43 Ways to Finance your Feature Film

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43Ways to Finance Your Feature Film


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Copyright 2008by John W. Cones

All rights reserved. First edition 1995

Third edition 2008

Printed in the United States of America

11 10 09 08 4 3 2 1

Library of Congress Cataloging-in-Publication Data

Cones, John W.

43ways to finance your feature film : a

comprehensive analysis of film finance / John W.

Cones.3rd ed.

p. cm.

Includes bibliographical references and index.

ISBN-13:978-0-8093-2693-8(pbk. : alk. paper)

ISBN-10:0-8093-2693-0(pbk. : alk. paper)

1. Motion picture industryFinance. I. Title. II.

Title: Forty-three ways to finance your feature film.

PN1993.5.A1C64 2007

384'.83dc22 2007016176

Printed on recycled paper.

The paper used in this publication meets

the minimum requirements of AmericanNational Standard for Information Sciences

Permanence of Paper for Printed Library

Materials, ansi z39.48-1992.


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To Donna, without whose support, encouragement and

cooperation this book could not have been completed


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Contents

Preface xi

Introduction: No Single Best Way

PART ONE. Subsidies 9

1 Gifts and Grants 11

2 Domestic Government Subsidies and Tax Incentives 21

PART TWO. Investor Financing 39

active investor vehicles 47

3 The Investor-Financing Agreement 49

4 General Partnerships and Joint Ventures 52

5 The Initial Incorporation 59

6 The Member-Managed LLC 64

passive investor vehicles 67

7 The Manager-Managed LLC 71

8 Limited Partnerships 749 Corporate Finance 80

securities compliance 95

private (exempt) offerings

10 Statutory Exemptions of the 1933Securities Act, Section 4 96

11 Intrastate Offering Exemption 103

12 Regulation D 105public/private (hybrid) exemptions

13 Public/Private (Hybrid) Exemptions 115

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public (registered) offerings

14 Small Corporate Offering Registration 128

15 Regulation A 131

16 Regulation S-B 135

17 S-1Public Offerings 138

18 Over-the-Counter, NASDAQ and Stock Exchanges 141

PART THREE. Lender Financing 147

19 Lender Financing without Distributor Contracts 149

20 Negative Pickups and the Artificial Version 157

21 Presale Financing 166

22 Gap and Supergap Financing 177

23 Insurance-Backed Schemes 18424 Securitization 188

PART FOUR. Studio/Industry Financing 193

25 Studio Development and In-House Production 195

26 Studio Production-Financing/Distribution Agreements 199

27 Studio-Based Production Companies 204

28 Independent Distributors 20729 Domestic Studio Facilities 210

30 Film Laboratories 213

31 Talent Agencies 215

32 Actor Financing 217

33 Product Placements 221

34 End Users 225

35 Completion Funds 227PART FIVE. International Finance Options 231

36 Foreign Equity 233

37 International Coproductions 244

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Contents


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38 Foreign Tax Shelters and Tax Incentives 256

39 Blocked Currency or Blocked Funds 275

40 Foreign Currency 279

41 Foreign Below-the-Line or Facilities Deals 281

42 Foreign Government Subsidies 283

43 Foreign Debt Capitalization Programs 289

Conclusion: The Broader Film Finance Environment 291

Appendix A: Finding Investors 297

Appendix B: Limited-Use Business Plans 299

Appendix C: Financial Projections 304

Appendix D: Securities Marketing Considerations 307 Sources and Further Reading 331

Index 359

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Contents


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xi

Preface

This book is published with the understanding that the author is notherein engaged in rendering legal, accounting or other professional ser-

vices. For those readers seeking legal advice or other expert assistance,the services of a professional should be engaged for that specific purpose.All opinions expressed in this book are those of the author.

The earliest drafts of this book were used as texts and as a basis fordiscussion in the authors Independent Feature Film Financing andDistribution class in the graduate-level Independent Producers Pro-gram at the University of California at Los Angeles and in a lecture onfilm finance and distribution for the University of Southern California

School of Cinema-TV. Other parts of this book evolved from seminarhandouts developed for lectures sponsored by the American Film Insti-tute, UCLA Extension, IFP/West, American University (Washington,D.C.), the Nashville Bar Association, the Cal Western School of Law, theUniversity of Texas Entertainment Law Institute, the Semester in LosAngeles program of Columbia College Chicago, the North CarolinaSchool of the Arts and other film industry organizations. I am grate-ful for the useful comments I received from many of the graduate and

undergraduate students in those schools writing, directing, producing,business and law programs as well as others who attended my seminarpresentationsan aggregate audience of more than 5,000that includedcertain filmmakers, attorneys, accountants, broker/dealers, film com-missioners, film students, government officials and others. I have trulybenefited from their participation.


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43Ways to Finance Your Feature Film


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1

Introduction: No Single Best Way

This book has been written to meet a need within the American filmindustry for a balanced and objective overview of information relating to

the numerous film-financing options and their respective advantages anddisadvantages. The book is for those people, whether they are producers,executive producers, attorneys, screenwriters, investors or others, who arethinking about developing, producing, distributing or even investing inone or more feature or documentary films and trying to determine thebest way to go about financing the costs of their project or projects.

The need exists for several reasons: (1) Each year in the United States,thousands of filmmakers are confronted with the question, how can

I finance the costs of producing my feature (or documentary) film?(2) None of the currently available books, articles, or seminar presenta-tions provides a comprehensive overview of the subject. (3) Much of theinformation presented through books, articles, or seminars is biased inone way or another. (4) And, unfortunately, some of the informationavailable is simply inaccurate.

This book seeks to provide an overview of film finance and is dedicatedto the proposition that

there are a variety of ways to finance one or more feature films;

often a combination of methods may have to be used;

there is no single best form of film finance for all motion pictures at

all times;

there are advantages and disadvantages associated with each form of

film finance; and

one of the most important responsibilities of the producer or some-

one on the producers team is to be generally aware of the advantagesand disadvantages of each form of film finance so that the method or

methods chosen for a particular project are more likely to succeed in

raising the money needed.


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Introduction

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that used in the previous edition: instead of starting with a discussionof studio and industry financing (the least likely to be accessible to thefirst-time producer) and then proceeding to lender financing, investorfinancing and foreign financing options, this new edition starts with

those forms of film finance that may, of necessity, have to be consideredfirst by a U.S.-based independent feature film producer because they arelikely to be more accessible, even if they offer the least amount of funds.The book then proceeds to discuss other forms of film finance that mayprovide a greater amount of money or that may become available as theproducers career matures. Thus, the new order of the topics coveredis (1) gifts, grants, subsidies and tax incentive programs; (2) investorfinancing; (3) lender financing; (4) studio and industry financing; and

(5) international financing. For many film producers, the natural orderof progression for the last two broad categories may be reversed; after all,there is no law requiring that filmmakers proceed in this fashion. Theyare free to pursue whatever financing is available for a particular projectat any given time. Some forms of film finance simply make more sensefor particular filmmakers at a given stage in their career.

Independent Film Finance

With the exception of the section relating to studio film finance, most ofthe film-financing methods presented in this book are considered moreappropriate for the production of independent feature films and docu-mentaries. But just what is an independent film? The Independent Filmand Television Alliance (IFTA, formerly known as the American FilmMarketing Association, or AFMA), a trade association for the indepen-dent film and television industry, sets forth an easily applied definition.Most important for the purposes of this book, the IFTA definition focuses

on how the film is financed: It states that a film should be considered anindependent film if more than fifty percent of its financing comes fromsources other than the . . . major U.S. studios. The IFTA definition goeson to indicate that independent productions cover all budget ranges andgenres and are aimed at wide, as well as niche, audiences.

