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Investing in Movies, and Vetting Investment Opportunities in the Film Industry

  • May 19
  • 8 min read

Every once in a while, somebody in our online communities for doctors posts about investing in movies. Physicians are often sought out for these opportunities, and told about the tax benefits of investing in the film industry. While the tax incentives can be substantial, it’s important to understand the business of the filmmaking, how returns are generated, and how to do due diligence in this space. We’ll cover all of this and more below. 


Disclosure/Disclaimer: Our content is for generalized educational purposes.  While we try to ensure it is accurate and updated, we cannot guarantee it. We are not formal financial, legal, or tax professionals and do not provide individualized advice specific to your situation. You should consult these as appropriate and/or do your own due diligence before making decisions based on this page. To learn more, visit our disclaimers and disclosures.


Due diligence guidance and questions to ask when assessing an opportunity to invest in a movie


Why invest in movies and the film industry?


There are many reasons why you might want to invest in a movie, and not all of them are financial. There are also personal and strategic reasons to diversify your portfolio or exposure to the film industry.


Common reasons for investing in movies include:

  • The potential to make a lot of money if a film does very well

  • Diversifying your portfolio into alternative assets

  • Tax advantages of investing in the film industry (we’ll cover these below)

  • The ability to invest in intellectual property which can be monetized in other ways (merchandise, franchises, streaming, games, books, etc.)

  • The potential for recurring revenue from streaming rights, remakes, international remakes or releases, etc.

  • Access to screenings, celebrities, and cool events, and the prestige or networks that may come with it

  • Wanting to support a cause, or more globally support the arts



Are movies a good investment?


The fact is that most movies lose money or barely break even. It’s very hard to predict the financial success of a film, even if it has A-list actors. 



What does it take for a movie to make money?


How a movie does financially depends on audience demand, the timing of the release, the effectiveness of distribution, how much it cost to make the movie, how good the movie actually is, whether something goes viral, and other micro and macro economic and emotional factors that are often beyond your control. Therefore, unlike some other investments into things like businesses or real estate, there’s not a great way to reliably map out a pro forma for many films. 


It’s important to remember that just because something does well in the box office doesn’t mean it offsets all the production costs, which can be very substantial especially for high budget movies with big name actors. Basic revenue vs expense calculations apply here. 


If a movie wins a big award, is in the right place at the right time in terms of messaging or trends, etc., the movie may deliver outsized returns. But again, this is very difficult to account for, particularly in this era of streaming services and what it takes for you to go to the box office and watch a movie in the theater.



What are ways that movies can be a good investment if they don’t shatter box office records?


As alluded to above, there are other reasons that movies may end up being a good investment aside from pure money generated at the box office. This could be in the form of tax incentives that we discuss below, royalties related to the IP, or even tangentially via the networks you become connected to, as high net worth people do tend to invest in movies, and you may be invited to events related to the movie.



What are the main ways to invest in film and the movies?


Public markets


You may already be invested in movies without even knowing it, just via exposure via your stock portfolios. Several big filmmakers or companies involved in production are publicly traded, such as Disney, Warner Brothers, Netflix, IMAX, and Paramount. You could also individually purchase these stocks for more dedicated exposure. While this is an easy way that provides liquidity, these won’t get you the same type of upside from a successful movie that investing individually may.



Direct film financing


This is what people often refer to with movie financing, and it’s when you specifically invest in an individual movie that’s being filmed. There are different structures by which you can get involved, including having an equity stake that gives you upside potential (but also likely the highest risk), or financing the debt, the production company, or providing gap financing. Again, remember that most movies lose money.



What sorts of expenses does a movie have?


There are many expenses to making a movie that you’re probably not aware of. These include:

  • Paying the actors

  • Studio overhead and shooting costs

  • Marketing costs

  • Distribution costs

  • Interest and other payments on the debt related to financing the movie



How do you reduce the risks of investing in movies?


There are some things that make movies tend to do better. These include:

  • Popular actors (but remember, you’ll also be paying them more)

  • Experienced and popular producers (again, costly)

  • Good distribution strategy 

  • Negotiating returns based on gross profits, rather than net profits

  • Having completion bonds to mitigate risk

  • Sitting at a more favorable position in the capital stack from the risk perspective (equity positions have the highest risk/reward profile, but financing and debt get paid first)



How to do due diligence and questions to ask if you’re considering investing in a movie


Much like investing in a real estate deal or in a private practice partnership, you’re going to want to ask a lot of questions about various aspects of the movie. These include:



Who’s the team behind the production, and what’s their experience?


