PONTIAC, Mich. — Even the great and powerful Oz could not save the film studio that was supposed to save this town.
The studio, a state-of-the-art facility fit for Hollywood blockbusters, had risen from the ruins of a General Motors complex here. It was the brainchild of a small group of investors with big plans: the studio would attract prestigious filmmakers, and the movie productions would create jobs and pump money into the local economy. A glamorous sheen would rub off on this down-on-its-luck town.
But in Pontiac, happy endings do not usually come Hollywood-style. The tale behind the studio, though, was cinematic in its own right, filled with colorful characters, calls from the White House and a starring role for Michigan’s taxpayers. Rounding out the cast was a big-budget Disney movie, “Oz: The Great and Powerful.”
It all started back in August 2007, when Gov. Jennifer M. Granholm met with Mike Binder, a Michigan-born actor and director who was lamenting the state’s lackluster program to award financial aid — otherwise known as film credits — to the movie industry. Ms. Granholm, an aspiring actress when she was in her early 20s, became determined to make Michigan competitive, she recalled.
Eight months later, the capital of the flailing auto industry became the capital of film tax credits. For every dollar spent locally, filmmakers would receive almost half back from Michigan. That sort of money turns heads at even the richest film studios, and word spreads fast. Janet Lockwood, the director of the state’s film office, said that a week after the enhanced credits were announced, she was besieged at a movie conference in Santa Monica, Calif., by “the baby studios to the big guys.”
Hollywood may make movies about the evils of capitalism, but it rarely works without incentives, which are paid for by taxpayers. Nationwide, about $1.5 billion in tax breaks is awarded to the film industry each year, according to a state-by-state survey by The New York Times.
Within two months, 24 movies had signed up to film in Michigan — up from two the entire year before. The productions estimated that they would spend $195 million filming there, and in return they would be refunded about $70 million in cash.
Before long, residents were rushing out on their lunch breaks to catch a glimpse of celebrities like Drew Barrymore, who was filming her movie “Whip It” in Ann Arbor, and Clint Eastwood, who was shooting “Gran Torino” in the Detroit area. Even Michael Moore, who was filming a movie about corporate welfare called “Capitalism: A Love Story,” sought and received incentives.
A ‘No-Brainer’ for Michigan
It was a time when most financial news was bad. Housing prices plunged, and thousands of automobiles went unsold. Michigan was facing growing budget shortfalls, and some lawmakers who voted for the film credits soon began questioning whether the state could actually afford them.
In Pontiac, tax revenue plummeted as General Motors pulled out and workers left. Half of downtown was boarded up, and landlords accepted rent checks through slits in doors locked for safety. For some, Hollywood provided distraction and hope.
By 2008, a plan was being hatched for what would become the movie studio in Pontiac. The man behind it, Linden Nelson, was a well-connected local entrepreneur with a charismatic personality. He had made a name for himself by creating the removable key chain for valet parkers in the 1980s. His company later manufactured promotional trinkets for brands like AT&T and Harley-Davidson. In the late 1990s, Mr. Nelson found himself in the headlines when a fire broke out at his office in Beverly Hills, Mich. It was ruled accidental.
Mr. Nelson got the idea for the studio, he said, from his college-age son, who had heard that the Michigan tax credits were the talk of the Cannes Film Festival in France that year. Mr. Nelson soon met an old friend, Ari Emanuel, over coffee in Aspen, Colo., to discuss the idea. Mr. Emanuel was the force behind what would become William Morris Endeavor Entertainment, and his fast-talking, take-no-prisoners style had been immortalized in HBO’s “Entourage.” His brother Rahm would soon be named the chief of staff to President Obama.
Intrigued, Mr. Emanuel did not take long to sign on. “I’m, like, blown away by it,” he told a gathering of the Detroit Regional Chamber of Commerce. “Not to use an L.A. phrase — I think this is a no-brainer for the state of Michigan.”
Motown Motion Pictures LLC was incorporated in May 2008, and two more partners came on board. One, John Rakolta Jr., had building expertise as the head of a commercial construction company. The other, A. Alfred Taubman, was a longtime friend of Mr. Nelson and a prominent investor who made billions building shopping malls nationwide.
Mr. Taubman is among the most generous donors to universities and institutions in Michigan and elsewhere. He went to prison for nearly 10 months in 2002 over price-fixing accusations related to Sotheby’s auction house, which his company owned. He has maintained that he was innocent.
When Mr. Taubman first visited the vacated General Motors site in Pontiac, he was brought to tears. “What happened to all the people?” he said, according to Mr. Nelson, who was at his side. “Where are the cars? What happened to their families?”
In early 2009, the four investors bought the property from G.M. for “virtually nothing,” said Mr. Rakolta. General Motors, which had just received a hefty federal bailout, “spent more on the carpet than we spent on this building,” he said.
