Relationships between commercial and nonprofit theatre primer

Partnerships between commercial theatre producers and nonprofits are becoming more and more common across the United States. Each season, I end up consulting on several of these agreements.  For better or for worse the number of people who call themselves commercial theatre producers and shop/buy shows to/from nonprofits has increased significantly.  The partnerships are happening nationwide. 

Whether developing new work or creating a new interpretation of a classic, I think it is imperative that nonprofits take the position that as original producers of a show they are entitled to significant participation in the future productions.  The strength of the negotiation position is usually derived from whether the nonprofit holds the right to the production and brings the project to a commercial partner or whether the commercial partner holds the rights.  The former is always more beneficial in negotiations. 

It is key for a nonprofit not to get trapped in the idea that these partnerships are just financial transactions – they are so much more than that.  Here are some basics!

Simple definition of some key terms:

Enhancement: An individual, group or entity pays the nonprofit a certain amount to produce the show usually based on costs beyond the traditional budget of the nonprofit’s production of a similar show. There is usually a rights exchange between partners. This money is considered earned revenue and is not a donation. The nonprofit would most likely have future participation as original producer.

Non-recourse loan: An individual, group or entity “loans or guarantees” the funds or part of the funds to produce a show. The “loan” is repaid out of “net profits of the production.”  This framework is not used as often as enhancement.

Production/producing partnership: a relationship between nonprofit and commercial theatre where there is no financial transaction but rights are assigned (usually from the commercial producer to nonprofit), but participation in future production is contractual.

Producer: Raises funds for and “manages” commercial production. Participates in producer’s gross royalty and producer’s portion of the net (usually 50/50 split before deals), above the title billing.

Investor: someone who gives money for a commercial production and is eligible for repayment of investment and a share of profits.

Donor: someone who gives money to a nonprofit in exchange for tax deduction or donor benefits

Participation: can include several terms on a future production including but not limited to, royalty, net participation, the right to raise funds for a production, billing, artistic approvals, consultation, etc.  Participation does not necessary equal money.

Original producer’s royalty: Royalty varies, almost certainly includes gross participation (.5-2%) and can include net participation (2.5-10%). Level of participation usually depends on who has the rights and how “hot” the property is.

It is a myth that original producer can only have a role in the commercial production if they make a financial contribution. Defining future participation is key to any production agreement.  Three most important factors to a nonprofit for any partnership in a commercial production –  billing, who has the decision to close the show, and financial participation.  Other important issues are approvals and expense/marketing decisions. 

Billing is highly contested now. Most producers will now not agree to above the title billing without financial contribution to capitalization. The status of the theatre would certainly affect the deal they can make. 

The most important, difficult, and controversial decision in any production is when to close the show.  This is the decision that can ruin relationships between partners.  The factors are not as cut and dry as how well is the show selling.  There are many things to consider: sales, awards, artist relationships, investor relationships, subsidiary rights, and additional productions such as tours.  More often than not these factors are at odds with one another.

I encourage every nonprofit entering into an enhancement deal to make sure that they are allowed to serve as actual partners on a future production.  There are two basic models for acting as a Producer/investor in a commercial project if you are nonprofit theater – many organizations use both:

1. Form a for-profit subsidiary and raise funds or invest organizational funds (something I would advocate against).  In this model, the nonprofit would act as any other commercial producer or associate producer would with appropriate financial participation and role in production decisions. Risk – IRS could determine income as taxable (unrelated business income), although many precedents against.

2. Raise or invest organization funds as the organizations itself. In this model, the nonprofit would act as any other commercial producer or associate producer would with appropriate financial participation. Risk – non-profits and for-profit can not be on same level in LLC structure, so in this model the role in production decisions would have to be legally defined. It also must be very clear that investors are working with the LLC or other corporate structure they are not donors to the organization.

Risk in either model is that the nonprofit could be asked to waive original producer’s royalty and participation, which I would fight. It is an easier fight under the first model, but the second model (my favorite) is becoming more and more preferred by many non-profits.  I don’t think an organization should consider an enhancement agreement without the right to raise a significant portion of the capitalization.  It is a right to do it, that can always be waived.  But it is very important to have a choice as to whether to participate as a producer and participate in the producers financial portion of the commercial venture.

NOTE: There is no way for a commercial investment or enhancement to count as a donation.  If there is an exchange of rights, billing, repayment of the investment, or other benefit it is not a donation.  This is often confusing in the second instance above or with enhancement agreements.  You must know if the commercial corporation or partnership that is going to be formed is going to account for the enhancement in it’s capitalization – if it is it cannot be counted as a donation in any way.  Without question how funds are designated enhancement (which is earned revenue) or donations needs to be established up front and in writing and can’t be switched back and forth based on how a show does.

An issue a nonprofit should address before working with a commercial producer or transferring a show is whether Board of Trustees/Directors membership can be investors or producers in commercial productions:  If the nonprofit theatre does not benefit in financial participation (for example it is not the organization’s show or the organization doesn’t participate beyond original producer’s credit), its role in the production or in billing, investment in any commercial production is considered a potential conflict of interest that must be disclosed, but is not normally consider a problem. If the organization is producer or as associate producer how board members who are commercial producer or want to invest in a commercial production might be a part of a production: (1) Enhancement of a production; (2) separate investment in production in which theatre is participating in (beyond original producer’s credit); (3) the Board member can serve only as supporting investors or partners in a production not competitors (in other words any funds from board members count towards money raised by the organization as part of their producer's participation as seen in model two above).  Most theatres restrict the first two significantly.  Obviously the third is the most ideal for the nonprofit theatre.  Any participation in a commercial venture would require Board member to withdraw themselves from all votes and decisions regarding production or in some cases, a board will require a leave or absence.

Should note in terms of moving forward, a board traditionally would vote on the participation in the project but like all producing efforts the commercial participation in decisions and day to day operations would be limited to leadership staff.

Also it is important to say that this primer is exactly that.  If your organization doesn't have a strong history with these types of deals or a strong negotiator – hire one.  These deals can have a tremendous impact on an organization and you don’t want to be negotiating after the fact or regretting the deal you signed.  These contract are among the most complicated that a nonprofit can enter into and can if done incorrectly threaten the nonprofit status of an organization.  Make sure you negotiate smart and thoroughly.

If you are a commercial producer, rather than thinking you should just negotiate the opposite of all of the above, I encourage you to consider all that the nonprofit adds to the production and the fact that a good negotiation means that everyone walks away feeling good about the partnership.  Nonprofits also have board members and donors who may be part of your future investor pool – this is more common than most people realize.  It is also important to remember that theater folks tend to talk about relationships good and bad.  I have certainly heard about deals that haven’t worked out well or other stories about how great a partner someone has been.  Word travels fast in our community.  And as more and more of these deals happen and as expenses keep rising the commercial world needs the nonprofit world for a lot of project development.  This is one of the few situations where everyone can win if everyone works together with goodwill.

If you are reading this post via Facebook Notes, please click-thru to Off Stage Right and be counted (and keep reading other posts).