You’ll want to know what movies the producers have previously worked on and what the financials of those deals turned out to be, who’s handling finances, and what their connections are for distribution and marketing.



What are their plans for distribution?


How do they plan on getting the word out about this movie in a world that’s saturated with new releases and content? You’ll want to focus on the actual how, not just vague statements. Do they have any signed agreements in this capacity? Are they set to release internationally as well? Are they able to get into festivals? Do their actors tend to be heavy promoters of the films they participate in and are they popularly followed on social media?



What are the financials of the deal?


You’ll want to ask about the budget with the anticipated expenses and profits, whether or not there’s a completion bond or other insurance policies, what kind of extra money they have access to if things go above budget, and where they see distributions being made back to you and when. A completion bond is an insurance policy that the producer takes on to guarantee that the film will be delivered on time and within budget, or they’ll give the money back to their financiers and distributors.  You’ll also want to understand the tax incentives and how they help you in your personal financial situation.



Have they covered their bases legally?


You’ll want to make sure that intellectual property rights are secured, obligations to unions and the Screen Actors Guild are appropriately fulfilled, and that you as the investor are protected from actions against the film or production team.



What are the tax advantages of investing in the film industry?


These are often highly touted, so it’s important to understand these, and if they actually apply to your financial situation.


Many locales, including cities, states, and even countries, offer incentives for filmmakers to shoot their movies there. This is often because it can bring publicity and tourism to their area, jobs, or other secondary economic gain. 


Because of this, they may offer tax credits to the film, which can drastically reduce the effective costs of production and mitigate the downside risks.


It’s important for you as the individual investing to understand how those flow down to you. This depends very much on the structure of the deal and the entity itself. It’s important to know that tax rules can change a lot, and that they’re highly location dependent, so you’ll have to do significant due diligence here. Hopefully, there are entertainment attorneys and accountants involved in helping to discern this, with specific experience in media financing.



State film tax credits


Many states offer tax rebates or credits to productions because they will be spending money locally on things like hotels, crew members, equipment and construction, catering, and more. Usually this will take the form of a substantial tax credit  (think 25-35%) on money spent in the state. This will substantially reduce costs and can sometimes be transferable, or even sellable, creating a secondary market for companies or wealthy individuals that want to buy the credits. 



Federal tax treatment


There are also some production expenses that qualify for accelerated deductions, write offs, expenses, pass through losses, and depreciation. There are also sometimes benefits related to opportunity zones. Though this space is always evolving, these can pass down to investors. This is a very complicated discussion that should be had with an experienced accountant to ensure it will actually help your tax situation, if this is your primary reason for investing. Things to ask about are whether passive losses can help you, what limitations may be present, and whether there are any participation requirements to qualify.


Related PSG resource:



Caveats and cautions


You never want to let the tax tail wag the dog. A bad investment is still a bad investment. Additionally, these are well known tax strategies that can attract IRS scrutiny or worse, get you involved in allegations of fraud or other litigation.


Also, depending on your income and your types of income, some of these strategies may not help you. You typically need to be a very high income earner, and as these will be passive losses for most physicians who are not materially participating actively within the film, you need to have the right types of taxable gains to be offset. Again, discuss the nuances of this with your accountant.


Related PSG resource:



Conclusion


Ultimately, there may be a lot of reasons that you want to invest in a film, but you should be careful about investing in movies as a reliable source of returns, as most movies lose money. It’s very difficult to underwrite or project returns for a movie investment due to the factors above, and it’s generally important to be cautious about letting the tax tail wag the dog if you’re pitched the tax advantages of investing in movies as your primary consideration. We highly recommend talking to your accountant about how these incentives may apply to your tax situation if this is why you’re investing. If there’s a movie you want to see in the world, or if you find the industry exciting and want to support and be a part of it, you may want to invest. In a best case scenario, you’ll be pleasantly surprised if the film is a hit, and in these cases, the rewards can be substantial and recurring. 



Additional investing related resources for physicians


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