What is the secret of Hollywood financing?


      Hollywood studios find ways to use OPM (Other People's Money), including government subsidies and tax-credit deals, to pay for a large part of the production cost.  Consider Paramount's Lara Croft: Tomb Raider.  It cost a staggering $94 million on paper to make. But after Paramount applied the arcane art of studio financing, of which  the deal is a minor masterpiece, the studio's outlay was only $8.7 million.

First, it got $65 million from Intermedia Films in Germany in exchange for distribution rights for six countries: Britain, France, Germany, Italy, Spain, and Japan. These "pre-sales" left Paramount with the rights to market its film to the rest of the world.

Second, it arranged to have part of the film shot in Britain so that it would qualify for Section 48 tax relief. This allowed it to make a sale-leaseback transaction with the British Lombard bank through which (on paper only) Lara Croft was sold to British investors, who collected a multimillion subsidy from the British government, and then sold it back to Paramount via a lease and option for less than Paramount paid (in effect, giving it a share of the tax-relief subsidy.) Through this financial alchemy in Britain, Paramount netted, up front, a cool $12 million.

Third, Paramount sold the copyright through. Herbert Kloiber's Tele-München Gruppe, to a German tax shelter. Because German law did not require the movie to be shot in Germany, and the copyright transfer was only a temporary artifice, the money paid to Paramount in this complex transaction was truly, as one executive put it, "money-for-nothing."  Through this maneuver, Paramount made another $10 million in Germany.

Before the cameras even started rolling, then, Paramount had earned, risk-free, $87 million. To be sure, for arranging this financial legerdemain, Paramount paid about $1.7 million in commissions and fees to middlemen, but that left it with over $85.3 million in the bank. So, its total out-of-pocket cost for the $94-million movie was only $8.7 million.

The lesson of Lara Croft: Tomb Raider is that things in Hollywood--and especially numbers--are not what they appear to be. According to the published reports, it cost $94 million to make a movie that earned only $62.8 million in rentals in North America. That equation changes radically when the $85 million that Paramount netted from its nonpublic "risk management" is factored in, proving, yet again, that in Hollywood, the real art of movies is the art of the deal.

Corollary Question:

     Even if a studio makes a movie  at little or no cost, can it still lose money on it?


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