The Arranged Marriage Between Not-For-Profit Theater Companies and Commercial Producers

The Introduction

Jason P. Baruch

In my law practice, I have the privilege of representing successful commercial producers, brilliant playwrights (sometimes referred to as “authors” in this article) and resourceful not-for-profit theater companies (“NFPs”) all over the country. These clients all have different interests and needs, and I find myself wearing a number of different hats on a daily basis. I like to think that the broad range of my theater work has given me some measure of insight into the relationships among these different clients.

While a great deal of my time is spent negotiating production contracts between commercial producers and authors, I am also called upon frequently either to prepare (when I represent the NFP) or to negotiate (when I represent the author) developmental theater production agreements between authors and NFPs, as well as “enhancement” agreements between NFPs and commercial producers. It is this three-way dance among the author, NFP and commercial producer- and more specifically the tango between the NFP and commercial producer- that is the subject of this chapter.

The Set Up

In order to discuss the sometimes uneasy alliance between the for-profit and not-for-profit theater worlds, a little background about developmental theater agreements (that is, the agreement an author enters into with an NFP interested in developing the author’s piece), and how they are structured, will be helpful. The basic developmental theater agreement between the author and the NFP has the NFP bearing the costs of developing and mounting a new play or musical. The developmental process may involve staged or unstaged readings and, ultimately, fully staged performances before a paying audience, a portion of the audience for which may be comprised of subscribers of the NFP. In consideration for developing a new work, the NFP will ask that the author guarantee the NFP future billing credit plus some sort of ongoing financial participation.

The financial participation typically takes the form of a percentage of gross weekly box office receipts (“GWBOR”) from future commercial performances plus a percentage of the net profits of any commercial entity formed to produce the play. It would not be uncommon, for example, for a NFP to request one percent (1%) of GWBOR and five percent (5%) of the net profits. Some of the more influential NFPs, particularly what I will call the Manhattan-based “super-NFPs”, might demand as much as two percent (2%) of GWBOR and ten percent (10%) of the net profits in connection with third party commercial transfers of plays they have developed. The right of the NFP to share in future income usually “sunsets” if the author does not enter into a production contract with a commercial producer within a certain period of time, such as three years after the close of the NFP’s production. The theory here is if a commercial producer shows interest in the work, say, eight years after the close of the NFP’s production, that interest probably was not sparked by the NFP’s production, and the NFP should benefit financially only if its developmental efforts were the proximate cause of a commercial production. (A less common variation of the “gross/net” participation might have the NFP, instead of sharing in gross and net profits from a commercial production, simply being treated as an investor in the commercial production to the tune of the NFP’s developmental production costs. For example, if the NFP spends $400,000 to mount a new musical, which musical is then produced on Broadway for $8,000,000, the NFP will be deemed to have invested five percent (5%) of the capital of the commercial production.)

But what if there is no commercial production that results from the NFP’s presentation of the play? What if, for example, the play lives a vibrant (and possibly even profitable) life in regional productions, without the benefit of a commercial run? Most developmental theater agreements with authors have a built-in contingency plan along the following lines: If there is no commercial producer to assume the gross and net profit obligation to the NFP then, in lieu of the foregoing, the author agrees to pay the NFP a percentage of the income the author receives from all sources in connection with the author’s exploitation of rights in the play. This percentage might be as high as ten percent (10%) of the author’s income (generally net of agency commissions), but more typically around five percent (5%). Occasionally, a NFP will ask for both a gross/net participation from future commercial productions and a percentage of the author proceeds, although this is a point that is (or should be) vigorously debated by the author’s representatives. In addition, from the author’s perspective the developmental theater agreements should contain an additional clause whereby the NFP agrees to reduce its contractual share of gross and net profits by a certain amount, by as much as one-half, if a second developmental production is required and the second NFP requires an ongoing financial participation. In this case, the first developmental production yields a work that apparently is not “ready for prime time” and, in order to render the work suitable for commercial production, further development (capitalized by a new NFP) is required.

