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Hedge Fund Investors Look At Alternative Investment In Private Equity Section 181 Fund
"Its all about leverage. I don’t know of any industry in the world where you have an investment indirectly guaranteed by the government in order to stimulate jobs and economic development at such high yields"
Well a Chicago film finance, production, and distribution company, Noci Pictures Entertainment, is putting a slate of films using an innovative hybrid tax, finance, risk minimization, and exit strategies that in some instances can offer a dollar for dollar Federal Tax Deductions, state income tax credits or rebates, a possible exit IPO on the London AIM., equity in a slate of films, as well as stimulating local economic development, and creating jobs, including for women and minorities.
“I don’t know of any other alternative investment that can offer tax incentives, multiple exit strategies, as well as giving back to the local economy, while being involved with the moviemaking process", states Yuri Rutman, the head of Noci Pictures. “That would also add to the long line of recent film funds that have been structured with numerous hedge funds, private equity investors, corporate tax credit buyers, and institutions"
On the institutional side, familiar names such as CITIGROUP, Deutche Bank, JP Morgan, Morgan Stanley, Dresdner Kleinwort, GE Commercial Finance, ABRY Partners, AIG Direct Investments, Bank of America Capital Investors, Columbia Capital, Falcon Investment Advisors, and M/C Venture Partners are all involved with the finance of films.
Familiar individuals who are financing films include Larry Ellison, Paul Allen, Steven Rales, Fred Smith, the CEO of Federal Express, Norman Waitt, the Co-Founder of Gateway Computers, Jeff Skoll Of Ebay, Marc Turtletaub of The Money Store, Roger Marino Of EMC Corp, Sidney Kimmel Of Jones Apparel Group, Minnesota Twins owner Bill Pohlad; Real Estate Developers Tom Rosenberg, Bob Yari; and, financiers Sheikh Waleed Al Ibrahim, Zeid Masri of SilverHaze Partners, Michael Singer, Mark Esses, David Larcher, Michael Goguen, Richard Landry, Michael Reilly, Rafael Fogel, and Philip Anschutz
The American Jobs Creation Act Of 2004, the 2004 enactment of Section 181 of the Internal Revenue Code of 1986 (the "Code") marked an unprecedented change in U.S. policy toward the phenomenon known as "Runaway
Runaway Production refers to a film or television production that leaves one state or country to be filmed in another purely for economic reasons. This movement occurs because producers tend to film in the location where they can minimize production costs through tax incentives, cheaper labor.
Over the years, Canada has been the greatest beneficiary of U.S. runaway productions (according to some reports, Canada has claimed up to 80% of the U.S. runaways, generating an economic impact of $10.3 billion in production output in 1998 alone).
Section 181 represents the first time that the U.S. federal government has recognized this impact by passing tax legislation to actively combat the flight of film and television programming.
Section 181 permits a 100% write-off for the cost of certain audio-visual works, regardless of what media they are destined for (e.g., theatrical, television, DVD, etc.).
An individual or company who makes an investment into Section 181 qualified productions can take a 100% deduction of their investment against their passive income in the year their investment was made.
The deduction can be made against active income should the investment be made by or through a widely held C corporation. The law is in effect until December 31, 2008, therefore investments must be made before that date and the money invested into qualifying productions must be spent by then by the productions.
Rutman stressed that “As an example, should an individual or corporation that is taxed at a 35% tax rate have passive income to take a deduction against, then should that individual make a $1 Million investment into a qualified production or film fund, the actual net investment will be $650,000 since they can take a deduction against that full $1 Million against their passive income, and 35% of $1M is $350,000, which is the value of the deduction they can make in the year they make their investment.
But since Section 181 also allows for all other debt costs which are usually associated with film finance, a $10 million dollar film, where only $3.5 million is equity, an investor can deduct $3.5 million dollars against the $10 million, especially if the latter is mezzanine or gap finance.
Plus, an additional 20%-40% in state tax credits or rebates can be generated back to the Investors, before revenues. The State of Michigan now offers a 40% cash rebate for making a movie there, which is the most aggressive in the country. That translates to an additional $4 million in rebates to an investor based on a $10 million dollar film.
"Its all about leverage. I don’t know of any industry in the world where you have an investment indirectly guaranteed by the government in order to stimulate jobs and economic development at such high yields".
”I am also surprised how many investors, hedge funds, VC, tax planners, CPA’s, tax attorneys, public and private companies have no clue about these benefits”, Rutman adds. “Federal Preservation, New Markets Tax Credits, etc was the usual route for tax planning, but film production incentives offer a more liquid premium, equity, as well as little Hollywood adventure and schmoozing with movie stars".