The ins and outs of investing in films

Most of the crew are wearing water-soaked Handi-Wipes around their necks. A producer struggles to sponge some pancake makeup on a sweaty 10-year-old boy while a student intern from SMU douses her long, bare legs with Cutter’s Insect Spray. As the sun beats down on a grassy meadow in rural McKinney, history is being made.

“Quiet, please! Cameras are rolling!” A round little metal droid with bug eyes and a red bandanna sits perched on top of a horse. Take one: The horse lets out a loud, unsolicited whinny. Take two: A Cessna buzzes overhead. Take three: The bandanna slips to the ground. Take four: “Cut!”

In his air-conditioned trailer, oblivious to the heat, the star awaits his call. Suddenly, a whistle sounds. A little mop-haired dog with soulful eyes trots onto the set, picks up the horse’s reins and leads him down the trail. Benji, Dallas’ star canine, rides again.

Benji’s success story reads like a made-for-TV-movie script. At a time when few films emanated from outside New York or L. A., the character of Benji was conceived here, funded here, produced here, distributed here. Benji movies have packed first-run theaters, attracted healthy audience shares on network TV and brought in considerable cable rights. Today, the dog is recording for a Saturday morning series on CBS-the only live-action show in a field of cartoons.

Twelve years ago, Benji didn’t exist except in the heart of a young Dallas greenhorn in the film business, Joe Camp. Not only did Camp convince local investors to give him money for a G-rated movie about an emotional dog, but he also refused to sell his film down the Hollywood distribution stream. Camp set up his own selling network, controlling releases and writing the ads and promos himself. To date, that handful of original backers has seen an incredible 11-to-one return. And it’s not over yet: Income is expected to flow for at least another 10 years.

In the local film community, Camp has been the lodestar among a host of beacons in the corporate, commercial and documentary film business-many of whom are tops in their fields. Dallas is, after all, the jingle capital of the world. A strong production industry existed here long before Peter Bogdanovich popped into town.

But once a leading Hollywood director expressed an interest in Dallas, and once the $30-million Dallas Communications Complex went up at Las Colinas, local film efforts took on a new urgency. With typical lack of reserve, we declared ourselves the brave new Third Coast. We waited for Bogdanovich and friends to swarm in. When it didn’t happen overnight, we declared the whole hyped-up business a flop.

The truth is, despite our rapid-fire cries of boom and then gloom, the local film business is working up a healthy head of steam. According to Harry Friedman, who took the reins of the Dallas Communications Complex last spring, business has increased some 500 percent just since he’s been there. Two blockbusters are lined up for filming there this fall: a BBC picture starring none other than Vanessa Redgrave, Louise Fletcher and Lee Marvin, and the movie version of author Thomas Thompson’s novel, Celebrity.

There’s a new soundtrack playing around town. It says we’re not Hollywood, and we don’t want to be. It says that we’ve got a lot going for us here: a state-of-the-art studio, cheaper prices, first-rate crews and a downright. friendly attitude. It says that we’d like to sell ourselves not as a Third Coast, but as “the Southwest Airlines of the movie business”-a high-quality, lower-cost regional film hub.

But now that we’ve gotten the tune straight, it seems we’re missing a few crucial chords- some minor, some major-like the lack of financial support. Trammell S. Crow, developer of the Dallas Communications Complex (DCC), has said repeatedly that for a film industry to thrive in Dallas, there has to be a firm investor base. But so far, efforts to raise movie capital have fallen on a lot of deaf ears. Some have accused the Hollywood types of moving into town expecting to find a lot of dumb fat cats with money to burn. What they discovered here were shrewd investors who were more comfortable betting their ranches on wildcat wells. In short, movie deals are a hard sell in this town.

Why the sudden proliferation of partnerships that offer ordinary (albeit moneyed) folks a toehold in moviedom? Some background is in order.

