Investing in Film - Q & A

Q: Isn't film a high risk investment?

A: Any speculative investment carries a risk, however, it is often assumed investing in film is riskier than other investments. But that is not entirely accurate:

As an example, stocks diversified in the financial sector of banks and real estate, were considered to be 'safe' investments. What could have been a safer than a stock diversified in the most conservative of all investments - banks and real estate? But yet, we saw those stock collapse in recent years.

And how safe  to invest in the icon of American Business - General Motors? Ironically, the pillars of American Business - the American Auto Industry desperately needed Government bail-outs just to stay in business whereas the Film Industry is not only healthy but one of the United States major assets:

"Based on Department of Commerce statistics, the copyright industries represent more than 6% of the nation’s GDP. We bring in more international revenues from exports than aircraft, agriculture, auto parts. The movie industry alone has a surplus balance of trade with every single country in the world that exhibits our films. No other American enterprise can make that statement."
Sheldon Pressor, Senior Vice President of Warner Brothers
Those who believe film investing has a higher risk than other investments point to cinema's two worst financial disasters: 'Heaven's Gate' and Kevin Costner's 'Waterworld.' 'Heaven's Gate' was unique in that the studio allowed director Michael Cimino to go radically over budget and out-of-control to shoot 220 hours of footage (more than 1.3 million feet of film) and deliver a movie that was 5 and 1/2 hours long. Despite being a theatrical bomb, since its release 30 years ago, 'Heaven's Gate' is still recouping monies in television sales, VHS, DVD's, cable, international sales, etc. And the other historic flop - 'Waterworld' broke-even many years ago. If flops were the norm and not the exception - studios would stop making movies.

There is a risk in any speculative investment, although there is an old adage: "No Risk- No Reward." It is sensible to diversify a portfolio with secure investments, such as CD's. Current CD interest rates are less than 1% for a CD, and with the US inflation rate at 1.8% it will not keep your investment even.  The average money market fund's annualized yield is an infinitesimal 0.02%. At that rate an investment of $10,000 will earn all of $2 a year - not quite enough to buy that mansion on Malibu beach.

An investment strategy depends on one's goals and level of financial security: as a general guide: one should not invest what one can not afford to lose. If investing $5,000 means not being able to pay the mortgage or put food on the table, then do not invest.

Q: With our current economy isn't this the worst time to do a new film?

A: Ironically - just the opposite - especially for low budget films - and especially for low budget films not dependent on Distribution advances for financing.

"This sobering recession ... has studios cutting back the number of movies they were producing in recent years." Doug Hansen, president and chief operating officer of Endgame Entertainment, says "Clearly, there are a lot less packages being made out there, but I think in the long run, it's healthy.We see it as a big opportunity."

Lacking any new distribution entities, Amritraj predicted, "We'll start to see holes on those domestic calendars."

Variety article, March 7, 2010:  http://www.variety.com/article/VR1118016032.html?categoryid=10&cs=1&nid=2248

Q: Are there tax incentives to investing in film?

A: Depending on one's situation there could be significant tax incentives.  Several states offer tax reductions as part of their Incentive opportunities.

For Federal Tax Information Section 188 click on:  http://governor.state.tx.us/files/press-office/Federal_Section_181.pdf
and for Section 199:

For any tax questions seek expert legal and tax advice.

Q: Tax advantages might be good for those in upper income levels, but I can't afford to lose my money in a film investment. What happens if the film goes over budget, or there is a disaster and the film is never made?

A: Most film productions can secure a Completion Bond (usually 2-2.5% of the budget) that assures banks and/or investors that:

1. The film will be in keeping with the screenplay, budget and production schedule that the bank or financiers approved;
2. The completion guarantor will complete and deliver the film in keeping with such pre-approved screenplay and production schedule, and advance such sums in excess of the pre-approved budget necessary to do so; or
3. In the event production of the film is abandoned, the completion guarantor will fully repay all sums invested in the film by the bank or financiers.
4. In the event of an ultra-low budget picture with a small group of investors the investment group may decide not to purchase Completion Bond insurance, as such, if additional capitol is needed to complete the film the investors can decide could decide between several options:  to contribute additional money (with a pro-rata share of profits), or apply for a bank loan, or bring in additional investors, or accept an advance from a distribution company.

Q: How can I be confident in an honest accounting in a film?

A: In addition to the oversee and security of a Completion Bond company, film productions have the integrity of qualified Production Accountants and Attorneys. Moreover, states that offer incentives require a State Audit; some states require both an official State Audit and an Independent Third Party Audit.

In addition, all sales require a 'chain of title.' This means the screenwriter turns over the copyright to the film corporation. The corporation now OWNS the 'property' and the Distributors relies on the chain of title to sell, for example, to Foreign countries who pay the Distributor who in turn must send checks to pay the corporation who controls the chain of title.

Q: How do 'Deferrals' effect budgets and profits?

A: It can be a significant savings to the budget if Producers, Directors, Writers, Actors, Crew, Special Effects Companies, etc. agree to defer part of their fees. There is more risk for the creative side, but less risk for investors since it lowers the budget and therefore requires less monies to be invested. Deferred fees are recouped prior to net profits, and deferrals may be slightly above normal fees because of the extra risk.

When you see some actors are on every talk show promoting their new film it is either because they have a contractual obligation to be available for publicity, but many times it is because they lowered their fees for a percentage of the profits.

In addition, it could be just to get the film made. Making a film is a long process with many changes along the way. Often a film may have the star and a director 'attached' to the project but then the financing is not complete. Later the financing is in place and the director is attached - but then a star drops out. There are many examples of movies that have taken 10 years to be made - and some of those went on to win Academy Awards. Making a movie is a complex and fragile journey with many pitfalls, sandtraps and bunkers, detours and many 'element' changes along the way. It is often said -  "It's a miracle any movie ever gets made."

Q: Wouldn't it be better to invest in a major Hollywood film than a low budget independent feature?

A:  Studios do not like to share their budgets, but this is one listed on Wikipedia  for the film Spider-Man 2:
Story rights: $20 million
Screenplay: $10 million
Producers: $15 million
Director (Sam Raimi): $10 million
Cast: $30 million:  (Tobey Maguire: $17 million - Kirsten Dunst: $7 million  - Alfred Molina: $3 million - Rest of cast: $3 million )
Production costs: $45 million
Visual effects: $65 million
Music: $5 million; Composer (Danny Elfman): $2 million.
Total: $200 million

If one were able to invest $5,000 in Spider-Man it would represent an investors' profit share of 0.00025. Whereas if one was lucky enough to have invested $5,000 in Paranormal Activity (a budget of $15,000) one would have had a 1/3 share - a 1/3 of a share of a film that hs grossed over a 1/4 Billion dollars would be a significant profit.

Q:  In addition to possible financial benefits are there other benefits in investing in film?

A: Being part of a film production can be exciting: walking the red carpet on Opening Night. Showing your friends the first DVD copy. Seeing the DVD release on shelves at Blockbuster. Attending a screening at one or several of the 1,200 film festivals around the world. Seeing the film trailers in movie theatres. Seeing clips on YouTube. Reading the reviews in newspapers and magazines. Seeing photos on the Internet. Watching the video with your friends and family. Seeing the movie translated into other languages. Reading comments from viewers on IMDB and other sites and blogs around the world. In short, an investor becomes a partner in the experience, part of the legacy and history of cinema.

And the Oscar goes to ...