With the explosion in tax credits, new media incentives, broadcaster programming funds and government and cableco financing initiatives, Playback’s annual compilation of investment and finance sources lists the ever-widening national and provincial pools of money producers can dip into. But as an increasing number of producers flood the funding gate, alternative sources of raising cash are becoming more vital. Playback takes a look at new opportunites on the banking front – expanding initiatives from the established players and new kids on the block getting in on the film and tv game (see page 1). Gap financing is another growth area producers are checking out and Malcolm Silver, the president of a production financing firm, looks at some of the innovations (see page 35). Eager eyes are also being cast overseas and a special edition of Binchmarks looks at the how-to’s of tapping into u.k. benefits (see this page).

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Joey Mastrogiuseppe is a lawyer at the law firm Byers Casgrain, McMillan Binch’s associate firm in Montreal.

British tax legislation provides tax incentives for film and television productions in the u.k. Canadian film and television production companies may be able to benefit from these incentives if their films qualify as ‘British films.’

A new type of structure – the so-called ‘sale and leaseback deals’ – could provide Canadian producers with an opportunity to generate cash to assist production financing and to receive cash benefits of up to 8% of the film’s budget.

We set out below an overview of the criteria that are required to qualify as a British film as well as the basic steps involved in a sale and leaseback transaction.

Can your film qualify as a British film?

A Canadian film or tv production company can take advantage of the British tax incentives for film and tv production through a sale and leaseback arrangement if the production in question is certified as a ‘British film’ according to the British Films Act by the Secretary of State of National Heritage.

Two types of films qualify as British films. The first are films made in accordance with the Films Co-production Agreement between the u.k. and Canada or the European Convention on Cinematographic Co-production Order.

The second type are films which meet the following criteria:

– the maker of the film was, throughout the making of the film, either ‘ordinarily resident’ in the u.k. or in the eu or the company making the film is registered there and its business is managed and controlled there;

– the studio (if any) used in making the film was located in a Commonwealth country or in the Republic of Ireland;

– at least 75% of the wage cost (excluding the salary of one person) is payable to nationals or residents of the u.k., the eu or a Commonwealth country, or 80% of the total labor cost after deducting payments made in respect of labor or services of any two persons neither of whom were citizens or ordinarily resident in the u.k., the Commonwealth or the eu and at least one of whom was an actor (the exclusion in respect of one person is to enable a major non-u.k. or non-eu individual to be engaged without breaching the rule);

– where more than 20% of the total playing time of the film is made on location outside the u.k.: the preparation for the making of the film is carried out in the u.k., the laboratory processing work is undertaken in the u.k., and at least 50% (in terms of value) of the technical equipment used in making the film is from u.k. sources.

Note that up to 7.5% of the film’s playing time may be totally disregarded for the purposes of determining if it qualifies as a British film.

Basics of the sale and leaseback structure

First, some definitions. A ‘lease’ is a contract by which one person who owns property (the ‘lessor’) grants to another person (the ‘lessee’) the right to possess, use and enjoy the property for a specified period of time in exchange for periodic payments of a stipulated price – commonly known as rent.

A sale and leaseback transaction is one by which a person sells his property and later leases it back. For example, a sells his property to b and subsequently leases the property from b. Thus, a becomes the lessee and b the lessor.

In the case of a sale and leaseback transaction for a film or tv production, the mechanics of the transaction are similar to those involving other kinds of property, except that the tax benefits for films will normally be more favorable.

After the film’s completion but prior to its release, the production company sells to another company (the lessor) the master negative, sound track and distribution rights for a sum equivalent to the production cost of the film. The lessor immediately leases the film and all rights relating to the film back to the production company for a period of usually 12 to 15 years.

Then tax law enters the scene. For tax purposes, a lessor who has legal title to an asset will be entitled to claim capital cost allowance in respect of tangible property and a revenue deduction on the acquisition price of the production, thus realizing a significant economic benefit.

Under British tax law, the lessor as owner of a film will be entitled to take a 100% capital cost allowance in the production during the first year. Part of this benefit may be transferred to the lessee through reduced rental payments – thereby conferring a benefit onto the lessee which the lessee might otherwise not have been able to obtain.

The lessor claims a revenue deduction on the acquisition price and passes this benefit on to the lessee in the form of reduced rental payments. At the end of the lease, the lessee may continue the lease for a nominal annual rental payment, or alternatively, act as the lessor’s agent in selling the film. In the event of a sale, the arrangement between the lessor and the lessee will provide that the lessee will retain the vast majority of the sale proceeds.

How it works

How does this all translate into money for a producer?

It works like this.

A u.k. lessor (typically a leasing company affiliate of a major bank) purchases the master negative, sound track and distribution rights from the producer of the certified British film. The lessor then leases this back to the producer or an acceptable party chosen by the producer (e.g. a distributor) for a fixed term. The distributor then enters into its normal distribution agreement and has full access to the film materials pursuant to the agreement.

There is no need for the lessee (either the producer or the distributor) to be a resident of the u.k.

The lessor may write off the cost of the film for tax purposes over several years (usually three), but is taxed on the lease income over the full term of the lease.

The lessor’s willingness to enter into the sale and leaseback transaction is driven solely by his view of the credit status of the lessee and the nature of the security for the lease obligations. The lessor does not normally assume any risks in respect of the success of the film.

The lessee places on deposit with a bank associated with the lessor a sum equivalent to the present value of the lease rentals. Funds for this deposit come from the price paid by the lessor to the producer of the film, which is loaned or otherwise advanced by the producer to the distributor.

The deposited sum, together with interest, will be calculated to be exactly enough to service the lease rentals and will leave a surplus out of the sale price for the producer to take at the start of the transaction.

The net value to be extracted by the producer depends upon the lease rental profile and the terms assumed in conjunction with the matching deposit rates.

As mentioned above, the lessee may re-acquire title to the master negative, sound track and distribution rights at the end of the lease term.

The bottom line

If your production fits within the British rules, the sale and leaseback structure may very well prove to be a useful tool for you. It can allow you to benefit not only from the British tax incentives in the film industry but also from an immediate cash benefit of up to 8% of the film’s budget.

(This article contains general comments only. It is not intended to be exhaustive and should not be considered as advice on any particular situation.)