Another industry association, not so directly tied to film finance andproduction, uses a less objective and more difficult to apply definition.The Film Independent group (FINDformerly IFP/West or IFP/LA)takes the position that an independent film is one that exhibits unique-ness of vision; contains original, provocative subject matter; was producedusing an economy of means (with particular attention paid to total pro-duction cost and individual compensation); and derived some unstatedpercentage of its financing from independent sources. That means that,


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Introduction

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at the discretion of FIND, films financed by the major studios or theirsubsidiaries can compete for FIND awards, which may be the purpose ofsuch a vague definition: It allows FIND to include more well-known starsin their annual awards ceremony, thus making the organization appear

more glamorous. In the process, however, FIND is literally inviting themajor studio/distributors to gobble up even more of the attention andmarket share desperately needed by independent filmmakers. Thus, asan organization, FIND can hardly be said to effectively represent theinterests of independent filmmakers.

To some extent, both of these definitions seem to be succumbing tothe power of the Hollywood major studio/distributors. After all, if a filmis 50percent financed by a major studio/distributor or one of its affili-

ates, it is most likely also going to be released, at least in the domesticmarketplace, by a major studio/distributor or affiliate, which will haveexerted a considerable amount of influence over both the production andthe distribution; thus, for all practical purposes, it is not an independentfilm, in the ordinary sense of the word. When major studios put up halfof the production financing for a film, they tend to have a say in how thefilm is made.

To be more precise in determining whether a given film is an inde-

pendent film, it may be relevant to determine which of the three phasesin the life of a film have been financed without the aid of any of theso-called major studio/distributors. In other words, if an independentproducer has been responsible for raising the funds to develop, produceand distribute a motion picture, that is clearly an independent film. If, onthe other hand, an independent producer has financed the developmentphase but has used the assistance of a major studio/distributor or one ofits subsidiaries in financing the production phase in addition to the dis-

tribution of the film, it would not be accurate to call that an independentfilm. Still further, if an independent producer raised the financing for thedevelopment and production phases and then merely looked to a majorstudio/distributor or to an affiliate or subsidiary of one to release thepicture (i.e., the distributor was only responsible for the costs of distribu-tion and acquired the rights to distribute the film as a pure acquisition),that may be considered an independently produced film that was merelyreleased by a major studio/distributor, affiliate or subsidiary.

The Internet

In this new era of the Internet, a book also has to be written in a waythat complements the information available online. Thus, the extensivebibliography (i.e., Sources and Further Reading) appearing at the end of


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Introduction

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the book not only includes articles and books but also online sources.Readers must recognize, however, that websites tend to come and go. Inaddition, since anyone can put up a website or post an article, the qual-ity of the information relating to film finance appearing online is not

consistent, and some of it may not be reliable. Thus, readers are advisedto proceed cautiously. Never rely on any single source for film-financinginformation. Learn from as many different sources as possible. And donthesitate to check out the credibility of sources. If you find that someone ispushing too hard for your acceptance of their point of view, consider theirmotives. Many film finance practitioners do not even know what a conflictof interest is, much less how to appropriately handle such a situation.

Bad AdviceA new feature added to this revised and updated edition of the book isentitled Bad Advice. Independent filmmakers are often given misinfor-mation about film finance, and some of that bad advice has been notedhere so that future filmmakers can recognize and avoid it.

Why Forty-Three?

The choice offorty-three as the number of ways to finance a film is some-

what arbitrary, but it is based on an early analysis of the question andan estimate of the number of possible solutions. A number smaller orlarger could have been chosen. In fact, by one count, as many as sixty-twodistinct types of financing methods are explored in this presentation,and an even greater number of combinations could be used on a givenfilm. Thus, the various forms of film finance could have been presentedas the Major Types of Film Finance. Certain forms of film finance thatwere covered as separate chapters in the earlier edition (e.g., the three

exemptions under Regulation D) are now covered in one chapter. It justso happens that forty-three was my original estimate of the number offorms of film finance that could be reasonably discussed in a book of thisnaturea number not so large as to be overwhelming, but large enoughto suggest the great range of film-financing optionsand although dur-ing the actual writing of the book, various editorial decisions were made,splitting, combining, adding or omitting chapters, forty-three stayed onas a comfortable, if not catchy, number.

Availability Analysis

Finally, a book that focuses on providing an analysis of the advantagesand disadvantages of various forms of film finance, as this one does,will overlook one of the most important advantages or disadvantages,


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Introduction

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as the case may be, if it does not discuss the availabilityof such formsof film finance; that is, whether a particular form of film finance wouldrealistically be available in the marketplace for a particular filmmaker ona particular project at a given time, regardless of what other advantages

might attract the filmmaker to that form of film finance. Different formsof film finance may be more, or less, available to some people than others,depending on the specific project, its budget and other film elements,along with the relationships and other resources that such persons bringto the table, and so forth. In addition, reliableavailabilityinformationis difficult to come by in the film industry, if for no other reason thanthere is no organization that routinely develops and makes objective,comprehensive film-financing information available to those who need

it (another missed opportunity for the professional associations purport-edly representing the interests of independent producers). Thus, beforea producer ultimately determines which form of film finance is best fora particular film project at a given time, it is important to objectivelyanalyze whether that form of film finance is realistically available forthat person and that project at that particular moment.

Overview and Order of Use

In the normal course of events, a filmmaker might start off as a soleproprietor and might choose to operate the sole proprietorship under afictitious name (or dbadoing business as). The filmmaker may nextchoose to bring some start-up funds into the business by seeking gifts,grants or investment funds through an investor-financing agreementor a joint venture agreement. Eventually, the filmmaker may choose tocreate an entity to serve as the production company, either a corpora-tion (so-called regular C corporation or S corp) or a member-managed

limited liability company (LLC). In either case, the creation of such anentity will provide another opportunity for the filmmaker to raise someadditional start-up funding for the production companys operations.The next level of finance might come from a privately placed securitiesoffering of corporate stock (long-term corporate finance) or a privatelyplaced securities offering through a manager-managed LLC or a limitedpartnership (project financing). Such project financing may be for asingle motion picture project or a series of films. It may be combinedwith other forms of film finance, such as gifts, grants, coproductions(joint ventures), lender financing, or state, federal and foreign subsidiesand tax incentives.

In the alternative, the filmmaker may want to conduct a public (regis-tered) securities offering for LP or LLC units. If the venture continues to


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Introduction

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the advantages and disadvantages of each form of finance as applied tothat filmmakers current circumstances. Also, somewhere along the way,the filmmaker may choose to become vertically integrated and not onlyengage in production but set up a subsidiary development company, or

an affiliated distribution arm, and eventually, maybe even an exhibitioncompany. Thats what the major studio/distributors did. The companymay also expand horizontally, engaging not only in film production butthe production of television shows and other media and entertainmentactivities. Good luck with all of that!


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PART ONE

Subsidies

This first section of the book brings together several forms of film financethat are not generally considered stand-alone financing methods, in thesense that such methods are not likely to raise enough money to financethe entire production of a single motion picture, unless the budget is inthe ultra-low-budget category. However, such film-financing methodsmay work well in supplementing one or more of the other forms of filmfinance described in later parts of the book. In fact, the various domestictax incentive programs described in this part, by their very definition,

are generally used in conjunction with investor financing techniques sothat investors may benefit from the tax incentives.


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Subsidies

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the size of estates eligible for the tax exemption increased from $675,000in 2001to $1million in 2002and 2003, $1.5million in 2004and 2005, $2million in 2006through 2008and $3.5million in 2009. When the year2010arrives, the estate tax is supposed to end. The heirs of people who

die in 2010may be able to avoid the estate tax altogether. However, therepeal is temporary. The legislation contained a so-called sunset provisionthat would bring the current estate tax rules back in force in 2011. At thattime, the debate over the estate tax may resume. In the meantime, someproponents of estate tax repeal have been advocating passage of a law thatwould make such tax cuts permanent.

