ABC TV Matthew Fox, Evangeline Lilly and Josh Holloway star in "Lost," filmed in Hawaii. Producers of the hit TV show are voicing doubts about continued production here.

High filming costs force
ABC network executives
to consider relocating

The hit television series "Lost," which is spending about $45 million in Hawaii in its first season on ABC, likely will relocate unless state and studio executives can find ways to offset the high cost of filming here.

"Nobody wants to move, but this is a business and we must consider options to cut expenses," said producer Jean Higgins.

The sentiment is shared by other ABC/Touchstone executives who agreed that the series is losing about $500,000 an episode, or $11 million for the first season's 22 episodes. Season one filming ends in April.

"Lost," with its ensemble cast, costly sound stage, office and storage space and crew expenses, arguably is the most expensive series on television, costing $2.5 million to $2.8 million an episode, several sources said. The series has cost at least $60 million to date, with 75 percent of its budget spent in Hawaii. About half of that spending is local crew salaries.

Hawaii production costs can be as much as 35 percent higher than in Los Angeles, but the higher costs of "Lost" are in the 25 percent to 30 percent range, several sources said.

State officials are taking steps to try to keep the highly watched weekly drama.

"We're actively working through the process and have had many discussions with ABC about these issues and possible solutions," said Ted Liu, director of the Department of Business, Economic Development and Tourism. "We do not yet have (an assistance) package ready."

One of the major issues for producers is the higher cost to film in Hawaii.

"This is all tied into (ABC/Touchstone's) perception of the cost differential between filming in Hawaii and Los Angeles," said Liu. He said the differential is less than 35 percent.

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ABC TV The "Lost" cast, posing on the Hawaii set, are, in front row, Daniel Dae Kim, Yunjin Kim, Harold Perrineau, Malcolm David Kelley, Emilie De Ravin; middle row, Josh Holloway, Naveen Andrews, Evangeline Lilly, Matthew Fox, Ian Somerhalder, Maggie Grace; back row, Dominic Monaghan, Jorge Garcia and Terry O'Quinn.

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A conference call earlier this month between production executives in Los Angeles and Liu; Judy Drosd, chief officer of the Arts, Film and Entertainment Division of DBEDT, and Donne Dawson, Hawaii Film Office director, centered on ways to lower production costs, including using state tax credits available for investments in high-tech businesses, sources said.

The state's options are limited, though it could allow the production to use the Hawaii Film Studio rent-free, which would save ABC/Touchstone about $500,000 a year. The Hawaii Film Studio, which has a 16,500-square-foot sound stage, is being used by Fox Television's "North Shore" hotel drama.

The annual savings on sound-stage costs, however, would not be enough to keep "Lost" in Hawaii, ABC sources said.

Liu believes ABC/Touchstone wants to remain in Hawaii because "they've been successful here and cast and crew are happy."

"If I were a producer, I would say, 'Why tinker with a model that's worked?'" he said.

Jorge Garcia, who plays Hurley in the show, said the subject of relocating has been mentioned a few times. "We all immediately shoot it down," he says.

Liu said he hopes to have an assistance package ready by the end of February.

"Whatever we come up with, the state must be comfortable that it can offer this to other productions as well, and that's what is taking us time to prepare," Liu said.

"Lost" will get no special deal, he said: "That would be the worst for the industry, the worst for Hawaii, and the state ends up with everyone being suspicious and unhappy."

Another option has the state helping "Lost" get discounted contracts with local vendors for vehicle rentals, air transportation and accommodations, said Marsha Wienert, the state's tourism liaison. The production won't disclose these costs, but the amount saved likely would do little to offset the series' deficit.

According to several sources, "Lost" producers spend about $70,000 a month for its 30,000-square-foot sound stage in the former Xerox building, office space at Dole Cannery and storage units. The production also spends as much as $20,000 a month on a special air-conditioning system to cool the stage.

Because the show's current sound stage can only hold one major set, the production has had to do more shooting outdoors, adding $30,000 to $60,000 an episode to the budget, sources said.

The public may perceive that since the series is a hit, it's making money. But "Lost" is "not a bona fide hit" financially until it runs five years then goes into syndication, an executive said.

A major reason for the "Lost" budget problems surrounds Act 221.

ABC/Touchstone expected to raise as much as 20 percent of the show's budget from selling investment credits under the act, which is designed to encourage investment in the state's fledgling high-tech industry. For qualifying investments, the act provides a 100-percent tax credit over five years. According to sources, the Department of Taxation allowed fewer tax credits for each dollar invested than expected, which caused the budget deficit. Details of Act 221 transactions are confidential.

Some Hollywood filmmakers say the administration and Tax Department are being overly careful in granting Act 221 investment credits after production companies for "Blue Crush" and "The Big Bounce" films a few years ago received especially high returns. Universal reportedly got a $15 million to $18 million tax credit on the $41 million budget of "Blue Crush"; Warner Bros. received $13 million in tax credits on the $53 million budget of "The Big Bounce."

Some state officials and the public believed that "Blue Crush" took advantage of the legislation, which lawmakers later agreed had been too liberally written. The act has been tightened and applications more scrutinized.

