The Los Angeles Business Journal August 4, 2003 Page 3

Crossing the Cinematic Pond

By RiShawn Biddle Staff reporter

To get a sense of how British taxpayers have become players in Hollywood, check out “Laura Croft Tomb Raider: The Cradle of Life,” the sequel to the videogame-inspired action flick starring Angelina Jolie as a swashbuckling archaeologist. The film was produced by Lawrence Gordon, the mastermind behind “48 Hours” and the first two “Die Hard” movies and distributed by Viacom Inc.’s Paramount Pictures and Mutual Film Co. But for all their work, none will own the film. Instead, they have leased the rights from the financial backer, a British tax shelter fund that backs movie production. In the last three years, these funds have raised $7.2 billion for film and television production, according to Martin Churchill, who edits the Tax Efficient Review, a British newsletter on tax deals. And while many of those tapping into the funding source have been British, such a large source of cash has not escaped the eyes of Hollywood producers. Producers and major studios like Paramount and AOL Time Warner Inc.’s Warner Bros. used British funds to finance the films in the “Harry Potter” franchise and the Hugh Grant vehicle “About a Boy.” “The Americans are taking account of the money we can bring them,” said Duncan Reid, a managing director of British film fund promoter Ingenious Media. “They need our money, the country needs the film industry, and taxpayers need the tax breaks.” Complicated structures The tax game has become a big consideration for Hollywood. To get a film off the ground, producers have to cobble tax deals along with distribution agreements, bank loans and equity investors. Canada, Australia and New Zealand long have offered rebates on production costs, as well as credits based on a point system accounting for such things as, say, the number of native-born among the cast and crew. Such credits, which producers sell off to taxpayers at a discount, can pay for as much as 14 percent of the film budget. Then there are tax shelters like those offered in Britain, Germany and Australia that are usually structured as sales-leaseback partnerships. In such deals, the partnerships buy the rights to a film from a producer, then lease it back to the producer for as long as 15 years. The producer will usually buy the film back at the end. “If done right, it can really work out for everyone,” said Churchill. But the funding tool does not come without strings – for both investors and producers. When backed by a British fund, the film must be a “qualified British film,” with an active producer (one not simply acquiring an already-produced film) incorporated in the UK. Some of the cast members also have to be British. The number is calculated based on the country of origin of the producers, stars and extras, among other factors. But the producers can deftly skirt around other requirements. For example, while 70 percent of production has to take place in Britain, that rule can be evaded if production is in countries with co-production treaties with the UK, such as the Czech Republic – where production costs are cheaper – or Canada, the foreign locale of choice. The British government authorized such arrangements in 1997 as a way to encourage local film production. But while Hollywood would occasionally dip into the pool to make movies, such as the Oscar winning hit “Shakespeare in Love,” American producers shied away from them because of the restrictions. Instead, producers preferred to do deals with German film funds, which handed a tax break to investors even if the film was produced on U.S. soil. Paramount became the first to exploit such arrangements during the late 1990s, when it raised money for films such as “The General’s Daughter” and “Mission: Impossible 2.” “Those funds were more flexible, something the British deals were not,” said David Molner, managing director of L.A. film financing firm Screen Capital International and the former Viacom senior vice president who masterminded the German film fund craze. Teutonic shift So what makes the British film funds so attractive now? In September, German officials essentially shut down its film financing industry by announcing it would apply new restrictions. While the government has not yet issued the new rules, the threat of retroactive application has scared off German investors. Adding to the skittishness is the collapse of European media firms such as Kirch Gruppe, whose generous acquisition of foreign film rights could help pay for as much as 65 percent of a U.S. producer’s budget. As a result, Hollywood has turned to the Brits as benefactors. Last year, Warner Bros. raised 200 million British pounds through a film fund sponsored by British money manager Scotts Private Client Services. The fund helped finance European advertising costs of 10 Warner Bros. films, including the Jerry Bruckheimer caper “Kangaroo Jack” and “Analyze That,” the sequel to the Robert DeNiro-Billy Crystal cornball comedy “Analyze This.” But the British government may soon shut off the spigot. Concerned that producers are conducting most of their production in Canada and other locales instead of on British soil, the British government’s Department of Culture, Sport & Media is considering adding a requirement that least 40 percent of production to be done in Britain. Meanwhile, a provision allowing film fund investors to immediately deduct their entire investment in the year the film is in production will expire in 2005. A committee of the House of Commons is replacing those provisions with more stringent terms. Which means Hollywood will be on the hunt for money again. “Studios and producers are very creative when it comes to financing,” said Wayne Levin, an executive vice president of Lions Gate Entertainment. “Something will eventually bubble up.”