When reviewing assets for donation or estate planning it is not uncommon for documentary or privately produced film to be overlooked in the attic or on the bookshelves. When advising your client, it’s important for attorneys be aware of these assets and to have a sense of how they are valued.
Calculating the fair market value (FMV) of a unique piece of documentary or privately-produced film is a difficult process. “ The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”1
FMV (and other types of value) is judged by three tests: the income approach; the cost approach; and the comparative market data approach. It’s necessary to select and discuss the appropriate valuation technique when preparing any appraisal for the Internal Revenue Service. In most cases, there are few comparable films available to enable the use of comparative market data. This leaves a combination of the cost and income approaches the most appropriate.
The Income Approach
This is the method used to ascribe a value to an object that will (or could) be used to generate income at a future date. This approach is generally applicable when the subject film is either being or could be leased or rented, as a business practice, by a firm, an institution or an individual who is in the business of leasing or renting images.
Example: A static image from an iconic event, such as the 1936 Olympics, may be used to create a set of signed and numbered prints as well as other commercial products, such as scarves, posters and ash trays. In this case, the vehicle or frame bearing the original image, the "master," is the object that’s being valued, and the income approach would be applied. It should be noted, however, that the master object has a limited and/or depreciable life, determined by the life of the contract.
In using the income approach, the appraiser assumes the following:
· The owner will act in a passive role – Using a third party as distributor;
· Valuation will be based on a presumed 8.5 percent investment return to asset value;
· The distributor/library and owner would have a 70 percent to 30 percent split in favor of the library;2
· A reel of documentary film with an historical or teachable value will yield 15 percent of library type footage;3
· Each available clip will be leased, on average, once every four years;4
· Clip lengths will be assigned according to actual footage history per acknowledged distributor; and
· The cost to initially digitize the film as sale-ready, must be considered.
Getty Images and Thought Equity, Inc. both create and distribute the world's best and broadest imagery collections, making film clips available in the most accessible and usable ways. Licenses to use Individual film clips are sold “by the second” in the feature film industry for media and advertising usage. Prices vary according to the use the clips are put to. The median usage in the market is a 15 percent yield, as suggested by Thought Equity, which is their yield assumption for a normal library item. It’s further assumed that the owner will be a passive participant in the rental or sale of the clips and therefore command no more than the industry’s standard contract percentage of 30 percent.
Specifically, in dealing with a documentary relating to Inupiat tribal practices, my search of the Getty library for film clips of “Eskimo” brought 14 film clips to the table. The film clip that demonstrated content with the closest similarity to the one being appraised was a 1955 clip (#860-50) showing two Eskimos rubbing noses for 3.8 seconds. The price for limited rights to use this clip is $2,800, or, $737/sec. This clip is annotated with, “Use in one entertainment project; does not include trailers. This license includes the right to distribute the project in its final form in all media now known or hereafter devised throughout the world in perpetuity. For documentary films (opening title, body, closing sequence).”
The market value of any portion of the subject dramatization of an Inupiat legend of the Bering Straits that reconstructs aboriginal Eskimo customs and values is certainly equal to or greater than the clip described above. Film producers questioned agreed that the annual sale of 45 seconds of this films contents at $737/second was reasonable, thereby giving the subject film an annual income to the donee/owner of $33,165. Assuming: 8.5 percent return on investment, the FMV by the income approach is: $390,176. Assuming 30% interest to the owner/donor leaves him/her with a usable FMV of $117,053.
The Cost Approach
I obtained the following cost approach data from research at unhollywood.com based on figures posted in March of 1999. I then confirmed these values and they’re now considered within the more conservative range by a cinematographer recipient of both a Peabody Award and a Cine Golden Eagle Award. 5
Assumptions of Average Filming Costs for 35mm 90 minute Documentary Film:
35mm Film Avid Edit $ 68,000
Film to Beta Non Linear Editing $ 20,000
Non Linear Edit to 35 Release Print-Std Answer Print $ 65,000
TOTAL TRAVEL = $ 61,500
SALARIES: Producer ,Editor, Asst Editor, Sound Editor, Camera, Camera Asst $174,000
TOTAL PRODUCTION (REPLACEMENT) COST = $386,955
[email protected]% $116,087
Income Approach $390,167
Cost Approach $386,955
Average usable [email protected]% $116,570
Given the relative scarcity of benchmarks for evaluating comparable specialty films, the appraiser will usually choose to include in the evaluation of the film an understanding that each title's evaluation depends on anticipated audience interest over time, ownership of the exploitation rights as well as new technological applications. Commercial rights can be divided among different parties by geographic market, time period, distribution medium, language and other factors.6 As with the “Zapruder” film, the substance of their review supports an ultimate evaluation based on quality and rarity. A brilliantly mastered documentary or the rare glimpses offered in a privately produced film may give an invaluable and otherwise impossible to obtain insight into the ethos and culture of the subject. The quality and rarity of a documentary or privately-produced film has often caused me to add value as a qualitative enhancement to the already prescribed quantitative value, thereby adding to the final FMV.
1. IRC Section 1.170A-1(c)(2)
2. As per the standard industry contract.
5. Scott Billingsley of Antenna Films for documentary “Black Sky, The Race for Space.”