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Authors: Edward Jay Epstein
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stars’ smiling attendants on this organized flight from reality? The answer: deception is a cooperative enterprise. By suspending their disbelief, the entertainment journalists get the stars on their programs.
PART III
HOLLYWOOD’S INVISIBLE MONEY
MACHINE
WHY
LARA CROFT: TOMB RAIDER
IS CONSIDERED A MASTERPIECE OF STUDIO FINANCING
A Hollywood studio has both an official budget, which is often leaked to trade papers such as
Variety
and
The Hollywood Reporter
, to show how much money it is supposedly costing to produce, and a closely-held production cost budget that shows how much money the movie is actually costing toproduce. The latter budget, which is rarely seen by anyone outside of a studio, takes into account the money the studio gets from government subsidies, tax shelter deals, product placement, and other sources that greatly offset the amount of its own money that a studio actually has to sink into a film. A vice president at Paramount explained to me how these invisible maneuvers, including pre-sales abroad, can reduce the risk to practically zero. As an example, he cited Paramount’s
Lara Croft: Tomb Raider
as a “minor masterpiece” in the arcane art of studio financing. Although the official budget for this 2001 production was $94 million and reported even higher in the press, the studio’s outlay was only $8.7 million. How?
First, Paramount got $65 million from Intermedia Films in Germany in exchange for distribution rights to
Lara Croft: Tomb Raider
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-lease-back transaction with the British Lombard Bank through which (on paper only)
Lara Croft: Tomb Raider
was sold to British investors, who collecteda 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 Munchen 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 the executive put it, “money-for-nothing.” Through this maneuver, Paramount made another $10.2 million in Germany, which paid the salaries of star Angelina Jolie ($7.5 million) and the rest of the principal cast.
Before the cameras even started rolling, then, Paramount had earned, risk-free, $87 million. 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.
Since Paramount could be assured of selling the pay-TV rights to its sister company, Showtime, with which it had an output deal, for $8.5million, it had little, if any, risk. As it turned out, the movie brought into Paramount’s coffers over $100 million from theaters, DVDs, television, and other rights.
Of course, it’s not only Paramount that employs these devices. Every studio uses them to minimize risk. In the case of the
Lord of the Rings
trilogy, New Line covered almost the entire cost by using a combination of German tax shelters, New Zealand subsidies, British subsidies, and pre-sales. The lesson here is that things in Hollywood—and especially numbers—are not what they appear to be, proving, yet again, that in Hollywood, the real art of movies is the art of the deal.
MONEY-FOR-NOTHING FROM
GERMANY
A loophole in Germany’s tax code
PART III
HOLLYWOOD’S INVISIBLE MONEY
MACHINE
WHY
LARA CROFT: TOMB RAIDER
IS CONSIDERED A MASTERPIECE OF STUDIO FINANCING
A Hollywood studio has both an official budget, which is often leaked to trade papers such as
Variety
and
The Hollywood Reporter
, to show how much money it is supposedly costing to produce, and a closely-held production cost budget that shows how much money the movie is actually costing toproduce. The latter budget, which is rarely seen by anyone outside of a studio, takes into account the money the studio gets from government subsidies, tax shelter deals, product placement, and other sources that greatly offset the amount of its own money that a studio actually has to sink into a film. A vice president at Paramount explained to me how these invisible maneuvers, including pre-sales abroad, can reduce the risk to practically zero. As an example, he cited Paramount’s
Lara Croft: Tomb Raider
as a “minor masterpiece” in the arcane art of studio financing. Although the official budget for this 2001 production was $94 million and reported even higher in the press, the studio’s outlay was only $8.7 million. How?
First, Paramount got $65 million from Intermedia Films in Germany in exchange for distribution rights to
Lara Croft: Tomb Raider
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-lease-back transaction with the British Lombard Bank through which (on paper only)
Lara Croft: Tomb Raider
was sold to British investors, who collecteda 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 Munchen 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 the executive put it, “money-for-nothing.” Through this maneuver, Paramount made another $10.2 million in Germany, which paid the salaries of star Angelina Jolie ($7.5 million) and the rest of the principal cast.
Before the cameras even started rolling, then, Paramount had earned, risk-free, $87 million. 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.
Since Paramount could be assured of selling the pay-TV rights to its sister company, Showtime, with which it had an output deal, for $8.5million, it had little, if any, risk. As it turned out, the movie brought into Paramount’s coffers over $100 million from theaters, DVDs, television, and other rights.
Of course, it’s not only Paramount that employs these devices. Every studio uses them to minimize risk. In the case of the
Lord of the Rings
trilogy, New Line covered almost the entire cost by using a combination of German tax shelters, New Zealand subsidies, British subsidies, and pre-sales. The lesson here is that things in Hollywood—and especially numbers—are not what they appear to be, proving, yet again, that in Hollywood, the real art of movies is the art of the deal.
MONEY-FOR-NOTHING FROM
GERMANY
A loophole in Germany’s tax code
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