Ledes from the Land of Enchantment

The Passive Tax Loss Generating Machine, With 828 Studios OZ Fund

In this webinar, Wally Sullivan from Javelin Securities highlights a unique OZ investment opportunity that has the potential to generate meaningful tax write-offs.

Webinar Highlights

  • Unique opportunities in the subsidized film production industry, including the unique tax incentives associated with film production.
  • An overview of OZ projects presented at past OZ Pitch Days, including the Darwin Mine in California and North Country Growers in New Hampshire.
  • How this OZ project will capitalize on the increasing demand for streaming content.
  • The layered tax incentives that this fund employs to generate passthrough losses for investors while maintaining potential for significant long-term returns.
  • An overview of the state-specific incentives offered by New Mexico, particularly for projects located outside Albuquerque.
  • Live Q&A with webinar attendees.

Featured On This Webinar

Industry Spotlight: 828 Studios OZ Fund

This QOZ Fund will created a movie studio in addition to provide financing for firm projects. The movie studio will consist of 100,000 square feet of buildings that include sound stages, offices and post production facilities amongst other venues. The facilities will cost $50 million to build and the additional $125 million will be used for project financing.

Learn More About 828 Studios OZ Fund

Webinar Transcript

Jimmy: Take it away, Wally. Appreciate it.

Wally: Thanks again, Jimmy. And I appreciate everyone’s time today. So, as Jimmy mentioned, my name is Wally Sullivan. And I represent Javelin Securities, which is a FINRA registered broker-dealer that focuses on helping OZ projects raise capital. So our team is constantly reviewing deals searching for what we feel are some of the strongest projects in the OZ space. So 828 Studios caught our attention for a couple of reasons. The first has to do with the major industries shift towards streaming media and the increased demand for studio space. The second has to do with the fact that the film production business is a subsidized industry. So as part of a subsidized industry, this project comes with its own set of state and federal tax advantages, in addition to the OZ benefits. And specifically, what I’m going to explain is how the special federal IRS rules regarding film depreciation turns this project into a tax loss generating machine. But before we jump into the 828 Studios, I’d like to take a minute to provide some tiny updates on a couple of other projects, since rising inflation seems to be a growing concern for all of us.

Both of these projects, both of these OZ projects are considered traditional inflation hedges. The first is the reopening of the Darwin Metals Mining operation in California. Darwin was one of the largest mining districts for much of our country’s history. And after my recent visit, it’s clear to me it still is. This whole area was the cauldron of a prehistoric volcano that pushed up all the metals from deep in the Earth’s crust. These mountains are full of base metals and nine critical minerals. It’s remarkable that one family has been able to acquire in ready this national strategic asset. It’s even more remarkable that they chose to raise the startup capital through the OZ program. It should be noted that the Stone family reserves the right to close this fund early. This is likely since they are sitting on vast quantities of zinc, which was recently added to the U.S. critical mineral list and trading at all-time highs. The Biden administration is also considering invoking the Defense Production Act for mines with critical minerals, which Darwin certainly represents.

What makes this project unique is the limited time needed to restart the operations. Because of the extreme dry conditions, most of the infrastructure, like rails, electricity, lines, and ventilation were perfectly preserved throughout 150 miles of existing tunnel. Phase 1 operation that will begin processing 500 tonnes is scheduled to begin next month with a focus on silver and zinc. They expect to generate $75 million in revenue in just the first 8 months, with $25 million net profits, allowing for the first distribution by year-end. It should be noted that these estimates are based on last year’s prices, and do not reflect the recent spike in commodity prices. I like to refer to this project as the fastest horse in the OZ space.

This next project I like to refer to as the most important. North Country Growers OZ Fund is our large-scale industrial greenhouse operations in Berlin, New Hampshire. What is more important than our food supply and being able to afford it? The supply chain issues impacting food prices are only getting worse, especially for produce. Remember that 95% of all vegetables consumed in the Northeast gets trucked in from far distances like California and Mexico. The 20-year megadrought west of the Rockies, the global fertilizer shortage, and now the spiking fuel prices, especially for diesel, these are just not easy problems to fix. The Northeast needs food security and food independence.

