Film Financing

Film Financing Made Easy?!

By Adam P. Davies

Wouldn't it be great if, once you have a film financier interested in your project, s/he would just write you a check for $10 million so you could go off and make your film?! In return, you would give her/him some of your profit and keep the rest. Easy!

Instead, we have to involve banks, production funds, tax funds, equity investors, sale and leaseback facilitators, sales agents, distributors, completion guarantors, public bodies, government departments, tax authorities, lotteries, financial engineers, accountants and so on. Who are all these people? What do they do? And how do they fit together into the financing puzzle?

The first thing to realize is, at anything above micro-budget levels, you are unlikely to find a single financier to fund your entire project. Most investors like to share their risk with others, and so will want to see other people co-financing the same project. This means you're going to be dealing with more than one financier right from the start.

This wouldn't necessarily be too much of a problem if all financiers were the same. Unfortunately, this almost never happens. In the real world of film financing, each financier tends to approach the project from a different angle, looking for a different type of deal and a different form of reward. In fact, it's often impossible to have more than one of any specific type of financier on board at the same time. So the problem facing the producer is how to glue all these species together into one happy family, such that everyone feels like they are getting the deal they want.

To appreciate the different deals done by this diverse range of financiers, it helps to understand what their respective roles are in the process. In this article, by putting you into the shoes of the Producer/Construction Company, we illustrate certain parallels of the movie business with the building industry in order to demystify the film financing conundrum.

The Players

Imagine the construction of a large, fifteen-floor block of condominiums costing a total of $10 million. Someone owns land on which s/he would like the block to be built. A Construction Company buys the land in order to erect the building on it, based upon instructions given by an Architect. At some point, a Realty Agent is appointed to sell off the various condos (usually by way of long lease) in order to bring in revenue.

The original land-owner is analogous to the owner of a film's underlying rights - the script or other property that's going to be used as the basis for creating the film. You, as Producer, are the Construction Company - the person who actually puts the project together, engages the team, arranges the finance and, ultimately, intends to own and earn money from the finished product. The Architect can be seen as the film's Director, under whose guidance the creative vision is materialized. The Realty Agent, who may get involved surprisingly early in the process, can be compared to the film's Sales Agent, whose job it is to sell the film to international distributors, territory by territory; and so on.

Soft Money

Once you (the Construction Company) have all your plans and designs finalized, obtained the necessary planning consents and identified the main department heads within your construction team, you will be in a position to go looking for the finance required to pay for the construction of the Building.

Your first stop could be your local government. You may be eligible for a grant or other incentive specifically available to those who create residential housing in your local area. We will assume you're able to get a $1.5 million contribution towards the project in this way. This is the equivalent of what we call "soft money" in the film industry because, although the money probably comes with restrictions as to how, where and on whom it may be spent, it is unlikely that you will be obliged to repay it in full.

Pre-selling

You may also, at this stage, try to pre-let some of the condos in order to obtain further money to put toward the cost of construction. To do this, you will enlist the services of a Realty Agent. The prospective lessees (or owners) of these condos would have to commit funds having only seen plans of the proposed Building, and would therefore probably obtain their leases at a lower price. We will assume you sell three floors of condos at $1 million per floor. This is the equivalent of pre-selling a film to foreign distributors, with their territories the equivalent of the different floors.

Although they are committed to buy, the purchasers are unlikely to part with their money until the condos are actually finished and available, so you will probably have to go to a bank to borrow the money in the meantime, using the sales contracts as collateral. In film, this is known as discounting the pre-sales.

Deferments

It may be that you and the Architect both believe in the future commercial success of your project so much that you're willing to defer some of your own fees! Although, between you, you may have $1 million of fees technically included as part of the budget for the construction, you may choose to defer half of these and agree for them to be paid out of future income (obtained from selling off the remaining condos) rather than from funds raised to finance the Building. Effectively, you and the Architect are financing the construction to the tune of $0.5 million. This is analogous to the Producers and/or Director - or, for that matter, cast - deferring of part of their fees, a common (if often reluctant) sacrifice made by above-the-line personnel when passionate about their project.

Equity

An Equity Investor may also believe in the long-term profitability of the apartment block. Despite realizing that s/he is unlikely to see any money out of the pre-sold floors for some time, s/he is comfortable that the remaining 12 floors of condos can be sold at a level high enough to cover the remaining cost of construction and make a profit on top. In return for providing equity cash, the investor will require a share of any profit you ultimately make. The rule of thumb is that for every percentage point of the budget provided in equity, you should give between 0.5 percent and 0.75 percent of your profit. If the investor puts up $3 million (30 percent of you budget), you might be expected to give the investor 20 percent of the film's profit.

The Bank

Even with $3 million in equity, another $3 million from selling three floors, $1.5 million in soft money and $0.5 million from your deferred fees, you are still left with a shortfall of $2 million. Reluctantly, this is when you probably have to trot off to the Bank for a loan. You still have 12 floors of condos to sell and you only need a further $2 million to complete the financing for the block. Your Realty Agent confirms to the Bank that s/he thinks s/he can sell the remaining floors for far in excess of $2 million. If the Bank can be convinced those potential receipts outweigh - by a huge margin - the amount it's being asked to lend, it will consider lending you the remaining $2 million. This will probably be on condition that the Bank gets its money repaid with interest (and an additional fee), is first in the pecking order to be paid from any receipts generated by selling off the remaining floors, takes a security over the building until such time as it is repaid in full, and has the right to discount the pre-sales. In the film industry, this type of plugging the hole in the finance is known as "bank gap" financing, and depends on the Bank's faith in the Sales Agent to sell the territories at sufficiently high prices.

The independent film Producer is likely to need to approach a similar number and range of financiers in order to obtain the full $10 million needed to produce her/his film. The issue then becomes how, and in what order, each of the financiers gets paid back its contribution. That is down to the various financiers (and their respective lawyers) to agree, usually before one penny of production finance is actually spent(the "Recoupment Waterfall").