Flings

The Reel World

by Brett Pulley

Want to invest in a film? It won't be easy to make money, but you will likely have some fun hobnobbing with future (maybe) stars.
Terry l. Woodard had just graduated from Morehouse College. A classmate named Shelton Lee asked him to pony up a few thousand bucks for Lee's film project. Short on cash, Woodard turned Lee down. What a mistake. You know the young filmmaker as Spike Lee. He scraped up enough money to make the 1986 hit She's Gotta Have It. A triumph for a film not made by a big studio and costing only $175,000, the flick grossed $7.1 million at the domestic box office, and its investors continue to receive profit checks. A 20th-anniversary DVD of the sex comedy has been planned, but no release date is set. Along the way Lee has produced 22 other films that did a combined $433 million at U.S. box offices. That's why Woodard, now a New York City bank executive, is playing angel to another fledgling filmmaker, 29-year-old Pete Chatmon. "I missed my chance with Spike and now I'm in a position to help Pete's career," says Woodard, who paid $5,000 for a stake in Chatmon's $520,000 romantic comedy, Premium. "From a return perspective, I'll be happy if I get my $5,000 back." The idea of owning part of a motion picture has fascinated outside investors since as early as 1915, when director D.W. Griffith convinced business leaders to finance his $100,000 ($2 million in current dollars) silent epic, The Birth of a Nation. An explicitly racist movie, it became the industry's first blockbuster, earning over $60 million (adjusted to current dollars) during the next 25 years. Today's film investors, certainly a well-heeled bunch, could easily find much smarter things to do with their capital. But Tinseltown's allure is intoxicating. "People love the idea of rubbing up against the film business," says John Pierson, one of the fortunate investors in She's Gotta Have It and a University of Texas film instructor. "And if the film clicks, you get something in return." The odds, of course, are steep. Multi-million-dollar movies, with all the power of a Paramount or a Disney behind them, blossom at the box office on Friday and wither by Sunday night. Indie films usually go before the public without the studios' muscle. For every She's Gotta Have It or Blair Witch Project--the spooky 1999 phenomenon that cost $35,000 and grossed $240 million worldwide--thousands of other nonstudio films never recoup their initial investment. Many never even make it into distribution. The Sundance Film Festival, one of the primary markets for selling to distributors, this year received 3,148 feature-film submissions. Of those, 120 were accepted for screening at the festival, which was founded 23 years ago by a group including screen idol Robert Redford and is held each year in Park City, Utah. In the end only a handful of films left Sundance with a distribution deal this year. Among the ones that get shown in a theater, probably fewer than half will make back their production costs. While all filmmakers naturally would love to strike cinematic gold, the profit motive is not necessarily their first priority. Maybe the main point is to make an artistic or political statement. Maybe they want to showcase their ability to complete a film, thereby earning a credential for larger things later. "Even if unprofitable," says Roy A. Salter, a film finance adviser, "to the filmmaker, it's still not a failure."

Certainly, films that lack theatrical distribution can always try the straight-to-video market, or, all else failing, get onto YouTube or the like and hope to drum up a following. Yet these must be viewed as fallback positions. "Despite the new models, the theatrical distributor is still vital," says Robert E. Berney, whose Newmarket Films distributed nonstudio blockbusters such as The Passion of the Christ. Berney now runs a separate distribution business for Time Warner. If you invest in a film partnership, you'll need a lot of faith. Hollywood accounting, whether by the big boys or the small boys, always has been a miasma of funky amortization schedules and expense shifting from one project to another. "Hollywood has a history of fleecing," says Bob Yari, who made a fortune in real estate before becoming a financier and producer of independent films, including Crash, the 2006 Academy Award winner for Best Picture. As a limited partner, of course, you have no say in how the film is made. Typically a film's profit (if any) is not distributed until at least the third year. That means it receives favorable capital gains tax treatment (15%). How do you find out about film investments? The usual method is word of mouth. Nascent movie people typically pass the hat to friends and relatives first. No central clearinghouse for film investing exists. You can always contact university film schools, which keep tabs on hungry students. Someone who went to one of these places has, one hopes, a modicum of training. An alternative: visiting some of the film festivals that have sprouted across the land, at least 150 of them. Tap the words "film festival" into a search engine like Google, and they will pop up. Ambitious auteurs prowl these forums in search of financing. They should come equipped with a business plan, a partnership agreement, references--and most important, samples of their work, often short student films. You will want to interview the various people involved in the project to get a feel for it. One solace: With digital technology the cost of shooting and editing a film has gone way down. To be sure, not all films made outside the mainstream studios are by beginners. A whole stable of seasoned producers and directors like Ang Lee, Terry George and William H. Macy make independent works with sizable budgets. Several recent hits--from this year's Best Picture runner-up, Brokeback Mountain, to the critically acclaimed 2004 docudrama Hotel Rwanda--were indie projects financed by large investment pools. Since pros are running these outfits, they stand a better chance of preselling rights and locking up distribution deals ahead of time, usually in partnership with a large studio. The intricacies of the film industry are daunting. And the bigger the project, the more daunting they get: who gets paid (actors, directors, etc.), when and how, union rules, copyrights, foreign rights, merchandise (T shirts, action figures) and on and on. To John Sloss, who runs Cinetic Media, a consulting firm that specializes in locating financing for independent filmmakers, the investment pools are the best way for individuals to survive Hollywood's many pitfalls: "People gain the scale to invest in these projects." Like any good investment fund, the pools seek diversification, here meaning that they back a slate of disparate movies to enhance their chances for success. "I'm not a big proponent of investing on a one-off basis," says James Stern, a former money manager who three years ago launched Endgame Entertainment to finance movies. "You need to invest in a portfolio of films and invest with a company that has a strategy for how they're going to be profitable." Stern's many film credits include Harold and Kumar Go to White Castle, as well as Hotel Rwanda. Thanks to those hits, he says, his Endgame Fund has increased in value by 50% over the past three years. Stern recently rolled the fund's assets into an operating company that will be four times the size of the original fund. He put in only a small amount of Endgame's initial capital himself. Stern says his analysis is designed to make sure that a percentage of his films are making money on a consistent basis. "No one is okay with losing money," he says.