The investors agreed that they would put in a total of $10 million to $12 million of their own money, according to the studio’s chief financial officer. They would pay for the rest — $70 million or so — using borrowed money and state and federal incentives. “Michigan’s current tax incentive program appears to be the largest competitive advantage for the company,” one studio document said.
Ms. Lockwood, the film commissioner at the time, said she visited Mr. Taubman’s office in early 2009. Over lunch served by a butler, Mr. Taubman filled her in on the plan. “He believed that there was money to be made,” she recalled.
A Town on the Ropes
In public, the investors extolled the studio as an altruistic effort on behalf of Pontiac. “I go into things to make money, but on this, I don’t really care,” Mr. Taubman told The Detroit Free Press. “I just want to help create jobs, and this can create 3,600 jobs.”
Pontiac desperately needed them. In March of that year, roughly one of every two residents was without work, according to federal data. Food pantries had record requests. Pontiac was consistently listed among the top 10 most dangerous cities by the F.B.I. The city had made national news when a group of teenagers approached homeless people on the street and beat them to death.
Ms. Granholm declared the city in a financial crisis in February 2009 and appointed an emergency manager, Fred Leeb. The city’s budget was $54 million a year, but it was overspending by an estimated $7 million to $12 million. Pontiac was also still weighted down by old incentives it had given to businesses like G.M.
The movie studio was an added challenge, since it was seeking financial incentives from the city — not to mention from other branches of the government. It won redevelopment tax credits from the federal government and separate aid from the state that included incentives for technology companies that hire residents.
Job creation became a point of contention with beleaguered Pontiac, which was being asked to waive virtually all property taxes for the studio. The investors claimed that thousands of people would be employed, but Mr. Leeb said that when he asked for job numbers to be written into the contract, the investors refused. “We started seeing some backpedaling,” said Mr. Leeb, who added that the negotiations featured “knock-down, drag-out fights.”
Mr. Nelson said he did not recall that request, but added that his company could not have guaranteed jobs anyway, since they were mainly supposed to be created by filmmakers renting out the studio.
Under pressure from the governor’s office, Mr. Leeb said he had little choice but to approve the investors’ requests.
Ms. Granholm announced the project in her 2009 State of the State address, saying she thought the industry would create a flood of new jobs. “It was very exciting,” recalled Ms. Granholm, a Democrat. “A classic transformation, the phoenix rising from the ashes. This plant in Pontiac — it was a really great moment for a community that really wanted and needed hope.”
That summer, as the studio moved forward, Mr. Nelson was in local headlines for a second fire, this one at his 23,000-square-foot lakefront home in Bloomfield Hills. The fire extensively damaged the home, and its cause was not determined. Mr. Nelson declined to discuss it.
Not long after, he and the other studio investors hit a major hurdle. They would be borrowing around $18 million in municipal bonds, but they needed someone to back them.
Over the objections of some local officials, the state agreed to use the state workers’ pension funds to guarantee the bonds. If the investors failed to pay, the retirees would be on the hook.
At the time of the deal, the governor was speaking regularly with Mr. Obama, who was negotiating the General Motors bailout. Edward B. Montgomery, who was leading the White House’s efforts on communities and workers affected by the automaker’s bankruptcy, was engaged on the studio plans.
Mr. Montgomery said in an interview that he had expressed support for the studio and other projects that he believed would help diversify Michigan’s economy. He said the studio’s investors received assistance from the Treasury Department to qualify for a federal tax credit program. Mr. Montgomery said he was unaware of the bond guarantee involving the state pension fund.
On July 27, 2010, the governor and other officials gathered for the studio’s groundbreaking. Also on hand were Hollywood players like Mr. Binder, a creator of HBO’s “The Mind of the Married Man,” who had been instrumental in persuading the governor to expand the film subsidies.
Mr. Nelson, the studio’s main impresario, talked up the job numbers on local radio that day and said the incentives were necessary. “It’s a very competitive landscape out there,” he said. “There are very, very competitive rebates going on with other states. People don’t realize this, but 40 states have some kind of rebate or another in this industry. It’s an industry that’s fought after.”
Even as Michigan celebrated the studio, the Motion Picture Association of America was facing criticism of the use of film credits in a report by a Washington tax research group. The film association estimated that the industry employs just over two million people and supports 115,000 businesses. The report, conducted by the nonprofit Tax Foundation, which opposes film incentives, said that states justified them using “fanciful estimates of economic activity.”
The Pontiac studio was complete by the summer of 2011. Its first big production moved in after being awarded about $40 million from the state — the largest single movie payout yet. The Disney “Oz” film was being directed by Sam Raimi, a Michigan native who made the recent “Spider-Man” movies.
