government wants to change for the future, it wants to bring in some new types of industries, so they can bring in film production. But because they're not, you know, operational there, they don't have those tax liabilities, it wouldn't be attractive, if you could do nothing with it. So this ability to trade in the tax credit, allows them to bring in industries, almost to try it out, to start their businesses to start some projects to diversify an economy and to slowly change it.
So that in 20 years time, you've got this experience, you've got the skills, all the facilities, all the train people, everything's there, that naturally it will self fulfilling, and it pulls up in industry, it's in their trade of them tax credits, that they add value, because that's what makes them you know, attractive in terms of pulling new companies, new people into the space.
And you talked about the film industry, that's obviously where the Forest Road Company started and you've really grown well there. And obviously, it's a industry everybody likes to hear about - what have you seen from your work lending against tax credits in that space?
Zach Tarica 13:50
So what getting into tax credit lending on the media and entertainment side has led to for us is really the ability to develop meaningful relationships with people creating content. And what we found was the biggest issues around content creation was not the ability to create it, but it was the ability to distribute it.
And what these streaming companies have done, which has been an incredible transformation over the last decade is democratise that access to content, right? If you look at the amount of streaming video on demand and advertising video on demand platforms that have come up; and if you look at the hundreds of millions of subscribers across these platforms, the ability to get content into your home is unlike anything we've we've seen in certainly in the history of planet Earth.
So what is unique from our standpoint is our ability to have these downstream relationships with these production companies, and then figure out the better smarter ways to handle distribution.
And so the first acquisition we made in the space was actually right before COVID, where we acquired a company called Vertical Entertainment. Vertical Entertainment is a domestic distribution business. And what is really unique about Vertical is their willingness and ability to go after content. That is not the big blockbuster title, the big $25/ $35/ $50 million plus movie, actually where vertical has had most of its success is in the aggregation and distribution of smaller budget films $5 million and less budgeted films.
And what that does is, is get these titles onto these platforms so that they can be seen. The way we do that is by providing minimum guarantees. So we put up cash, and we do backstopped deals, where we're investing in the content, we're then getting that content onto one of these big platforms. And we are working with these filmmakers to get them the distribution and get them the eyeballs that a lot of these titles really deserve.
That was the first acquisition we made in the space. The second is a company called TPC. TPC is that tax credit and factoring business around minimum guarantee paper tax credit administration, lending, brokering tax credits and other forms of factoring and receivables. So it's in our core bread and butter, and really the to allow for a one stop shop solution for all content creators to be able to go to one place and think through the financing mechanisms and distribution mechanisms for their title.
Brendan Le Grange 16:39
Again, just from a pure outsider's point of view, but you think of movies and it's bang or bust, you know, you see a blockbuster, maybe it cost $200 million made $20 million. Or there's another one that took $20 million to produce and has made $200 million - and the industry feels like it's all about these hits and misses.
But actually, you can actually make this a business there is actually a way to approach this to control the downside risk, but not in their traditional way where everyone's said are thinking too much about the business would ruin the art, there is a way to get the funding right to enable that or to actually make the art will reach more eyes.
Zach Tarica 17:14
Yeah, it's it's one of those things where I think probably about a year ago, or maybe even more Reed Hastings, CEO of Netflix, I think in his book, or maybe in an interview said, 'Netflix competes with sleep'. And so that highlights how saturated the content market is.
And I think it is worth noting that the content space is a distressed industry, there is a great economic model in the content space. It just lacks the discipline and the fundamental underwriting that goes into it. Fortunately, for Forest Road, we have two incredible partners in Vertical and TPC providing not only great service, but also making money.
And we as a company, you know, look, we do incredible things and a lot of good, but we are a business, we are in the business of making money for our investors and for for our company. And so we do take advantage of the constant distress cycles that exist in the media space.
And the amount of great companies we see with bad balance sheets is remarkable. And films are companies, you know. If you're making a movie - that is that is a company. And we often find that the tax credit product that we offer, and the way in which we invest, delivers the ability for the underlying company or filmmaker to avoid a distressed scenario.
And that's, that's our goal in what we do. We want to make money, but we want to do it in a way that we feel like enhances the enterprise value of the underlying business or borrower that we're giving capital to.
