REV: NOVEMBER 21, 2006
MIHIR A. DESAI GABRIEL J. LOEB MARK F. VEBLEN
Tax-Motivated Film Financing at Rexford Studios
Charles O. Shaw, president and head of production for Rexford Studios, Inc., stared through his windshield at the bumper-to-bumper traffic on Highway 101, just north of Melrose in Hollywood. Given Rexford’s box office successes in 2000 and 2001, Shaw realized that the next few years would truly define the midsize studio’s place in the competitive production industry. A new slate of 15 films was ready to be “green-lighted” for production over the next three years, but Shaw was under increasing pressure from the Rexford board of directors to reduce financing costs and mitigate the risks associated with film production. On Shaw’s mind on this hot afternoon in September 2002 was a film-funding proposal from Film Fund International II, GmbH (FFI) in Germany to fund a single film—the first on Rexford’s new slate—scheduled to begin production in January of 2003. FFI was a relatively new financing source for funding U.S. films via film-specific investment vehicles. Shaw knew that the major studios had finance groups that sourced funds from around the world—possibly through similar structures—but without a finance group of his own to support him, Shaw had to quickly learn more about the mechanics and risks involved in the proposed deal.1 More specifically, Shaw knew that if the deal closed, he would have to immediately deposit a substantial amount of cash in a German bank. Part of his decision to go ahead with the deal, however, depended on how much he would have to deposit. Even if he decided to go ahead with this deal and deposit the money, he wondered how much it would benefit Rexford and how much value each of the other parties involved was receiving. Was there room to negotiate with them for a better deal? He needed to come up with answers quickly so he could advise Rexford’s board at its meeting next week.
1 German film funds have...