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0612 for FilmInvesting

0612 for FilmInvesting

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Published by Stu Pollard

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Published by: Stu Pollard on Aug 10, 2012
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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 askedhim 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 the1986 hit
She's Gotta Have It 
. A triumph for a film not made by a big studio and costing only $175,000, theflick grossed $7.1 million at the domestic box office, and its investors continue to receive profit checks. A20th-anniversary DVD of the sex comedy has been planned, but no release date is set. Along the wayLee 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 fledglingfilmmaker, 29-year-old Pete Chatmon. "I missed my chance with Spike and now I'm in a position to helpPete'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, whendirector 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 withtheir capital. But Tinseltown's allure is intoxicating. "People love the idea of rubbing up against the filmbusiness," 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 Disneybehind them, blossom at the box office on Friday and wither by Sunday night. Indie films usually gobefore the public without the studios' muscle. For every
She's Gotta Have It 
or 
Blair Witch Project 
--thespooky 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 received3,148 feature-film submissions. Of those, 120 were accepted for screening at the festival, which wasfounded 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 onesthat 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 toshowcase 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 elsefailing, get onto YouTube or the like and hope to drum up a following. Yet these must be viewed asfallback 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 
. Berneynow 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 boysor the small boys, always has been a miasma of funky amortization schedules and expense shifting fromone project to another. "Hollywood has a history of fleecing," says Bob Yari, who made a fortune in realestate 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) isnot 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 peopletypically pass the hat to friends and relatives first. No central clearinghouse for film investing exists. Youcan always contact university film schools, which keep tabs on hungry students. Someone who went toone of these places has, one hopes, a modicum of training. An alternative: visiting some of the filmfestivals that have sprouted across the land, at least 150 of them. Tap the words "film festival" into asearch engine like Google, and they will pop up. Ambitious auteurs prowl these forums in search of financing. They should come equipped with a businessplan, a partnership agreement, references--and most important, samples of their work, often short studentfilms. 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 independentworks 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 bylarge investment pools. Since pros are running these outfits, they stand a better chance of presellingrights 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 thatspecializes 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 EndgameEntertainment to finance movies. "You need to invest in a portfolio of films and invest with a company thathas 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
. Thanksto those hits, he says, his Endgame Fund has increased in value by 50% over the past three years. Sternrecently rolled the fund's assets into an operating company that will be four times the size of the originalfund. He put in only a small amount of Endgame's initial capital himself. Stern says his analysis isdesigned to make sure that a percentage of his films are making money on a consistent basis. "No one isokay with losing money," he says.

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