A different, and increasingly common, spin on the ongoing participation theme will have the NFP requesting the exclusive right to effectuate a commercial transfer of the play, by itself or with co-producers, within a certain period following the close of the developmental production. Ever since A Chorus Line was transferred from the Public Theater in 1975 to the Shubert (filling the theater’s coffers with more than $25 million), NFPs no doubt dream of a similar destiny, and many endeavor to provide for that right contractually in their agreements with authors. The terms of the commercial transfer will either be spelled out in the developmental theater agreement itself or negotiated in good faith if and when the NFP elects to exercise its commercial option. In this situation, where the NFP actually succeeds in mounting a commercial production, the terms set forth in the commercial production contract generally supersede the gross/net formula or the author proceeds formula set forth above. What is often vexing to authors, however, is that many of the NFPs requesting the right to transfer the play have little or no experience, and perhaps no interest or capability, in producing commercially. We are not talking about the super-NFPs like Manhattan Theatre Club, but rather the smaller NFPs, most with no track records for producing commercially. Often this negotiated exclusive right to transfer serves the primary function of putting the NFP in the driver’s seat in controlling the negotiation of commercial stage rights to third party producers and, consequently, cutting the best possible financial deal for the NFP if the play is a hit. If an NFP produces a phenomenal critical and financial success and producers are knocking down the doors to transfer the play to the commercial stage, the NFP that has carved out for itself the exclusive right to produce or co-produce the play commercially will find itself in a position of leverage.

Some of my clients have expressed to me their belief that it is inappropriate for NFPs to demand any ongoing financial stake, be it from the authors or from future producers. Their position is that NFPs are financed by public funding and tax-deductible contributions, and their mission is to help authors bring new works to the stage, not to exact a pound of flesh from authors or to financially encumber the property if the result of the developmental process is a commercially viable play. While I understand that point of view, in my experience a modest future participation by the NFP, particularly one that will be assumed by a third party commercial producer, is not out of line and does not create significant obstacles for future exploitation.

Assuming the propriety of an NFP asking for a future financial stake in a property, we must examine the myriad factors relevant to determining whether the financial participation requested is reasonable or not. One factor relates to the extent of the development by the NFP. It makes sense that a theater company which has nurtured a new work- from its moment of inception, through countless drafts, readings, workshops and stage productions- is deserving of a greater future financial interest than a theater which essentially was handed a finished product (perhaps already developed elsewhere). Another relevant question is the degree of the financial commitment by the NFP to the development of the work: from an author’s perspective, having to pay 5-10% of the author’s income from future exploitations of the author’s play is an easier pill to swallow when the theater company has invested hundreds and thousands of dollars from its annual budget on the production of a play as opposed to a theater company that has kicked $5,000 in to a small production. Similarly, the size and scope of the developmental production may be relevant: Needless to say, an 8-week subscription run of a play in a 400-seat theater will have more of an impact on the future value of a play than a 6-performance run of a play in a 49-seat theater, and it will be easier for a NFP to justify a greater ongoing participation in the former scenario. And, of course, the reputation of the developmental theater itself plays an important role, both in what is appropriate for the NFP to request and its ability to get what it wants. Some regional theaters with excellent reputations as Broadway “feeders” will have an easier time persuading an author to commit to a meaningful future participation than a wonderful but obscure theater company which has never presented a play that went on to be a commercial success.

Interestingly, many of the smaller NFP theater companies I represent are concerned more with billing than anything else. Financial participation takes a back seat to recognition to these organizations (which may explain while some are struggling to meet payroll on a weekly basis). Being credited as an originating home for a commercially successful project is an invaluable marketing tool for raising awareness of the NFP, as well as the NFP’s managing and artistic directors, who are often credited along with the theater company. In a perfect world, this broader recognition can increase the subscriber base and traffic to the theater and boost fund-raising potential. It might also attract higher profile artists interested in showcasing their work. The sort of credit negotiated depends on the nature of the NFP involvement. An eventual move to a commercial theater within a certain number of years following the close of the NFP production could result in a simple “Originally produced at ABC Theater Company” credit somewhere at the bottom of the title page, a fraction of the size of the credit accorded the commercial producers. If, however, the commercial production is essentially transferred en toto from the NFP, a more meaning credit might be negotiated, such as an above the title credit along the following lines: “X, Y and Z Commercial Producers present ABC Theater Company’s Production of…” In figuring out what sort of transfer merits such a prominent credit for the NFP, a typical rule of thumb is this: If the transferred production uses the same direction, at least two of the three principal designers and at least half the original cast, it is the developmental theater’s production of the work. In my experience, most authors and commercial producers do not begrudge the originating theater its credit, although size and placement of that credit can often be the subject of protracted negotiation.

