Montreal: Sandy Mackay-Smith says the budget threshold for transitional TV coproduction using a U.K. tax component is very high at $1.2 million per hour and should basically help only MOWs.

The president of Invicta Capital Canada says he has proof Canadian clients with TV coproduction projects budgeted at less than $1.2 million but who had filed with DCMS prior to April 17 have received confirmation of acceptance.

Invicta raised approximately $600 million among its pool of U.K. investors seeking tax deferrals in fiscal 2001. ‘We ended up with a $100-million surplus and we had a garage sale,’ says Mackay-Smith.

The funds are placed in a reliable U.K. bank and subsequently invested in certified U.K. production, including Canada/U.K. coproduction. The producer(s) buys a guarantee from a bank to ensure the funds advanced to the producer(s) will be paid back to the investor.

‘Where the play is and where our funding comes from is the future value of that money at the bank. The money earns interest and we pay some of the interest to the investor to entice them into the tax vehicle, and to pay our fees [and pay commissions to third-party brokers, banks, insurers, auditors, legal fees, etc.]. The balance goes to the producer,’ explains Mackay-Smith.

The coproducer’s gross balance or benefit in the case of the sale-and-leaseback mechanism runs currently in the 11% to 12% range as a percentage of the total production budget. The benefit to the producer starts to diminish ‘or make less sense’ in terms of cost and time when the budget is $3 million and less, adds Mackay-Smith.

Typically, Invicta’s payment is made 30 days after delivery (following final certification approval from DCMS) to the U.K. side in the form of the legally constituted (joint-account) coproduction partnership, with the financing and spending splits predetermined in the coproduction deal negotiation.

Brokers like Invicta do not charge producers executive producer-type fees or participation fees. ‘None of the normal financial parts [other revenue sources] are affected by this. That’s why the leaseback is so attractive,’ says Mackay-Smith.

The coproduction partners do incur various obligatory costs, including the bank guarantee (in the 0.55% range), auditing and legals, which on average represent 0.75% of the overall production budget in the case of a smaller production and up to 0.65% on more expensive productions (over $10 million), he says.

Royal Bank of Scotland and Comerica Bank will provide interim financing of up to 60% to 80% of the sale and leaseback. ‘It’s not really an additional cost because we’re giving [the producer] more financing. The producer is able to use our sale and leaseback as a security,’ says Mackay-Smith.

Mackay-Smith and others are actively working with Canadian banks to develop their participation in financing this highly specialized security. Mackay-Smith hopes this can be done by later this fall.

As to why producers should undertake such a relatively complicated option, Mackay-Smith says the simple answer is that coproductions automatically receive national status in the coproducing territories and also broadly qualify as European content.

Invicta will not go into equity deals where the investor takes a major share in the production with significant exec producer fees, etc. ‘We believe the prospectuses for those [deals] are not properly setting up the investor [for] what is happening. This is about the issue of payback of the one-year write-off. The investor [in England] puts money in and immediately gets a tax write-off of one year and it is repaid back to them and taxed in their hands over a 15-year period, so much per year. And while [the investor] thinks they have a 15-year tax-free ride, in fact, under the mechanism, tax is going to be paid two years out, and I don’t think investors are fully aware of that.’