The economics of the movie business have changed dramatically during the past 20 years. It used to be that movies were bought and sold where they were made: in Hollywood. Rarely did a studio look for funds outside the L. A. banking community. But, gradually, Hollywood’s stranglehold on the market has been blown apart. “Ever since the demise of the great star/studio system, there’s been a demys-tification of Hollywood,” says Dr. Sam Grogg, head of the USA Film Festival. Burdened by huge overheads that have shot production costs through the studio roof, the “majors” are down to a paltry five or six pictures per year.

“Today, the big studios are little more than bankrollers and distributors,” says local producer/writer Bob Mittendorf. “They make more money distributing other people’s films, and they hope that their own few will turn out to be home runs.” That, of course, has thrown the field wide-open to independent producers, who, if they’re going to make a film-even economically-have to get money from somewhere. Hence, the independents’ entry into the competitive arena of private investing.

Another significant development in the movie business has been an incredible expansion in the marketplace. Back in the studios’ glory days, only one market counted: domestic box office-i.e., the theater near you. There may have been some spinoff revenue from network TV, but basically, if it didn’t play in Toledo, it didn’t pay. Now, there are several important “ancillary markets” that can rescue even a box-office dog. The foreign home-video market, especially in countries that don’t have cable TV, is exceptionally strong. Then there’s cable TV right here at home, where dozens of channels mean dozens of empty time slots to fill.

Industry forecasters say that by 1984, movie consumers will pay as much for films at home as they pay for films in theaters. By the end of the decade, it’s predicted that home viewers will spend twice as much. In the words of Midland native Terry Jastrow, who produced and starred in Waltz Across Texas, “There was great fear that cable would ruin the movie business. But in reality, it proved the economic theory that says that two gas stations on the corner are better than one.”

In addition to being a major market for films, television companies have become movie producers themselves. In 1982, the three major networks created, between them, some 100 films. Now, even major cable firms such as HBO are getting into the act. HBO, in fact, is sponsoring one of the most popular partnership deals currently in circulation. “Silver Screen Partners” is out to raise $125 million for five to six films-all, eventually, to air exclusively on HBO.

If Dallas has been too shrewd-or too conservative-to welcome movie money-raisers with open arms, it doesn’t seem to have dampened the enthusiasm of the myriad promoters out there looking for cash. “The amazing thing to me,” says Grogg, “is that last year, three major filmmakers-Joe Camp, Peter Bogdanovich and Robert Altman-put deals on the street, and none of them were funded. You would think, then, that interest in Texas as a financial source would wane. On the contrary-there are more deals out there than ever before.”

“I’d guess I see offerings that total about $2 million a month,” says DCC head Harry Friedman. “And most of them are foreign-by that, I mean out of the state.” Friedman and the DCC have become a sort of hub for any film-related activity around town. Says Gloria McCall, who specializes in public relations for the local film community, “No one comes into town without checking with Harry [Friedman] and Sam Grogg.”

There’s no question that the studios at Las Colinas play a pivotal role in the efforts to fund a film business here. The Crow family’s commitment stands as a signal to the world that Dallas is serious about making movies. But as one producer points out, “Sound stages don’t make movies. People and money do.” And most of the financial community is still sitting on the fence.

In a business rife with huge losses and horror stories of investors losing their shirts, a wait-and-see attitude may not be all bad. “The conservative outlook in Dallas will work to our advantage in the long run,” says Lorraine Gress, head of the Dallas Communications Council. “As we grow, we have to be careful-you can get all kinds of strange things moving in.”

There are a number of reasons local investors have looked a movie deal in the eye and walked away. Number one on the list is risk. No one has yet devised a successful formula for predicting what will or won’t make it with movie audiences. There simply are no guarantees. Who could have predicted that the world would fall in love with a squatty little creature like E.T.? Or a foxy female impersonator like Tootsie? Add to that uncertainty the fact that it takes $3 coming in for every $1 going out, and it’s easy to see that making money in films is tricky. By way of example, Sigurd Johnsen, investment analyst at Rauscher Pierce Refsnes Inc., said at a film conference at the Las Col-inas Studios that Alien pulled in $122 million in box-office receipts. Yet its producers are still carrying it as a $2.5 million loss.

