works for film and TV industry

Malcolm Silver, fca, mba, is a Toronto-based investment executive specializing in the financing of film, television and video. He publishes Silver Screen, a quarterly journal focusing on investment in these industries and has also published a guide to media and entertainment investment.

In the wake of the February budget, which took precise aim at the most commonly used structures for sheltering money by investing in film and television, it is time to take a look at this vibrant sector to examine new trends and changes to the market.

Relief for the film and television industry’s old deal comes in a grandfathering clause. For offering memorandums that were filed before the budget on Feb. 22, 1994, the old deal continues to allow funds to be raised until Dec. 31, 1994. It also allows new productions to be placed in the old deal. Consequently, the ‘old’ subordinated loan deals will be only in effect for this year. Effectively this is because the government has recognized that these types of deals work perhaps a little too well. Therefore, it is time to re-evaluate the film and television industry’s options.

For the past two years, television production has continued to grow and prosper in Canada. In 1993, two production companies went public in Quebec and three in Ontario with a fourth Ontario company jumping into public waters in 1994. Others are considering doing likewise.

The recent battle for Paramount has highlighted the so-called information highway. It may be a little known fact, but Canada is actually a strong leader in the provision of interactive television through Videotron in Quebec. It is able to deliver services to subscribers that u.s. companies are just talking about. With the recent developments in the use of cd-rom as a means of providing entertainment and information which can be accessed by a personal computer, there should be the potential for very interesting financing opportunities.

The basic rules for investing in film, television and video have not altered and the government made a point of outlining its commitment to these industries. Most things we hear seem to stress that investing in Canadian content film, television and video production is at a deductible rate of 30% per annum. However, it is important for investors and advisors to remember that overall it is still 100% deductible. When dealing with investing in the marketing of film and video, it is considered a business expense and therefore 100% deductible when incurred. Canadian content rules do not apply to this particular type of expenditure.

In Ontario, the province still offers its effective tax-free grant incentive to investors of up to 25% of the investment. In Quebec, producers, not investors, may be eligible for a tax credit of up to 18% of the budget based upon the amount of Quebec labor employed. Once a production has benefited from this credit, it can only be sold on to investors outside the province.

It is the tried-and-true limited partnership that continues to be the most popular formed for private investors. Structures using the limited partnership are:

1) Business/risk/equity deals:

Investing in films on a purely risk basis has been a notoriously poor choice. However, in the case of video, especially ‘how-to’ titles, there has been some spectacular success.

Video is attractive as an investment but requires some homework on the part of the investor. They need to know who they are investing with and what they are investing in. Sales projections will also need to be examined for their feasibility. Profitable videos should return their capital within one to two years of investing and deliver a separate solid return in the 20% range for many years, excluding the tax advantages.

Typical subjects that can sell amazing quantities range from management training videos with either corporate or entertainment stars, how-to videos relating to current personal dilemmas like coping with new babies or improving your sex life.

The new cd-rom market will prove a fertile ground for investors, especially in the areas of storing huge amounts of video and text like specialized encyclopedias.

Equity deals are mainly limited to how-to videos, which are increasingly being marketed through television using infomercials and 30-second ads. This is an important area to consider, especially with the growing numbers of viewers and the huge sales racked up by the Home Shopping Network and late-night infomercials. A large portion of the money invested for these deals often now goes towards purchasing television time and to create infomercials. Typically in the past, these have been private placements, but expect to see prospectus deals with affordable unit sizes soon.

Overall the investor goes in with the expectation of making real profits first and gaining tax benefits second.

2) Production service deals:

This is a new type of investment vehicle for Ontario investors. In b.c. these deals have raised substantial money for non-Canadian content productions produced in Vancouver. The b.c. film and television production community mainly provides services for u.s. productions as opposed to the Ontario and Quebec sectors. In these two provinces, the production community tends to originate its own productions and then bring in foreign partners to share the cost.

A production service deal has several advantages for investors:

– It is a business expense and not a cca deduction, therefore write-offs are 100% the first year.

– Deductions are not added back for amt purposes.

– A negative-adjusted cost base is not created.

– It is not restricted to servicing Canadian content productions so can provide a way to invest in u.s./European productions with a high potential success factor.

– Liquidity may be provided by giving the investor the option to sell his interest.

A production service deal typically provides the services a producer needs (i