Greenhouse technology has improved to the point which makes these facilities superior in every way. We need thousands of greenhouse acres built from Maine to D.C. producing hundreds of millions of pounds of produce, and we needed it yesterday. If I sound alarm, it’s because I am. From what I can tell, the resources are not flowing into the only viable solution to a worsening problem. Elevated prices improve margins for this project. So this fund represents a way we can help ourselves and our neighbors. We are close to reaching our phase 1 capital goal, which will trigger the 25 million in debt, so we can begin construction on the first 10-acre facility. The site is cleared, permits are in hand, and we hope to break ground this spring. Thank you for your patience on that.

So now let’s get back to the subsidized industry and the tax loss generating machine. This is where I need to point out that I am not a lawyer or a tax advisor. Since this project involves multiple tax incentive programs, we encourage everyone to consult their own tax professional. This is a Reg D 506(c) offering and available to accredited U.S. investors only. 828 Studios is a large-scale film production complex to be built on a 30-acre site in Las Cruces, New Mexico. The project will capitalize on rising demand for streaming content on platforms like Netflix and Amazon Prime. This trend has seen the entertainment industry scrambling to find enough production space to keep up with the demand to produce more content. The fund is a Multi Asset Fund. That simply means your investment into a QOF, the Qualified Opportunity Zone, will be allocated between two businesses, the physical studio business, as well as a slate financing business.

It’s common that studios will extend short-term financing to film projects during the production phase. This type of short-term financing is characterized as a relatively low risk with low default rates. Studios are not trying to pick film winners at this stage, but simply facilitating production efforts with 18-month bridge financing. We feel it’s on this side of the business that really differentiates this product. Special federal IRS rules regarding film production in financing allows for 100% depreciation in 12 months. In addition, similar to OZ rules, no depreciation recalculation applies. So this depreciation gets wiped away even for non-capital gain investors. Since the same capital can be reinvested into other films every 18 months, you can start to see why I am referring to this fund as a passive tax loss generating machine. So these special IRS film rules could potentially allow an investor to receive 100% tax loss on an investment year one, and then further losses from recycling the funds into further films. Okay? So that’s the federal loophole.

Now, let’s talk about state benefits. So why leverage these federal benefits in New Mexico project? A handful of states compete aggressively to attract high-quality studio jobs into their state. Massachusetts and Georgia are amongst the most aggressive using tax credits. New Mexico has recently taken things to a whole new level by offering a 30% rebate on qualified expenses instead of the traditional tax credits. This funding is outside the state budget and is guaranteed for 10 years fitting nicely with OZ rules. They also give an extra 5% to studios built outside of Albuquerque. So for every $1 million of qualified expenses submitted, the state then cuts them back a check for $350,000. Coupled with a host of other local grants and incentives, this all helps to de-risk this project and increase IRR.

So, in addition, Las Cruces is a great location because the land was relatively inexpensive. The labor force has helped by having New Mexico State University film department right there. It has a close airport to service jet traffic, and it’s located within an opportunity zone. It also has the full support of local and state government officials. This project has a strong management team led by Todd Lundbohm. Todd is an award-winning filmmaker with a long list of accolades, and 3 projects being released in 2022. Just as important, he is well established in the film financing side of this industry. So after the first 10 million in equity is raised, the slate financing portion of this fund will begin under Todd’s direction. So the majority of your investment gets put to work immediately without having to wait to the studio construction to be completed. As you can see from the project term sheet, the returns speak for themselves. Ten percent preferred return, but you should please note that you do need to give up part of the back end of this project so that management can maintain control of the studio after the 10-year mark. Since this raise is just starting, there could be some flexibility in the $250,000 minimum.

