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.

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Why don’t we treat ourselves better?

The other night I ran into a great friend who I hadn’t seen in a while.  We caught up briefly.  I was delighted to hear that she had reached out beyond theater to radio.  But what struck a chord was when she mentioned how working outside of theatre, made her realize how tired she was from a life lived constantly in tech rehearsals.  This made me think about how unhealthy our business can be.

Let’s start with the concept of tech.  AEA standards and what producers can afford comes in packages of 10/12 hour days.   Now let’s be honest on any given tech day very few people involved in the production work 10 out of 12 hours.  Crew, designers, stage managers, etc. are always called before the actors and stay after for production meetings.  Even the actors working under union rules usually work longer than the 10 hours, whether they are running lines, reviewing their blocking, etc, most actors during the tech period through opening are focused on the show they are doing more or less from the time they wake up until they go to bed.  The theory is that the higher the contract tier, the more ten out of twelve days you can do.  For example a Broadway show often does 10/12s from tech to press nights.  Off-Broadway shows may do a week of 10/12s and then rehearse up to 5 hours more each day.  It is exhausting.  And in most cases, designers live in this process the majority of their lives.  Even when a show is up and running there are understudy rehearsals, publicity events, put-ins, etc.  The point is there is a heck of a lot of work outside of rehearsals and performances that most people don’t really think of they just live it. 

The staffs of nonprofits, don’t escape the rigorous schedules.  In addition to regular office hours, many leaders and staff members attend tech, have early morning committee meetings and evening board meetings, must participate in a variety of social events, should see shows at other theatres, and must be at the curtain of a show most nights. 

In addition to the exhausting schedule, theatre folks spend the majority of their lives in building that are either so cold in the summer that you need a sweater or so hot in the winter that you can feel your throat dry the minute you walk in the door.  Many theatres are in older building that don’t have the best air circulation.  In tech or in nonprofit offices you can spend hours sitting in the same place, in the same position.  Or you can spend all day running from meeting to meeting, rehearsal hall to audition space, etc. always in transition in and out of the elements back indoors.

An exhausting schedule, cabin fever, lack of fresh oxygen are just the beginning.  For some reason, theater greenrooms, rehearsal halls and offices are usually filled junk food, snacks, endless supplies of caffeine, and tons of fast food or takeout.  Between short meal breaks, long rehearsal hours and too many cocktail parties and events, keeping a healthy eating schedule is more or less out of the question.

As a group we are not eating well, can barely keep our eyes open and our minds focused, and spend less time outdoors than vampires.  Then many theater folks are smokers.  Musicals can wreck havoc on the body without proper training.  Raked stages tear bodies apart (let’s just admit it – you try walking on a rake in high heels, I have had to do it too many times and I’m just short not an actor).  Haze fills their lungs – sorry it aggravates allergies and asthma.    And after a day filled with all of the above, who doesn’t want a drink.

Of course I have described the worst of it all.  There are plenty of folks who make frequent appearances at their gyms or yoga classes.  Many even train for advanced body conditioning.  There a lots who have unbelievable discipline in what they eat and treat their bodies like temples (at least reformed temples if not orthodox ones).  But as with many careers this takes a lot of hard work.  Yet when theatres are built (and goodness knows we have built or renovated a whole lot of them recently for good or for bad), staff and artist amenities are the first things cut.  What would happen if every theatre created a small gym and mediation room on site?  What would happen if changed the rules and schedules so people could get a little more sleep and a bit more fresh air?  What if we planned the entire tech process for each production rather than by industry standards?  I challenge that rather than making the process take longer it may actually make us work more efficiently and with much greater focus.  Who says you have to do 10/12s?  What if we said that production meetings couldn’t go into the wee hours of the night and finance committees weren’t allowed to demand 9am or worse 8am meetings?   What if we made all of our nonprofit staffs stop eating lunch at their desks?  Sure it would be a big change, but actually it would be pretty easy to test.  Of course there would still be people who don’t take of themselves, but maybe if we found a better balance more folks would take care of themselves, just a bit better and not have to take a break from working in theater to do so.

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