Over the coming months, the studio’s seven stages were filled with a yellow brick road and a haunted forest. The designers planted live grass and built a huge waterfall and pond where James Franco, the star of the film, could land in a hot-air balloon. Perhaps the most elaborate set was the courtyard around the good witch Glinda’s castle, which took 75,000 hours of work to build and used $9 million worth of wood, according to Mr. Nelson.
Sahir Rashid, a 35-year-old production assistant and Detroit resident, said that walking into the studio had been overwhelming. It was his first time on a soundstage, and he was thankful that the state’s movie boom allowed him to give up construction work. “For me, the films saved my life,” he said. “It’s not a dead-end job. It’s actually a career.”
As for the crew and actors, “the majority of them I think were from L.A.,” said London Moore, a local actress. Ms. Moore was the body double for Michelle Williams, who was playing Glinda. “I went into this thinking these people were probably going to be stuck up, but they welcomed me with open arms. They are like a family to me.”
Film Jobs Prove Scarce
The studio had created only 200 positions by the summer of 2011, according to correspondence between the company and local officials. And when temporary construction workers were excluded from the tally, Pontiac’s records show, the studio reported only two employees in 2010 and 12 the next year. The studio’s chief financial officer said it had not been able to cash in on $110 million in tax credits that were contingent on creating jobs. But the studio did cash in on other credits, including $14 million for a “Film and Digital Media Infrastructure Investment Tax Credit,” he said.
As the “Oz” shoot was under way, Pontiac moved on to its third emergency manager, Louis Schimmel, and he was not a fan of incentives. A former municipal bond analyst, Mr. Schimmel spent decades warning Michigan towns against trading tax revenues for jobs. “I’m just about the biggest critic of these programs, because giving away the taxes of the city is so detrimental,” he said. “The money is needed for police, fire and trash pickup.”
Mr. Schimmel said Disney had offered to prepay its workers’ personal income tax to the city, but Pontiac declined. The city later had problems collecting some of the taxes because Disney operated through a separate business entity that was difficult to track down, he said.
“This is a glamorous industry if you want to talk about Hollywood, but it’s not very glamorous for the municipality that wants to collect something,” Mr. Schimmel said. Pontiac, he said, was outgunned.
Disney declined to comment. Mr. Nelson said the studio and Disney were responsive to the city.
Mr. Schimmel was not alone in his opposition to incentives. Michigan elected a new governor in 2010, Rick Snyder, a Republican who believed that it made better sense to lower taxes for all businesses. The governor’s budget director, John Nixon, said in an interview, “States harm themselves by competing on tax credits.” The governor quickly began reining in the program.
Almost immediately, filmmakers pulled out of Michigan. The change hit hard at “Hollywood-land in Pontiac,” as Mr. Nelson sometimes refers to his studio, now called Michigan Motion Picture Studios. He said the makers of “Iron Man 3” had been considering filming there but opted for North Carolina after Mr. Snyder slashed incentives.
When the bill for the studio’s bond interest came due in February this year, it paid only a portion, $210,000. The state pension fund had to pick up the remaining $420,000. Mr. Nelson said he and his partners would have made the payment if the state had not changed the tax credit program. “No one would have missed a bond payment,” he said. “No one would have missed anything.”
The situation is galling to even longtime government officials, who over the years have seen plenty of economic development deals fail. “Taubman could write the whole check for that himself,” said Doug Smith, an official at the state’s economic development agency. The state pension fund may “end up owning these studios,” he said.
One of the development agency’s board members is Mr. Rakolta, the construction executive who invested in the Pontiac studio. He and Mr. Nelson said in separate interviews that they had never considered personally paying for the bond interest. A deal is a deal, they said, and the state agreed to cover the bond. The studio’s chief financial officer said the investors already stood to lose twice as much as they originally intended to invest.
A spokesman for Mr. Emanuel said he was not willing to discuss the situation on the record. A spokesman for Mr. Taubman said he was unavailable.
In August, the studio defaulted on the entire $630,000 payment on the bond, despite a decision by Mr. Snyder to temporarily allocate some film incentives.
The investors are lobbying state lawmakers to put more money into the tax credits and have formed a political action committee. Donating to the PAC are the four investors; Mr. Emanuel’s agency, William Morris Endeavor; and the Teamsters union. To rally public support, the studio offers public tours. “Please don’t hesitate to contact your state representative,” Mr. Nelson tells visitors. “Tell them you’ve been here, you believe in it, so please appropriate enough money so it will work.”
Mr. Nelson said that if the state did not improve the incentives, the Pontiac studio would probably shut down. For now, the soundstages are empty. Filming wrapped up last month on a Warner Brothers movie called “Black Sky.” It is about a town ravaged by deadly tornadoes.
