What Is Amortization Expense? Explained

What Is Amortization Expense? Explained

The financing side of a Broadway production is far less exciting than the stories and songs that come alive on stage. However, navigating the unique economics of Broadway is equally important to the success of a show. Questions like “What is an amortization expense?” and “When does recoupment occur?” may be daunting, but they play a critical role in financing Broadway productions.

Given how challenging it can be to mount a profitable show, investors and producers alike should understand these terms and how they impact their rights.

Answering the question “What is an amortization expense?” first requires a brief overview of the economics of a Broadway production. To start, it takes a significant amount of capital to finance a production. Production costs for a Broadway musical typically range from $17 to $23 million. Meanwhile, plays have lower production costs of approximately $3.5 million to $5 million.

The amount the producer spends on a production from the initial concept to its official Broadway debut is called “capitalization.” Such costs include securing intellectual property rights, set construction and props, costumes, lighting design, rehearsal expenses, and compensation of directors, cast, and crew.

Once a Broadway show debuts, it incurs weekly operating costs (also referred to as running costs), which are the expenses incurred to run the show each week. Examples include marketing expenses, salaries, theater rentals, and royalty payments. Thankfully, once a show opens, it generates revenue from several sources, including box office receipts and merchandising sales.

The revenue from a Broadway production is then divided among several stakeholders. Typically, 65 percent of each week’s profit is allocated to paying back investors for the capitalization. Meanwhile, the remaining 35 percent flows into a profit pool. This is to be divided among the lead producer, writer, director, choreographer, and other royalty participants by previously established legal agreements.

Amortization Speeds Up Recoupment

Amortization is a financial arrangement that allows producers to repay investors and achieve recoupment more quickly. Recoupment occurs when the producer has repaid investors all the funds that were raised to develop, mount, and produce the show.

Because amortization shifts the economics of production, the arrangement must be negotiated between the investor, producer, and other royalty participants. When amortization is used, before the 65-35 split, an agreed-upon amount (i.e., two percent of the capitalization) is taken from the profits and sent directly to the investors. This results in more money going back to investors and less money from the profit pool being available to royalty participants. However, any amounts taken out for amortization are later paid back to the profit pool after recoupment. The difference between the amount of royalties that would have been available without the use of amortization. The amount of royalties paid to the royalty participants using amortization is known as the “deferred royalties.”

After recoupment, the division of weekly profits changes again. As a tradeoff for the use of amortization, royalty participants often receive a higher guaranteed minimum weekly royalty. The agreement for the repayment of the deferred royalties may also include an additional bonus following recoupment, which is paid out of the show’s net profits.

Is Amortization an Operating Expense?

Amortization generally qualifies as an operating expense. An operating expense is an expense that a business incurs through its normal business operations. Meanwhile, non-operating expenses are those incurred by a business that are unrelated to the business’s core operations. The distinction is important given that operating expenses are tax deductible if the business operates to earn profits. In the theater industry, amortization is generally considered a weekly running expense before recoupment to calculate royalties to the percentage of royalty participants.

Rely on an Experienced Broadway Attorney to Help Finance Your Production

Financing a Broadway production is critical to its success. However, every show has its unique investment agreements, royalty structure, and budget. Given the risks involved in mounting a production, it is essential to negotiate an agreement that protects your best interests.

The attorneys of Scarinci Hollenbeck’s Entertainment & Media Group are ready to assist producers and potential investors. Whether that is on the legal, business, or financial aspects of a Broadway production, we are here to help. We understand the myriad of legal issues that can arise when producing theatrical performances. That’s why we’ll work with you every step of the way to minimize risks and position your project for success.