Proposed Bill Would Raise Hawaii's Production Tax Credits by 20%

8:29 PM PST 04/29/2011 by Alex Ben Block
Mario Perez/CBS
"Hawaii Five-0"

The legislation, supported by Relativity Media and Steve Bing's Shangri-La business group, may move forward for a final vote Friday night.

It look like it will be surf’s up for Hollywood in Hawaii.

Legislation supported by the rapidly expanding Hollywood studio Relativity Media and Steve Bing’s Shangri-La business group is before a conference committee of the Hawaii state legislature and may be forwarded for a final vote as soon as tonight. The state House of Representatives and Senate are expected to approve it by the end of June and the governor has already promised to sign it into law.

The bill would raise film production tax credits for movies shot in Hawaii from the current 15 percent to 35 percent on Oahu, the island where Honolulu is located, and from 20 percent to 40 percent in the rest of the state.  

It  would make tax credits easier to sell or assign to others, and would remove a cap on how much the state will spend annually to support film production.

The bill would also exempt productions that shoot for a long period of time from hotel room taxes and provide an additional 5% bonus for special and visual effects and animation done in the islands.

What is even more unusual is the incentives to build permanent infrastructure and quickly train a local workforce. Each studio could get back up to $25 million of the cost of the building. If the film company trains and then hires a worker, they can get a rebate of up to 50 percent of that salary on the first 900 hours of employment by a state resident.

That would make it competitive with Louisiana and ahead of the other 40-something states offering incentives to lure movies and TV shows.

A state legislative analysis says it will cost Hawaii $46.3 million in the next fiscal year. But Ryan Kavanaugh, CEO of Relativity, has said he expects it would bring in about $2 billion a year in business fairly quickly.

This whole thing started with Kavanaugh who has a home on Maui. “He was there so much he said ‘how can I work where I want to live?’” says J. P. Pettinato, a Los Angeles based consultant who has been very involved in the project since it was kick started this past January.

Pettinato says it was Kavanaugh who brought in Shangri-La to help construct the studios that will be needed. At first, he says, Kavanaugh only planned to build a facility on Maui, at least at first.

Pettinato was with Kavanaugh when he first met with Hawaii Gov. Neil Abercrombie, a Democrat, and proposed his idea. The governor was immediately interested, says Pettinato, but said “in order to support this he had to also build in Oahu first,” where the major business, government and existing film businesses are centered.

“So Ryan said, O.K. let’s build two studios,’” says Pettinato, “one where Ryan wants to build and one where the governor wants to build it.”

Another unusual aspect, says Pettinato, is that Kavanaugh has committed to have Relativity movies and TV shows made in Hawaii as soon as it is practical, with a goal of doing 10 movies a year with budgets over $50 million, at least two network series and as many as 30 cable TV series each year. His Relativity Real division would provide TV projects to be based in Hawaii going forward.

In a presentation to the legislators prepared in January by Relativity and Shangri-La, who are working with investment bank J.P. Morgan,  they project that in the first year there will be 11 films produced who will spend $332 million, which will be multiplied by 1.29 times to create the total economic impact. They estimate the direct spend will rise to $644 million in 2012, to $1.6 billion in 2013, and over $3 billion by 2015.

They estimate that 1,184 construction jobs will be created in the first year and 557 film and TV jobs. That goes up to over 3,000 jobs by 2015. The bill also calls for the film companies to pay an administrative fee to the state which will be $800,000 in the first year rising to $6.6 million by 2016.

In the first phase Relativity and Shangri-La intend to build movie production facilities, including soundstages, on Oahu and Maui at a total cost of almost $400 million. They also expect to eventually build additional facilities on Kauai and the big island of Hawaii with the eventual investment rising to as much as $500 million. They promise the facilities will be environmentally friendly, be partly built with recycled materials, use solar energy and less water than a typical building.

The proposal is for a “groundbreaking film tax incentive program for Hawaii that will create a new industry projected to generate economic activity of more than $5 billion annually, more than ten thousand new high-wage jobs and a state-of-the-art, green film production facilities budgeted at several hundred million dollars.”

Pettinato says that it would take about five years to get the infrastructure built and the work force trained. He feels an advantage would be that many producers, directors, actors and L.A. crew would prefer to work in Hawaii over most other potential locales.

To boost their arguments, the Hollywood producers prepared a six minute video that features locals who support the plan as well as various Hollywood actors, including Bradley Cooper, Adrian Brody, Topher Grace, Sylvester Stallone and Ashley Tisdale, who says with a grin in one segment, “I just really want to surf.” There was also a video showing why a Relativity movie set in Hawaii was actually shot in Puerto Rico became they offered a better economic incentive.

They also enlisted former President Bill Clinton, who wrote a letter in February to members of the Hawaii legislature urging passage: “The passage of the bill should increase the value of Hawaii’s film-based economy from $20 million to over $800 million in the first year alone.”

The state has offered tax incentives since 1976 and in the past year has seen movies and TV shows shot there, including the CBS series Hawaii Five-0 and portions of Disney’s latest Pirates of the Caribbean. But the plan is to move Hawaii into the big leagues with Louisiana, New Mexico and Canada as a place that has incentives, infrastructure and a trained work force.

While the plan has some strong support it has also raised concerns by some critics. The state’s largest newspaper, the Star Advertiser, editorialized against passage of the bill: “While state legislators are considering taxing pensioners and raising taxes on alcohol, they are pondering increasing tax breaks enjoyed by film producers. The proposal is based on the wishful theory that moviemakers would arrive in droves, paying even more in taxes. That is a gamble the state should avoid; lawmakers should hold the line at tax generosities already offered.”

Another complaint of the newspaper, and critics, is that this will really mostly benefit wealthy Hollywood companies and most of the jobs created will not actually be permanent. Pettinato says that has been the case in some states but it does not have to be that way.

“If states don’t have a long-term commitment and a commitment to build infrastructure they are right, it will never work and they will give out more in tax credits than they get back,” says Pettinato. “The reason why it worked in Louisiana and New Mexico is that they built  their infrastructure quickly and started training crews immediately. With this plan for Hawaii it can be done there as well. No state has ever done it as quickly as this will.”

Relativity, which is primarily backed by New York hedge fund Elliot Management, has in the past two years begun to expand from simply financing movies for studios including Universal and Sony to being its own distributor of movies through the Rogue label and its own name. Many of the movies that it has been associated with in promoting the plan in Hawaii, such as The Social Network and Despicable Me are not movies it actually made, but rather films it financed.

However it is now increasingly making movies, and distributing them worldwide. It had a hit earlier this year with Limitless and was a key backer of Oscar nominee The Fighter. Upcoming releases include Judy Moody and the NOT Bummer Summer on June 10, Shark Night 3D over Labor Day, and the big budget Immortals in November.

Shangri-La has invested in movies in the past including Polar Express and Beowulf, but is not an active producer or distributor. Bing is more involved in investments, real estate and in the past, in politics. He was a major backer of President Clinton and donated over $10 million to his foundation, and apparently was the one who recruited Clinton to help lobby for the plan. 

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