Gift Tax

As a general rule, in the United States a federal gift tax is imposed ontransfers of property by gift during the transferors lifetime (IRC Section2501), but most states do not impose such a tax. The gift tax is imposedon every gift except those subject to specific exclusions under the law. Forexample, charitable gifts are excluded from the tax. On the other hand,gifts to a spouse are not excluded but are entitled to a deduction thatresults in there being no tax on gifts between citizen-spouses.

Generally, the gift tax rate ranges from 37to 49percent of the value

of the gift. However, there is a provision in the law that allows donors tomake gifts each year up to a certain amount to any person, and there isno limit on the number of persons who can receive those gifts. Formerlythe limit was $10,000each year per person, but the limit has now beenincreased to $11,000. In other words, a donor can now make as many$11,000gifts as he or she desires each year without incurring any gift taxobligation, as long as no one person receives more than $11,000from thesame donor in any one calendar year. That means, of course, that a donor

could give a filmmaker $11,000in late December and another $11,000inearly January without being subject to the gift tax in either year.

By taking advantage of this annual exclusion provision in the law,the federal gift tax law permits donors to reduce the size of their estatesby making $11,000gifts each year to as many people as they wish. Suchgifts can be made to children, grandchildren, great grandchildren, otherrelatives, friends or anyone elseincluding filmmakers. The relationshipbetween the donor and the recipient does not matter. The value of thegift is the amount of money given away or the fair market value of anyproperty given away calculated as of the date of the gift. This technique ofmaking annual exclusion gifts can result in substantial savings of federalestate taxes for the donors family, assuming the donors estate would besubject to the estate tax.


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Gifts and Grants

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Filmmakers need to know that in addition to helping filmmakers getstarted, making gifts can be an excellent way for donors to reduce taxes,and tax reduction may be the motivation for such gifts. The basic principleinvolved is that when donors give something away while they are alive, it

will not be a part of their estate when they die and therefore their heirs willnot have to pay taxes on it. On the other hand, if the estate tax is finally andpermanently abolished, this motivation to make gifts will disappear.

As is often the case, this area of the law is quite technical and maychange from year to year; thus, if a filmmaker is placing significant reli-ance on gifts for funding some of the development or production costs ofa film, an attorney or accountant should be consulted for a review of thecurrent status of such laws. In any case, filmmakers may want to talk to

wealthy individuals about helping to finance their film through gifts thatreduce the size of the donors estate and avoid any gift tax.

Advantages

No obligation to return or pay back. The recipient does not have to paya gift back to the donor.

Current enjoyment. Recipients can currently enjoy the benefits of thegift (i.e., use the gift to help produce a film).

Tax advantages for donor. A donor may be able to avoid federal estatetax on gifted property. The estate or inheritance tax on appreciation invalue after the date of the gift may also be avoided.

Tax advantages for recipient. Income from the gifted property maybe taxed at a lower income tax rate (assuming the recipients income issubstantially less than the donors).

Disadvantages

Loss of control. Donor loses control over the gifted property.Loss of income. Donor cannot retain income from the gifted property.No return. Donor cannot demand return of the gifted property.Creditors claims. Gifted property may be subject to claims of the

recipients creditors.Divorce proceedings. Gifted property may be subject to divorce pro-

ceedings of the recipient.Medicaid eligibility. The donors eligibility for assistance from Medicaid

for nursing home expenses may be affected.

Financing Films with Grants

Grants for filmmakers may come from foundations, government agencies,large corporations, film festivals, arts organizations and other groups.


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Grants may be intended to fund and encourage screenwriters, students,women or minority directors, or the production of films relating tocertain subjects of interest to the grantor. They may be intended to fundcontroversial or experimental films or specific ideas or causes, such as

strengthening organizations that address poverty and injustice or promotedemocratic values, international cooperation and human achievement.They may be specifically designed to cover the costs of development, pro-duction or postproduction, or may be used as so-called finishing funds,or even to cover the cost of distributor delivery items. They also may betargeted at specific populations or residents of certain cities or states.

Most grants are cash awards, but some may be for materials or equip-ment. Other sources may characterize their grants as so-called recoverable

grants, loans or loan guarantees. In some instances, the grant organiza-tion may require the production company to match the grant with fundsfrom other sources. Some grant-making organizations require that activi-ties supported by grants and program-related investments be charitable,educational or scientific, as defined under the appropriate provisions ofthe U.S. Internal Revenue Code and Treasury Department regulations.

Seeking one or more grants can be extremely competitive. Grant sourcefunds are limited in relation to the great number of worthwhile propos-

als received. Some grant-making organizations will receive as many as40,000grant requests in a given year.

Research Phase

Asking a foundation or any organization for money and actually get-ting it may be more overwhelming for a filmmaker than actually produc-ing the film. The initial task is to identify one or more sources of grantsthat may benefit the planned production. That means going online, going

to the library or going to the bookstore to locate sources of informationon organizations that make grants.

Then the grant research portion of the project has to be narrowed togrants relating to films. That research has to be focused even more: to findorganizations that make grants for the specific kind of film the producerintends to produce. Be encouraged by the fact that many foundations arespecifically created for the purpose of giving away money. The producersobjective is to persuade one or more of these organizations to award thatmoney to a particular film project instead of to competing projects.

Most experts in the field recommend that this research phase be han-dled very carefully, and that is why it is so time-consuming. It is essentialto learn which organizations may show serious interest in the subjectmatter of the proposed film. On the other hand, many foundations and


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Gifts and Grants

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other organizations do not have specific funding programs for films, butoften they have mission statements that will provide useful guidance. Aproducer seeking a grant must study the foundation, its grant program,the programs guidelines, the organizations annual report and any other

information that will aid in the evaluation of how a proposed film mayadvance the mission of the organization.The Grantsmart.org website, http://www.grantsmart.org, provides a

searchable database with more than 480,000tax returns filed by morethan 95,000private foundations and charitable trusts. The data are sup-plied to the site in raw form by the IRS and are updated on a continuingbasis. By law, these tax returns are public records, and they may proveuseful in the filmmakers search for a grant source.

Another valuable online resource may be found at the website for theNew York Foundation for the Arts, http://www.nyfa.org. The site providesinformation on helpful articles, online resources, books, funder directo-ries and writing guides. The resource page may be found at http://www.nyfa.org/leve13.asp?id=209&fid=1&sid=51.

Once such a match is identified, the producer may want to contact theorganization directly to gain more insight into the nature of its interest.It may even become necessary to embark on a campaign to persuade the

organization that the proposed film would be a good way to advance theorganizations mission statement. That sometimes means getting involvedwith people in the organization. That is where the filmmakers socialskills and politics sometimes come in to play. This type of research andpersonal involvement is all designed to help the film producer developa tailor-made application for an available grant. Using the shotgun ap-proach of sending out generic proposals to many possible grant sourcesis not generally recommended.

It is important to review the grant organizations requirements regard-ing rights to the results of a grant (i.e., so-called grant products) to makesure that those rights are consistent with the producers planned use of thefilm production. Some programs will require an acknowledgment (e.g.,screen credit) on all funded materials and products. The grant organiza-tion may also reserve a royalty-free, nonexclusive and irrevocable right toreproduce, publish or otherwise use a work produced with its funding.Some may even want the grant money to be repaid if the project makesa profit. It is important to know these requirements going in and to planfor them. The process of seeking grants gets even more complicated if anapplicant is trying to obtain grant money from several sources. Then itis necessary to make sure the rights requirements of each organizationare consistent with each other.


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Subsidies

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Some grant-making organizations limit their grant funds to orga-nizations or restrict the number of grants made to individuals. So it isimportant to note whether only individuals or only entities (or both) areeligible for the grant; and if an individual, whether that individual must

be a U.S. citizen, must reside in a particular state or city and must haveresided in any particular place for a period of time prior to the applica-tion being submitted.