Brendan Le Grange 18:49
Yeah, so building something rather than just arbitraging out some profit.
Zach, you've given me a few hints already in terms of the back end connections, but how do you move from the movie space into green energy, digital assets, quite different segments. What was the connection there? And how's that expansion been for you?
Zach Tarica 19:11
So I think all three industries have one, or maybe two things in common. The first is that they're the future. Everything that we do, is constantly changing the way we live and think our lifestyles, our life choices. We are banking on, and betting on the future of this country and the world. And so we're providing capital to what we believe will drive the future forward.
The second part is that you can't afford to not be invested in these three sectors. So if you are ignoring digital assets, if you are ignoring renewable energy, if you are ignoring content and media, you're ignoring such a massive part of the addressable market of the global economy, if you look at it from the standpoint of GDP, if you look at it from the standpoint of dollars invested, if you're not hyper focused on these three things, you're not investing, you're not an investor.
And I think by way of being experts in these three things, and the underlying macro that these three things happen to be the future of the global economy, is what gets us out of bed in the morning. It's what makes us really excited to work at this company and to deliver this type of product to our borrowers.
Brendan Le Grange 20:33
I've got an interview that will be published the week after yours on crypto loans backed by NFTs, so you're going to be helping me do my homework here for that interview, but you've just launched the Forest Road Digital Fund. Talk to me a little bit about that, what is the link into digital assets. And in particular, what is behind this forest roe digital fund that you you're launching.
Zach Tarica 20:57
So I think it's I think it's three fold. And I think today's a very topical day to talk about digital assets. I don't know when this is going to air, but there is a massive lack of trust in central banking and policymakers. And there is decentralised currency. Currency security, we can have our own separate five hour conversation around how to define what these actually are, but certainly my generation and my peers and the people that I worked with dating back to 2008, we as a society have to think about the ways in which we want to invest in these products and the exposure that we should have to them.
Whether they're Dows, or NFT's or layer one and layer two protocols, we're investing in technology, when you look at the underlying mechanisms of blockchain. And when you look at the comparisons to 25 years ago, and the birth of the Internet, really our methodology or process as far as for a digital fund is we're offering a product to investors that diversifies across direct investments fund investments, liquid so that's anything from staking to arbitrage.
And what we think is going to be a massive part of the global economy. Again, just highlighting the end use cases and the way in which we will use storage by way of blockchain digital storage by using cross collateralized currencies and lending opportunities via Dows, or decentralised finance, the biggest knock that digital assets have right now is charts, right?
We're in this moment in time where every chart is a 90 degree drop to the right. And so when you look at that against the dollar or other currencies, it's really hard to get excited about digital assets. When they're going up, everyone's excited about them / when they're going down, everyone's petrified of them.
And so I think if you take a step back, and you look at this as investing in technology over a long period of time, I'm hopeful that this podcast will will be on Spotify and I can point to it and say we were not even in the first innings of investing in this technology that will greatly transformed the way we consume, the way we think about our health, the way we think about payment processing. And ultimately, the goal, like Brian Armstrong says at Coinbase of creating economic freedom is super exciting and unique to us. And that's that's the mission and the focus for the digital fund.
Brendan Le Grange 23:42
Yeah, and we're recording this the day after the British pound had a very Bitcoin like collapse on the markets, as if to prove that that sort of volatility isn't restricted to just the digital asset world!
Zach Tarica 23:55
You know, a day later, the people the policymakers change, tune, and then reissue this status of quantitative easing, and buy long dated bonds. And you have to ask yourself, like at what point will we as a society continue to trust central policy and economists and academics, when making stabilising economic decisions for Main Street and consumers? And it's one thing to look at that on a chart, it's another thing to find out that, you know, humans have lost such great percentages of their wealth in what is deemed to be or categorised as riskless assets.
That has to change. And I think what a lot of the assets in the digital ecosystem in web three and cryptocurrencies offer is an option to say, look over here because maybe this can be a little bit different. Maybe this can be a bit better.
And I think that requires certainty around regulation. I think thing that requires buy in from the large financial institutions, the one thing that investors will always pay a premium for is certainty. And unfortunately, in digital assets, right now, there's a lack of that certainty. There's a lack of a regulatory environment, there's a lack of certainty around volatility and liquidity and things like that.