So as a recap, the market dynamics for this project could not be more promising. The film industry is under radical change due to streaming services. The Netflix, Amazon Prime, Hulu, Apple TV, etc., all need more studio space, and that trend is showing no signs of slowing. I think the New Mexico State 35% rebate helps to derisk this project. And the special federal IRS tax treatment for film depreciation will make this project particularly interesting to investors needing to shelter passive gains. If you have a portfolio with income-producing assets, this could be an interesting one to throw into the mix. So I have to admit, when I was initially introduced to this project, I felt annoyed by the thought that a relatively small Hollywood crowd had been benefiting from these subsidized tax advantages for decades. What makes me feel good now about promoting this project is that the current industry trend of spreading out production across the country will provide more opportunity for everyone to participate. So, I think I’m gonna stop here and open this up to some questions about 828 Studios, or any of the other projects I had mentioned. Thank you.

Jimmy: All right. Well, thank you, Wally. I really appreciate it there. Let’s see if we have any questions here. We have a couple here actually. First question is, what is the structure of the Darwin Mines investment and is there any carry on that?

Wally: That is a non-traditional project in that there is no carry, and there is no management fee. You basically are direct partnership with the Stone family. They are just so confident in what’s going to come out of that mine. They’re old school. They’re very much looking to take care of their community. And so that’s why they chose the OZ program, but it’s really a… It’s a great American story, to be honest with you.

Jimmy: And question I have actually for you guys, I was on capital markets. I’m looking at your website right now, ozonecapmarkets.com. I posted the link in the chat. You got a lot of different investment opportunities. They’re not your run-of-the-mill vanilla opportunity zone real estate funds for the most part. What do you like about all of these different operating business type QOFs that you have?

Wally: Well, look, for two reasons, number one is the qualified opportunity businesses often can have far more aggressive depreciation schedules than your typical building project. So that’s sort of the first thing. We also think it actually keeps to the spirit of the opportunity zone program. And these business are truly what are driving stimulus in jobs into the places that need it most. And you know, for example, New Mexico, you know, we’re looking at…this will employ hundreds of people. The Darwin Mines, it’s going to be thousands of people.

Jimmy: Awesome. Quite a few questions just came in here in the last few minutes. First question is, “Can you speak to how the struggles of the traditional theater industry in the wake of COVID may or may not impact film studio production needs? Is recovery to pre-pandemic levels fully expected?”

Wally: Well, that’s just it. The trend towards streaming had started before COVID, right? Instead of people waiting for and going to the local movie theater, people started, you know, downloading Netflix and whatnot. But since COVID, the whole trend accelerated. And so, now, you know, there’s new entrants into the space every day and like I said, it just does not look like that trend is going to slow anytime soon.

Jimmy: Did you expect…? How does that impact your project, specifically 828?

Wally: Well, again, 828, there’s a large backlog for people trying to get into these style studios. I mean, you know, where it started as… It was a year backlog, it’s now going much longer. So, you’ll see this effort and these movie studios, this will not be the last one. You will see them popping up into these different states because it is a major trend. It’s a supply-demand imbalance. And it is a very good industry, high margins across the board. And again, if you take a look at this project, the numbers speak for themselves.

Jimmy: Awesome. Question from Melvin. Melvin asks, “What is the square footage of the 828 Studio?”

Wally: Well, the main sound studio in Las Cruces, New Mexico is 100,000 square feet, and then it will have multiple other outbuildings, different types of production buildings.

Jimmy: Fantastic. A question here from an anonymous attendee, asks, “Can you explain the incentive for projects outside of Albuquerque?”

Wally: So the New Mexico gave…it’s essentially a 25% state tax… Again, they’re not referring to it as a tax credit. They’re actually just referring to it now as a just a flat rebate. And so if you’re inside Albuquerque, essentially you add the state advantages up. It’s 25%. Any place outside of Albuquerque, you actually get… It’s a total of 35% rebate.