Application Process

Some grant programs will allow a prospective grant applicant to sendin a brief letter of inquiry before a request is made for a grant or program-related investment. Through such a letter, the prospective grant applicant

may be able to determine whether the foundations present interests andfunds permit consideration of the request.

Such a letter may include

the purpose of the project for which funds are being requested;

problems and issues the proposed project intends to address;

information about the production company proposing to produce

the film;

the estimated overall budget for the project; the period of time for which funds are requested; and

the qualifications of those who will be working on the film.

Then after receiving the letter, the grant organizations staff membersmay ask the grant seeker to submit a formal proposal, or point out whythere is not a good fit between the two. Usually, grant organizations willeventually require some form of more formal proposal or application. Inother cases, there are no grant application forms. A grant application mayhave several components, including a cover sheet, narrative portion andbudget. Each grant program will provide special instructionsprogramguidelineson how to prepare an application for their grants. Theseshould be reviewed carefully before beginning to prepare the applica-tion. Look for information about the focus of the program, the eligibilityrequirements and the types of funding offered. A film producer needsto make certain that he or she qualifies for the particular grant, since a

considerable amount of time can be wasted if it is learned after the factthat the filmmaker or project are not eligible and therefore could noteven be seriously considered for a particular grant.

Although each prospective grant source will have its own specific re-quirements, grant proposals without application forms typically include


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the financial status of the production company;

a description of the proposed film and how and where it will be produced;

the names and biographical information for those attached to the film;

a detailed film production budget;

a description of the present means of support for the production company;

the status of applications to other possible funding sources; and

the legal and tax status of the film production company seeking the

grant.

Unfortunately, there is no standard application form. So applicationswill have to be customized for each potential grant. One of the primarygrant-writing skills is simply the ability to write effectively. If, as a film-maker, writing is not one of your strong points, then clearly you will want

the assistance of someone else who has those skills when applying forgrants. There are professional grant-writing consultants who may be ableto help in this process, but they also will either charge money up front, ona monthly basis or at least take a percentage of the money raised. Bringingsomeone with grant-writing expertise on board as a coproducer may bethe dream of the producer seeking grants, but that situation is likely tobe rare in the real world. Sometimes bringing on a more experienced filmproducer will enhance the strength of the grant application, regardless ofwhether the person has grant-writing skills, and so will putting togetheran experienced team of filmmakers to demonstrate that your group hasthe capability of producing a quality film. Others even suggest that afilm producer should surround himself or herself with an experiencedboard of advisers to both gain their good advice and help strengthen thegrant application.

Often the application itself will ask whether the applicant has received

other grants. Apparently many grant sources find the indication ofcommitment by other grantors reassuring, particularly in cases wherethey know that their own grant alone is not sufficient to complete theproposed project.

Experienced grant writers advise that applications for grants needto be studied carefully. Any particular grant application may be oneof hundreds or even thousands that are being submitted to a givengrant source during a single grant season. Answers that write around

a question or do not otherwise answer the question asked will reducethe chances of the application being well received. The same is true forincomplete applications. Grant consultants consider the following tobe some of the more common characteristics of grant applications thatare not very persuasive:


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not really understanding the mission of the potential grant source;

providing information that is not consistent with the grants guidelines;

choosing to apply to a grant source that is not a good fit for the film;

failing to answer all of the questions or failing to provide adequate

information in response to one or more questions; and

significantly underestimating the cost of making the film, or grossly

overstating the films budget.

Some grant providers are available to offer advice about preparing aproposal, to supply examples of grant applications and even to reviewpreliminary drafts (for most programs, if they are submitted well beforethe deadline). Producers should pay close attention to each programsinstructions on how to submit the application, whether by mail or online.If the requirement is for mail, an online application is likely to be ignored.Note also that even if formal applications cannot be accepted by emailor fax, a particular grantor may encourage the use of fax or email forother kinds of correspondence, including inquiries, preliminary drafts,recommendations or reports. To ensure that the application is processedin a timely fashion, the envelope or package used to send the applicationmaterials should prominently display the producers return address and

should not be covered with tape.Each grant program will have its own deadline. If cutting it close,double-check whether the deadline is based on receipt of the applica-tion or its postmark.

Some grant organizations consider applications throughout the year. Insome instances, a grant applicant will have to wait seven to eight monthsafter the deadline to get a decision. On the other hand, applicants to somegrant organizations may at least receive within six weeks an indication

of whether their proposals are within the grant organizations programinterests and budget limitations.

Grant Monitoring

Most grant organizations engage in some form of monitoring activi-ties that may consist of regular financial and narrative reports submit-ted by the grantee. During the course of a grant, some grant programssend representatives out to actually visit with the grantee onsite. Theyreview the grantees periodic financial and narrative reports and sharethem with a grants administrator and occasionally an attorney who alsoreviews them and provides comments. The grantee may be asked to at-tend meetings the organization convenes to discuss current and futureprogram strategy. In other cases, the grant-making organization may hire


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consultants to help monitor groups of grants or a single grantees work.Monitoring is designed to ensure that the funds are used for approvedand lawful purposes and to see whether those purposes are contributingto the grant-making organizations larger goals.

Latino Public Broadcasting Grants

One example of a sponsored grant program for a specific type offilm is that of the Latino Public Broadcasting (LPB) organization. Thegroup holds an annual open call for independent producers throughoutthe United States in the first week of June to apply for funding for thedevelopment, production and distribution of television programmingthat represents Latinos and their culture. Made-fortelevision movies

and documentaries are included. For four months before each yearsopen call, LPB executives travel around the country, holding workshopsto inform producers how to apply for funding.

Independent producers, who apply for funding from LPB may expect toreceive grants between $5,000and $100,000to help support their projectsat any phase of production. While the LPB program focuses primarily onthe promotion of Latino projects and subject matter, its target audienceis not strictly Latino. The idea is for the projects to have a broad appeal.

At the same time, the programming supported by LPB is noncommercialand conveys educational and cultural messages. The organization reportsthat it has seen a large increase in the number of proposals received atopen calls in recent years. It may see as many as 135proposals in a givenyear, from which only about 14are selected for funding.

Latino Public Broadcasting was created in 1998by Edward JamesOlmos and Marlene Dernier and is part of the National Minority Con-sortia, a division of the Corporation for Public Broadcasting (CPB). The

Minority Consortia includes five divisions, each of which receives fund-ing from the CPB to finance programs representative of their respectiveminority communities.

Advantages

Only possible funding source. One or more grants may be the only avail-able funding source for certain film projects that are highly specializedor targeted at small, specific groups and that are not expected to makea profit.

No obligation to repay. Often, but not always, a filmmaker awarded agrant is not expected to repay the money.

Combination financing. Small grants might be combined with otherforms of film finance to bring a movie to the screen.


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Disadvantages

Grants too small. Relative to the cost of producing a feature film oreven a documentary, grants are rarely large enough to play a significantrole in funding a feature-length movie.

Lots of research involved. A considerable amount of research is gener-ally required to identify potential grant sources and to determine morespecifically whether an application relating to a specific film project isappropriate to any given grant source. Thorough grant research mayrequire the review of hundreds, if not thousands, of possibilities, somefrom outside the subject area of filmmaking.

Challenge of grant writing. Properly completing or drafting the grantapplication can be a tedious and time-consuming activity.

Professional assistance. The expert assistance of a grant consultant maybe required to reduce the time and effort involved in research and grantwriting, and such assistance may cost money.

Extremely competitive. Seeking grants for any purpose is generally avery competitive field and sometimes politicalgetting one or moregrants is usually a long shot at best.

Takes time. The passage of a considerable amount of time is usuallyinvolved in obtaining grantsresearch time, writing of the grant applica-

tion, waiting for the decision and actually receiving the check.Monitoring required. The way in which the funds are being spent is

likely to be monitored by the grant-making organization.


