Hollywood Hands Michigan an Empty Bag | AccountingWEB

Hollywood Hands Michigan an Empty Bag

Update and Correction. This article was originally published in March 2013. It included information gleaned from various sources regarding a giant loan (for $198 million) which, the article said, was sought by Michigan Motion Picture Studios (MMPS) from the state of Michigan, to bolster its difficult financial situation. We reported the state reluctantly made the loan, guaranteeing it with the state workers' pension fund which put state retirees at risk.

On October 18, 2013, MMPS Director of Marketing Sanford Nelson contacted us to correct this information. Nelson reports this loan was neither made nor requested by MMPS and might have been confused with transactions related to a defunct movie studio project unrelated to MMPS. 
Nelson added, the total investment in infrastructure for MMPS was less than $80 million, and the backers of this investment fulfilled the goals of the project. He gladly reported the result of the MMPS project as the building of a "world-class facility on time and under budget." 
In the interest of accuracy, we are happy to correct the record.


By Teresa Ambord

Whatever happened to the big push to make movies in Michigan? It's complicated. A few years ago, with giant auto manufacturing plants sitting empty and the economy dragging, Michigan threw open its doors, literally inviting Hollywood to come in and produce films economically. The bait was federal film credits, which movie producers covet. Of course, Michigan anticipated an influx of jobs and revenue. 
The plan started out with a bang as the film industry quickly responded. Private investors were lined up, film credits were granted, along with other government incentives, and enormous concessions and even kudos from the Obama White House. Then the hoopla began to fizzle. What happened?
First some background 
Every state has federal film credits that they can use to lure filmmakers within their borders. Peter Dekom, a prominent Hollywood attorney, described how filmmakers view these credits. "The definition of mental illness in Hollywood is making a large-budget motion picture without some kind of tax incentives, which we call euphemistically soft money." He said moviemakers seek film credits to finance about 13 percent of their budgets, which, he added, some people see as corporate welfare. He prefers to see it as fostering the lucrative film industry.
With Michigan in an economic ditch, then-Governor Jennifer Granholm and Mike Binder, a Michigan-born actor and director, got investors to tap into the plan. 
The film credit program
By 2008, Michigan had developed one of the nation's most aggressive programs of this kind, with a 42 percent tax credit and unlimited rebates. Hollywood paid attention. The previous year, two movies were made in Michigan. But within two months of offering the credits, Hollywood responded to the state's bold "come hither" and soon twenty-four movies were lined up to be filmed in Michigan. A few of the titles included: Gran Torino, Whip It, Scream 4, Salvation Boulevard, Youth in Revolt, and Stone. Eventually Disney's Oz: The Great and Powerful would be made there.
Filmmakers estimated they would spend $195 million in the state, and in exchange, they would be refunded $70 million in cash, said The New York Times. Michigan saw visions of 3,600 jobs that were promised. That was the answer they were looking for, they thought. 
But things didn't turn out quite that way. Certainly some money was spent on food and lodging for the crews that the studios imported, rather than hiring locals. But according to many in power in Michigan, the studio was a strain on the already-tapped-out resources of the city and state. And the jobs . . . what jobs? 
Who was to blame?
It depends on who you ask. Investors, led by Linden Nelson, a well-connected local entrepreneur, bought GM's Pontiac, Michigan, auto plant for almost nothing. One of the investors, John Rakolta Jr., said GM paid more for the carpet than the plant itself. Government officials said that in spite of major concessions and generous film credits, the investors constantly demanded more financial incentives and help from all levels of government, including asking the city to waive almost all property taxes on the studio. 
Still hoping for the promised jobs, the city of Pontiac was in too deep to back out. When the jobs didn't materialize, officials asked the studio backers to put the promise in writing – the answer was a flat "no."
"We started seeing some backpedaling," said Fred Leeb, the city's emergency manager. Leeb added that the negotiations with Nelson's company, Motown Motion Pictures LLC, featured "knock-down, drag-out fights."
Still, the studio project moved forward, that is, until the investors hit financial hurdles. That's when they went hat in hand to the already-beleaguered state asking for a loan of $198 million. Reluctantly the state agreed, issuing municipal bonds and guaranteeing them with the state workers' pension fund, putting those retirees at risk. 
By the summer of 2011, only 200 people, including temporary construction workers, were hired. In the end, the entire studio had twelve employees (two in 2010 and ten in 2011). The news just continued to get worse for Michigan. 
The film industry said . . . 
The studio and its investors seemed to feel they were the victims. "When states make a promise or pass a law, they can't just pull the rug out from the people who have invested money. And in this case, the victims are us," said Nelson. He was going on the radio talking up the number of jobs that had been created, but locals didn't seem to see that. 
The studio's CFO complained they couldn't cash in on $110 million of tax credits which were contingent on the creation of jobs. They did, however, cash in on other millions of dollars in other credits. Movies did get made, but not with local labor. The filmmakers brought their own crews. 
What about the $198 million loan?
The New York Times said when the February 2012 interest payment was due, the studio only paid one-third, $210,000, leaving the state pension fund to pick up the remaining $420,000. Nelson blamed the state. "No one would have missed a bond payment if the state had not changed the tax credit program. No one would have missed anything." 
The "change" Nelson referred to was made by current Governor Rick Snyder. With the filmmaking project failing in Michigan, Snyder slashed the film credit funds in half, preferring to bolster Michigan businesses by reducing their tax rates. When that switch occurred, filmmakers pulled the plug leaving with an empty Swag bag. 
In August 2012, the entire interest payment of $630,000 went unpaid by the investors. Nelson and another investor told reporters that a deal was a deal, and the state changed the deal. He and other investors already stood to lose twice as much as they intended to invest, he said. 
The issue is complicated, and there's probably blame on both sides. But it seems clear that this venture wasn't the boon Michigan hoped for. More like a concrete life preserver thrown to a drowning man. 
Chances are Michigan residents regret ever rolling out the red carpet for Hollywood.
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