Film investing puts your money where your marquee is

August 15, 2011

Looking for a win-win situation for investing your money? You might be enticed to try something like “Win Win.”

That indie wrestling movie with a heart, starring Paul Giamatti, was made for around $10 million, played at Sundance in January and then hit multiplexes in March, where it racked up a profit at the box office in the U.S. and is just about to hit the secondary market of cable, On Demand and DVD. It’s the kind of film that makes would-be Hollywood moguls pull out their checkbooks, hoping for a little touch of glamour and a big payout.

But just as high-net-worth individuals thought it might be safe to invest in movies again, here comes more market turmoil. While a shaky stock market makes anything but equities seem like a safe place to park your money, producing films is still a business that is smoke-and-mirrors for most real people, who spend their days filling cavities, running tractor companies or managing hedge funds.

The film business over the last 10 years has not been unlike the housing market, says financial adviser Michael Hansen, who structures film financing deals as managing director of Three Point Capital in New York. It even had its bubble burst to reveal shady financials behind the deals. Back in the heyday, “you could make a film with little or no equity and get 100 percent financing, and because of that there was a ton of product being generated,” he says. “People were making films at $15 million because they could, and needing to sell them at $20 million.”

But then came the recession, and it was an ugly spiral from that point. Distributors didn’t buy up the bloated films, and because there were no buyers, no investors would put money into new ones. The films that did make it through were made on lower budgets, and were consequently sold for less money, and did worse overall in return.

Sam Zietz, who founded the credit-card transaction processor American Bancard, got caught up in this loop. Back in 2007, the Boca Raton, Florida-based entrepreneur was doing some angel investing of $500,000 chunks at a time and a friend suggested he invest in some movies. So he put $600,000 into the $5 million budget of The Ten, starring Paul Rudd and Mad Men’s Jon Hamm. “Movies are the only investment that I’ve made that my wife has taken an active interest in,” he says. “We got to go on the set. That was fun. We all went out to Sundance.”

That is when his little taste of Hollywood started to turn sour. Bidding to sell the movie didn’t go well after the first midnight screening. Instead of taking a lowball offer, Zietz put in even more cash in to buy the rights to the film himself and promote it, in partnership with the production company and the distributer ThinkFilm. The film did about $1 million at the box office.

Around the same time, he put money into another film, Harold, starring Cuba Gooding Jr. and Spencer Breslin, this time only a $1.7 million budget. “That’s when the economy collapsed,” he says. “Nobody wanted to buy it.” So he put more money in again, did a limited release and planned to recoup his investment selling DVDs. But between the bad economy and changes in technology, there wasn’t money in DVDs anymore.

Both the companies he partnered with went out of business still owing him a great deal of money. So now he owns the rights to the two films, plus the rights to other films in the library of the bankrupt production company, and he doesn’t even have a lousy T-shirt to show for it.

“This was the biggest stain on my investment record,” he says. “The funny part is that I ran projections, and even the worst-case scenario didn’t come to fruition. Sure, we went to Sundance, had parties, got to walk on the red carpet at the opening in New York … but no, I wouldn’t do it again.”

There are success stories out there. Attorney John Sloss, who has put together many of the biggest deals in independent film over the past 20 years, never even felt a slowdown of investment after 2008. “Most of the people who do what I do don’t think it’s harder to raise money that it used to be,” he says. “It has just changed from playing traditional chess to playing 3-D chess.”

Sloss says he has high-net-worth individuals approach him in all sorts of ways – at parties, at film festivals, through acquaintances. “If the people actually have money, that’s a joyous moment,” he says. “The majority of people who approach me who say they have money either don’t or haven’t done sufficient homework for us to want to work with them. I’m repelled by dumb money, and there’s a long history of dumb money in this business that we’re dedicated to rehabilitating that approach.”

The people who want to invest in film range from those who troll Kickstarter and IndieGoGo to make donations to dentists who want a little glamour to billionaires like Oracle’s Larry Ellison, who is funding the film slate of two of his children.

“It used to be that people would invest in indie movies, as that was their only shot. But now there are investors who do slate deals with studios, where their money is spread around a slate of movies, and the returns usually for those kind of deals is 6 to 8 percent on a seven-figure investment,” says Scott Steindorff, a former real estate developer in Las Vegas who turned to film producing in 2003.

The key to making a smart investment is in the structuring of the deal, and in today’s volatile market, and especially since 2008, investors can get better terms. “The investors have the ability to drive decision-making process right now,” says Hansen. “You can really take the pick of the litter.”

Steindorff says he finds it more beneficial to get in on the front end of a project, much like being the guy who owns the land where a shopping mall will be developed. So he focuses on buying rights to popular books, like “The Lincoln Lawyer” and his first project, Phillip Roth’s “The Human Stain.” “Whatever deals I make, I am going to get the money reimbursed when the movie starts, plus usually a 20 percent return above the intellectual property costs,” he says.

There are tax benefits to investing in film projects, too. A federal tax incentive, Section 181, allows a 100 percent deduction of the first $15 million invested in a film. Even more important are state tax credits, which get submitted after the film is done shooting, and can be used to pay off investors.

Investors can expect percentage deals on a film’s profit, for which there is no standard. Investors typically either get paid back their principal and a fixed percentage based on their investment should the movie make money, or a percentage of the profits of the movie.

This is where the real risk comes in.

Not only are there countless lawsuits over the distributions of profits (involving everyone from A-list movie stars to equity partners like Zietz), which tells you what a sticky accounting process it is, but there are also no guarantees that a movie (or a good movie, at that) will eventually come to be.

“You could be the next ‘Paranormal Activity’, which was the biggest-grossing movie in terms of percentage return to investor,” says Ethan Bordman, an entertainment lawyer who structures film deals.

Or you could be the next “Harold,” which Zietz says he may eventually squeeze into break-even status years from now after pushing through every new distribution initiative that comes around.

Or you could invest in a project that never gets completed and just ends up counting as a loss against your taxes.

What separates the winners from the losers is simple, says Steindorff: “The people who have won in this business have bet on the right material. The people who have lost have bet on the wrong material.”


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One must be aware of market conditions in terms of material (as stated above) and the scope of the film budget level. As inward investment has decreased and dvd sales have tanked distributors product requirements and cost structures have likewise contracted.

Posted by FilmBudget | Report as abusive

Interesting article.

One thing your readers should be aware of is that the deduction created by section 181 of the US tax law only applies to film investors who have passive income and only to the extent their passive income equals their investment in film, and that investment is spent this year. The law is scheduled to expire on December 31, 2011.

Posted by marcjacobsonpc | Report as abusive