Raleigh Michigan Studios to Default on $18 Million in Bonds By Wednesday

Real Steel Hugh Jackman Robot - H 2011
Walt Disney Pictures

Real Steel Hugh Jackman Robot - H 2011

UPDATED: The Michigan film commissioner is in L.A. this week to tout a new state-backed subsidy program to attract movie and TV productions, but it comes too late to stop the 10-month-old studio from missing its payments.

Raleigh Michigan Studios sent out a press release Monday touting a new state law passed in December that again provides some incentives to make movies and TV shows in the state as “great news” for the facility which has seven sound stages. 

What it doesn’t say is that Raleigh’s state of the art studio outside Detroit, which opened only ten months ago, is almost certain to default as soon as Wednesday on $18 million in state issued bonds that were part of the financing for the $80 million complex.

That will force the Michigan state employee’s pension fund, which invested in the studio in 2009, to make a $630,000 payment immediately, and put them on the hook for potentially millions more in payments in the future.

Raleigh had made two previous payments in February and August of last year, but has not made required monthly escrow set-aside payments since October, according to an article that appeared in the Detroit News last month. 

The impact of the default on the facility in Pontiac, Michigan is still unclear but it is not expected to affect other properties operated by Raleigh Studios – which bills itself as largest independent studio operator in the United States – located in Hollywood, Manhattan Beach, Playa Vista, Baton Rouge, Atlanta and  Budapest.

Michael Newport, VP, Marketing & Client Development, Raleigh Studios/Raleigh Film said in an email to The Hollywood Reporter that they can’t provide details on a potential default but remain hopeful: “This is a situation that is constantly developing and…conversations have been ongoing for some time regarding this.  Everyone wants to do what is best and something is being worked out. “ 

According to the press release the partners (investors) in Raleigh Michigan Studios are Raleigh Studios, the Nelson family, John Rakolta, The Taubman Group and William Morris Endeavor.

Besides the $18 million in bonds, the 360,000-sq.-foot production and office facility was also built with $3.8 million in Federal Infrastructure Recovery money, $15 million in Federal Market tax credits, $11.1 in Michigan Film Infrastructure tax credits and equity investment by the investors.

The last big movie in Michigan, which kept the Raleigh studios filled much of 2011, was Disney’s new version of Oz, which wrapped its work in the state at the end of December. The studio has been mostly empty since then. Disney, grandfathered under the old rules, got about $40 million in incentives from the state, and estimated that it spent about $105 million in Michigan.

Carrie Jones, director of the Michigan Film Office, who is in Los Angeles this week to tell movie studios and producers that Michigan is back in the incentive business, said she remains hopeful they can bring movie and TV productions back to her state. She declined to discuss the situation at Raleigh Michigan Studios.

“We have a new program we’re really excited about,” says Jones. “We think it’s competitive and we think Michigan has got much to offer in terms of workforce, infrastructure and locations. I’m out here to talk to decision makers about bringing their projects to Michigan.”

What Jones is trying to do is a form of damage control. Only a few years ago – before the 2008 recession hit, and there was a change of administration in the state capital - Michigan was flying high with Hollywood’s biggest productions. It offered tax incentives that were more than 40% of the cost of a production under a plan that had unlimited state funds to spend. Michigan was touted as the new Hollywood of the Midwest. That was when Raleigh started production in a former auto plant in Pontiac, Michigan.

Among movies made in the state under the former incentive program were Oscar nominee Real Steel, Cedar Rapids, Conviction, Harold and Kumar 3 and parts of Ides of March and the most recent Transformers.

Then almost two years ago, as the economy tanked, a new Republican governor arrived and pulled the rug out from  under the program. It wasn’t just film. He was against a whole series of tax incentive programs and ended most of them.

Early last year he lowered the money available for the film incentive program to $25 million, which was quickly spent. The free lunch was off the table. The impact on the choices made by Hollywood was immediate.

”Business does not like uncertainty,” says Jones.

There was a two-thirds drop in the number of applications to film in Michigan during the second half of 2011, compared to the period one year earlier, according to a study released by the state film office earlier this month. From July 1 to Dec. 31 of 2011, 16 productions applied for the film and digital media incentives compared to 42 in 2010.

The report by the Michigan Film Office' revealed that one production the state lost was Iron Man 3 which had sought $34 million in tax credits for a production expected to spent $102 million in the state. It went to North Carolina instead.

The Detroit Free Press last year wrote that one reason Iron Man chose North Carolina was that the state funding was guaranteed while money from Michigan was contingent on funding by the legislature and governor.

After intense lobbying by supporters who believe the film business is crucial to the economy of Michigan, a state senator introduced a new bill. Instead of tax incentives (which are sold for about 85 cents on the dollar), a program of cash subsidies was established. The governor didn’t back it but he didn’t say he would veto either, as long as no more than $25 million in state funds were put up for the first year. Funding beyond that must be appropriated by the legislature each Spring in the budgeting process.

“We feel really good about the stability and certainty were now able to offer productions going forward,” says Jones. “That uncertainty from when we were in a transitory period is no longer.”

The bill signed by the governor averages a 30% subsidy, with special added bonuses for work by state residents. That made it competitive with other states such as North Carolina, Georgia, New York, New Mexico and even Louisiana – in theory.

“Our approach is that this incentive is a good thing and is competitive with other state incentive plans versus many of the earlier local reports that painted the incentive in a negative light simply because the amount was reduced,” says Newport.  

The problem is that the $25 million cap on spending in any one year isn’t enough to attract big Hollywood productions, or even medium sized ones. It did attract some smaller indie movies and most of the available money was quickly committed.

Joseph Chianese, senior vp, tax production planning and business development, for Entertainment Partners (which does payrolls, helps with tax credits and provides other industry services) says the new rules did streamline the process and clarify what it would take to qualify, which was a problem previously. But with the cap, says Chianese, Michigan simply is “not in the game as it relates to large budget films.”

He says they need to allocate more like $50 million or $75 million to be seriously considered for major movies again. He believes that when appropriations are done in future years, it might actually increase the amount because, “Michigan is realizing the are losing business because of this.”

“We were aware the incentive would be reduced,” says Newport, “and we are happy with the new plan and confident in going forward there will be a positive response from the industry.”  

Chianese says he isn’t surprised Raleigh Michigan Studios is in financial trouble: “They built a studio based on the prior governors promises that there would be an incentive to attract production. There hasn’t been.”

Chianese says with the economy improved, he is optimistic that Michigan and other states which have cut or cut back on film incentives will return to the battle for movie and TV productions.

“Things are coming back,” says Chianese. “the pendulum has shifted again and states are seeing there is an economic incentive and while they have to be conservative, if they want this very mobile business in their state they need to offer something to incentivize them.”