Business legal aspect of film production liif 7 15 12

LI Film Expo July 15, 2012Marc Jacobson, PC

Today’s Topics Rights Acquisition Entity Formation Basic Financing Structure Financing Issues Tax Incentives Marketing Profit Distribution - Theatrical Distribution Cash Flow

Rights Acquisition Option/Purchase Agreement  Key terms: ○ Length of option period ○ Price of option ○ Price of purchase, profit participation? ○ Time within which to commence production Self – Written Script  Consider requirement for “Chain of Title” The producer will typically need a “Package” to raise money.

Entity Formation  Limited Partnership Agreement  Limited Liability Company Agreement  Sub-Chapter S Corporation  Producer wants to avoid double taxation  C Corporation  Effect on eligibility for tax credits and other tax incentives.

Basic Terms of Film Financing New entity formed  Entity buys the rights Managing Member  Producer Limited Liability Members  Investors Completion Bond  Cost of Production Picture is sold/licensed  Who gets what?

Equity Financing Issues  Sale of Securities - highly regulated  Same marketplace as IPOs, private placements  Exemptions exist for raising “small” amounts of money  New law will permit “crowdfunding”  Can be a landmine if not done properly  Be wary of projections, and using “Blair Witch Project” results as an indicator of your likely success

Debt Financing Issues Collateral  Territory sales/licenses  Media licenses  Tax Rebates or Tax Credits Finishing Funds  Typical Terms Development Funds  Typical Terms

Distribution Based Financing “Negative Pick-up”  Distributor “picks up” the negative of the film in exchange for payment Pre-Sales  Certain territories sold in advance of production  Payments made on delivery Distributor-Financed.  Cash flow from Distributor, changes economic deal dramatically

Federal Tax Incentives Old Rules  Complexity, Unpredictability New Rules  Simplicity, Speed, Certainty Practical Effect  Faster Recoupment and Profits Future Outlook  Statute expires December 31, 2011 Back to Old Rules again

Federal Tax IncentivesOld Law and now Current Law Copyright in films considered a capital asset  Depreciated over time, reduces income and tax  For many assets-same amount year to year – “Straight Line” Method Film was depreciated on Income Forecast Method  10-15 year cycle  Weighted in early years, as much as 80%  Later years nominal Complex, Unpredictable

State Tax Incentives About 40 States Provide Incentives for Film Production  Lots of Foreign Countries also provide incentives Rebates v Credits  Ability to turn these rebates or credits into cash is not simple, or easy. New York Rules are unusual How to Finance with and around these

Theatrical Distribution Cash Flow Assumptions:  Picture Financed by Distributor Costs:  Negative Cost: $12,000,000  Actual Marketing Cost (Prints & Ads): $10,000,000

Studio Distribution Deals Distribution Agreement Terms:  Distribution fee = average of 33.33%  Overhead charge = 15% of Negative cost  Interest charge = 8% of Negative cost

Talent Deals  Talent Participations & Agreements:  Major star deal:  $1.0 million advance against 5% of Distributor’s Gross  No other Gross Participants  Contingent deferments for other talent & director = $1.0 million  Director also receives 5% of 100% of net profit  Writer also receives 5% of producers share of net profit

 Theatrical Box Office Gross $120,000,000 Exhibitor Share (50%) -60,000,000 Distributor Gross Receipts 60,000,000 (Film Rentals) Distribution Fees 20,000,000 Marketing Cost: Prints & Advertising* 10,000,000 Overhead at 15% 1,800,000 Interest at 8% (one year) 960,000 Major Star – 5% of Gross Receipts (less $1.0 million advance) 2,000,000Total Deduction (34,760,000)Producer’s Gross Receipts 25,240,000* Includes additional overhead charge of 10%, executive salaries, rent, etc., not just out of pocket expenses

 Producer’s Gross Receipts (from previous page) 25,240,000 Negative Cost 12,000,000 Contingent Deferments 1,000,000100% of Net Profit 12,240,000 Financier’s (Distributor’s) share 50% of net 6,120,000 Director’s Share 5% of 100% of net profits 612,000 Other talent & participants share at 25% of net 3,060,000 Producer’s share 2,448,000 Writer at 5% of producer’s share 122,400 Producer’s final participation $2,325,600

Definitions Exhibitor’s Gross Distributor’s Gross Receipts-Film Rentals Distribution Fees Prints & Advertising or P & A Producer’s Gross Negative Cost Deferments Break Even/Rolling Break Even Producer’s Share

Contact Information Marc Jacobson Marc Jacobson, P.C. Direction By Appointment, Inc. 244 West 54 Street, 9th Floor New York, NY 10019Tel: +1 212 245 8955/ +1 212 245 8688 Marc@MarcJacobson.com Marc@DirectionByAppointment.com

Business legal aspect of film production liif 7 15 12

by Direction By Appointment, Inc. on Jul 16, 2012

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Business legal aspect of film production liif 7 15 12 Presentation Transcript