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2 Domestic Government Subsidies andTax Incentives

It may not be quite accurate to consider tax incentives as a stand-alone

form of film finance. In all fairness, tax incentives function more as asupplement to investor financing, in the sense that they provide additionalmotivation for investors to invest. Many investors are partly motivated bythe opportunity to get tax deductions from their investments, whether infilm production or otherwise. Recently in the United States, federal andstate governments have begun passing various forms of tax incentives toencourage investment in U.S.-made films, while also discouraging run-away productions going to Canada and elsewhere. For the purposes of

this book, domestic tax incentives are discussed separately from investorfinancing here.

The Federal Approach

When Congress passed the American Jobs Creation Act of 2004(contain-ing special rules for certain film and television productionsSection 244of HR 4520) and the president signed the legislation into law in Octoberof that year (later codified as IRC Section 181), many in the Hollywood-based U.S. film industry cheered and predicted great things for the futureof film production in the United States. At the time of this writing, it wasstill too early to tell how much of an impact the legislation would haveon the financing of film production domestically, and more specifically,whether it would move significant amounts of investor funds into filmproduction as intended. In addition, as of the early months of 2005,there were already reports of talk in Congress about the possible repeal

of some elements of the new tax incentives for film. Such is the nature ofgovernment-provided tax incentives.To summarize, the Special Rules for Certain Film and Television

Productions found at Section 244of the American Jobs Creation Act of2004apply to films produced after October 22, 2004, and before January 1,2009. The legislation would allow the investor members of an entity such


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as a limited partnership or limited liability company that has acquiredthe rights to produce a feature film to elect to deduct their pro rata shareof 100percent of the direct and indirect costs of producing the film asan expense for the taxable year in which the costs of production are first

incurred, so long as the aggregate cost of the film does not exceed $ 15million and 75percent of the total compensation paid to actors, directors,producers and other relevant production personnel working on the filmis paid for services performed in the United States.

More specifically, the legislation provides that a taxpayer may electto treat the cost of any qualified film (and in some instances, televisionproductions) as an expense that is not chargeable to a capital accountand to take such costs as allowable deductions. The deductions, however,

are limited in that they do not apply to any qualified film or televisionproduction the aggregate cost of which exceeds $15million. However, inthe case of any qualified film production the aggregate cost of which issignificantly incurred in an area eligible for designation as either a speci-fied low-income community or a specified distressed county or isolatedarea of distress, the ceiling on the aggregate cost for which deductionsmay be allowed can go as high as $20million. Taxpayers making suchan election will not be allowed to use any other form of depreciation or

amortization deduction relating to the same expenses in that tax year.The term qualified filmas used in the legislation means certain pro-

ductions, as further described in the law, in which 75percent of the totalcompensation of the production is qualified compensation. The termqualified compensationmeans compensation for services performed in theUnited States by actors, directors, producers and other relevant productionpersonnel. The term compensationdoes not include participations andresiduals. However, IRS temporary regulations (Internal Revenue Bulletin:

200712, March 19, 2007, T. D. 9312) provide that these P and R costs areconsidered production costs for purposes of the production cost limit.

The taxpayers election to take this deduction needs to be made by thedue date (including extensions) for filing the tax return for the taxableyear in which costs of the production are first incurred. In addition, suchan election cannot be revoked without the governments consent.

Thus, in effect, this legislation moves the date of deductibility for filmproduction expenses forward from the date the film is placed in com-merce (the old rule), to the date in which the expense is incurred (the newrule). This might mean the deduction is available to a taxpayer-investorone or two years earlier in most instances. In addition, the legislation en-larges the percentage of deductibility for a films production expenses.


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However, Varietyran a headline as early as January 18, 2005, suggestingthat Congress was likely to make some revisions to the new tax provi-sions (see Congress Likely to Take Back Indie Pix Tax Break). Be sureto review the latest developments in the tax law before relying on the

provisions in existence as of this writing.

Right or Wrong Solution

The problem of so-called runaway production, referring to film pro-duction companies taking their operations out of the country to lowertheir costs, is the supposed reason for asking both federal and state gov-ernments to provide special tax incentives for the domestic production offeature films. But the problem is not necessarily caused solely by foreign

government subsidies; rather there are other contributing factors thatinclude the decisions made by U.S.-based film company executives whotry to save money by seeking cheaper production costs, as opposed toreducing the salaries of major star talent or their own executive salaries.It is even possible that the practices of foreign governments offering filmsubsidies are not the real problem at all. Maybe the real culprits are theHollywood major studio/distributors who, for nearly one hundred years,have used anticompetitive business practices to gain dominance over

film distribution even in foreign countries (see 337Reported BusinessPractices of the Major Studio/Distributors; and Hollywood Wars: HowInsiders Gained and Maintain Illegitimate Control over the Film Industry).When these other countries reacted to protect their own interests byproviding film subsidies (i.e., when they hit us back), then the Americanfilm production community reacted to that by seeking government help.Maybe the U.S. government is being asked for the wrong service. Insteadof trying to stop the foreign government subsidies or being drawn into

a never-ending spiral of competing subsidies, maybe our governments,federal and state, should join with the governments of other countriesto investigate the business practices of the Hollywood-based major stu-dio/distributors. That is the genesis of the problem.

Advantage

Faster deductions. The new U.S. tax law (HR 4520or IRC Section 181)allows production expenses to be deducted more quickly.

Disadvantages

Constantly changing. Just as other governments across the globemanipulate tax incentives for political reasons, the U.S. government is


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constantly changing the rules or even, in some instances, taking away orthreatening to take away the incentives altogether.

A fairness problem. Tax deductions provided to wealthy taxpayers tosupport a particular industry, such as the film industry, merely shift the

burden to other taxpayers, who pay more taxes to make up the lost rev-enue. Many consider this sort of government activity to be inappropriateand even unconstitutional.

State Tax Incentives

Most of the fifty states offer some form of tax incentive to encouragefilm production in their state (some thirty or more states do this). Thesesorts of tax incentives, provided to a particular industry over other in-

dustries, are often hotly debated in the state legislatures, and for goodreason. They provide examples of the quintessential special interest inconflict with the general publics welfare. After all, what small industrywouldnt want a special government subsidy or tax incentive to help itprosper?

The specific incentives change from time to time. Thus, any listingof them will always be out of date in some respect. Some such listingsdo appear online at several film-related sites and can serve as a starting

point for researching available tax incentives in states of interest. Thebetter practice, however, is to contact the state film commission in eachof the states being considered and obtain the most current informationdirectly from such offices.

In addition to state film commission offices, some regions and citiesalso fund and staff film commissions that can provide helpful informa-tion. There are approximately 350film commission offices worldwide,representing countries, regions and cities. The information that follows

provides some examples of the tax incentives offered by selected statesthat may be available to filmmakers. It also provides a collection and re-statement of the arguments often used on both sides of this film industrydebate, along with a listing of advantages and disadvantages of state-leveltax incentives, as well as sources for additional information.

Florida Film Finance Incentives

Any company engaged in producing filmed entertainment in Floridamay submit an application to the Florida Office of Film and Entertain-ment for the purpose of determining qualification for reimbursement ona percentage of qualified expenditures.

Florida entertainment sales tax exemption. Qualified production com-panies engaged in Florida in the production of motion pictures, made-


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for-television motion pictures, television series, commercial advertising,music videos or sound recordings may be eligible for a sales-and-use taxexemption on the purchase or lease of certain items used exclusively asan integral part of the production activities in Florida.

Sales tax exemption at point-of-sale. Florida does not require the pay-ment of sales taxes on the sale or lease of motion picture, television orsound-recording equipment. This exemption takes place at the point ofsale. In order to be exempt from Floridas sales tax at the point of sale,the production company must apply for a certificate of exemption to bepresented to a registered Florida sales-and-use tax dealer when makingpurchases and rentals of qualified production equipment.