"What happened back then can't happen now," Drosd said.

The Hawaii Film Office, the local Screen Actors Guild and others within the state's production industry this legislative session will propose a bill that provides a 15 percent to 20 percent tax credit for money that productions spend in Hawaii. The bill won't be voted on until after ABC/Touchstone executives decide whether to relocate.

The bill would allow productions to factor rebates into their budgets. The state currently offers productions a refundable 4-percent production expense and 100-percent hotel room tax credit, based on qualifying criteria. Several states offer production expense incentives more attractive than Hawaii's production and hotel room tax.

Competition to attract productions has become so intense that New Mexico Gov. Bill Richardson traveled to Hollywood last year to meet with executives from Universal, Dreamworks SKG, Warner Brothers, MGM and Paramount studios to lure them to his state. Since Richardson took office, 14 films have been shot in New Mexico, including the remake of "The Longest Yard," which star Adam Sandler wanted to shoot in Hawaii.

No Hawaii governor has traveled to Hollywood to help promote the industry.

If Hawaii loses "Lost," it's losing a wealthy neighbor that has spent heavily with local businesses.

When ABC/Touchstone was preparing its camera equipment order prior to arriving in Hawaii last spring, executives required supplier Panavision to open a Hawaii company. The production also uses Hawaiian and Aloha airlines exclusively to transport actors, executives and crew to and from Los Angeles.

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State incentives to productions
include tax credits and rebates

Here is a look at how Hawaii's incentives compare to other film destinations:

Hawaii

Two incentive programs are offered: a 100-percent tax credit for recurring investments, and an income tax rebate on expenditures.

» The Motion Picture and Film Production Income Tax Credit offers a 4-percent rebate on general expenditures and a 7.25-percent credit on hotel expenditures.

» Act 221 is a 100-percent tax credit on investments apportioned over five years on investments that meet a set of guidelines that have been interpreted differently depending on the project. The program was intended to promote high-tech businesses, but it has been used for film productions. The funds also are supposed to be for recurring projects in the state, but have been used for individual films.

South Carolina

The state offers savings to filmmakers of up to 25 percent through tax exemptions and rebates.

Productions spending $1 million receive rebates of 5 percent of labor withholding tax to crew, cast and extras subject to state withholding tax; and 7 percent rebate of expenditures for items purchased or rented from South Carolina vendors. Those spending $250,000 are exempted from a 5 percent sales-and-use tax and a 7 percent accommodations tax.

Filmmakers who create, convert or equip a South Carolina film or post-production facility receive a 20- percent investor credit. Total credits for all investors per facility is $5 million: A minimum investment is $2 million for a production studio, while a post-production facility requires a $1 million minimum. Those willing to ante up a $500,000 annual base investment to create a South Carolina commercial production company will receive a 10-percent tax credit for the total annual outlay.

Louisiana

The state offers an exemption on the state's 4-percent sales tax on qualified purchases if the production spends more than $250,000 in a year and is certified by the state's film commission.

The state also gives an employment tax credit of 10 percent for Louisiana residents on productions costing $300,000 to $1 million, and a tax credit of 20 percent on productions costing more than $1 million (does not apply to individual salaries above $1 million). Unused credits may carry over for 10 years.

An investment tax credit of 10 percent is available to productions spending $300,000 to $1 million in the state, and a tax credit of 15 percent is available to those that spend more than $1 million. Unused credits can carry over for 10 years.

Missouri

Qualified productions that spend more than $300,000 in the state may receive a state income tax credit of up to half of their expenditures in the state, or up to $500,000. The credits may be applied to income taxes, corporate taxes or be sold to third parties. They may be carried forward for up to five years. The cap per year for all productions is $1 million, given out on a first-come, first-served basis.

New Mexico

Eligible productions may benefit through tax exemptions or rebates. They must choose between an upfront sales tax exemption or a 15 percent income tax rebate on qualified purchases. The 15 percent income tax rebate was amended in 2003 so that a production could calculate the expected amount of a rebate and get the money up front through the investment program.

The investment program uses money from the state's severance fund to make equity investment in films substantially shot in the state. The original limit was 0.5 percent ($20 million), which was raised to 2.5 percent ($80 million) last year, or up to $7.5 million for one project. New Mexico negotiates a portion of the profits as compensation, and loans are repayable in 2 to 5 years. Qualified productions must have a majority of New Mexico crew, be shot substantially in the state, be rated PG-13 or milder (unless otherwise approved) and the production must have a loan guarantor. The state offers a 50 percent tax rebate on salaries of New Mexico workers who qualify as trainees.

Oklahoma

Two incentives: The enhancement rebate program and the sales tax exemption. The sales tax exemption is for local and state sales The Film Enhancement Rebate Program provides a 15 percent rebate on qualified expenditures for goods and services in Oklahoma. There is a cap of $2 million a year, but that is dependent on funding.

Australia

Offers a refundable tax credit of 12.5 percent for qualifying production expenditures. Individual Australian states offer additional incentives in the form of payroll tax rebates or exemptions, cast and crew wage rebates, location attraction cash grants, and the provision for free or subsidized public service resources.