K E N T M A T S U O K A
K E N T M A T S U O K A
Locations vs. Incentives
The way Hollywood determines where to shoot virtually changed overnight when Canada first introduced its groundbreaking Production Services Tax Credit in 1997, followed shortly thereafter as Louisiana and New Mexico offered the first domestic incentives in 2001 and 2002 that have now been adopted in over 40 states and 30 countries around the world and counting.
While value for the dollar has always been a concern, the introduction of film incentives shifted the focus away from what was a primarily creative decision to that which is now discussed at length by a studio’s executives prior to approval and created a niche industry of incentive consultants and tax credit brokers.
For those film makers without the advantage of a studio accountants on staff, or for film commissions without the benefit of incentives, how does this affect you?
It has become so prolific that being a CPA is almost more helpful in getting your film off the ground than having a film degree with no end in sight between dueling regions fighting to attract more and more production dollars. Understanding the difference between a refundable tax credit, a cash rebate, co-production, sunset, and qualified spend means you'll at least be able to speak the same language in pitching why your property works or understand why it won't work the way it is currently scripted.
To start, why would a region offer a subsidy to Hollywood for filming? There are several reasons, the first being the immediate effect of the direct production spend in the region which typically amounts to several million dollars in hotel rooms for visiting cast and crew, lumber for sets, food for catering, fuel for trucks and generators, to the secondary expenditures of crew members who go to local restaurants for dinner, the dry cleaners for their laundry, and the need for everyday sundry items from toothpaste to shampoo.
Second, if the area did not previously have an existing infrastructure, the production provides hands-on training for local employees to learn the stock and trade of film making and helps to develop the experienced crew base that will make the area more valuable in reducing the number of crew a production needs to import the next time around.
Finally, as we have seen with “Lost”, “Breaking Bad”, “The Lord of the Rings”, and even “Field of Dreams”, film tourism has become a significant multiplier of the initial investment by the region in providing increased tourism marketing opportunities at a fraction of the media buy necessary by riding the coattails of a successful project.
Now that we understand why a region might want to attract filming, we can start to figure out the true value of incentive. A 40% tax credit might sound like a great deal next to a comparable location offering a 15% cash rebate, but if the first has no local crew, you’re going to use up all your savings on flying, housing, and on per diem for LA crew.
If there isn’t enough hotel rooms in the area, you’re going to lose productivity bussing everyone from the next town over. Specialized camera, grip, and lighting equipment that is readily available and can be easily rented on an as-needed basis in Hollywood or New York requires pre-planning and adds significant shipping and longer rental costs in order to have them brought to a developing area. Period wardrobe, set dressing, and prop houses are harder to come by in developing areas and may also need to be shipped in. Finally, lack of specialized crew and experience could slow down the pace on set as they figure out how do unusual rigging or complicated lighting set-ups.
A savvy producer must take all these variables into account when determining if one particular region is better than the other despite the availability of an incentive or not. For the film commissioner without an incentive but an established infrastructure, these can be key selling points over a developing rival that offers a incentive without the resources.
Also keep in mind who else is currently shooting in or is planning to go to the same area. What might look acceptable in regards to crew depth on paper might end up with the production already started taking up all experienced crew and equipment that you might as well be shooting in Siberia in terms of crew and equipment availability.
Next of concern is how the incentive is monetized. Is it in the form of a cash rebate or a tax credit? Is the credit transferable or refundable? A rebate or grant is the most liquid, as they’re generally not administered by local tax authorities, but is a straight cash rebate based on applicable expenditures. A refundable tax credit is based on the company’s tax return, and provides an refund of excess production credits remaining after tax liabilities have been paid. A transferable tax credit are excess non-refundable credits that can be sold to other entities, usually at an amount less than face value. Finally, a non-refundable and non-transferable credit is just that, and any additional credits in excess of the production’s tax liabilities are lost. Obviously, the more liquid, the better. The further down you go, more and more points are shaved off the advertised incentive that must be accounted for.
Once liquidity has been established, you can start to figure out how much that incentive is actually worth to you in real dollars. You’ll need to research what is actually covered. Is it the entire production budget or only that which is spent locally? What constitutes local spend? Does above the line payroll qualify? What about below the line crew from LA? Airfare? Is there a co-production agreement in place that opens up the availability of “local” crew or equipment from neighboring regions? Can you just open up shop in their area or are you required to use an established local company as an intermediary? What’s the protocol for applying? Does the region require script approval or locally certified accountants? Is there a minimum or maximum spend? What’s the timeline for approval? What’s the guarantee you’ll receive your incentive?
Finally, international production creates an additional layer of difficulty in the calculation due to currency fluctuation and purchasing power. You’ll need to determine how much your dollar is worth in real terms, or what some economists call the “Big Mac index”. Basically, we take a constant that is widely available throughout the world that we know the relative cost of, and calculate how far a dollar goes towards purchasing that item. The more or less burger we can buy for our dollar indicates the relative strength of the currency, or how much more or less crew and equipment we can get in one country versus another.
After you’ve determined if there’s a value incentive to an area, you need to look at the stability of the currency, or the probability that the exchange rate will significantly fluctuate between start of production and the end of production. If you were to arrive and exchange a million dollars to get the shoot off the ground and the dollar loses 5 points between then and the next time you go in to transfer funds, it will cost you an extra $50k to receive the same amount of local currency you had the first time around. Or let’s say you’re working in Europe and exchange $5 million US Dollars at the current exchange rate of $1 = €0.91 and receive €4,556,225 Euros. You spend €4 million Euros and go to exchange your money back to dollars but now the Dollar has fell to $1 = €0.85. You will have lost $40k cash during the course of filming just to currency fluctuation. If for some reason you’re forced to push production the same amount of time, you could potentially have lost €200k so make sure to take into account how various vendors are to be paid, if they specify dollars or local currency, and how the fluctuations over the course of the payout schedule might affect your cost in dollars.
What does this all mean at the end of the day? As film financing gets tighter and more complicated, compromising your creative vision of the lake town you spent your summers growing up on for one in the next state over could mean the difference between a greenlight or being stuck in turnaround. Knowing what’s going through the minds of the financiers and executives holding the purse strings can help in creating a convincing argument of why one area might work or not work in language they can understand.
Saturday, July 25, 2015