An investment basis for wealthy investors who are thinking of film financing

Okay, so you woke up one day, checked your Swiss bank account, called your family office planner, had breakfast with your private client wealth manager, called your accountant, and the three of you decided to invest your proceeds from the merger or acquisition of your last business don’t go into some shady hedge fund or start-up biotech, but into Hollywood movie funding because you figure you need the state tax credits, the federal tax write-offs, plus a nice hedge of earnings from a few movies.

Well, that might not sound too good at first with your hedge fund manager neighbors in Connecticut or your oil and gas investor friends in Bahrain or Dubai, but aren’t these the same guys who fund Hollywood blockbusters? And the only question for you: How do you get in the game without feeling like the film student’s uncle who wrote his nephew a check for $1,000,000 for a film that starred his classmates from the theater department and the ended up on YouTube as a free download? com?

So now that you’ve done your share of homework, here’s what might be the opportunity to spice up your wealthy but boring life:

*Sergey Brin and Larry Page of Google, Fred Smith, the CEO of Federal Express, Norman Waitt, the co-founder of Gateway Computers, Jeff Skoll of Ebay, Todd Wagner and Marc Cuban (formerly of broadcast.com), Max Levchin and David Grodnick from PAYPAL, Marc Turtletaub of The Money Store, Roger Marino of EMC Corp, Jim Stern, former co-owner of the Chicago Bulls, Sidney Kimmel of Jones Apparel Group, Bill Pohlad, owner of the Minnesota Twins; 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 wealthy entrepreneurs who have successfully entered the Entry into film financing and production business.

*There are various tradable state, federal and international tax credit incentives that would offer a premium based on a stock position. Suppose there is a film with a budget of $10 million, 50% of which is equity and 50% from international distribution guarantees before release. Now let’s say there’s a 20-25% tax credit on the total $10 million, which immediately translates into a $2-2.5 million tax credit for an investor.

*Numerous hedge funds including Reed, Conner & Birdwell (DISNEY), Legendary Fund (Warner Brothers), Melrose Fund (Paramount Pictures), Ingenious Media’s $700 million float at London’s AIM, Benjamin Waisbren Investments and a host of other funds and fund managers enter the film financing arena.

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

*The American Jobs Creation Act of 2004, amending the Internal Revenue Code of 1986, was enacted. The law creates three tax incentives specifically applicable to motion pictures, one of which – Section 181 of the Internal Revenue Code – is particularly important to independent film producers and their passive investors in qualifying films with budgets under $20 million.

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

*Movie investors’ returns can be cheaper and more liquid than holding direct equity positions in most public entertainment and other public companies, real estate investments, and other alternative investments.

* There is huge demand, huge audiences and a growing distribution structure for specialized independent, crime, horror and other low-budget films, such as the success of films like “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 produced for $800,000 and was purchased by Dimension for nearly $4 million prior to its release, and Hustle and Flow, which was produced and purchased for $2 million $16 million from Paramount Pictures.

*Apart from big blockbusters like King Kong, Harry Potter and other large-scale studio films, the majority of studio-produced films underperformed at the box office. The films that were successful for studios were all externally funded and/or co-funded with studios, sold for 2 to 3 times their cost, and most of them retained overseas sales rights to maximize revenue.

After checking out all the great benefits, how do you actually go about finding a deal or film project where you’re sure half your money isn’t going to a Hollywood producer as a down payment on a new Pacific mansion? is used? palisades?

The key that separates the successful film financiers from the new oil tycoons who come to Los Angeles with a bag full of money and end up leaving with half a bag full is several things: structured financing, leverage, risk reduction, multiple exit strategies, tax credits, and the ethical awareness of the filmmaker/producer.

What does that mean for you in a real world scenario? Let’s say you want to fund 100% of a $1.5 million low budget genre film whose worst case scenario is a DVD release and profits from international sales and maybe some other equity sweeteners at the Converting the securities is which you trade as part of the subscribe. Well, if you write a check for $1.5 million and the film is shot in a state that has a 30% tax credit, you get back $450,000 in tax credits + under Section 181 you can write off that amount under Federal . So you’re already making a nice return before the profits come in. Then expect to sell the film to 50 countries, and if you’re really lucky you’ll sell the film for 3-4 times its cost to a studio at a fancy festival like Sundance, Toronto, Cannes, etc. Lead Do this for 5-10 films and you can make a very profitable name for yourself among the Hollywood elite.

But let’s really take it a step further and see how the bigger guys use film investment because they can get a bigger star that can translate into bigger foreign sales. Let’s say a filmmaker/producer has a $10 million movie and you want to get in on the action. They would park $5 million equity, get a 20-30% tax credit on $10 million, which is $2-3 million, the producer gets the biggest star he can get, and get a studio to do the other 5 Throwing in millions of dollars, you don’t have to worry about ever seeing a dime from the theatrical release knowing that your DVD profits and international sales will cover your equity position. Make sense?

Take advantage of this now with different budgets, genres, stars, distribution, places where you can get big tax credits (e.g. Puerto Rico is 40%), other exit strategies where you can find your shares in London AIM, and You are on your new career path as a sophisticated and educated film financier. Of course, if you want to go further and guarantee 100% of your capital, there are tricks for that too.