The Third Side of the Triangle

The reality is that many plays developed by NFPs already have commercial producers “attached.” These commercial producers find it far less risky to develop a property in the relative safety of the not-for-profit world. They have, in most cases, already acquired commercial stage rights from the author pursuant to a production contract (which contract almost always requires the author to hold back or “freeze” non-commercial production rights while the commercial producer retains commercial production rights). The commercial producers then temporarily waive their exclusive stage rights for the purposes of allowing the NFP to premiere the play. For reasons relating to the not-for-profit status of the theater company (an area more dear to the accountants and not, therefore, a focus of this piece), the commercial theater producer can not be the producer of, or exert control over, the not-for-profit production. However, the commercial producer can and does “enhance” the NFP production financially.

A typical example of how this could work is as follows: A commercial producer acquires the rights to a new musical from an author. The estimated production budget for a Broadway production might be $12 million. A reasonably sophisticated pre-Broadway production could be presented at a NFP theater for $1.2 million. In addition to allowing the parties to see how the play goes over with audiences (some of whom may be subscribers, thereby ensuring at least minimal attendance), the NFP production will generate reusable tangible assets, such as set elements, costumes and props. The problem is the NFP theater in question has a maximum per-play production budget of $500,000. In this hypothetical, the commercial producer might “enhance” the developmental production by an additional $700,000. While this is still a substantial investment, it is an effective method of managing risk. Rather than being forced to raise $12,000,000 for an unproven show that could bomb on Broadway on opening night, the commercial producer has the opportunity, for the relative bargain price of $700,000, to give the work a test run before paying objective audiences (i.e., not an invited crowd of industry insiders and relatives of the cast). This would take the form of a polished professional production largely funded by the NFP and which will reap assets that can be used by the commercial producer should a commercial transfer be appropriate. The NFP, in turn, gets the advantage of premiering a high-profile show that will bring in audiences and, perhaps, increase the theater’s subscriber (and donation) base in the future. Moreover, as previously noted, the theater will strike a deal with the commercial producer that allows the theater to share in the gross box office and net profits generated by the commercial producer’s exploitation of rights in the play, including the Broadway production and future touring or sit-down productions.

Some commercial producers have “first look” deals with NFPs, domestically or abroad, where, in consideration of a financial contribution by the commercial producer to the theater company, the commercial producer has the first right to effectuate a commercial transfer. One major Broadway producer, for example, has a special relationship with the National Theatre of Great Britain which gives the commercial producer the right to move to Broadway plays presented by the National Theatre.

Whether all of foregoing effectively makes the NFP a research and development arm of the commercial producer and, if so, whether there is anything wrong with that sort of relationship, is what will be explored below.

The Gripes

Although most of my author clients are thrilled to have any theater companies interested in developing their plays, I hear a familiar refrain from others. NFPs, the authors argue (as do a few commercial producer clients), have a mandate to support playwrights and foster the art form. As previously noted, they are not commercial theater producers, and their mission is not to profit from their productions or transfer their productions to Broadway. They enjoy significant tax benefits and subsist on donations and grants. The gripe is that when an NFP requires a percentage of a playwright’s future income from subsequent productions for helping develop a piece, that theater company is betraying its mission. Similarly, I have heard on more than one occasion, when a theater festival demands a percentage of future box office and/or author income for what in most cases amounts to the furnishing of a venue and certain group marketing initiatives, it is not so much supporting new artists as investing in them with the hope of some financial return, while potentially making the now financially encumbered property less attractive to commercial producers (who, all things being equal, would rather not produce a work that arrives with substantial monetary obligations to third parties attached).

