Keep reading for an example from Michael Sinder, an entertainment attorney and CTI alum practicing predominantly in live theater.
Assuming (i) a Broadway musical is capitalized at $15 million, (ii) the production regularly takes in $1 million per week in ticket sales, (iii) the production’s weekly running expenses are $700,000, and (iv) the royalty participants (in the aggregate) are entitled to royalties equal of 35% of the weekly operating profits, THEN (A) if amortization is NOT used, there would be $300,000 in weekly operating profits ($1 million minus $700,000), the royalty participants would receive 35% of $300,000 or $105,000 per week, the production company (the investors) would receive the balance of the weekly operating profits or $195,000 per week (prior to Recoupment), and it would take about 77 weeks to recoup $15 million ($15 million divided by $195,000), OR (B) if amortization IS used (at $200,000 per week), the amount of weekly operating profits available to the royalty participants would be reduced from $300,000 to $100,000, the royalty participants would receive 35% of $100,000 or $35,000 per week, the production company (the investors) would receive $265,000 per week (prior to Recoupment), and it would take about 56 weeks to recoup $15 million ($15 million divided by $265,000).
Under this example, the production would pay back its investors and reach Recoupment 21 weeks faster with the use of amortization, and the amount of the Deferred Royalties would be $70,000 per week ($105,000 minus $35,000), or an aggregate of $3,920,000 after 56 weeks.
As a tradeoff for the use of amortization, the royalty participants would typically receive an increase in their guaranteed minimum weekly royalty. Also, there would be a negotiated and mutually agreed upon structure for the repayment of the Deferred Royalties. One common repayment structure would be to pay back the Deferred Royalties, plus an additional bonus (for example, an additional 10% of the Deferred Royalties) following Recoupment out of a portion of the production company’s Net Profits (such portion might be 15% of the Net Profits, for example). If the Net Profits are insufficient to repay the Deferred Royalties (plus the bonus), the balance might be required to be paid back out of a portion of the production company’s share of the authors’ subsidiary rights income.