Legal Law

An investment manual for high-net-worth investors considering movie financing

All right, so you woke up one day, checked your Swiss bank account, called your family office planner, had breakfast with your private customer service wealth manager, called your tax accountant on the phone, and between three of you, You decided to invest your proceeds from the Merger or Acquisition of your last company are not going to a dubious hedge fund or a start-up biotech company, but to financing Hollywood movies because you think you need the State Tax Credits, the federal tax write-offs, as well as good income coverage from some movies.

Now this may not sound very good initially to your neighboring hedge fund managers in Connecticut or your oil and gas investor friends in Bahrain or Dubai, but aren’t these the same guys who are funding Hollywood blockbusters? And the only question for you, how do you get into the game without feeling like the uncle of the film school student who wrote his nephew a check for $ 1,000,000 for a movie starring his classmates from the theater department and ended up as free download on youtube? .com?

So, after doing your share of the homework, here’s what you discover a chance to spice up your rich but boring life may be:

* Sergey Brin and Larry Page of Google, Fred Smith, CEO of Federal Express, Norman Waitt, co-founder of Gateway Computers, Jeff Skoll of Ebay, Todd Wagner and Marc Cuban (formerly of broadcast.com), Max Levchin and David Grodnick of PAYPAL, Marc Turtletaub of The Money Store, Roger Marino of EMC Corp, former Chicago Bulls co-owner Jim Stern, Sidney Kimmel of Jones Apparel Group, Minnesota Twins owner Bill Pohlad; Real Estate Developers Tom Rosenberg, Bob Yari; and financiers Robert Sturm, Sheikh Waleed Al Ibrahim, Zeid Masri of SilverHaze Partners, Michael Singer, Mark Esses, David Larcher, Michael Goguen, Richard Landry, Michael Reilly, Rafael Fogel and Philip Anschutz are just a handful of high net worth entrepreneurs who entered the motion picture film production and financing business with successful results.

* There are several state, federal and international negotiable tax credit incentives that would offer a premium based on an equity position. Assuming there is a movie with a $ 10 million budget, where 50% is in equity and 50% is through international distribution guarantees prior to release. Now suppose there is a tax credit of 20-25% on the total amount of $ 10 million, which will immediately translate into a tax credit of $ 2-2.5 million for an investor.

* Numerous hedge funds such as Reed, Conner & Birdwell (DISNEY), Legendary Fund (Warner Brothers), Melrose Fund (Paramount Pictures), Ingenious Media’s 700 Million dollar Float on London’s AIM, Benjamin Waisbren Investments and a number of other funds and the Fund managers are entering the field of film finance.

* The explosion of international DVD, pay-per-view, home video, cable, megaplex cinemas, the future of multi-language video-on-demand downloads over the Internet, and cross-market digital distribution, including digital theatrical projection of low cost, the film industry. it is accelerating at an unprecedented rate of growth.

* The United States Job Creation Act of 2004, amending the Internal Revenue Code of 1986, became law. The Law creates three tax incentives expressly applicable to cinematographic films, one of which, article 181 of the Internal Revenue Code, is especially significant for independent film producers and their passive investors in qualified films with budgets of less than 20 million euros. Dollars.

* The film and entertainment sectors consistently outperform and exceed analysts’ expectations for growth, and are the only industries resilient to untimely global events and adverse economic conditions.

* Movie Investor returns may be more favorable and more liquid than holding direct equity positions in most public entertainment companies and other public companies, real estate investments, and other alternative investments.

* There is a high demand, audience and a growing distribution structure for specialized independent films, crime, horror and other low budget films, as evidenced by the success of such films as “Brokeback Mountain”, “Sideways”, “Capote”, ” Garden State “,” Napolean Dynamite “,” Y Tu Mama Tambien “,” My Big Fat Greek Wedding “,” Memento “,” Crash “,” Saw 1 & 2 “, Friday The 13th”, “Halloween”, “Texas Chain Saw Massacre, “” Hostel, “and” WOLF CREEK, “which was made for $ 800,000, purchased for nearly $ 4 million prior to release by Dimension, as well as” Hustle and Flow, “which was made for $ 2 million. dollars. and purchased for $ 16 million by Paramount Pictures.

* Aside from blockbusters such as “King Kong,” “Harry Potter,” and other large-scale studio films, most studio-produced films have underperformed at the box office. All the films that have been successful for the studios were externally financed or co-financed with studios, sold for 2-3 times their costs, and most of them retained overseas sales rights to maximize revenue.

So after seeing all the great benefits, how can you find a deal or movie project where you’re sure a Hollywood producer won’t use half of your money as a down payment for a new mansion in the Pacific? Palisades?

The key that separates successful movie financiers vs. Rookie oil moguls who come to Los Angeles with a pocket of money and end up going with a half pocket of money are called by various names: structured finance, leverage, risk minimization, multiple exit strategies, tax credits, and the ethical conscience of the filmmaker / producer.

What does that translate to you in a real world setting? Suppose you want to finance 100% of a $ 1.5 million low budget genre film whose worst case scenario is a DVD release and the proceeds from international sales and maybe some other capital sweeteners in converting the securities that you subscribe as part of the deal. Well, if you write a check for $ 1.5 million and the movie is shot in a state that has 30% tax credits, you get $ 450,000 in tax credits + under Section 181, you can write off that amount in Federal. So you are already doing well before the profit shows up. So imagine that you sell the film to 50 countries and, if you are very lucky, you sell the film to a studio for 3-4 times what it costs at a fancy festival like Sundance, Toronto, Cannes, etc. Do this for 5-10 movies and you can make a very profitable name among the Hollywood elite.

But let’s take it a step further and see how the bigger kids take advantage of the investment in movies because they can land a bigger star, which can translate into higher sales abroad. Let’s say a filmmaker / producer has a $ 10 million movie and you want to get in on the action. He would park $ 5 million in equity, he would receive a 20-30% tax credit on $ 10 million that will be $ 2 to $ 3 million, the producer will get the biggest star he can, get a studio to kick the other $ 5 million dollars, you won’t worry about seeing a penny from the theatrical release because you know your DVD earnings and international sales will cover your capital position. Make sense?

Now take advantage of this with different budgets, genres, stars, distribution, places where you can get high tax credits (that is, Puerto Rico is 40%), other exit strategies where you can find your shares in the London AIM, and you are already in. his new career path as a sophisticated and educated financial movie. Of course, if you want to go even further and guarantee 100% of your capital, that also has tricks.