The odds against a film getting into the black are tallied at anywhere between 10- and 20-to-one. Naturally, investors have viewed one-movie deals as something akin to a shot in the dark. For that reason, the trend is to group films into deals that spread the risk over anywhere from three to 20 films.

“Dallas investors are conditioned to thinking of film deals as a Las Vegas crapshoot,” says Mittendorf. “There is risk on their part, but it’s not a roll of the dice. I would liken it to a low-risk, medium-return oil deal-in a proven zone.”

Analogies to oil-and-gas deals crop up often in conversations about investing in film. One-shot, one-movie packages are often compared to wildcat wells. “But you’d think that with the sort of wildcat mentality around here, we’d see more people anteing up,” says one frustrated film promoter, who asked not to be named. “Filmmaking is not seen as an industry indigenous to Texas. Oil and gas is.”

“When a potential investor is contacted by an out-of-town producer,” says Camp, “his first reaction is that if the guy were any good, he would have gotten his money in L.A.” Says Grogg: “It’s like trying to peddle oil-and-gas deals in New York. They tell you to find yourself a man in Texas.”

But it’s not just that our roots are in liquid gold. Oil-and-gas partnerships-and real estate, too-offer much better tax advantages than movie deals. “The first year write-off is about half what you get with oil and gas,” Mittendorf says.

Before the Tax Reform Act of 1976, movie investors could claim deductions of two to three times the amount of cash they put in. But the IRS doesn’t take kindly to that anymore and, in fact, has been known to come along years later to collect its back debts. The new rule on writeoffs is that they can’t exceed the amount of the investor’s money “at risk’-in other words, 100 percent of what you put in. Even that may have to be spread over three or four years. Tax benefits are derived from investment credits, depreciation and advertising costs, which are deductible right away as a business expense. First-year deductions typically range from 50 to 85 percent.

But it’s not all bad news. Because the tax write-offs are relatively meager, filmmakers have had to put together projects that they truly believe will succeed. “Anybody going into a film deal for the tax consequences is going in for the wrong reason,” says Johnsen. You have to be able to see a potential profit down the line.

Every producer who has peddled his package around town will tell you that it was no easy task. Even in an area where people are open to movie deals, funding is the most difficult challenge an independent filmmaker takes on. Many are creative people who write, direct or even act in their own films. The business angle is one they have had to learn.

Even so, local filmmakers say they do better when they’re selling one-on-one. “When we raised the money for the original Benji,” says Camp, “we insisted on four-hour blocks of time with the investors-and in our offices.” Camp’s most recent effort to raise money, which failed, was put in the hands of professional brokers. In hindsight, he admits that “we just seem to do better when we do this kind of thing ourselves.”

Mittendorf agrees that the only way a filmmaker can win investors’ confidence is to persuade them that the producers are confident, competent and savvy on the business side. “People have heard a lot of horror stories, and they tend to think of people in this industry as flakes.”

Some of the blame for local reticence has been aimed at the brokers, who, it is said, aren’t knowledgeable about film deals themselves. “So far, the brokers in town haven’t felt all that comfortable with film deals,” says Grogg. “But that’s beginning to change. We’re seeing an influx of entertainment professionals from California and a real growth of interest among brokers locally.”

Many local brokers say they know enough to smell a deal that is stacked in favor of the producers-and there have been strong feelings that some partnerships around town have been slanted that way. For that reason, Dallas-based promoters have done the opposite by packaging deals that weigh heavily in favor of the investors. “No question about it, Dallas is just waiting for a deal that will deliver-to them,” says Mittendorf. Friedman agrees: “Texans have money. That’s a fact. But whether they will part with it or not depends on how good the deals are. If a deal looks promising, they’ll listen.”

The major banks in town are also taking an active-if cautious-interest in film. Both RepublicBank and InterFirst Bank have made significant educational forays into the ways of motion-picture financing. “So far, I’ve seen the banks give a lot of lip service to the industry, but little has come of it,” Friedman says. “With the right kind of guarantees, they can play a big role in financing films the same way they do real estate and oil and gas. 1 think if you look at the California banks, you’ll discover that they lose less on their film portfolios than they do on other investments.”