On the other side of the issue, most of the NFPs I represent survive, barely, on donations and grants, with annual budgets of far less than a million dollars. Their productions in general are not intended to turn a profit, indeed it is an impossibility for many to ever break even under a “perfect storm” of favorable circumstances (e.g., a renowned playwright, enjoying rave reviews and a standing room only run). What I hear from my NFP clients is this: “Why shouldn’t our struggling little theater company enjoy some contingent benefit from developing a new work should that work attain a measure of financial success? If we develop the next Avenue Q, Vagina Monologues or Rent, why shouldn’t we replenish our coffers and have the opportunity to reinvest this income into the theater company? In our shop, the successful works essentially subsidize the other good work we do which, in a world where donations and grants inadequately subsidize our enterprise, could be the difference between existence and insolvency. In any event, we generally are not assessing the playwrights, but rather asking that the future commercial producer bear the payment obligation to us.” I have a certain amount of empathy for this position. It is true that NFPs enjoy tax exempt status, the benefit of donations and the other perquisites of being a 501(c)(3) organization (e.g., less expensive postage, better deals with publications in connection with advertisements, etc.). But at the same time I have observed that fundraising itself, in the form of grant writing and outreach to private donors, is an excruciatingly time-consuming and expensive process. Many NFPs have staff members devoted solely to the task of grant writing and private fundraising, and this in an environment of diminishing governmental support. Of every dollar spent by a typical NFP, I am told, barely half comes from the box office. The majority of NFPs, according to the Theatre Communications Group, lose money.

I am also told by my NFP clients that it is particularly disheartening to nurture an artist and a project from infancy, at times even commissioning the artist to create the work in the first place (one theater company I have represented even experimented with giving their resident artists health insurance), only to hand over the reigns to another producer that will transfer the production and, inevitably, grab the glory. When a commercial success emerges from the developmental process and the NFP theater has not negotiated a financial participation, the potential for bad feelings is great. Not surprisingly, many of the NFPs I represent are so poorly funded, and sometimes inexperienced, that they really have no idea what to ask for in their author agreements (or, if applicable, enhancement agreements), and no counsel to guide them. My advice to the young NFPs is to make the investment in procuring professional representation in creating form agreements which can act as the template for future contracts. If you can get an experienced entertainment lawyer on your board of directors (which is really just code for “free legal advice”, of course), do it. The same goes for accountants and other professionals. If it means paying a representative to work through the basic structure of your various agreements, I believe (at the risk of sounding self-serving) that this is money well spent.

Finally, most of the commercial producers I represent do not begrudge a NFP a reasonable ongoing financial participation for having developed a work. The more the NFP requires, however, the more encumbered the property becomes and, therefore, the potentially less attractive it becomes to the commercial producer that, with its investors, ultimately will have to bear the financial burden to the NFP. Commercial theater producers by and large understand the invaluable service the NFPs provide in developing new product- and new product is the life blood of commercial theater. They also know that in a world of escalating production costs it often is not economically viable to nurture a new project from “square one” for the commercial stage. This explains why so many of the dramatic plays and musicals on Broadway have their origins in the not-for-profit world.

To be sure, some producers have bypassed the NFP route altogether. In the process they have sacrificed the risk (read: cost)-spreading benefits of having a NFP produce the initial production, but they have also reigned in creative control of the process and eliminated the continuing financial obligation to the NFP. This does not mean that these producers have elected to open cold on Broadway- this is rarely done, and almost always at the peril of the commercial producer. Instead, these commercial producers mount an out-of-town tryout, “four-walling” the production in a venue outside of New York before bringing it to the Great White Way. This was recently done with tremendous success by the producers of The Producers, Hairspray and Wicked at The Cadillac Theater, Fifth Avenue and The Curran Theater, respectively. This gave the producers an opportunity to see how the show works before a paying audience and gauge the impressions of some of the non-New York critics, and to tinker with the production before its Broadway transfer. The risk in this approach, however, is that a failure out-of-town could spell a financial disaster.

