| The State Of Michigan is offering a new 40% | | | | Over the years, Canada has been the greatest |
| cash rebate of motion picture production which | | | | beneficiary of U.S. runaway productions (according |
| makes it the most aggressive program in the | | | | to some reports, Canada has claimed up to 80% |
| country. It is trying to send a message to hedge | | | | of the U.S. runaways, generating an economic |
| funds, private equity groups, money managers, | | | | impact of $10.3 billion in production output in 1998 |
| family offices, tax attorneys, high net worth | | | | alone). |
| investors, tax credit buyers, New Markets Tax | | | | Section 181 represents the first time that the U.S. |
| Credit investors, and other international investors | | | | federal government has recognized this impact by |
| on the risk minimization of entertainment finance | | | | passing tax legislation to actively combat the flight |
| by getting a 40% cash back on the cost of | | | | of film and television programming. |
| equity. | | | | Section 181 permits a 100% write-off for the |
| However, on top of the 40% cash rebates, | | | | cost of certain audio-visual works, regardless of |
| investors may also utilize Section 181 to offset | | | | what media they are destined for (e.g., theatrical, |
| their 75% and in some instances 100% dollar for | | | | television, DVD, etc.). |
| dollar on the cost of film finance, all before | | | | An individual or company who makes an |
| operations, distribution, and international revenues. | | | | investment into Section 181 qualified productions |
| In the past two years many institutional investors | | | | can take a 100% deduction of their investment |
| such as such as CITIGROUP, Deutche Bank, JP | | | | against their passive income in the year their |
| Morgan, Morgan Stanley, Dresdner Kleinwort, GE | | | | investment was made. |
| Commercial Finance, ABRY Partners, AIG Direct | | | | The deduction can be made against active income |
| Investments, Bank of America Capital Investors, | | | | should the investment be made by or through a |
| Columbia Capital, Falcon Investment Advisors, and | | | | widely held C corporation. The law is in effect until |
| M/C Venture Partners are all involved with the | | | | December 31, 2008, therefore investments must |
| finance of films. | | | | be made before that date and the money |
| Indiviudals who are financing films include Larry | | | | invested into qualifying productions must be spent |
| Ellison, Paul Allen, Steven Rales, Fred Smith, the | | | | by then by the productions. |
| CEO of Federal Express, Norman Waitt, the | | | | But since Section 181 also allows for all other debt |
| Co-Founder of Gateway Computers, Jeff Skoll Of | | | | costs which are usually associated with film |
| Ebay, Marc Turtletaub of The Money Store, | | | | finance, a $10 million dollar film, where only $3.5 |
| Roger Marino Of EMC Corp, Sidney Kimmel Of | | | | million is equity, an investor can deduct $3.5 million |
| Jones Apparel Group, Minnesota Twins owner Bill | | | | dollars against the $10 million, especially if the |
| Pohlad; Real Estate Developers Tom Rosenberg, | | | | latter is mezzanine or gap finance. |
| Bob Yari; and, financiers Sheikh Waleed Al Ibrahim, | | | | Plus, an additional 20%-40% in state tax credits |
| Zeid Masri of SilverHaze Partners, Michael Singer, | | | | or rebates can be generated back to the |
| Mark Esses, David Larcher, Michael Goguen, | | | | Investors, before revenues. And with the The |
| Richard Landry, Michael Reilly, Rafael Fogel, and | | | | State of Michigan offering a 40% cash rebate for |
| Philip Anschutz | | | | making a movie there, which is the most |
| The American Jobs Creation Act Of 2004, the | | | | aggressive in the country. That translates to an |
| 2004 enactment of Section 181 of the Internal | | | | additional $4 million in rebates to an investor based |
| Revenue Code of 1986 (the "Code") marked an | | | | on a $10 million dollar film. |
| unprecedented change in U.S. policy toward the | | | | With the current appetite for alternative investing, |
| phenomenon known as "Runaway Production". | | | | real estate, and hedge funds starting to crunch, |
| Runaway Production refers to a film or television | | | | the viability of having an investment guaranteed |
| production that leaves one state or country to be | | | | up to 75-100% before operations and revenues is |
| filmed in another purely for economic reasons. | | | | something that should be reviewed and |
| This movement occurs because producers tend | | | | considered carefully as part of a new asset class |
| to film in the location where they can minimize | | | | and portfolio holdings of private equity groups, |
| production costs through tax incentives, cheaper | | | | money and wealth managers, and high net worth |
| labor. | | | | individuals. |