Getting into movies -- as an investor -- could send you reeling

Picture yourself at a dinner party. The talk turns to this summer's blockbuster movies, ``Rambo'' or ``Back to the Future.'' And you casually drop into the conversation, ``Good flick. I own a piece of that celluloid.'' If so, you would be among the thousands of investors who have plunked down a minimum of $2,000 to $5,000 to take a shot at Hollywood movie moguldom. This year, major limited movie partnerships -- formed to finance cinematic ventures -- have raked in more than $250 million. And new partnerships are ``soon to be released.''

But apart from the occasional dinner party ego trip, most financial planners view these limited partnerships as dubious investments.

``Illiquid and risky,'' says Richard Hayes, at Tucker Anthony Management Corporation in Boston. ``The movie industry is trying to shift its risks to individuals.''

Or as Arnold Rudoff puts it: ``They're in the same league as hunting for buried treasure. If you're madly in love with movies, put as little as you possibly can in them.''

As the national director of partnership analysis at Price, Waterhouse, Mr. Rudoff recommends that clients looking to shelter their income from taxes should first set up individual retirement accounts, Keogh accounts, or both, then consider a conservative real estate partnership, and then, perhaps, an oil-and-gas or research-and-development partnership. ``Put movies on the bottom of the heap, with the highest risk,'' he concludes.

Why do most financial planners pan flicks with the vigor of a dour critic?

Well, they say the first measure of a tax shelter should be its investment potential. Tax benefits are secondary.

As an investment, movie partnerships present numerous risks. First, the odds of a movie's being a hit with the public are unfavorable, to put it mildly.

According to the industry trade newspaper Variety, there are more films (450) competing for the moviegoer's attention in 1985 than at any time in 10 years. On top of that, ticket sales this summer fell 17 percent from last summer. And only three (``Rambo,'' ``Back to the Future,'' and ``Cocoon''), out of many dozens of films released this summer, attained hit status.

Of course, if a movie doesn't make it in the theaters, there are other promising outlets such as cable-TV and videocassette sales. But some industry observers say that the pie isn't getting larger, it's just being sliced into more pieces.

Then, even if the public likes your film, it has to like it enough to cover costs. The Motion Picture Association of America says the average movie last year cost $14.4 million to make. Promotional costs can almost double the total price tag.

This summer's offerings show the difficulties of making a profit. Disney's ``Return to Oz'' was partially financed by Silver Screen Partners II. The film cost about $34 million to make and advertise. But it sold only $11 million in summer tickets.

Another film, ``Silverado,'' was financed in part by Delphi Film Associates. It has been a moderate success, with movie fans paying a total of $27 million to gain admission so far. But it cost about $25 million to make, plus $8 million to 10 million for prints and promotions. So unless ``Silverado'' gets a last-minute stampede of viewers, the financiers will have to hope international releases, cable-TV rights, and videocassettes will pull them out of the hole.

To be fair, a low-budget horror flick could help even things out for the Delphi partners. They have a slice of ``Fright Night.'' It cost $7 million to make and has already sold $22 million in tickets.

Even if you get a high-grossing film or string of films, accountants and financial planners say, the investing partners may be last in a long line of creditors.

``We've looked at a bunch of these and passed on all, for one primary reason: The definition of `net' is a very difficult thing to get a handle on,'' says Charles Hovey, vice-president of tax shelters at Tucker Anthony.

Mr. Hovey says theater owners, distributors, the production company, actors -- just ``everybody gets a percentage of the gross, and after it's all done, there's not a lot left over.''

He concludes that while ``not attractive from an economic standpoint,'' a limited movie partnership may offer some attraction for tax sheltering purposes.

Last spring, stockbrokers at Merrill Lynch and PaineWebber sold out a $40 million limited partnership in Delphi Film Associates. The minimum investment of $5,000 gives partners a 15 to 25 percent stake in 15 films. That deal, known as Delphi IV, should generate a first-year tax loss of 70 percent of the original investment, says Peter S. Gaillard, assistant vice-president of tax investment marketing at Merrill Lynch.

Mr. Gaillard allows that Delphi movie partnerships are not for every investor, but he considers them appropriate for someone looking for a high one-shot tax loss. ``You can't get a 70 percent write-off in a real estate partnership in the first year. And we don't market anything that gives you a higher first-year write-off.''

But not all limited movie partnerships have tax benefits. In May, it took E. F. Hutton brokers only three weeks to sell out a $150 million ``risk free'' offering of Silver Screen Partners II. The partnership was set up to finance Walt Disney movies. The deal was structured so that investors are guaranteed to get their initial $5,000 investment back within 15 years. Because of this money-back guarantee, however, the Internal Revenue Service won't allow any tax write-offs on the investment.

If the films flop and investors just get their money back 15 years from now, inflation and lost interest would make this a dubious ``investment.''

And the upside? Well, the problem with many of these offerings is that there is no track record.

When asked what kind of return an investor might expect on the Delphi IV offering, Peter Gaillard points to the Delphi I offering as ``the only program we have with hard information to go by.''

On a $5,000 initial investment in 1982, Delphi I partners got back $350 last year. In 1985, they've received $1,625 and should get $800 more before year-end, Gaillard says. A similar amount should arrive in 1986, he says, resulting in about $200 profit after roughly four years (about a 1 percent gain per year).

But add in the tax write-off, and Gaillard figures Delphi I yields a 14 to 15 percent return.

Even so, he will say only that Delphi I investors ``should at least get their money back; it should exceed $5,000.'' How much more than that? ``I have no idea,'' he responds, adding that sequels may increase the total return. One should also note that Delphi I has benefited by having a stake in a big hit, ``Tootsie.''

If you are interested in becoming a partner in a movie venture, remember that each deal is structured differently. Each offers a different level of tax sheltering. Some include international theater revenues, some exclude them. And the percentage of the gross you get varies across the board.

Also, these deals are for people in the 50 percent tax bracket (income over $149,000), and they have fairly high income and net-worth requirements.

In choosing a limited movie partnership, Arnold Rudoff at Price, Waterhouse recommends that investors consider who is offering it. ``You want to make sure you're dealing with people that have been in the business for a number of years. This is basically an insider's game. If management doesn't know the industry, they're not going to see the good deals.''

Also, managements experienced in putting together partnerships can help ensure that you don't wind up being the last to get a cut of any revenues.

Finally, Rudoff urges investors to diversify. Some partnerships are designed to finance a single movie. That increases the potential payoff, but also the risk.

The Delphi partnership spreads its risk over 15 films. Says Mr. Gaillard at Merrill Lynch, ``Two to 4 will be winners, 2 to 4 will be dogs, and the remainder so-so.''

Oh, yes, don't forget the impressive commission fees on these deals -- 8 to 10 percent -- the next time you want to brag to your friends about your shrewd Hollywood investments.

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