The State of Not-for-Profit Theater Today: A Marriage Born of Necessity

The relevance of NFP theater can not be understated. In the past 50 years, NFP resident theaters have grown from a modest collective of stages in big cities to a network of more than 1,200 theaters. All but three of the last 33 Pulitzer Prize-winners for Drama originated at regional theaters, nurtured in the not-for-profit community. Many of these plays had successful commercial runs (e.g., Doubt, Proof and Rent, to name a few), and most arguably would not have seen the commercial light of day if not nurtured through a NFP’s developmental process. It is this assumption that is used to justify coordination between NFPs and commercial producers: a mutually beneficial relationship is forged when two different communities with differing motivations and objectives can, together, accomplish what neither of them could accomplish on its own.

At the same time, as the embrace between the commercial producers and NFPs tightens, so too do concerns that the world of not-for-profit theater is losing its way, and forsaking its roots as a vital resource to support new and emerging artists and bring to audiences important- but not necessarily economically viable- works. By “getting into bed” with the commercial producers, the argument goes, the NFPs are encouraged to develop properties that have a possibility of financial reward, and these theater companies then fail in their purported mission to introduce challenging works of stage.

La Jolla Playhouse (“LJP”) in Southern California is an interesting example of the intersection. LJP was the birthplace of The Who’s Tommy, Big River, and the current Broadway hit Jersey Boys, among other wonderful projects. The artistic director of LJP is a founding member of an organization known as the Dodgers, a major commercial producer, as is the head of Jujamcyn, a major Broadway theater owner. All three musicals eventually were transferred by the Dodgers to Broadway houses owned by Jujamcyn, highlighting the choreographed dance that can take place between not-for-profit and commercial interests. And like the Old Globe Theatre’s production of The Full Monty (enhanced with funds from the film company Fox Searchlight), it is difficult to argue that these productions were anything other than Broadway tryouts. Whether this illustrates a disconcerting muddying of lines, or instead demonstrates an admirable, or at least necessary, cross-pollination of two worlds (a cross-pollination that has given bloom to a finely honed gem enjoyed by a wide swathe of theater-goers and which, in the process, has funded the operations of an NFP and has given financial nourishment to commercial theater producers arguably immersed in an economically irrational business), is a matter of debate. Whether this growing interconnectedness comes at the cost of the NFP theater developing other challenging and possibly non-commercial works is hard to say, but it is naïve to think an NFP theater has no interest (or should have no interest, for that matter) in benefiting from a financially successful and widely seen production.

Rocco Landesman, head of the aforementioned Jujamcyn, wrote an essay entitled “A Vital Movement Has Lost Its Way,” published in the June 4, 2000, Arts & Leisure section of the New York Times, which has been oft-repeated in the theater community. In the essay, Mr. Landesman talks about the Roundabout Theater, one of the super-NFPs I have referred to occasionally, and the success its artistic director Todd Haimes has had in bringing readily consumable quality theatrical fare to a broad audience: “It would, I suppose, be hyperbolic to say that Todd Haimes has had a more pernicious influence on the English-speaking theater than anyone since Oliver Cromwell (and it wouldn’t be nice, either, since Mr. Haimes is a personable and honorable man), but it can be reasonably argued that the forces of the marketplace through the years have been just as effective a censor as government edicts.” I view Mr. Landesman’s statement as a well-intentioned provocation- with perhaps a modest infusion of mea culpa- for those of us who care about theater to evaluate what effect this marriage of art (in theory, the province of the NFPs) and commerce (in theory, the province of the commercial producer) has had on the theater industry in general and the creative works (or product) it births in particular.