The form and instructions needed to apply for the Entertainment

Industry Qualified Production Company Certificate of Exemption (formDR-230) can be viewed online and printed from http://www.filmin-florida.com/ifi/incentives.asp. The certificate can be renewed for eithera12-month or 90-day period.

Other Florida tax incentives. Florida does not require the payment ofany tax on artistic or copyright material on master tapes, master films,master records and master videotapes. Transactions involving masters aretaxed only on the value of the blank film, tape or other tangible personal

property. The value of all the major cost components of making a master,such as artistic services, processing, copyrights and royalties, is excludedfrom taxation when the master is sold or leased.

Florida does not impose a tax on the rent or lease of real propertyused as an integral part of a motion picture production. The renting ofstudios, soundstages, lots, buildings or any other real estate is exempt.This exemption applies to small, independent operations and to majorstudio facilities.

In addition, Florida does not impose a tax on labor to produce a film,commercial or sound recording made for a companys own use. Also,Florida is one of only seven states that have no personal income tax andno tax on inventory or goods in transit.

Hawaiian Tax Incentives

The State of Hawaii offers two tax incentives that may be applied tofilm production in that state. One is an investment tax credit based onHawaiis 2001Session Laws (Act 221). This provision allows the state togrant 100percent tax credits to local investors in movie productions thatqualify. The second Hawaiian tax incentive is the Motion Picture andFilm Production Income Tax Credit, which is a refundable tax credit forfilm productions that take place in Hawaii.


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Investment tax credit. In order to take advantage of the Hawaiian in-vestment tax credit, the business must employ individuals, own capitalor property or maintain an office in Hawaii and qualify under one of theperforming arts provisions of the law. The credit is nonrefundable but

is deductible from the Hawaiian investors net state income tax liabilityup to a maximum of $2million a year, per investor. The tax credit is ap-plied in percentages, over a five-year period.

Production income tax credit. In order to take advantage of the refund-able production tax credit, a film producer has to get the Hawaii FilmOffice to send a letter to the Hawaii Department of Taxation certifyingthat the film production actually occurred. An income tax return andthe Motion Picture and Film Production Income Tax Credit Request

(on state form N-316) must then be filed with the Hawaii Departmentof Taxation.

Qualifying productions may receive, as a production income tax credit,4percent of the total production expenditures incurred during the filmsproduction in Hawaii, including purchases and payroll, as well as a creditamounting to 7.25percent of hotel room taxes incurred during productionin Hawaii. In order to receive 100percent of these credits,

a Hawaiian name or word must be in the title; the film needs to depict Hawaiian scenery, culture or products;

at least $2million must be spent during production in Hawaii; and

a distribution agreement covering a minimum of 66percent of the U.S.

market must be in place (evidence of domestic/foreign distribution may

be substituted).

The Hawaiian film production income tax credit must be claimed on astate income tax return filed within one year after the close of the taxableyear during which principal photography began in Hawaii.

Illinois Film Production Services Tax Credit Act

Illinoiss Film Production Services Tax Credit provides a 25percent taxcredit on Illinois income tax for wages paid by a production company toeach employee that is an Illinois resident. Production companies mustalso be willing to promote diversity by hiring a certain percentage of

minorities or by participating in a job-training, education or recruit-ment program.Tax credit eligibility. The Illinois Film Production Services Tax Credit is

limited to the first $25,000of wages paid to each employee of the produc-tion. To be eligible for the tax credit, a production of 30minutes or less


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must pay at least $50,000in wages, while productions of 30minutes ormore must pay at least $100,000in wages. The salaries for the two high-est paid employees of the production are excluded. The tax credit has todirectly contribute to the productions filming in Illinois.

Application requirements. Written applications are required and mustbe submitted prior to filming activity on an application form providedby the Illinois Film Office. The applicant will be asked to provide thefollowing information:

production title;

full script;

type of production: film, television series, movie-of-the-week (MOW),

commercial, music video, documentary;

length of production;

number of planned shooting days in Illinois;

total budget of production;

estimated total salary and wages;

estimated number of Illinois residents to be hired to work on the pro-

duction;

percentage of minority workers in Illinois that the applicant plans to

employ to perform work on the production;

documentation on the applicants intention to participate in training,

education and recruitment programs; and

documentation showing that the Illinois film production services tax

credit is essential to the decision to film in Illinois.

Tax credit exclusions. The following types of programs cannot takeadvantage of the Illinois film production services tax credit:

news, current events or public programming, or a program that includes

weather or market reports;

talk shows, games, questionnaires or contests;

sports events or activities; and

awards shows, galas or telethons.

Out-of-state applicants. If an applicant is not an Illinois taxpayer (i.e.,has no Illinois income tax liability), the applicant may use one of the fol-lowing structures in order to be eligible for the Illinois film production

services tax credit:

establish a partnership or an LLC (limited liability company) in Illinois;

establish a subsidiary company registered to do business in Illinois; or

contract with an Illinois taxpayer to coproduce the production.


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For more information, contact the Illinois Film Office.

Louisiana Motion Picture Incentive Act

Louisianas Motion Picture Incentive Program was created by state

legislation passed in July of 2002. It provides three separate sets of pro-duction initiatives: (1) a sales-and-use tax exclusion, (2) an employmenttax credit and (3) an investment tax credit. The Louisiana Motion PictureIncentive Program was created in order to achieve three basic goals:

to encourage film and video production in Louisiana;

to advocate the hiring of Louisiana technical crew and talent; and

to support and encourage the use of Louisiana equipment and services

related to film and video production.

A non-Louisiana producer or production company seeking to takeadvantage of the Louisiana tax incentives may have to coproduce with aLouisiana-based production company or establish a Louisiana LLC withLouisiana-based investors to whom the tax credits can be transferred.

sales-and-use tax exclusion

The Louisiana Motion Picture Incentive Act grants an exclusion from the

state sales-and-use tax (4percent). A film production company will begranted the exclusion if it reports anticipated expenditures of $250,000or more from a checking account in a financial institution in Louisianain connection with filming or production of one or more nationally dis-tributed motion pictures, videos, television series or commercials in thestate of Louisiana within any consecutive 12-month period.

Eligibility. Eligible applicants are motion picture production companiesthat report anticipated expenditures in the state that in the aggregate

equal or exceed $250,000in connection with the filming or production ofone or more motion pictures in the state within a consecutive 12-monthperiod. An eligible applicants expenditures must be made from a check-ing account at any financial institution in Louisiana.

Application procedure. The Louisiana Office of Film and TelevisionDevelopment provides a standard form that applicants need to use inapplying for the sales-and-use tax exclusion. The application asks for

name of the production company; phone number of the production company;

name of the producer;

name and phone number of a company contact person;

dates of first preproduction activity and production dates in Louisiana;


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production office address and phone number in Louisiana;

total budget of the project;

total anticipated expenditures in Louisiana; and

synopsis of the project.

Submission and review procedure. Applicants must submit theircompleted application to the director of the Louisiana Office of Filmand Television Development. Submitted applications will be reviewedand evaluated by the director. Upon determination that an applicationmeets the eligibility for this program, the director will then forward theapplication for approval to the Secretary of the Louisiana Departmentof Economic Development.

Recapture provision. A motion picture production company that failsto expend the required $250,000within a consecutive 12-month periodwill be liable for the sales-and-use taxes that would have been paid hadthe approval not been granted. In such cases, the sales-and-use taxes willbe considered due as of the date that taxable expenditures were made.

Reporting requirements. The production company applicant will berequired to complete an expenditure questionnaire on a form providedby the Louisiana Film and Video Commission (Commission).

employment tax credit

Louisianas law provides that a motion picture production company isentitled to a tax credit for the employment of Louisiana residents in con-nection with the production of a nationally distributed motion picture,video, television series or commercial made in Louisiana. The credit isequal to 10percent of the total aggregate payroll for Louisiana residentsemployed in connection with such a production when total production

costs in Louisiana equal or exceed $300,000but are less than $1millionduring the taxable year, which increases to 20percent when the total pro-duction costs in Louisiana equal or exceed $1million during the taxableyear. The term total aggregate payrolldoes not include the salary of anyemployee whose salary is equal to or greater than $1million.