The word right now is “education.” Organizations such as the DCC, the USA Film Festival, the North Dallas Chamber of Commerce and the Dallas Communications Council are aggressively attacking misconceptions that feed the rumor mill. By holding public seminars that showcase local film professionals, they hope to raise the level of interest in film while ironing out its complexities.

SO MOVIE deals are new. And they’re risky. And they’re not the best tax shelter in the world. Why would anyone invest? And why, specifically, would someone invest in a Dallas-made film?

“A lot of people go into movies for the novelty-the sizzle,” says Stephen Pullin, partner for the newly formed Las Colinas Productions Inc. “It’s not the best reason to invest, but, at the moment, film partnerships are hot.” Another more viable reason is that the payoff can be big. Some of the newer deals are set up so that the investor doubles his money before the promoters even kick in to claim their share. Dallas producers know that to build a film center here they must move toward financial self-sufficiency. That means bending over backwards to give their investors a good deal. The task at hand is to get something on the screen that can be called a success. With a newer talent, especially, you can get in on the ground floor of an operation that can take you right to the top.

If you think you’re ready to plunge in where others have feared to tread, there are several things to consider. The first is whether you need a “tax dodge” or a “revenue play.” If your primary objective is to reduce the chunk of money slated for Uncle Sam, you need a tax dodge. If you have more money to invest and it’s long-term profits you’re after, you’re in the market for a revenue play. Basically, it’s the difference between a tax shelter and a venture capital deal.

There are public movie deals and there are private movie deals. In general, public movie deals are peddled by large brokerages and are patrolled by the Securities and Exchange Commission. They require smaller pay-ins of their investors and spread the risks over a number of films. Some offer a blind pool of properties; others, specific titles. Some put up seed money for pre-production (the process that occurs before the film is made); others mainly support advertising after the fact. It is these advertising deals that offer the greatest write-offs.

A private deal can contain many of these variables, but it is more personal: You’re betting on the capabilities of the people involved. Typically, your ante will be in the $25,000 to $100,000 range, and you will be invited to observe the shooting of the film. “No matter how passive, a partner is a partner,” Mittendorf says, “and he must be dealt with almost daily. That means detailed accounting for the life of the partnership.”

Mittendorf is in the process of raising money ($3 million) for a film to be called Eagle. It’s a family picture about an old Indian who befriends a runaway city boy. Like Benji, Eagle offers an investment in home-grown, G-rated quality. But, unfortunately, quality doesn’t always ensure financial success. Some analysts believe that a G rating is the kiss of death. There’s an old movie maxim that distributors like a few cuss words sprinkled in to change a rating from G to PG.

“Which of these films do you think showed the greatest profit?” Johnsen asks. “Gandhi? Hopscotch? Gone With the Wind? or Debbie Does Dallas?” Three guesses, and the first two don’t count. Moral: Personal preferences aside, you have to take a hard look at the economics of the type of film you’re investing in.

But the real key to a movie’s success is distribution. Jastrow says, “The exploitation of a film-promotion, timing, advertising-is a real art, probably as important as the film itself.” It is here that independent filmmakers and industry analysts sharply disagree. The analysts like to see a film that has a distribution agreement up front. They want the filmmaker to have signed on with a Universal or a Columbia or with a smaller outfit like Atlantic to place the film in local theaters and possibly the ancillary markets as well. The thinking seems to be that any agreement that will assure that the film sees the light of day is better than no agreement at all. “I wouldn’t look at a deal without a distribution agreement up front,” Friedman says. “It’s like drilling an oil well five miles from the nearest pipeline. If you can’t get your product to market, what good is it?”