The bet we're making is that when you do get that clarity, that certainty, the price is going to reflect it. I always thought of myself, whether it's my role at Deutsche Bank or my role at Brookfield or my role now at Forest Road, as pricing risk. And so as prices of risk, we're making a bet that this will happen, that that is a matter of when not if, and when it does, our digital fund will be invested in the things that we think are the winners in the space, and then the price will reflect the certainty and that premium that was paid into the product in getting it.
Brendan Le Grange 26:00
Yeah, exactly.
So you've obviously got your eye on the future, and you've got forest road company set up to take advantage of that. When you look at the future now is this the three pillars that you're still focusing on? What else is on your horizon and what's coming next?
Zach Tarica 26:14
The other thing that all three things that Forest Road does have in common, is it's really hard to invest in the three things that we do, you know. Renewable energy, film and television, and media and digital assets... we didn't pick the easiest things to make bets on, right!
So if we were looking at how can we sleep well at night in the easiest sectors, we as a company would be investing in toll roads, we'd be investing in different real estate projects, we'd be investing in infrastructure, we'd be making plays on rates, and we would hedge it. Instead, we've picked three really challenging sectors and spaces to deploy capital into, because we do see how quickly the underlying landscape and arena were investing and changing.
And so I think we have a lot on our plate. I think if I think if I were to say we're gonna do anything next, the people that I work with, and our investors, will probably be disappointed.
But I think that for now, we will continue to really focus on how to be great lenders in the space that we're operating in. I think there's a couple opportunities that I'm really excited by in cannabis. Obviously, that comes with its complications around the federal legal landscape and is super nuanced, but as part of the life sciences sector, as part of really understanding medicine and understanding our bodies and everything going on in what I would categorise as techbio, not biotech, is something that is intriguing and exciting to me.
But I'm going to stick to my original answer and say we're just going to focus on these things for now, so I don't get in trouble.
Brendan Le Grange 27:58
It's a perfectly good answer. And if you moving into that cannabis space, you can chat to previous guests of mine at Payzel, who do a lot of banking in that area.
Zach Tarica 28:09
It's a really hard space to bank and to lend in, as I'm sure your guests referenced. And you know, the problem as a secured lender in the things that we do. As you know, in cannabis, there is a very tough hurdle in asset securitization and foreclosure and the practices around getting the asset and the money back to your investor in the downside case, because of the bankruptcy process and the court process around cannabis. So it's made it challenging for us, as a lender to understand where we can really not only deliver great returns to our investors, but also come up with the right model so that we can be a great service provider and capital solution provider for the borrower.
Brendan Le Grange 28:55
And yeah, one of the the side effects, I guess, of talking about these three pillars of the future is that I think a lot of people listening whether they intend to do any business in this space or not, almost everybody's interested in at least one of movies, green energy, or digital assets.
So if people want to have a closer look at what you're doing, want to learn a bit more about your projects, where can they go to see what Forest Road is doing?
Zach Tarica 29:20
Yes, or our website www.forestroadco.com
Also, they can email us (info@forestroadco.com) we generally believe in the more people that that are focused on this the more transformation and the more pushing this forward, the more we can achieve together so we are looking at doing small deals, big deals, service providing capital solutions, really anything that forwards our objective and agenda of watching these three sectors, transform the global economy, job creation and ultimately making great returns. So the more the more the merrier.
Happy to answer any and all questions, love talking about this stuff, our team is hyper focused on it. I think collectively we as a company do a great job of providing this service both by way of investing our capital and time.
Brendan Le Grange 30:16
Thanks again, I'll put all those links in the show notes as well. Zach, thanks so much for your time as it really is an interesting space.
Zach Tarica 30:23
Really appreciate it. Thank you for taking the time to chat with us. And if there's any questions that come up, we'll be sure to answer and there's been great
Brendan Le Grange 30:30
And thank you all for listening. Please do look for and follow the show on your favourite podcast platform and share the updates widely on LinkedIn where lending nerds are found in our largest concentration. Plus, send me a connection request while you're there.
This show is written and recorded by myself Brendan Le Grange in Brighton England, show music is by Iam_wake and you can find show notes and written transcripts at www.HowtoLendMoneytoStrangers.show
And I'll see you again next Thursday.