The minimum investment for new Endgame partners was $1 million. But some investors were able to combine their money to reach the minimum. (The fund now is closed to new money.) The film studios have always used some off-balance-sheet financing, yet over the last several years the practice has increased. The big studios, such as Warner, Sony, Disney, Universal and Paramount, have become more content to earn only distribution fees from smaller films, leaving those productions to independent filmmakers. Thus, these studios increasingly reserve their production dollars for huge franchises like Warner's Harry Potter films or Sony's Spider-Man series. They sometimes partner with outside companies to share the financing of productions on smaller projects. New investment pools are available. Disney lately formed an alliance with Kingdom Films, which was set up by Credit Suisse First Boston and partially backed by hedge funds; Kingdom is raising $505 million. Relativity Media agreed earlier this year to invest $400 million in 11 Sony Pictures films, and another $200 million in 9 films from Universal. In each case the studios and outside financiers will share in the cost and profits. You can get in on these, too, by linking up with others to buy partial shares. The expansion of such large institutional investments, along with the increasing transparency of Hollywood's notorious accounting methods, is turning the traditionally untamed world of film investment into more of a viable, albeit still risky, alternative-asset class. "There is a way to make money, but you have to take your gloves off and try to understand a very complicated business," says Yari, whose Yari Film Group has financed 29 movies in addition to Crash, including Hostage and The Matador. Some film investment pools have had rocky roads. Silver Screen Partners, which raised $1 billion for 70 Disney films during the late 1980s, including Down and Out in Beverly Hills and Ruthless People, was created to provide a vehicle for small investments, at $500 per partnership unit. Silver Screen scored some hits but had a spotty record and a rep for high fees that left a bad taste with a number of investors. Hey, let's face facts. The main motivation of amateur film financiers is to have fun. It's akin to visiting a casino or a racetrack: Although you are unlikely to score, you'll have a hell of a time losing your money. If this is your outlook, then rolling the dice on a single film makes more sense. You will be a big shot in the production, not another face in the crowd, as you'd be with an investment pool. That's the spirit of the 35 people who each invested at least $5,000 in Pete Chatmon's Premium. Last spring they attended a screening at the Miami International Film Festival, where they were treated like VIPs. When the credits rolled, they could read their names. After the screening they dined and partied with the film's cast, which includes the stunning Zoe Saldana, heartthrob Hill Harper and rising star Dorian Missick. "Everyone was impressed with the tinsel and the stars, but they were more impressed by the stealth players and moguls in the room," says Craig A. Woolridge, a New York City corporate bond salesman who helped Chatmon raise financing for the film and attended the festival. The evening was a memorable success, save for one vital detail: Chatmon left the festival without a distribution deal. But shortly thereafter he agreed to link up with Codeblack Entertainment, which is planning a limited theatrical showing of Premium in 2007, followed by a DVD release. Chatmon, who has started preproduction on a second film, believes that he will recoup the money that investors have bet on Premium. And if he doesn't, he knows his investors had a great time on the red carpet.