The credit may be applied to any income tax or corporation franchisetax liability applicable to the motion picture production company. If thecompany is not subject to income or franchise tax (e.g., a limited partner-ship or limited liability company), the credit flows through its partnersor members in the following manner:

corporate partners or members are to claim their share of the credit on

their corporation income or corporation franchise tax returns;


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individual partners or members are to claim their share on their indi-

vidual income tax returns; and

partners or members that are estates or trusts are to claim their share

of the credit on their fiduciary income tax returns.

Any unused credit may be carried forward no more than 10years fromthe date the credit was earned.

Eligibility. Motion picture production companies are eligible for the 10percent Louisiana state tax credit if production costs spent in Louisianaon the qualifying film or other production equal or exceed $300,000, butare less than $1million during the taxable year. Motion picture produc-tion companies are eligible for the 20percent Louisiana state tax creditif production costs spent in Louisiana on the qualifying film or other

production equal or exceed $1million dollars during the taxable year.Amount of credit. The credit is based on the total aggregate payroll of

the employment of Louisiana residents.Application procedure. The Commission provides a standard form that

applicants need to use when applying for the tax credit. The applicationis similar to that used for the sales-and-use tax exclusion.

Submission and review procedure. Applicants must submit their com-pleted application to the Director of the Louisiana Film and Video Com-mission. Submitted applications will be reviewed and evaluated by thedirector. Upon determination that an application meets the eligibility forthis program, the director will send a certification letter to the productioncompany and the Louisiana Department of Revenue.

Reporting requirements. The production company is required to com-plete and submit an expenditure questionnaire on a form provided by theCommission, along with a final cast and crew list for the project.

investment tax credit

The State of Louisiana also offers a tax credit against state income tax fortaxpayers domiciled and headquartered in Louisiana. The stated objectiveof the Louisiana tax credit is to attract private investment for the pro-duction of nationally distributed feature-length films, videos, televisionprograms or commercials made in Louisiana, in whole or in part, fortheatrical or television viewing or as a television pilot. Further, the state

hopes by means of the tax credit to encourage development in Louisianaof a strong capital base for motion pictures, in order to achieve a moreindependent and economically sustainable film and video industry.

Amount of tax credit. Investors earn the tax credit at the time of theirinvestment. If the total base investment is greater than $300,000and


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less than or equal to $8million dollars, each taxpayer will be allowed atax credit of 10percent of the actual investment made by that taxpayer.If the total base investment is greater than $8million dollars, each tax-payer will be allowed a tax credit of 15percent of the investment made

by that taxpayer.Application for state certification. Again, the Commission provides astandard form for applicants to use in applying for state certification.

Submission and review procedure. Applicants must submit their com-pleted application to the director of the Office of Film and Television De-velopment. Submitted applications will be reviewed and evaluated by thedirector of that office. Upon determination that an application meets thecriteria for this program, the director will send a certification letter to the

investors and the Louisiana Secretary of the Department of Revenue.Unused credit. In the event the entire credit cannot be used in the year

earned, any remaining credit may be carried forward and applied againststate income tax liabilities for the subsequent 10years.

Audits. A motion picture company applying for the investment taxcredit will be required to reimburse the Louisiana Department of Revenuefor any audits required in relation to granting it.

Reporting requirements. The production company is required to submit

a report evidencing the total base investment made in Louisiana, alongwith a completed expenditure questionnaire (on a form provided by theCommission) and a final cast and crew list for the project.

Recapture of credits. If an investor received credit for funds not actuallyinvested and expended in a state-certified production within 24monthsof the date the credits were earned, then the investors state income taxfor that taxable period will be increased by the amount necessary for therecapture of those previously granted credits.

Procedure for recovery. The Louisiana Secretary of Revenue may recoverinvestor credits previously granted to an applicant, but later disallowed,through any collection remedy authorized by state law.

New York Tax Credit

The State of New York offers a production tax credit program. Amongthe benefits is a 10percent credit for below-the-line costs, provided that

at least 75percent of these costs are spent at a New York State soundstage.If below-the-line expenditures amount to less than $3million, locationshoots also are eligible for credit.

The production scheme is capped at $25million each year and creditis distributed on a first-come, first-served basis. New York City offers


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an additional 5percent credit on production costs, as well as help withmarketing, location scouting and sourcing.

New Mexico Tax Incentives

New Mexico offers a gross receipts tax deduction on certain produc-tion costs at the point of sale. In order to benefit from the deduction,production companies filming in New Mexico have to apply for anexemption certificate.

In addition, New Mexico offers a film production tax credit. It is afully refundable tax credit of 15percent for eligible production coststhat may be deducted from the income tax of a New Mexicobased pro-duction company or producer. Thus, producers not from New Mexico

may want to coproduce a suitable film with a New Mexico productioncompany.

To qualify for either incentive, production companies must registerwith the New Mexico Film Office. Qualifying companies may chooseone incentive per documented expenditure. Feature-length films mustinclude an onscreen credit for the state of New Mexico. New Mexico alsodoes not charge location fees for state-owned buildings.

North Carolina Film Industry Development AccountsThe State of North Carolina offers what it calls a Film Industry

Development Account. The account is funded by taxpayers and paysup to $200,000to any qualified production company making a film inNorth Carolina.

The Film Industry Development Account subsidies require that acompany spend at least $1million in North Carolina to receive grantsand prohibits a subsidys use for political and issue advertising or for

obscene films. Unlike similar statutes in other states, the North Caro-lina statute creating the program does not, however, require that thefilm company be from North Carolina, create jobs for North Carolin-ians, contract with North Carolina businesses, purchase North Carolinaproducts or pay North Carolina income taxes.

North Carolina also offers fee-free use of state property and a 1percentcap on the state sales-and-use tax. In addition, state sales taxes for hotelroom occupancy in excess of 90consecutive days may be refunded.

Oklahoma Tax Programs

The State of Oklahoma has created a rebate program to entice morelong-term narrative film and television production to the state. It isreferred to as the Oklahoma Film and Music Enhancement Rebate


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provides links to the details of the tax incentives and other financialincentives offered by each of the member jurisdictions. In addition, theMotion Picture Association of America (MPAA) publishes a state-by-statelist of tax incentive programs for the film industry (see http://www.mpaa.

org). Another good source of information is the Christopher Lytton ar-ticle Soft Money: The Weapon of Choice for Runaway Productions.

Advantages

Another source of finance. Government subsidies or tax incentives at anylevel represent another opportunity to whittle down the size of a filmsbudget. Tax incentives may reduce the net expenditure by 10percent to15percent.

Motivation for investors. Tax incentives may help to motivate investorsto invest in a high-risk investment such as film.

Disadvantages

Thrust into debate. Accepting the benefits of tax incentives may thrusta producer into the vortex of a never-ending public debate regarding thepropriety of government subsidy of the film industry.

Philosophical conflict. Taking advantage of tax incentives or other

government subsidies may be inconsistent with the producers personalphilosophy regarding the proper role of government.

Investor abuse. Historically and almost inevitably, there always seem tobe some investors who interpret the tax laws so liberally as to engage intax-shelter abuse, and a public outcry will follow and governments willreduce or eliminate the tax advantages.

Ruinous competition. Many believe the studios here in the United Statesare pitting the different film commissions and legislative bodies from

various jurisdictions against each other, as a way to get bigger and biggersubsidies, with the only sure result being larger profits for the studios andincreased salaries for studio executives.

