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Jan 2008
21
January 21, 2008

New Deals for a New Economy: Introducing the Changing Film Production Industry to Financial Services Clients in Michigan

Attorneys are always looking for ways to add value to their clients' business. In the midst of Michigan's recent economic struggles, the ability to introduce new opportunities to financial services clients can make a world of difference. Banks are in the hunt for new deals. While lenders are forced to spend more and more time keeping up with their portfolios' rough spots, it is difficult for them to explore opportunities in the various industries that are emerging in Michigan. Recent activity in Michigan's film industry may indicate that there is potential for growth that financial services providers can help to fuel, and in turn, profit from.

Film and video production is not a new industry in Michigan. In fact, when the production of automobile commercials was handled by in-house production departments at Ford, General Motors and Chrysler, Detroit boasted a production community that rivaled Hollywood. Now that the "Big Three" are deep into what has been years of cost-cutting efforts, the work of their advertising and production departments landed with outside firms long ago. Gone are the days of the bustling Detroit soundstage. In West Michigan, religious production projects have generated revenue for production companies for years, and the strong evangelical Christian roots of the area continue to keep many people employed behind cameras and in editing booths working on films that are often exported to churches around the country intent on growing their multimedia ministries. Also in West Michigan, production professionals have assisted the office furniture industry with creative displays of their wares as their designs have ebbed and flowed, and that work continues. Michigan also has its share of feature film productions under its belt, but feature film production has never been a significant component of the state's economy.

Wherever industry generates revenue in Michigan, the banks are there. Production professionals throughout the state have long-term relationships with commercial bankers just as manufacturing professionals have. Loans, letters of credit and all aspects of treasury management are capably handled by Michigan financial institutions for the state's production industry. Where the banks and, for the record, the state's legal community have lagged behind is in their support of the innovation that production professionals are pushing in Michigan.

There is some indication that Michigan's legislative and executive branches of government are seeing the potential for growth in the production industry. The state's tax incentive program for commercial and feature film production has been in place for a little over a year, and Lansing is already working on updating the program. As it stands, production companies can get a cash rebate of 12-20% of eligible production dollars spent in Michigan through the program, which is administered by the Michigan Film Office. This program is similar to the financial incentives other states and countries have implemented as a way to spur growth in production, but it is becoming clear that in order to be competitive, it takes more than a tax incentive program. If Michigan hopes to claim a meaningful share of the production work generated in the United States, it needs not only support from the government but also a financial services industry that is capable of serving the industry and is willing to take some of the risks that are inherent in production ventures—particularly feature film productions.

While Michigan can expect to maintain its commercial production base with the help of the ongoing relationships between commercial producers and their financial services providers, there are current opportunities to break new ground when it comes to feature film production. On the coasts—in New York and Los Angeles, in particular—there are many banks that have specialized capabilities to serve the feature film industry. Some of those banks have significant footprints in Michigan (e.g., Comerica, JPMorgan Chase). These specialties have evolved because of the location of the capital that has historically fueled the major film studios and, more recently, the myriad independent feature film production ventures.

With advances in technology have come a democratization of the film industry. For the past several years, the cost of producing quality dramatic and documentary feature-length films has been falling, mostly due to the development of digital technology. This has given rise to a shift from large numbers of yet-to-be-discovered screenwriters that have written scripts they hope to sell to major studios, to large numbers of yet-to-be-discovered filmmakers who have written, shot and edited films that they are trying to find distribution for. This is hardly a new phenomenon at this point, but one of the key effects of the changes has been to challenge the notion that California and New York are the only states that stand to see economic gains from the feature film industry. Equity investment in feature film production has started to shake some of its regional ties, and capital from all over the country is finding its way into film projects at a rapid pace.

So what does this mean for our Michigan banking clients, and how can attorneys help their friends in the financial services industry get in on the "ground floor" of what could prove to be a new spark to Michigan's economy? At the very least, it presents an opportunity to be ahead of the curve in a market that has a pronounced shortage of new deal generation for commercial bankers. Banks that have distinguished themselves in other industries have done so by understanding the business issues that their customers face from day to day, and the production industry is no different. Beyond studying up on general trends in the industry, financial services providers should know how banking services can be adapted to production ventures and can start making those services available to their customers in the industry.

At this point, one concrete way for banks to get a feel for the changing film industry is to acquire participation interests in some of the syndicated credit facilities that make up the production financing funds for the major film studios and a growing number of independent production houses. While most of the participation interests in these deals are placed with lenders in a manner that resembles a traditional "club deal" (where most of the lending officers know one another and run in small circles centered in Los Angeles and New York), attorneys who represent investors in these funds can provide introductions to Michigan banking clients.

Being a participant in the debt component of a film fund provides a crash course in the credit and collateral analyses that lenders who operate in this industry employ. After reviewing the documentation of these deals, most lending offers are surprised to see that there is very little smoke and fewer mirrors than they expected to see in a film financing deal.

As Michigan attorneys continue to build relationships with an increasingly active production community and the volume of legal work handled in the state related to the financing of feature films grows, the chance to make connections for financial services clients grows as well. Collaborations between banks and lawyers to support economic development in Michigan have been successful in the recent past, particularly with respect to the emerging life sciences industry. Innovation and change in Michigan's film industry presents a unique opportunity for attorneys and banks to be on the forefront of what may prove to be a key component of the state's new economy.

Michigan Lawyers Weekly

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