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British film industry losing its incentive

<b>Adam Dawtrey: London Eye</b>

With the tumbleweeds starting to blow through the British film industry following recent changes in U.K. tax rules, the launch of a new £200 million ($400 million) film fund sounds like a welcome relief for parched producers.

But while the Limelight Fund, unveiled last week by lawyer Michael Henry and producers David Parfitt and Christopher Figg, marks a useful addition to the options now available to Brit filmmakers, it’s not quite the grand savior it was hailed to be in some quarters.

In fact, Limelight has joined the queue of banks and other financiers in the relatively prosaic business of lending against the U.K.’s new production tax credit, itself worth a maximum 20% of the budget for films costing up to $40 million.

There’s no doubting the sincerity of Henry, Parfitt and Figg when they say their deal is designed to be more “producer friendly” than alternative schemes.

But Limelight doesn’t pretend to answer, yet at least, the much tougher question of where British films are going to find the other 80% of their coin now that the so-called GAAP equity funds have been shut down.

That $400 million headline figure is actually the total budget of projects that Limelight claims the capacity to co-finance. The fund itself has raised $80 million from private and institutional investors, with $12 million sitting in cash in its core Venture Capital Trust and the rest to be called down as required into two parallel funds.

But even in a good year, the British film industry doesn’t generate anywhere close to $400 million of indie production. And 2007 is not shaping up to be a good year.  

Word on the Soho street is that production activity is grinding to a halt, as the effects of the end of sale-and-leaseback kick in. Other factors in the slowdown include the transition to the tax credit, the weak dollar, and the double clampdown in March on GAAP equity funds and Enterprise Investment Schemes.

Limelight would have to scoop up every single film made in Blighty this year, and then some, to reach anywhere near its target. And while its terms certainly look attractive for some projects — notably low-budget films with limited pre-sales potential — bigger movies needing gap finance might find other deals more competitive.

“Anything new is great, and Limelight looks like good news for a film that just needs its tax credit cashflowed,” says one leading accountant. “But what’s missing from the industry is genuine co-financing, not collateralized lending. If they could start to provide gap, then they would really have something.”

That’s exactly what the Limelight team hopes to do next. Henry, who previously ran the successful Surefire fund under the old Section 48 tax break, is now working on gap funding to offer loans against unsold territories, which would really give him leverage to make films happen.

Initially, however, Limelight is offering to cashflow 95% of the value of the tax credit. It charges no upfront fees, instead reclaiming 20% of the tax credit in first position out of the film’s income. As a sweetener, it will invest the remaining 5% of the tax credit into the development of a producer’s next project, and will also make small loans against distribution expenses.

The producer thus nets 80% of his tax credit, equivalent to a maximum of 16% of a film’s budget, which equates to the rates offered by the likes of Bank Leumi (although it levies heavy upfront fees as well), or by financiers such as Aramid who roll their tax credit loans into much larger gap finance deals. Depfa, the Irish-German bank specializing in public sector finance, is reported to be discussing 90% tax credit deals.

Limelight’s pitch is that it is fair and simple, and costs next to nothing until the film starts to make money. For a stressed-out producer, that can be compelling .

Henry has already committed to eight movies with an aggregate budget of $50 million. But whether all of these projects can raise the rest of their finance remains to be seen. Limelight may pride itself on being producer-friendly, but in this harsh climate right now for Brit indie filmmaking, one friend is rarely enough.

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