Jimmy: Very good. Let’s see, “When will distributions be for 828 Studios and for North Country Growers, what are you expecting there?”

Wally: 828 Studios, to start… Again, because the slate financing investment business goes into effect almost immediately, soon as you read that $10 million minimum, distributions will be out semi-annually. And we expect the first distribution by year-end…I’m sorry, one calendar year.

Jimmy: One calendar year. Got it.

Wally: And then North Country Growers, again, it’s expected that the building will be up, the first 10-acre greenhouse will be built in 12 months, and the first distribution will be coming 6 months after that.

Jimmy: Fantastic. Let’s see, shifting gears here. Back to North Country Growers again, “Who will North Country Growers sell their produce to?”

Wally: They already have LOIs with major distributors and grocery supply chains. So, they’ve already… All of their production is already spoken for 2X. So again, it’s a supply and demand imbalance there. So they’ve already had the buyers. And again, with the rising interest…with the rising prices in food, that’s why we’re referring to both, you know, North Country and a Darwin, these are really anti-inflationary hedges.

Jimmy: Very good. We got started a few minutes late for you here, Wally. So we’ll go for a couple of more minutes before we bring our next presenter on. We’ve got one or two more questions here for you. Another anonymous attendee asks, “Can you talk more about the financing piece of the venture?” The fund will be investing in production of films and series, is that right?

Wally: Yeah, films, indie films, you know, different series on the Netflix’s of the world. And again, the short-term financing, that’s typically extended by studios. So these two businesses go hand in hand. And in this particular case, the financing takes the form of both debt and equity. And so that’s why the depreciation works. And again, we were just surprised to realize that, again, 12-month depreciation for a film production is incredible. And, again, we like the fact that, you know, more people are gonna be able to take advantage of…again, I didn’t even know what a subsidized industry was until I came across this project.

Jimmy: Yeah, I don’t know. I learned a lot too just in the last 20 minutes hearing you talk about that. I didn’t know about all of those different subsidies afforded to the movie studio industry. Last question here, and then we’ll move along. But a question in here from my friend Bob, “How do you make sure you can get the talent to New Mexico?”

Wally: It’s a good question. And number one, one of the things I had mentioned was, this property was strategically located where it’s just down the street of the airport that can handle jet traffic, right? And secondly, the local population, you know, not only are they looking for jobs, but these are specialized jobs, but they’re working closely with the New Mexico State University, and their film department. So now those graduates are gonna have a place for people to work and not have to leave the area, right? So, you know, look, we think that the cost of living is far less in Las Cruces than it is in, say, Albuquerque or California. So, we’re actually thinking, it’s a big advantage to set up in a location like that, beautiful location where people will actually wanna come, and you know, be able to have a high standard of life based on the income for those types of jobs.

Jimmy: Very good. Wally, I lied. I got one more question for you actually, just came in. I wanna know the answer to it too. Do you have a summary of all of the different subsidies available anywhere? Is there anywhere we can get a list of that or a breakdown?

Wally: Sure, no problem. If you just send an email to my email address on the screen, and we’ll send them all up, because they do stack up. There’s a lot there. And I know there’s kind of a lot of moving parts to this project but if you’re just kind of thinking as even though there’s two businesses, they both benefit from federal and state, and I think if you kind of look at it that way, it’s fairly easy to understand.

Jimmy: Fantastic. Yeah, so whoever asked that question, or if anybody else wants to get in touch with Wally for more information, please reach out to them [email protected] He’s got the email address up on the screen there. I just posted it in the chat as well. If you wanna select it with your cursor, copy and paste it into a new email. And while I’m sure Wally would love to hear from you and get you any information that you request from him. Wally, we’re at time. I gotta move along, but thank you again for your presentation. They always love having you guys present your fund offerings on OZ Pitch Day. Really appreciate it. Thank you Wally.

Wally: That was great. Thank you, Jimmy.

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