There are several opposing arguments. For one, filmmakers say that unless you’ve got some big draws “above the line (producer, director, actors and actresses),” a distribution agreement isn’t worth the paper it’s written on. “You hand me a script, and I’ll get you a distribution agreement,” says Camp. “It will say, ’We’ll guarantee our best effort to distribute your film.’ Well, when that film is in the can and they don’t think much of it, their best effort is going to be to put it on a shelf. When you’re talking to the majors, they’ll take your shirt, your pants and your underwear.” Independents say that there’s more to negotiate with when you’ve got a film in hand. Before that point, the distributor has no assurance that the project will ever be completed, and he may not be willing to put big bucks on a wing and a prayer. They also maintain that with a rapidly changing marketplace, it’s hard to predict up front where your most valuable assets will lie.

Obviously, pay back-when, how and after what-is an essential element to consider in a film deal. The better deals allow an investor to recoup 100 percent of his money immediately, with a revenue split of 99-to-l. Some deals, including the HBO Silver Screen Partnership, guarantee, say, a five-year return. Typically, though, any split comes after the deduction of expenses and distribution fees-which can run as high as 40 percent of the gross.

All things being equal, is there any reason to invest in a locally produced movie? Experts are divided on this one, but those who say “yes” do so strictly on economic grounds. “Every dollar we spend goes onto the screen,” Mitten-dorf says. “We have some of the best crews in the country. We’re a right-to-work state with good union rapport.” Visiting directors have likened Texas production crews to those in Hollywood’s golden age-when people cared. Dallas has no tradition of featherbedding-like spending $20,000 on limousines. Most of our firms can work for less because they have no big overheads, no burdensome plants. Everybody works hard, they say, and theoretically it pays off on the screen.

Locally originated or not, it’s clear that bids for film financing are here to stay. If investors aren’t tripping over each other to get to their checkbooks, they’re a lot closer than they were a couple of years ago. “We have to measure our progress in small steps,” Grogg says. “Peter’s [Bogdanovich] presence alone generated all kinds of curiosity about movie deals. And that’s no insignificant step.”

“We have to be careful we don’t become victims of our own hype,” says producer StephenPullin. “There’s been a lot of euphoria andrazzmatazz about the budding film industry inDallas. Everybody’s sitting around waiting forthe phone to ring. It’s not going to happen thatway. What we need to do now is begin buildingour reputation and our credibility. If we dothat, the funding will fall in line.”


●Track record. Check the reputation of the producer or promoter. Call his references and his competition. Does he have sufficient capital to see the project through?

●Distribution deal. Does the producer understand how to market and distribute the film once it’s made? Has he made an agreement with a distributor that will assure that the movie makes it to “a theater near you”?

●”The package.” Has the producer lined up big-name directors, actors or actresses? Recognizable talent can cut a better distribution deal and can mean more money up front in the ancillary markets.

● Money-back guarantees. Does the partnership specify that somewhere down the line the investors will recoup their contributions- even if the movie turns out to be a turkey?

● Pay back. How many people will get paid before you do? In some deals, the investor doubles his outlay before the producer kicks in. What is the projected life of the income stream? How long will it be until the checks start coming your way?

● Downside cover. Has the producer fully explored revenue potential in foreign sales, cable, video cassettes and network TV? Be suspicious, though, if too much is riding on the ancillary markets: The producer may be betting on a box-office flop.

● Upside potential. Is there true economic viability for the project, or is it structured for tax benefits? One analyst suggests that if there isn’t at least the potential for a three-to-one return, it’s probably a bad deal.

● Expenses. Are the various fees, commissions and compensation to management within reasonable bounds? Are there mechanics for controlling advertising and promotion costs?

● Risk. Are you betting the ranch on one movie, or is the risk spread across several films? Diversity is desirable, but don’t spread yourself too thin-it will take too long to get your money back.

● Completion guarantees. Does the partnership offer a money-back guarantee in the event that the picture never gets made? Or have the producers purchased insurance in the form of a completion bond?

● Tax advantages. Does the prospectus deal adequately with the murkier tax consequences of movie deals? Some film-related tax questions have yet to be answered definitively by the IRS. Get a good tax-shelter accountant to look over the deal.



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