The Super-NFPs: Single and Lovin’ It

Which brings us, finally, to the super-NFPs like the Roundabout Theatre Company, Manhattan Theater Company (“MTC”) and Lincoln Center Theater (“LCT”). Up until now I have been devoting most of my attention to the hungry little NFPs (many of whom I represent and/or on whose boards I have sat). The super-NFPs are interesting hybrids. Like other NFPs, they are supported by government, foundation, and corporate funding. They have budgets in the tens of millions of dollars. They have the cushion of substantial subscriber bases of tens of thousands of theater-goers, which ensures a minimal attendance for their productions. They enjoy substantially lower operating costs during their subscription runs, and have further negotiated a number of concessions for the post-subscription commercial runs. They do not need to worry about repaying investors. And to top it off, they can earn additional revenue by selling corporate naming rights (so now you can watch a Tony Award-winning Roundabout production in the American Airlines Theater – formerly the Selwyn Theater – enjoying an agreeable Sauvignon Blanc and Oreo cookie in the Nabisco Lounge). All of this arguably puts the super-NFPs at a competitive advantage over commercial producers. Moreover, in their developmental theater agreements and enhancement agreement, they are able to exact the largest continuing financial participations (i.e., gross and net profits) of any NFPs should they not move forward with commercial production of a property developed by them.

What really sets the super-NFPs apart from their NFP brethren, however, is the fact that they also happen to operate out of Broadway houses: LCT out of the Vivian Beaumont Theater, the Roundabout out of the American Airlines Theater, and MTC out of the Biltmore Theater. The super-NFPs are unique because they actually compete with Broadway producers. Because they present their works in Broadway houses, they are eligible for Antoinette Perry (“Tony”) awards. LCT snatched the Best Musical Tony Award from commercial producers in 2000 with its production of Contact. Most recently, in the 2005 Tony Awards, LCT’s production of Light In The Piazza won six Tony Awards. This is not an academic matter- commercial producers are now vying for the most coveted theater awards, and audience dollars, with the super-NFPs. These are not struggling downtown theater companies with $300,000 budgets constantly behind on their rent founded by recent college graduates who also take tickets and serve beer out of a makeshift concession stand. These are huge organizations, run by wealthy and well connected boards. They have tens and thousands of subscribers, budgets of tens and millions of dollars. And they operate out of Broadway houses- not to mention on the road, with Roundabout having recently announced that it will produce its first national tour, its successful Tony-nominated New York production of Twelve Angry Men, commencing September 2006.

Whether these super-NFPs serve a critical function in producing high quality theater that would not otherwise have been produced by commercial producers who must answer to investors expecting a return, or act as merely a different type of commercial producer with certain features of a NFP, is the real question. What is not in question is the fact that these super-NFPs are a vital and likely permanent part of the Manhattan theater landscape.

Conclusion

The First American Congress of Theater (“FACT”), the brainchild of Broadway producer Alexander H. Cohen, took place at Princeton University from June 2 through June 5, 1974, for the purposes of resuscitating a very ill (terminally ill, some thought at the time) commercial theater industry. It was followed 26 years later by the Second American Congress of Theater- Act II (“ACT II”), which took place at Harvard University from June 16 through June 18, 2000, and explored the relationship between the for-profit and not-for-profit worlds of theater, and how they could help each other nurture an atmosphere in which new and exciting theatrical works could blossom, artistically and financially.

At FACT, Mr. Cohen warned in his keynote address: “Broadway, Off-Broadway, non-profit, professional, experimental – we all work under a sword of Damocles. The sword has different edges for all of us, but it is the same sword, and it is high time that we began to design a common shield.” In the intervening 26 years before ACT II, the for-profit and not-for-profit world have forged an alliance of sorts. The industry began to recognize that the commercial theater world and the NFP world together could achieve certain objectives that neither could achieve on its own. What came out of ACT II was the sense by some that the alliance requires further refinement in order to better protect both worlds from the edge of the sword, but a sense by others that the alliance had already become too strong, the ties between two worlds too entangled and the final product too compromised.

Most new dramas these days do not have a third act, perhaps an acknowledgment of our collective diminishing attention spans. If the theater community can continue to focus its attention on this complex interdependence between the commercial theater world and the not-for-profit theater world, it will be interesting to see what Act III brings. And hopefully we won’t have to wait another 26 years to find out.

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