The Great Debate over Government Tax Incentives for Film

The appropriateness of and need for government tax incentives to en-courage film production in any given locale has been and continues tobe debated all across the country. Many of the arguments for and againstsuch measures appear below:

Arguments for State Subsidies

Lost jobs. More than $13billion in lost wages, production expenses, ba-sic hotel and support industry budgets go across the border and overseas


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every year on films that could be produced in the United States, costingAmerican jobs, American revenue.

Helps the local economy. When a film shoots entirely in one area, as muchas 40percent of the budget may be injected into the local economy.

Boon to tourism. Additionally, tourism (an important industry in manystates) can be significantly impacted. There appears to be no strongeradvertising medium available than the international release of a featurefilm that depicts potential vacation destinations in a favorable light (moreconfirmation that motion pictures influence behavior).

Helps working people. Runaway production is a problem for the work-ing people and small businessmen who depend on motion picture andtelevision production for their livelihood.

Millions lost. Runaway production can also be a problem for theeconomy of a given state, which could lose hundreds of millions of dol-lars directly, and more hundreds of millions indirectly, if the Canadiansor others are allowed to hijack the U.S. film industry.

Tax loss. Runaway production is a problem for California, which willlose a significant portion of tax revenues generated by motion pictureand television production activities.

Unfair competition.The U.S. film industrys plight results from unfair,

excessively generous tax breaks being offered by Canadian governmentsfor production north of the border (as well as unfavorable currencyexchange rates).

Cheaper labor. With government assistance, film production compa-nies are better able to afford shooting a film in locations away from LosAngeles, particularly in foreign locations, where they may also be able totake advantage of cheaper labor.

Arguments against State SubsidiesUnconstitutional. State subsidies of the film business violate some state

constitutional requirementsthose providing that tax revenues be col-lected and spent only for a public purpose, not for public aid to privatebusinesses.

Self-induced problems. When outsiders, such as the Wall Street Journal,examine the film industrys problems, runaway production isnt evenmentioned. On the other hand, advocates of the tax breaks never men-tion the film industrys self-induced problems.

Cyclical business. The film industry is a cyclical business. It also haslet its costs get out of hand. Just because the film industry may be goingthrough a mild downturn does not mean that taxpayers ought to be askedto give film moguls multimillion-dollar subsidies.


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the hope that some economic benefit will trickle back down to the statestaxpayers generally. It is an inappropriate use of the governments powerto tax and an unconstitutional expenditure for a private purpose. Ensur-ing that some Hollywood starlet has a nicer trailer isnt a public use of

our taxpayers hard-earned money.


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PART TWO

Investor Financing

Investor financing of all or part of a film production or its distributionis distinctly different than the other common forms of film finance wewill consider, such as gifts, grants or loans. With investments, the peopleor entities providing the money have an expectation of not only gettingtheir money back but of making a profit, even if, as with independentfilms, the investment is a risky one. On the other hand, investors mustaccept that if the business venture does not go well, some or all of theirinvestment could be lost, because as a general rule, the producer does

not have to pay the money back unless the film is an economic successat a level that allows the investors to recoup their investment and/ormake a profit.

Investors may be actively involved in the management of the projectthey are invested in, or they may be passive (i.e., not involved in man-agement). Certainly it is generally more desirable for the producers of acreative venture like a feature film to have the investors be passive, butsometimes, if the right active investors are brought together, it may make

sense to finance a film project with funds provided by a small group ofthem. The distinction between active and passive investors is likely tobe the most critical factor determining whether a film-financing schemedoes or does not involve the sale or offer of securities. The sale or offer ofa security triggers compliance obligations relating to the federal and statesecurities laws. Thus, filmmakers considering investor financing may firstwant to give some thought to the kind of investors who are available tothem and who they would prefer to work with. In short, active investorsare those who are regularly involved in helping the producer make im-portant decisions with respect to the management of the project. Passiveinvestors are those who do not materially participate in the managementof the business.


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Investor Financing Strategies

Within the context of film finance, investor financing offers a consider-able amount of flexibility to filmmakers. Generally speaking, there isno legal limit to the amount of money that can be raised through in-

vestor financing, although specific securities laws relating to securitiesregistration or exemption from registration may impose ceilings on theamount of money that can be raised pursuant to that particular type ofsecurities offering.

Spreading the Risk

Investor financing can work with small groups of active investors(e.g., 13investors) or with much larger groups of passive investors. Oneimportant point to remember about allowing a large number of inves-tors to invest in a film project is that the risk of losing the invested fundsis spread among more individuals, and therefore it is less likely that anysingle individual investors will suffer significant financial harm in theevent that the film does not recoup their invested funds. In a highly riskyventure such as the production of an independent film, that may be one ofthe more important risk-reducing mechanisms a producer has to offer.

Alternative Uses for Investor Funds

Investor financing can be utilized in a number of different ways. Notethat there are three stages in the life of a feature or documentary filmthat can be financed separately:

development (including acquisition, script development, packaging and

possibly even some preproduction activities, such as location scouting

and budgeting);

production (including preproduction, principal photography and post-

productionalong with marketing to distributors and delivery items);

and

distribution.

Thus, investor financing can be used to provide some or all of thefunds necessary to accomplish the following:

Single-film development offering. To pay the costs associated with ac-quiring rights, developing a single film script and packaging a project;and when the project is fully developed and packaged, seeking productionfinancing from other sources, or selling the project outright.

Multiple-film development offering. To pay the costs associated with ac-quiring rights, developing several scripts and packaging multiple projects;


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and when the projects are fully developed and packaged, seeking produc-tion financing from other sources, or selling the projects outright.

Single-film production offering. To pay the costs involved in producinga single film, including preproduction, principal photography and post-

production, along with expenses associated with marketing the completedfilm to distributors and delivering all required items to a distributor.Multiple-film production offering. To pay the costs involved in produc-

ing a slate of films.Coproduction offering. To pay for a portion of the production costs,

with the express intention of seeking out a coproduction partner (i.e.,joint venturer) to cover the balance of the films production costs.

Finishing fund. To create a fund dedicated to the purpose of providing

financial assistance to other filmmakers in finishing their films. Suchfunds may be used to aid in completing the production of a film, to pay forpostproduction, to finance marketing the film to distributors and to paythe cost of distributor delivery items (also called completion funds).

Distribution deal. To pay some or all of the costs of distributing one ormore films, whether through a self-distribution or a rent-a-distributorarrangement.

Thus, for example, investor financing may be used by a producer to

resolve the classic catch-22 of independent filmmaking; namely, theproducer cannot raise production money without recognizable nameactors attached to the project but cant get such actors attached withoutmoney. Keeping in mind that the three stages in the life of a film can beand often are financed separately, it becomes apparent that by raisingmoney through an investor offering as a development deal and usingthose early funds to, among other things, attach attractive elements tothe project (create a package), a producer may be able to approach other

sources of financing, whether studio or industry sources, lenders or otherinvestor groups, with a completed and fully developed script along witha partly or fully packaged film project.

On the other hand, this catch-22may only exist in the minds of somefilmmakers. After all, in the view of Paul T. Boghosian as set forth in hisImagine News article (see The Beach: American Film Market 2002), theworld market for independent film appears now to be in the television andvideo markets, more specifically in DVD, and not in a theatrical release.Further, as Chris Anderson opines in his Wired Magazinearticle online(The Long Tail) filmmakers should forget about squeezing millionsfrom a few megahits at the top of the charts. The future of entertainmentis in the millions of niche markets at the shallow end of the bitstream.And that shallow end of the bitstream includes the Internet, which in


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the view of many will inevitably become a medium for the distributionof feature-length movies.

Choice of Investment Vehicles and Entities

Another decision that must be made by a filmmaker seeking financing,investor financing or otherwise, is to choose the entity through whichto conduct the business of the production company and the investmentor financing vehicle for the current project or projects. The investmentvehicle may or may not be the same as the production company. Thischoice

43 Ways to Finance your Feature Film

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